IndyMac sells $590 million in Alt-A MBS
Says it's a sign that 'modest liquidity' is returning
Tuesday, August 28, 2007
IndyMac Bank last week sold $590 million in bonds backed by prime jumbo loans, the company said Monday -- the first bonds the lender has traded since July 19, when "fear-induced illiquidity" froze the market.
In a statement posted on the official company blog, IndyMac communications director Grove Nichols said the bonds traded Friday sold at prices below "historical ranges" but at smaller discounts than "fire sale" trades conducted by other lenders in recent weeks.
IndyMac traded $240 million of AAA bonds backed by prime jumbo fixed-rate mortgage loans and $350 million of AAA bonds backed by prime jumbo adjustable-rate mortgage (ARM) loans
"We are encouraged by these sales as they represent the first small sign that the ice is beginning to melt, and some modest liquidity is beginning to return to the private-label mortgage market," the statement said. "It appears as though, given the current historically wide spreads, significant tightening of underwriting standards by lenders, and the updated rating agency models requiring stronger subordination levels, investors are beginning to recognize that private mortgage-backed bonds may offer strong risk-adjusted returns."
The lack of demand for mortgage-backed securities (MBS) had forced IndyMac to stop offering jumbo loans. On Wednesday, the company announced it had resumed originating prime, single-family residential, full-documentation jumbo loans.
The loans, including 5/1 ARMs, 7/1 ARMs, and 15- and 30-year fixed-rate products, are available only to borrowers providing full documentation.
Borrowers with FICO scores of 680 and above and a 25 percent down payment are eligible for a loan of up to $2 million, or up to $1 million with 20 percent equity. A borrower with a FICO score of 700 or better, a 15 percent down payment and mortgage insurance is eligible for a loan of up to $750,000.
In its last quarterly earnings report, IndyMac said it laid off 400 employees as a cost-cutting measure and had been forced to repurchase $443 million in loans in the first six months of the year.
Tuesday, August 28, 2007
SCV Residential Rehab Program
Residents in the City of Santa Clarita are being encouraged to improve their homes through the City’s Residential Rehabilitation Program and Property Rehabilitation Program.
The program assists qualified residents in keeping their homes up to the standards of their communities by providing grants for mobile homes, condominiums, or single family homes.
Over $50,000 in grants is still available to residents who own a home in Santa Clarita and use it as their primary residence. The annual household income must be at or below 80 percent of the median household income for Los Angeles County in order for the resident to apply for assistance.
Repairs include include interior and exterior painting, roof repairs or replacement, plumbing and electrical work, heating and air conditioning repair, flooring and window repairs as well as disabled access modifications.
City’s Housing Program Administrator Erin Moore-Lay says, “The City of Santa Clarita is very happy to have the funds to help more people this year. Being lower income does not mean a family has to live with faulty electrical systems, leaking pipes, a non-working furnace, or broken gates. These programs are here to improve the quality of life for our lower income residents and maintain the community standards throughout the City.”
Homeowners who wish to take advantage of the grants have until June 30, 2008 to apply.
The City can be reached at (661) 286-4156.
The program assists qualified residents in keeping their homes up to the standards of their communities by providing grants for mobile homes, condominiums, or single family homes.
Over $50,000 in grants is still available to residents who own a home in Santa Clarita and use it as their primary residence. The annual household income must be at or below 80 percent of the median household income for Los Angeles County in order for the resident to apply for assistance.
Repairs include include interior and exterior painting, roof repairs or replacement, plumbing and electrical work, heating and air conditioning repair, flooring and window repairs as well as disabled access modifications.
City’s Housing Program Administrator Erin Moore-Lay says, “The City of Santa Clarita is very happy to have the funds to help more people this year. Being lower income does not mean a family has to live with faulty electrical systems, leaking pipes, a non-working furnace, or broken gates. These programs are here to improve the quality of life for our lower income residents and maintain the community standards throughout the City.”
Homeowners who wish to take advantage of the grants have until June 30, 2008 to apply.
The City can be reached at (661) 286-4156.
Monday, August 27, 2007
10 Projects With the Biggest Payback
Want that dream kitchen or sunroom addition? Even if you've decided to move forward, it makes sense to consider your return on investment (ROI). Not all home improvement projects are created equally, with some adding more value than others when it comes time to sell.
The 2006 Cost vs. Value Report (a combined effort by Remodeling magazine and REALTOR® Magazine) explains which home improvements pay off when you sell your home - and which don't.
10 Projects With the Biggest Payback
The 2006 Cost vs. Value Report (a combined effort by Remodeling magazine and REALTOR® Magazine) explains which home improvements pay off when you sell your home - and which don't.
10 Projects With the Biggest Payback
Thursday, August 23, 2007
Median Price Increase in a Declining Market
It’s not the first time that California has been home to some anomalous social phenomenon that lacks a ready explanation. But this time, because it has to do with real estate, the topic may be of general interest.
The oddity is this: On the one hand, the real estate market is, to say the least, a bit slow. The inventory of homes for sale is at all time highs, while the numbers of sales are at the lowest point in decades. On the other hand, the median price in much of the state is at or near record highs. Statewide, the median price of a single-family home is most recently reported as $591,180, barely off the highest ever. In our area, the median price of a residential dwelling is a record high around $600,000.
Now, this seems to fly in the face of whatever we might have learned in Economics 101. If supply is high, and demand is low, prices should be declining. How is it that the median price keeps climbing?
Not only does the increasing median price counter our expectations, it also doesn’t square with the experience of real estate practitioners. I have personally spoken with dozens of local Santa Clarita, San Fernando, and Antelope Valley Realtors® who say that they see prices decreasing in the neighborhoods where they do business. So, how can the median price keep rising?
First of all, we need to remind ourselves of what the median is. It is the mid-point. In any given period, the median sales price represents that price where an equal number of sales were below it and above it. It is not the average. For example, in the series of numbers 1,2,5,10, and 12, the median is 5, whereas the average would be 6.
How can the median mislead us? Imagine a marketplace where eleven homes sold, with the lowest being $200,000, and each other selling for $100,000 more than the one that preceded it. Next, imagine the same marketplace a year later, where each house sold is at a price 10% less than it was the year before, and the two lowest-priced houses don’t sell at all. Respective tables of these markets would look like the following:
Year One Year Two
$200,000 No Sale
$300,000 No Sale
$400,000 $360,000
$500,000 $450,000
$600,000 $540,000
$700,000 $630,000
$800,000 $720,000
$900,000 $810,000
$1,000,000 $900,000
$1,100,000 $990,000
$1,200,000 $1,080,000
In the first year, the median price is $700,000, with five sales below it and five sales above it. In year two, the median price is $720,000, with four sales below it and four sales above it. The second year median is $20,000 higher than the first year, even though values in the second year had decreased by 10% across the board.
Some suspect that the same thing is going on in the southern California market right now, and perhaps across the whole state.
It is no wonder that what might be called “entry-level” sales have dropped. For one thing, as many have observed for the past years, the price of entry had just become too high. The only thing that enabled entry into the market was the use of those now-infamous sub-prime and exotic loan products, including 100% financing and no-doc loans. Now, those are pretty much gone.
Along with the disappearance of the E-Z loans comes a drop in the sale of lower-priced homes, which ripples right up the entire housing market. And the ironic by-product? An increase in median prices, even while values go down.
Changes in the mix of housing in the local area can also skew the median price. For example, in the last few years homes were built that were generally higher-priced than the average price of the existing housing composition. As those homes have gone to a re-sale status, the median price sold for all homes in the area goes up.
This confusion about what the median sales price really means has given many sellers empty confidence in holding onto higher than market price list prices, which as the market makes a dive to the bottom, can significantly hurt them when their home does sell for much lower than they could have gotten at the beginning of the listing period.
Nobody wants to 'give your house away', but without exception I hear that phrase from sellers. As your listing agent, I do want to get absolutely the highest price possible given the market. It is a very competitive market environment, and I do closely watch market trends. Take my advice... you will end up netting a higher price if you do.
The oddity is this: On the one hand, the real estate market is, to say the least, a bit slow. The inventory of homes for sale is at all time highs, while the numbers of sales are at the lowest point in decades. On the other hand, the median price in much of the state is at or near record highs. Statewide, the median price of a single-family home is most recently reported as $591,180, barely off the highest ever. In our area, the median price of a residential dwelling is a record high around $600,000.
Now, this seems to fly in the face of whatever we might have learned in Economics 101. If supply is high, and demand is low, prices should be declining. How is it that the median price keeps climbing?
Not only does the increasing median price counter our expectations, it also doesn’t square with the experience of real estate practitioners. I have personally spoken with dozens of local Santa Clarita, San Fernando, and Antelope Valley Realtors® who say that they see prices decreasing in the neighborhoods where they do business. So, how can the median price keep rising?
First of all, we need to remind ourselves of what the median is. It is the mid-point. In any given period, the median sales price represents that price where an equal number of sales were below it and above it. It is not the average. For example, in the series of numbers 1,2,5,10, and 12, the median is 5, whereas the average would be 6.
How can the median mislead us? Imagine a marketplace where eleven homes sold, with the lowest being $200,000, and each other selling for $100,000 more than the one that preceded it. Next, imagine the same marketplace a year later, where each house sold is at a price 10% less than it was the year before, and the two lowest-priced houses don’t sell at all. Respective tables of these markets would look like the following:
Year One Year Two
$200,000 No Sale
$300,000 No Sale
$400,000 $360,000
$500,000 $450,000
$600,000 $540,000
$700,000 $630,000
$800,000 $720,000
$900,000 $810,000
$1,000,000 $900,000
$1,100,000 $990,000
$1,200,000 $1,080,000
In the first year, the median price is $700,000, with five sales below it and five sales above it. In year two, the median price is $720,000, with four sales below it and four sales above it. The second year median is $20,000 higher than the first year, even though values in the second year had decreased by 10% across the board.
Some suspect that the same thing is going on in the southern California market right now, and perhaps across the whole state.
It is no wonder that what might be called “entry-level” sales have dropped. For one thing, as many have observed for the past years, the price of entry had just become too high. The only thing that enabled entry into the market was the use of those now-infamous sub-prime and exotic loan products, including 100% financing and no-doc loans. Now, those are pretty much gone.
Along with the disappearance of the E-Z loans comes a drop in the sale of lower-priced homes, which ripples right up the entire housing market. And the ironic by-product? An increase in median prices, even while values go down.
Changes in the mix of housing in the local area can also skew the median price. For example, in the last few years homes were built that were generally higher-priced than the average price of the existing housing composition. As those homes have gone to a re-sale status, the median price sold for all homes in the area goes up.
This confusion about what the median sales price really means has given many sellers empty confidence in holding onto higher than market price list prices, which as the market makes a dive to the bottom, can significantly hurt them when their home does sell for much lower than they could have gotten at the beginning of the listing period.
Nobody wants to 'give your house away', but without exception I hear that phrase from sellers. As your listing agent, I do want to get absolutely the highest price possible given the market. It is a very competitive market environment, and I do closely watch market trends. Take my advice... you will end up netting a higher price if you do.
Friday, August 17, 2007
Market Volatility Directly Tied to Housing Market
The opening bell of this morning's stock market brought a continuation of a high degreee of volatility, first since this was an options expiration day where many began positions to heavily short the market, then with the news that the Federal Reserve was cutting the overnight discount rate half a percentage point. This move by the Fed portends an easing of interest rates at the September and October meetings.
What does this mean for the housing market? Both Countrywide Financial and Washington Mutual were in serious danger of declaring bankruptcy over the next week. For those not in the housing market CFC is the number one mortgage originator in the country by volume. Wamu is I think #3 or 4. Should these two have gone under the country would have quickly followed into a full recession. This Fed action frees up a lot of liquidity between financial institutions, and access to credit is the grease in the wheels that help make this whole system run.
Fed Chairman Bernanke and company have really taken an extraordinary step at a time when the stock market was facing a day of unprecedented danger of falling an all-time record in terms of point drop along with record-setting volume. It doesn't mean that everyone is out of the woods and we can all party once again. It does mean that the financial environment is in a precarious position and that volatility will be the watchword for quite a while.
If I have said it once, I have said it a thousand times over the past three years. You cannot have 20% plus appreciation in housing prices each year for three years and more running without building excess into the market, and the unwinding of the excesses will take years, not days, months, or a season. The sub-prime and Alt-A mortgage markets brought many people into home purchases, where now that interest rates are adjusting many loan payments are going beyond the financial capacity of the home owners. As these people stop making their loan payments and go into foreclosure, the securitized financial products that these loans became a part of turn to junk, and nobody wants to buy them. This restricts the credit market big time. Hence, the market crisis.
That said, it is always a great housing market in California... but not for everybody at the same time. If you are in my local market area, give me a call and let's talk about how you can profit from this market environment.
You can depend on us to give you the straight scoop here in the Blog, and when you work with us as either a Buyer or Seller of real estate.
What does this mean for the housing market? Both Countrywide Financial and Washington Mutual were in serious danger of declaring bankruptcy over the next week. For those not in the housing market CFC is the number one mortgage originator in the country by volume. Wamu is I think #3 or 4. Should these two have gone under the country would have quickly followed into a full recession. This Fed action frees up a lot of liquidity between financial institutions, and access to credit is the grease in the wheels that help make this whole system run.
Fed Chairman Bernanke and company have really taken an extraordinary step at a time when the stock market was facing a day of unprecedented danger of falling an all-time record in terms of point drop along with record-setting volume. It doesn't mean that everyone is out of the woods and we can all party once again. It does mean that the financial environment is in a precarious position and that volatility will be the watchword for quite a while.
If I have said it once, I have said it a thousand times over the past three years. You cannot have 20% plus appreciation in housing prices each year for three years and more running without building excess into the market, and the unwinding of the excesses will take years, not days, months, or a season. The sub-prime and Alt-A mortgage markets brought many people into home purchases, where now that interest rates are adjusting many loan payments are going beyond the financial capacity of the home owners. As these people stop making their loan payments and go into foreclosure, the securitized financial products that these loans became a part of turn to junk, and nobody wants to buy them. This restricts the credit market big time. Hence, the market crisis.
That said, it is always a great housing market in California... but not for everybody at the same time. If you are in my local market area, give me a call and let's talk about how you can profit from this market environment.
You can depend on us to give you the straight scoop here in the Blog, and when you work with us as either a Buyer or Seller of real estate.
Wednesday, August 15, 2007
What Kind of Concessions Can Buyers Expect?
On Top of Buyer’s Closing Costs, Perks and Price Cuts Become More Lavish
With the housing market looking increasingly frail, home builders and home sellers are going to new extremes to attract buyers, dangling lavish incentives and slashing prices.
In a recent Wall Street Journal article, examples of some concessions include:
In Boca Raton, Fla., Gordon Homes is offering to pay two years of property taxes and insurance -- worth as much as $150,000 on houses priced as high as $2.5 million -- for buyers of completed homes at its upscale Azura development. In Richmond, Va., Orleans Homebuilders Inc. is offering "Sizzling Summer Sale Savings" that include as much as $100,000 off the cost of upgrades ranging from granite countertops to a conservatory. And in Medford, Ore., Diane Adams, a real-estate agent, is offering to pay four months of mortgage payments on the $975,000 house she and her home-builder husband constructed on 20 acres near Crater Lake. "I'd also negotiate a lower price, too," says Ms. Adams, an agent with Re/Max International Inc. "I just want this house off our books."
Across the country, the theme is the same: Home builders and home sellers are juicing their efforts to unload single-family homes. Among other things, they are offering buyers cash discounts of as much as 20%, throwing in a pool and agreeing to finish basements, garages and other spaces at a cost of several thousand dollars -- incentives much richer than builders were offering as recently as six months ago, when the downturn didn't look as bleak.
The full article can be found at http://online.wsj.com/article_email/SB118661750287092393-lMyQjAxMDE3ODA2OTYwMTk3Wj.html
So what is happening locally??
Price concessions are rampant in the market, as motivated to sell homeowners continue what I have termed ‘the dive to the bottom’. Unmotivated sellers may be sticking to their price, but their numbers of showings decline and disappear as buyers look for deals elsewhere. Increasingly, sellers are offering to pay buyers’ closing costs, which is a nod to the already well-established de facto practice when an offer to purchase comes in for review. All buyers have already caught on to this perk. They ask: What else?
I’ve had sellers offer to include TVs, refrigerators, washers and dryers, gym setups, other furniture, cars, and all sorts of personal property as incentive to buyers. While these things are nice, it doesn’t swing the deal. More important to buyers can be financing terms such as buydowns, where the seller pre-pays interest on new loans. Increasingly buyers are asking sellers to carry a second mortgage of 5% or 10% (or even more!) for those sellers who have a lot of equity in the home.
For some sellers, a monthly payment on a second mortgage can be more important than all the cash in hand at once. A common arrangement for the seller carrying a note would be at 10% interest, amortized over 30 years and all due in 5 years.
Other concessions that buyers are asking for (and sometimes getting) would be pre-paid property taxes and insurance, homeowners association fees, Mello-Roos fees, and other recurring fees of that kind. Pre-payment terms can be six months, a year, or even more.
Motivated sellers who want their homes sold can get pretty innovative, given their particular circumstance.
If the property needs repairs or updating and the sellers can’t financially handle it prior to close, credits can be given to be applied to this type of work to be performed after close of escrow. Usually the lender will require these funds to be held in a special account to ensure that the work gets done and the buyer doesn’t just pocket it at close, but I’ve also seen some cash backs to buyers. Examples of work needed in a home for sale: new roof, re-piping, painting, carpets and flooring, landscaping, updating kitchens and baths, and miscellaneous repairs.
The home builders are another matter. Lennar, KBhomes, KHov, and the other builders active in the area have various incentives that are available to buyers, and some additional incentives if home buyers take a Realtor along on their first visit to the sales office. While buyers, as usual, overestimate their negotiating prowess when dealing with home builders, often choosing to ‘go it alone’ without the assistance of a Realtor, they end up unrepresented in the transaction and lose big time in the end. But that’s the psychology and ignorance of the new home buyer at work. God luv ‘em!
New home builders employ a sales staff to work in the builder’s interests, not to just smile and give away the store! Think about it the next time you go to a new home development. Then call me at 661-287-9164 and I will go with you, but remember, it must be on first visit when you register. Otherwise, I cannot help you get the best deal possible.
Builders generally try to avoid outright price markdowns, in part because it angers prior home buyers who don't want prices in their subdivisions forced down. These days, though, builders increasingly resort to price cuts because it's all about avoiding bankruptcy for some.
Builders are increasingly willing to pay agents substantially larger commissions -- as much as 4% or locally, even 5% of the home's sales price, up from 1.5% or less -- to help unload inventory homes. This trend is reflected in the re-sale market, where discount brokers are having a tough time with many going out of business, and the 6% commission as the standard for listing a home has returned to the market. Lower commissions just don’t work in a market where the average time on market is well over 90 days and there are few buyers. Incentivizing the listing agent to fully explore marketing outlets is important, and bringing the buyers in the door involves offering a competitive (and higher) commission to the selling agents. With as many homes on the market as there are, the selling agent has many many choices of homes to show a prospective buyer. One way to get that buyer in is to increase the Realtor’s commission. What many home sellers often don’t understand is that keeping a buyer involved through the escrow period is just as important, and the offering of a competitive commission is a critical aspect of that process.
This trend toward more-generous incentives is "likely to intensify," says Mark Zandi, chief economist at Moody's Economy.com, citing a growing inventory of new homes, an oversupply of pre-owned homes on the market and "a glut of homes that are a year or two old that investors bought as rental property that have never been lived in, and those investors are now trying to sell, too."
The best deals go to those who are ready to buy and can close within 30 days and who have no contingencies in their contracts, such as the need to sell another house or find financing. Those buyers get the highest concessions. Also, have a preapproval letter in hand, which indicates that a lender is ready to fund your mortgage immediately up to a certain amount, is an essential part of the offer. After all, an offer and a contract is only the beginning, closing the escrow is the real deal.
With the housing market looking increasingly frail, home builders and home sellers are going to new extremes to attract buyers, dangling lavish incentives and slashing prices.
In a recent Wall Street Journal article, examples of some concessions include:
In Boca Raton, Fla., Gordon Homes is offering to pay two years of property taxes and insurance -- worth as much as $150,000 on houses priced as high as $2.5 million -- for buyers of completed homes at its upscale Azura development. In Richmond, Va., Orleans Homebuilders Inc. is offering "Sizzling Summer Sale Savings" that include as much as $100,000 off the cost of upgrades ranging from granite countertops to a conservatory. And in Medford, Ore., Diane Adams, a real-estate agent, is offering to pay four months of mortgage payments on the $975,000 house she and her home-builder husband constructed on 20 acres near Crater Lake. "I'd also negotiate a lower price, too," says Ms. Adams, an agent with Re/Max International Inc. "I just want this house off our books."
Across the country, the theme is the same: Home builders and home sellers are juicing their efforts to unload single-family homes. Among other things, they are offering buyers cash discounts of as much as 20%, throwing in a pool and agreeing to finish basements, garages and other spaces at a cost of several thousand dollars -- incentives much richer than builders were offering as recently as six months ago, when the downturn didn't look as bleak.
The full article can be found at http://online.wsj.com/article_email/SB118661750287092393-lMyQjAxMDE3ODA2OTYwMTk3Wj.html
So what is happening locally??
Price concessions are rampant in the market, as motivated to sell homeowners continue what I have termed ‘the dive to the bottom’. Unmotivated sellers may be sticking to their price, but their numbers of showings decline and disappear as buyers look for deals elsewhere. Increasingly, sellers are offering to pay buyers’ closing costs, which is a nod to the already well-established de facto practice when an offer to purchase comes in for review. All buyers have already caught on to this perk. They ask: What else?
I’ve had sellers offer to include TVs, refrigerators, washers and dryers, gym setups, other furniture, cars, and all sorts of personal property as incentive to buyers. While these things are nice, it doesn’t swing the deal. More important to buyers can be financing terms such as buydowns, where the seller pre-pays interest on new loans. Increasingly buyers are asking sellers to carry a second mortgage of 5% or 10% (or even more!) for those sellers who have a lot of equity in the home.
For some sellers, a monthly payment on a second mortgage can be more important than all the cash in hand at once. A common arrangement for the seller carrying a note would be at 10% interest, amortized over 30 years and all due in 5 years.
Other concessions that buyers are asking for (and sometimes getting) would be pre-paid property taxes and insurance, homeowners association fees, Mello-Roos fees, and other recurring fees of that kind. Pre-payment terms can be six months, a year, or even more.
Motivated sellers who want their homes sold can get pretty innovative, given their particular circumstance.
If the property needs repairs or updating and the sellers can’t financially handle it prior to close, credits can be given to be applied to this type of work to be performed after close of escrow. Usually the lender will require these funds to be held in a special account to ensure that the work gets done and the buyer doesn’t just pocket it at close, but I’ve also seen some cash backs to buyers. Examples of work needed in a home for sale: new roof, re-piping, painting, carpets and flooring, landscaping, updating kitchens and baths, and miscellaneous repairs.
The home builders are another matter. Lennar, KBhomes, KHov, and the other builders active in the area have various incentives that are available to buyers, and some additional incentives if home buyers take a Realtor along on their first visit to the sales office. While buyers, as usual, overestimate their negotiating prowess when dealing with home builders, often choosing to ‘go it alone’ without the assistance of a Realtor, they end up unrepresented in the transaction and lose big time in the end. But that’s the psychology and ignorance of the new home buyer at work. God luv ‘em!
New home builders employ a sales staff to work in the builder’s interests, not to just smile and give away the store! Think about it the next time you go to a new home development. Then call me at 661-287-9164 and I will go with you, but remember, it must be on first visit when you register. Otherwise, I cannot help you get the best deal possible.
Builders generally try to avoid outright price markdowns, in part because it angers prior home buyers who don't want prices in their subdivisions forced down. These days, though, builders increasingly resort to price cuts because it's all about avoiding bankruptcy for some.
Builders are increasingly willing to pay agents substantially larger commissions -- as much as 4% or locally, even 5% of the home's sales price, up from 1.5% or less -- to help unload inventory homes. This trend is reflected in the re-sale market, where discount brokers are having a tough time with many going out of business, and the 6% commission as the standard for listing a home has returned to the market. Lower commissions just don’t work in a market where the average time on market is well over 90 days and there are few buyers. Incentivizing the listing agent to fully explore marketing outlets is important, and bringing the buyers in the door involves offering a competitive (and higher) commission to the selling agents. With as many homes on the market as there are, the selling agent has many many choices of homes to show a prospective buyer. One way to get that buyer in is to increase the Realtor’s commission. What many home sellers often don’t understand is that keeping a buyer involved through the escrow period is just as important, and the offering of a competitive commission is a critical aspect of that process.
This trend toward more-generous incentives is "likely to intensify," says Mark Zandi, chief economist at Moody's Economy.com, citing a growing inventory of new homes, an oversupply of pre-owned homes on the market and "a glut of homes that are a year or two old that investors bought as rental property that have never been lived in, and those investors are now trying to sell, too."
The best deals go to those who are ready to buy and can close within 30 days and who have no contingencies in their contracts, such as the need to sell another house or find financing. Those buyers get the highest concessions. Also, have a preapproval letter in hand, which indicates that a lender is ready to fund your mortgage immediately up to a certain amount, is an essential part of the offer. After all, an offer and a contract is only the beginning, closing the escrow is the real deal.
Tuesday, August 14, 2007
Impact of Mortgage Crisis Spreads Beyond Housing
Impact of Mortgage Crisis Spreads
Dow Tumbles 2.8%
As Fallout Intensifies; Moves by Central Banks
By GREGORY ZUCKERMAN, JAMES R. HAGERTY and DAVID GAUTHIER-VILLARS
August 10, 2007; Page A1
Fallout from the intensifying credit crisis stretched from a French bank to the largest home-mortgage lender in the U.S., triggering unusual central-bank interventions and driving the Dow Jones Industrial Average to its second-worst drop this year.
The troubles demonstrated both the global reach of the crisis and its impact on a widening circle of markets and companies. The first jolt came from French bank BNP Paribas, which said early in the day that it was freezing three investment funds once worth a combined $2.17 billion because of losses related to U.S. housing loans. That prompted the U.S. and European central banks to inject cash into money markets to keep interest rates down.
The unease accelerated in the U.S. with news that several hedge funds were in the red and selling off assets. Apartment and condominium builder Tarragon Corp. raised doubts about its ability to remain in business amid weak demand and an inability to raise new financing. After markets closed, mortgage-lender Countrywide Financial Corp. said "unprecedented disruptions" in credit markets could affect its financial condition.
The stock market, which on Wednesday had risen sharply on hopes credit problems were being contained, swooned as hedge funds, many of which borrowed increasing amounts of money in recent years to boost returns amid placid markets, scrambled to sell holdings and cut their borrowings. The Dow Jones Industrial Average ended down 387.18 points, or 2.8%, at 13270.68.
Meanwhile, Countrywide, of Calabasas, Calif., said in a Securities and Exchange Commission filing that it was shoring up its finances and had "adequate funding liquidity." But the company, the nation's largest home-mortgage lender in terms of volume, warned that "the situation is rapidly evolving and the impact on the company is unknown." Reduced demand from investors is prompting Countrywide to retain more of its loans rather than selling them.
The statement could send shivers through financial markets today. It came just a week after Bear Stearns Cos., the Wall Street trading giant, had to reassure investors that it had ample cash on hand amid concern that it faced funding problems because of deteriorating credit-market conditions and the implosion of two of its hedge funds.
On Friday, markets in Asia tumbled in early trading. After the Nikkei 225 index fell more than 2%, Japan's central bank injected $8.39 billion into money markets. That followed actions Thursday by the European Central Bank, which provided more than $130 billion to money markets, and the U.S. Federal Reserve, which added $24 billion in reserves to the U.S. banking system.
What started late last year as worry over a sharp rise in defaults on subprime mortgages has mushroomed into a crisis for the entire home-loan industry and investors world-wide. By March, late payments were reaching worrisome levels on Alt-A mortgages, a category between prime and subprime that includes many loans for which borrowers "state" rather than verify their incomes. Most prime loans continue to perform well, but Countrywide has reported a rapid rise in delinquent payments on certain prime home-equity loans that were used by people stretching themselves to buy homes with little or no money down.
Payments were at least 30 days late on about 20% of "nonprime" mortgages serviced by Countrywide as of June 30, up from 14% a year earlier, the company said. Nonprime includes loans to people with weak credit records and high debt in relation to their income, as well as to people who don't document their income or assets. On prime home-equity loans, the delinquency rate was 3.7%, up from 1.5% a year before. For all loans, the rate was 5%, up from 3.9%.
In a sign of the growing difficulty in selling loans, Countrywide said that it transferred $1 billion of nonprime mortgages from its "held for sale" category to "held for investment" in the first half -- meaning they will stay on the books instead of being sold. Countrywide marked the value of those loans down to $800 million. Despite its current woes, the company argues that it is well-placed to gain market share from weaker rivals.
Rattled by a constant stream of bad news, investors in recent days have been shunning nearly all mortgages except for those that can be sold to Fannie Mae and Freddie Mac, the government-sponsored investors that guarantee payments on loans that "conform" to their standards. That has prompted lenders to boost rates on prime "jumbo" loans -- those totaling $417,000 or more, too big to be guaranteed by Fannie or Freddie -- to as much as 7.25% or 8%. Usually, such loans cost only about a quarter percentage point more than "conforming" mortgages, but the gap has ballooned to as much as 0.8 point during the past week.
In financial markets, several entities thought to be insulated from the subprime meltdown now turn out to be affected, leading investors to wonder who might be next. For instance, BNP just last week had said the three funds were conducting business as usual. But Europe's sixth-largest bank by stock-market value said yesterday that it had been forced to suspend the funds on Tuesday because of a sudden and unexpected dearth of buyers and sellers.
"The market for the assets has just disappeared," said Alain Papiasse, head of BNP Paribas's asset-management-services division. "Since the start of this week, there are no prices for instruments that carry, directly or indirectly, some types of U.S. assets."
In the U.S. the latest crop of hedge funds to be hit hard by the market's turmoil includes those that focus on "market-neutral" strategies, or strategies that seek to do as well in both falling and rising markets. The strategy has been embraced by some of the biggest names in hedge funds, in part because it's popular with institutional investors who hunger for gains in any kind of market.
Many market-neutral funds have been wagering on high-quality stocks, or stocks that trade at low valuations based on various metrics, and betting against stocks that look expensive. Because this stance is seen as relatively conservative, the funds felt comfortable borrowing money to boost returns.
But as banks began getting worried about their hedge-fund clients in recent weeks, some hedge funds were asked to put up more collateral to back the loans, or anticipated these requests. The funds sold some of their holdings of high-quality stocks to raise the cash, and closed out "short" trades, or bets against companies, by buying back shares of companies seen as expensive. Others sold positions simply to become more conservative, in a rocky market.
Since market-neutral funds often are guided by similar computer models and share similar holdings, the actions magnified moves in asset prices. The last week has been the worst on record for many large hedge funds focusing on this strategy, worrying traders across Wall Street, many of whom look to these firms for signs of stability in difficult markets.
During the past several days, a number of other quantitative funds have also been hard-hit. These funds generally operate by building computer models of market behavior and then allowing computer programs to dictate trading. With the recent trouble in financial markets, many lenders, funds and brokerages were following statistical models that grossly underestimated how risky the environment had become.
--Kate Kelly, Alex Frangos, Henny Sender, Anita Raghavan and Ian McDonald contributed to this article.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com, James R. Hagerty at bob.hagerty@wsj.com and David Gauthier-Villars at David.Gauthier-Villars@dowjones.com
Dow Tumbles 2.8%
As Fallout Intensifies; Moves by Central Banks
By GREGORY ZUCKERMAN, JAMES R. HAGERTY and DAVID GAUTHIER-VILLARS
August 10, 2007; Page A1
Fallout from the intensifying credit crisis stretched from a French bank to the largest home-mortgage lender in the U.S., triggering unusual central-bank interventions and driving the Dow Jones Industrial Average to its second-worst drop this year.
The troubles demonstrated both the global reach of the crisis and its impact on a widening circle of markets and companies. The first jolt came from French bank BNP Paribas, which said early in the day that it was freezing three investment funds once worth a combined $2.17 billion because of losses related to U.S. housing loans. That prompted the U.S. and European central banks to inject cash into money markets to keep interest rates down.
The unease accelerated in the U.S. with news that several hedge funds were in the red and selling off assets. Apartment and condominium builder Tarragon Corp. raised doubts about its ability to remain in business amid weak demand and an inability to raise new financing. After markets closed, mortgage-lender Countrywide Financial Corp. said "unprecedented disruptions" in credit markets could affect its financial condition.
The stock market, which on Wednesday had risen sharply on hopes credit problems were being contained, swooned as hedge funds, many of which borrowed increasing amounts of money in recent years to boost returns amid placid markets, scrambled to sell holdings and cut their borrowings. The Dow Jones Industrial Average ended down 387.18 points, or 2.8%, at 13270.68.
Meanwhile, Countrywide, of Calabasas, Calif., said in a Securities and Exchange Commission filing that it was shoring up its finances and had "adequate funding liquidity." But the company, the nation's largest home-mortgage lender in terms of volume, warned that "the situation is rapidly evolving and the impact on the company is unknown." Reduced demand from investors is prompting Countrywide to retain more of its loans rather than selling them.
The statement could send shivers through financial markets today. It came just a week after Bear Stearns Cos., the Wall Street trading giant, had to reassure investors that it had ample cash on hand amid concern that it faced funding problems because of deteriorating credit-market conditions and the implosion of two of its hedge funds.
On Friday, markets in Asia tumbled in early trading. After the Nikkei 225 index fell more than 2%, Japan's central bank injected $8.39 billion into money markets. That followed actions Thursday by the European Central Bank, which provided more than $130 billion to money markets, and the U.S. Federal Reserve, which added $24 billion in reserves to the U.S. banking system.
What started late last year as worry over a sharp rise in defaults on subprime mortgages has mushroomed into a crisis for the entire home-loan industry and investors world-wide. By March, late payments were reaching worrisome levels on Alt-A mortgages, a category between prime and subprime that includes many loans for which borrowers "state" rather than verify their incomes. Most prime loans continue to perform well, but Countrywide has reported a rapid rise in delinquent payments on certain prime home-equity loans that were used by people stretching themselves to buy homes with little or no money down.
Payments were at least 30 days late on about 20% of "nonprime" mortgages serviced by Countrywide as of June 30, up from 14% a year earlier, the company said. Nonprime includes loans to people with weak credit records and high debt in relation to their income, as well as to people who don't document their income or assets. On prime home-equity loans, the delinquency rate was 3.7%, up from 1.5% a year before. For all loans, the rate was 5%, up from 3.9%.
In a sign of the growing difficulty in selling loans, Countrywide said that it transferred $1 billion of nonprime mortgages from its "held for sale" category to "held for investment" in the first half -- meaning they will stay on the books instead of being sold. Countrywide marked the value of those loans down to $800 million. Despite its current woes, the company argues that it is well-placed to gain market share from weaker rivals.
Rattled by a constant stream of bad news, investors in recent days have been shunning nearly all mortgages except for those that can be sold to Fannie Mae and Freddie Mac, the government-sponsored investors that guarantee payments on loans that "conform" to their standards. That has prompted lenders to boost rates on prime "jumbo" loans -- those totaling $417,000 or more, too big to be guaranteed by Fannie or Freddie -- to as much as 7.25% or 8%. Usually, such loans cost only about a quarter percentage point more than "conforming" mortgages, but the gap has ballooned to as much as 0.8 point during the past week.
In financial markets, several entities thought to be insulated from the subprime meltdown now turn out to be affected, leading investors to wonder who might be next. For instance, BNP just last week had said the three funds were conducting business as usual. But Europe's sixth-largest bank by stock-market value said yesterday that it had been forced to suspend the funds on Tuesday because of a sudden and unexpected dearth of buyers and sellers.
"The market for the assets has just disappeared," said Alain Papiasse, head of BNP Paribas's asset-management-services division. "Since the start of this week, there are no prices for instruments that carry, directly or indirectly, some types of U.S. assets."
In the U.S. the latest crop of hedge funds to be hit hard by the market's turmoil includes those that focus on "market-neutral" strategies, or strategies that seek to do as well in both falling and rising markets. The strategy has been embraced by some of the biggest names in hedge funds, in part because it's popular with institutional investors who hunger for gains in any kind of market.
Many market-neutral funds have been wagering on high-quality stocks, or stocks that trade at low valuations based on various metrics, and betting against stocks that look expensive. Because this stance is seen as relatively conservative, the funds felt comfortable borrowing money to boost returns.
But as banks began getting worried about their hedge-fund clients in recent weeks, some hedge funds were asked to put up more collateral to back the loans, or anticipated these requests. The funds sold some of their holdings of high-quality stocks to raise the cash, and closed out "short" trades, or bets against companies, by buying back shares of companies seen as expensive. Others sold positions simply to become more conservative, in a rocky market.
Since market-neutral funds often are guided by similar computer models and share similar holdings, the actions magnified moves in asset prices. The last week has been the worst on record for many large hedge funds focusing on this strategy, worrying traders across Wall Street, many of whom look to these firms for signs of stability in difficult markets.
During the past several days, a number of other quantitative funds have also been hard-hit. These funds generally operate by building computer models of market behavior and then allowing computer programs to dictate trading. With the recent trouble in financial markets, many lenders, funds and brokerages were following statistical models that grossly underestimated how risky the environment had become.
--Kate Kelly, Alex Frangos, Henny Sender, Anita Raghavan and Ian McDonald contributed to this article.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com, James R. Hagerty at bob.hagerty@wsj.com and David Gauthier-Villars at David.Gauthier-Villars@dowjones.com
Countrywide Financial Hit by Credit Market Woes
Countrywide Hit by Credit Market Woes
By JAMES R. HAGERTY
August 9, 2007 8:23 p.m.
Countrywide Financial Corp. and other mortgage companies are facing "unprecedented disruptions" in debt and mortgage-finance markets that could hurt earnings and the company's financial condition, the Calabasas, Calif., lender said in a regulatory filing. (Read the SEC filing)
The statement was a supplement to the standard "risk factors" listed in Countrywide's 2006 annual report.
See the SEC filing from Countrywide Financial.The company, the largest U.S. home mortgage lender in terms of loan volume, said reduced demand from investors is prompting it to retain more of its loans rather than selling them. The company also has been shoring up its finances. "While we believe we have adequate funding liquidity," it said in a quarterly filing with the Securities and Exchange Commission, "the situation is rapidly evolving and the impact on the company is unknown."
Payments were at least 30 days late on about 20% of "nonprime" mortgages serviced by Countrywide as of June 30, up from 14% a year earlier. Nonprime includes loans to people with weak credit records and high debt in relation to their income, as well as to people who don't document their income or assets. On prime home equity loans, the delinquency rate was 3.7%, up from 1.5% a year before. For all loans, the rate was 5%, up from 3.9%.
In a sign of the growing difficulty in selling loans, Countrywide said that it transferred $1 billion of nonprime mortgages from its "held for sale" category to "held for investment" in the first half. Countrywide marked the value of those loans down to $800 million. It also decided to retain as investments, rather than sell, $700 million of prime home equity loans, marking them down to $600 million. Countrywide has said many of those home equity loans were second-lien mortgages used by people who put little or no money down in buying a house.
Write to James R. Hagerty at bob.hagerty@wsj.com
By JAMES R. HAGERTY
August 9, 2007 8:23 p.m.
Countrywide Financial Corp. and other mortgage companies are facing "unprecedented disruptions" in debt and mortgage-finance markets that could hurt earnings and the company's financial condition, the Calabasas, Calif., lender said in a regulatory filing. (Read the SEC filing)
The statement was a supplement to the standard "risk factors" listed in Countrywide's 2006 annual report.
See the SEC filing from Countrywide Financial.The company, the largest U.S. home mortgage lender in terms of loan volume, said reduced demand from investors is prompting it to retain more of its loans rather than selling them. The company also has been shoring up its finances. "While we believe we have adequate funding liquidity," it said in a quarterly filing with the Securities and Exchange Commission, "the situation is rapidly evolving and the impact on the company is unknown."
Payments were at least 30 days late on about 20% of "nonprime" mortgages serviced by Countrywide as of June 30, up from 14% a year earlier. Nonprime includes loans to people with weak credit records and high debt in relation to their income, as well as to people who don't document their income or assets. On prime home equity loans, the delinquency rate was 3.7%, up from 1.5% a year before. For all loans, the rate was 5%, up from 3.9%.
In a sign of the growing difficulty in selling loans, Countrywide said that it transferred $1 billion of nonprime mortgages from its "held for sale" category to "held for investment" in the first half. Countrywide marked the value of those loans down to $800 million. It also decided to retain as investments, rather than sell, $700 million of prime home equity loans, marking them down to $600 million. Countrywide has said many of those home equity loans were second-lien mortgages used by people who put little or no money down in buying a house.
Write to James R. Hagerty at bob.hagerty@wsj.com
Saturday, August 11, 2007
The Mania for Sellers is Out. The Mania for Buyers is In.
Mania.
Fixation. Madness.
Also: abberation, compulsion, craving, craze, craziness, delirium, dementia, derangement, desire, disorder, enthusiasm, fad, fancy, fascination, fetish, fixed idea, frenzy, furor, hang-up, infatuation, insanity, lunacy, obsession, passion, preoccupation, rage, thing.
That what Roget's Thesaurus comes up with as related words.
It is now conventional wisdom that a few years ago, during the 'seller's market', that excesses were introduced into the housing market that are now being worked out. Back then, lots of liquidity poured into the housing market, with low interest loans, teaser loans, option ARMs, no document/no verification loans, and other 'exotics' that got more and more people into home purchasing and 'flipping' for profit. Every month home prices went up, year-to-year appreciation registered 20% or more for three years running, and the adjoining years weren't far off the pace. If you didn't buy RIGHT NOW, you were thought a complete idiot. Sellers asked for the moon, and got it. Appraisers and lenders went along. A lot of Realtors did too. Easy money bought the American Dream, and people from all over the world flocked to the party. Want a new car? Refinance at a lower (initial) rate, no costs, and pull money out. Get a HELOC and don't worry about it... price appreciation and low interest rates will finance your new lifestyle. And don't worry about the future... this is the New Reality. The party will go on forever!
Yes, I heard exactly these lines from sellers and mortgage brokers and Realtors and all kinds of people. Homes came on the market and were sold within days or even hours, seemingly no matter what the price was. It was a Mania, especially for Sellers but one that infected the entire market.
The party is over. At least for sellers.
Homes are now undergoing a re-valuation, and this time, it is the Buyer who is setting the price. [In reality, the Buyer always sets the price. That is a basic market mechanism.] Those sellers who got used to 20% and more appreciation per year bemoan the fact that they have to now 'give the home away'. Nevermind that a 20% appreciation on a home with a zero or 5% equity position has a pretty nice annual rate of return on investment, as long as you sell. Nowhere else in the market can you make that kind of money. But I digress...
Sellers aren't giving away their homes, and the family down the street who actually sold and closed their home sale last week isn't destroying your home's value. Home prices go up, home prices go down. If you thought that home prices were on the unending up escalator forever, well, all I can say is welcome to reality. Your fever may have broken and your sanity may be returning. The mania for sellers is over. Catch up with the facts, deal with the New New Reality.
So what is the New New Reality? I have had some people who self-describe themselves as serious buyers tell me that all homes on the market are foreclosures, or will soon be in foreclosures. They look at the local newspapers and see that there are notices of default on $600,000 or more homes on notes worth $7 or $10,000, and want to know how they can buy these homes for the defaulted note amounts or less. Some have gone on RealtyTrac.com and one told me she wanted the kind of deal she read about: a 4500 square foot home valued at $1.7 million dollars, for $350,000. She said she was prepared to buy that kind of deal TODAY!
Yeah, who isn't?
Of course she didn't have an address or any other information that at all indicated that she could or anyone else was getting that kind of deal. But people tell me 'those deals are out there... find one for me.' Of course they are ever so reluctant to even meet and seriously talk about their finances, enter a buyer's broker agreement, or do anything else that would at all justify the considerable amount of legwork required for what? Missed appointments, unanswered emails and a load of hot air? Don't get me wrong... serious buyers get serious service. But money talks. Bullshit walks. When we work together, I will respect your time and you will respect mine. Just because somebody might say they are a serious buyer doesn't mean they will buy in my lifetime, or through me. That last part is really operative if someone wants to work with me. They will buy through me without games or guile. Work with me, otherwise, why waste my time?
Are there deals out there? There are!! And I would be very happy to get you into one! But don't expect sellers to just give you the keys. It doesn't work that way. And don't expect to get a deal at fifteen cents on the dollar. If that is your expectation, you will need to work with someone else. It is fantasyland that you are living in. I live in Reality. It's the New New Reality, minus the mania.
If you are a serious buyer, let's get together. Call me at 661-287-9164 and we will set a time to meet.
Fixation. Madness.
Also: abberation, compulsion, craving, craze, craziness, delirium, dementia, derangement, desire, disorder, enthusiasm, fad, fancy, fascination, fetish, fixed idea, frenzy, furor, hang-up, infatuation, insanity, lunacy, obsession, passion, preoccupation, rage, thing.
That what Roget's Thesaurus comes up with as related words.
It is now conventional wisdom that a few years ago, during the 'seller's market', that excesses were introduced into the housing market that are now being worked out. Back then, lots of liquidity poured into the housing market, with low interest loans, teaser loans, option ARMs, no document/no verification loans, and other 'exotics' that got more and more people into home purchasing and 'flipping' for profit. Every month home prices went up, year-to-year appreciation registered 20% or more for three years running, and the adjoining years weren't far off the pace. If you didn't buy RIGHT NOW, you were thought a complete idiot. Sellers asked for the moon, and got it. Appraisers and lenders went along. A lot of Realtors did too. Easy money bought the American Dream, and people from all over the world flocked to the party. Want a new car? Refinance at a lower (initial) rate, no costs, and pull money out. Get a HELOC and don't worry about it... price appreciation and low interest rates will finance your new lifestyle. And don't worry about the future... this is the New Reality. The party will go on forever!
Yes, I heard exactly these lines from sellers and mortgage brokers and Realtors and all kinds of people. Homes came on the market and were sold within days or even hours, seemingly no matter what the price was. It was a Mania, especially for Sellers but one that infected the entire market.
The party is over. At least for sellers.
Homes are now undergoing a re-valuation, and this time, it is the Buyer who is setting the price. [In reality, the Buyer always sets the price. That is a basic market mechanism.] Those sellers who got used to 20% and more appreciation per year bemoan the fact that they have to now 'give the home away'. Nevermind that a 20% appreciation on a home with a zero or 5% equity position has a pretty nice annual rate of return on investment, as long as you sell. Nowhere else in the market can you make that kind of money. But I digress...
Sellers aren't giving away their homes, and the family down the street who actually sold and closed their home sale last week isn't destroying your home's value. Home prices go up, home prices go down. If you thought that home prices were on the unending up escalator forever, well, all I can say is welcome to reality. Your fever may have broken and your sanity may be returning. The mania for sellers is over. Catch up with the facts, deal with the New New Reality.
So what is the New New Reality? I have had some people who self-describe themselves as serious buyers tell me that all homes on the market are foreclosures, or will soon be in foreclosures. They look at the local newspapers and see that there are notices of default on $600,000 or more homes on notes worth $7 or $10,000, and want to know how they can buy these homes for the defaulted note amounts or less. Some have gone on RealtyTrac.com and one told me she wanted the kind of deal she read about: a 4500 square foot home valued at $1.7 million dollars, for $350,000. She said she was prepared to buy that kind of deal TODAY!
Yeah, who isn't?
Of course she didn't have an address or any other information that at all indicated that she could or anyone else was getting that kind of deal. But people tell me 'those deals are out there... find one for me.' Of course they are ever so reluctant to even meet and seriously talk about their finances, enter a buyer's broker agreement, or do anything else that would at all justify the considerable amount of legwork required for what? Missed appointments, unanswered emails and a load of hot air? Don't get me wrong... serious buyers get serious service. But money talks. Bullshit walks. When we work together, I will respect your time and you will respect mine. Just because somebody might say they are a serious buyer doesn't mean they will buy in my lifetime, or through me. That last part is really operative if someone wants to work with me. They will buy through me without games or guile. Work with me, otherwise, why waste my time?
Are there deals out there? There are!! And I would be very happy to get you into one! But don't expect sellers to just give you the keys. It doesn't work that way. And don't expect to get a deal at fifteen cents on the dollar. If that is your expectation, you will need to work with someone else. It is fantasyland that you are living in. I live in Reality. It's the New New Reality, minus the mania.
If you are a serious buyer, let's get together. Call me at 661-287-9164 and we will set a time to meet.
Monday, August 06, 2007
What's Going On in Mortgage Financing?
It's all over the news, but what does it mean???
Sub-prime mortgage woes, including American Home Mortgage (the nation's #10 lender) going out of business, bad news with Countrywide, Novastar stock going down to junk status... could mean something... or nothing to you. It depends on where you are.
Let's take a brief random walk around some definitions and details, so that you will be able to understand what is really going on, and can differentiate truth from hype, and gauge the screaming headlines without the filter of fear.
Over the past several years, many loans were made to homeowners with what is euphamisticly called 'non-traditional' or 'non-conforming' situations. These borrowers had a poor credit history, an inability to document income, or any number of factors that made them less than prime candidates for a loan. There is a reason these types of loans are called 'Sub-Prime' and their slightly more credit worthy cousin, 'Alt-A'. They are risky loans and not up to the standards of A credit, prime, or traditional loans. The low interest and lots of money floating around, there were a lot of loans made to people who should not have been able to get the loans, but the loans were made because after holding the loan for some short period of time (called seasoning), the loan could be sold off to the secondary market for these loans, which were then bundled into what is called tranches, assigned a risk rating, and sold to investors both here in the US and around the world. In fact, over 1/3 of these bundled tranches were sold in the European and Chinese markets.
Another type of non-conforming loan is the jumbo loan, which has a loan amount higher than $417,000, which is the current maximum loan amount that can be done from government-backed mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). Loan amounts higher than this maximum come from private institutions.
In the last week, most non-conforming loan product rate rocketed significantly higher.
Default and foreclosure rates are on the rise, and the rising rates are a natural re-pricing of risk. In fact on Friday Wells Fargo announced jumbo loans would have an interest rate of 8%. That's not a typo. Yes, 8%. Other major lenders raised rates, not to that level, but as much as 1% over the course of the week. What is happening is lenders are not able to sell these loans on the secondary market unless there is a much higher interest rate attached to them. In Wells Fargo's case, I think that they just shut the jumbo loan window until the market settles out and incorporates a revised risk structure into rates. Of course there are numerous other details and implications involved here, but I am trying to outline the basics so my readers know what is going on. To continue...
The end investor for sub-prime and Alt-A loans have charged a premium for taking on a pool of these loans because they knew that they have a higher rate of default and delinquent payments. But the rating agencies (those rating the risk of these loans) may have substantially underestimated the risk of default. This is the crus of the credit crunch. These private investors, not having accurate assessments of the risks of the tranches or packages of loans that they were buying, now aren't so eager to buy. So this paper is discounted, so instead of paying $101K for a $100K loan that will bear interest, they may be willing to pay $95K for that mortgage to account for that risk. Or lower. Substantially lower in some cases. In fact, the pool of buyers for these tranches has dried up, and discounts of up to 30% or more are not unheard of. To say that this has hit the financial and housing markets hard would be to sugar-coat it.
When you have thousands and thousands of these loans, you have millions and billions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a 'liquidity crisis', and is exactly what happened to American Home Mortgage. They were holding too many of these loans when the music stopped, and were forced to sell at massive losses, and eventually they had to make the decision to close the doors and stop the bleeding. Novastar is following suit, with their stock price dropping from over $42 per share in January, to a little more than $6 on Friday, and today, dropping down around $4 per share before rebounding back up to $6 on news that it will continue making loans.
To take it one step further in detail...
Even when a lender is able to take some losses, they may be subject to a 'margin call'. This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. [start thinking about the value of Countrywide]. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset they are secured on is now diminished. This is exactly like margin calls in the stock market. If you have a loan against a stock that is losing value, you will get a 'margin call' and need to pay down the loan, as the underlying stock is losing too much value to be considered adequate collateral any longer. So for the big lenders, as their portfolio is losing value due to increased risk premiums and losses... the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, and they themselves have decreased ability to obtain money on the market that they can then loan out. It all spirals down to a credit crisis, which is how the current situation is described.
In response to seeing this situation play out in the fall of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared for increased risk premiums in the future.
What's Next?
This is not a problem that is going to settle out overnight. There are too many bad loans out there that should not have been made as a result of an easy credit mania that went on for too long. Easy money with low interest rates, too many lenders giving money to too many people with little or no documentation and bad credit history, led to the too-fast rise in home prices. In Southern California and in our local area of Santa Clarita, home price appreciation was over 20% per year for what, four years running? That's insane, and totally not sustainable.
The credit market is tightening. Loans to people with bad credit are disappearing, 100% financing is disappearing, qualification is being made on the adjusted rate, not the initial rate, on adjustable rate mortgages. Negative amortization loans, where the loan balance goes up every month, don't make any sense in a depreciating environment. But all of these things will tend to dry up the pool of potential buyers, thus slowing down an already slowing housing market.
The Federal government threatens to bail out people and companies affected by what is essentially, a re-evaluation of risk. This is exactly the wrong thing to do. An accurate evaluation of risk in an orderly and transparent market is how this whole ball of wax works! To have the Fed step in is to distort the market, rewarding those who have made bad decisions, and penalizing the American taxpayer, who if the government does take action, will end up footing the bill.
What should you do now?
First, even if you are not presently in the market for a home loan of any type, work to perfect your credit.
If you are in the midst of getting a home loan, work on the credit, and now is not the time to be nickel and diming out the costs. Get the loan. Get it funded. Get it done.
My Team and I are available for counseling with a limited number of people. The real estate market is great, just not for everyone at the same time. If you think you will be making a move in the next year in the Santa Clarita area, give me a call today at 661-287-9164.
Sub-prime mortgage woes, including American Home Mortgage (the nation's #10 lender) going out of business, bad news with Countrywide, Novastar stock going down to junk status... could mean something... or nothing to you. It depends on where you are.
Let's take a brief random walk around some definitions and details, so that you will be able to understand what is really going on, and can differentiate truth from hype, and gauge the screaming headlines without the filter of fear.
Over the past several years, many loans were made to homeowners with what is euphamisticly called 'non-traditional' or 'non-conforming' situations. These borrowers had a poor credit history, an inability to document income, or any number of factors that made them less than prime candidates for a loan. There is a reason these types of loans are called 'Sub-Prime' and their slightly more credit worthy cousin, 'Alt-A'. They are risky loans and not up to the standards of A credit, prime, or traditional loans. The low interest and lots of money floating around, there were a lot of loans made to people who should not have been able to get the loans, but the loans were made because after holding the loan for some short period of time (called seasoning), the loan could be sold off to the secondary market for these loans, which were then bundled into what is called tranches, assigned a risk rating, and sold to investors both here in the US and around the world. In fact, over 1/3 of these bundled tranches were sold in the European and Chinese markets.
Another type of non-conforming loan is the jumbo loan, which has a loan amount higher than $417,000, which is the current maximum loan amount that can be done from government-backed mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). Loan amounts higher than this maximum come from private institutions.
In the last week, most non-conforming loan product rate rocketed significantly higher.
Default and foreclosure rates are on the rise, and the rising rates are a natural re-pricing of risk. In fact on Friday Wells Fargo announced jumbo loans would have an interest rate of 8%. That's not a typo. Yes, 8%. Other major lenders raised rates, not to that level, but as much as 1% over the course of the week. What is happening is lenders are not able to sell these loans on the secondary market unless there is a much higher interest rate attached to them. In Wells Fargo's case, I think that they just shut the jumbo loan window until the market settles out and incorporates a revised risk structure into rates. Of course there are numerous other details and implications involved here, but I am trying to outline the basics so my readers know what is going on. To continue...
The end investor for sub-prime and Alt-A loans have charged a premium for taking on a pool of these loans because they knew that they have a higher rate of default and delinquent payments. But the rating agencies (those rating the risk of these loans) may have substantially underestimated the risk of default. This is the crus of the credit crunch. These private investors, not having accurate assessments of the risks of the tranches or packages of loans that they were buying, now aren't so eager to buy. So this paper is discounted, so instead of paying $101K for a $100K loan that will bear interest, they may be willing to pay $95K for that mortgage to account for that risk. Or lower. Substantially lower in some cases. In fact, the pool of buyers for these tranches has dried up, and discounts of up to 30% or more are not unheard of. To say that this has hit the financial and housing markets hard would be to sugar-coat it.
When you have thousands and thousands of these loans, you have millions and billions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a 'liquidity crisis', and is exactly what happened to American Home Mortgage. They were holding too many of these loans when the music stopped, and were forced to sell at massive losses, and eventually they had to make the decision to close the doors and stop the bleeding. Novastar is following suit, with their stock price dropping from over $42 per share in January, to a little more than $6 on Friday, and today, dropping down around $4 per share before rebounding back up to $6 on news that it will continue making loans.
To take it one step further in detail...
Even when a lender is able to take some losses, they may be subject to a 'margin call'. This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. [start thinking about the value of Countrywide]. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset they are secured on is now diminished. This is exactly like margin calls in the stock market. If you have a loan against a stock that is losing value, you will get a 'margin call' and need to pay down the loan, as the underlying stock is losing too much value to be considered adequate collateral any longer. So for the big lenders, as their portfolio is losing value due to increased risk premiums and losses... the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, and they themselves have decreased ability to obtain money on the market that they can then loan out. It all spirals down to a credit crisis, which is how the current situation is described.
In response to seeing this situation play out in the fall of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared for increased risk premiums in the future.
What's Next?
This is not a problem that is going to settle out overnight. There are too many bad loans out there that should not have been made as a result of an easy credit mania that went on for too long. Easy money with low interest rates, too many lenders giving money to too many people with little or no documentation and bad credit history, led to the too-fast rise in home prices. In Southern California and in our local area of Santa Clarita, home price appreciation was over 20% per year for what, four years running? That's insane, and totally not sustainable.
The credit market is tightening. Loans to people with bad credit are disappearing, 100% financing is disappearing, qualification is being made on the adjusted rate, not the initial rate, on adjustable rate mortgages. Negative amortization loans, where the loan balance goes up every month, don't make any sense in a depreciating environment. But all of these things will tend to dry up the pool of potential buyers, thus slowing down an already slowing housing market.
The Federal government threatens to bail out people and companies affected by what is essentially, a re-evaluation of risk. This is exactly the wrong thing to do. An accurate evaluation of risk in an orderly and transparent market is how this whole ball of wax works! To have the Fed step in is to distort the market, rewarding those who have made bad decisions, and penalizing the American taxpayer, who if the government does take action, will end up footing the bill.
What should you do now?
First, even if you are not presently in the market for a home loan of any type, work to perfect your credit.
If you are in the midst of getting a home loan, work on the credit, and now is not the time to be nickel and diming out the costs. Get the loan. Get it funded. Get it done.
My Team and I are available for counseling with a limited number of people. The real estate market is great, just not for everyone at the same time. If you think you will be making a move in the next year in the Santa Clarita area, give me a call today at 661-287-9164.
Friday, August 03, 2007
Sub-Prime Mortgage Meltdown Spreads
Yes, the news is full of it.
The sub-prime loan market with its 100% financing and option ARMs and no-document loans is having a tough time these days, and the problems are spreading into the sub-A and prime markets. In a report on CNBC today, Wells Fargo announced that it was raising jumbo rates to 8%, an increase of 1% since just last week. Other major lenders are following suit with increases, albeit at not taking the full leap that WF has taken. Today also, in a long-anticipated move, American Home Mortgages closed its doors, laying off more than 7,000 employees. A major player in the sub-prime market, AHM may be just the latest casualty in this correction in the housing market. The stock markets, largely in reaction to renewed focus on housing market woes, dropped again today. The Dow Jones Industrial mark dropped nearly 300 points, much of it in late and pre-weekend trading.
I will have more commentary on the housing market next week, but my readers should be aware the we think its always a great housing market, but not for everybody at the same time. For those in position to take advantage of current market conditions, this is a wonderful market. If you are in the Santa Clarita area, give us a call at 661-287-9164 and let's get started.
We start from wherever we are. Let's go!
The sub-prime loan market with its 100% financing and option ARMs and no-document loans is having a tough time these days, and the problems are spreading into the sub-A and prime markets. In a report on CNBC today, Wells Fargo announced that it was raising jumbo rates to 8%, an increase of 1% since just last week. Other major lenders are following suit with increases, albeit at not taking the full leap that WF has taken. Today also, in a long-anticipated move, American Home Mortgages closed its doors, laying off more than 7,000 employees. A major player in the sub-prime market, AHM may be just the latest casualty in this correction in the housing market. The stock markets, largely in reaction to renewed focus on housing market woes, dropped again today. The Dow Jones Industrial mark dropped nearly 300 points, much of it in late and pre-weekend trading.
I will have more commentary on the housing market next week, but my readers should be aware the we think its always a great housing market, but not for everybody at the same time. For those in position to take advantage of current market conditions, this is a wonderful market. If you are in the Santa Clarita area, give us a call at 661-287-9164 and let's get started.
We start from wherever we are. Let's go!
The SCV Home Team Supports Evan the Warrior
Hello everyone!
First of all we would like to thank you for caring about Evan. He is doing well. He is fighting for his cure like a champ. You can keep updated on his website that he and mom maintain at www.carepages.com sitename: evanthewarrior He loves receiving messages.
Second, wow! We are thrilled to have so many of you. Please know that we will do our best to keep everyone updated on our Fundraising efforts for Evan. We have been dubbed Evan's Warrior Women. We have begun fundraising efforts already and we have some really exciting events planned. You can keep up with the fundraising efforts at www.evanthewarrior.com also, if you ever have any questions you can email us at evanswarriorwomen@gmail.com We promise to do our best to answer and be prompt. Please be patient if it takes a while though.
Tomorrow, we are holding our last Recycling day for the summer. We will be continuing this monthly. For those of you that have been participating thank you! Please collect all your CRV beverage containers and bring them to Highlands tomorrow, Saturday, August 4th from 9-11 a.m. We will come to you, so if you like you don't even need to get out of your car! This has been a great way of raising funds for Evan and his family.
Evan, his mom Kimberly, and big brother Ryan are looking to move back to Santa Clarita this month. They need our help in finding a rental in the Tesoro Del Valle area. They need to be close enough to Rio del Norte for Ryan to walk to and from in the times that Kimberly is with Evan at appointments. Realtor Ray at http://www.scvhometeam.com/ has been working extremely hard for Evan's family. He needs our help in finding available rentals for a 2 year lease for Kimberly. If you know of anything, please contact Realtor Ray through his website. The sooner we can help Evan get back to his comfort zone, the better he'll do.
Also, since this is our first mass mailing, please let us know if you are on the list more than once or there is a better email to contact you at.
Hopefully, we'll see a bunch of you on Saturday. In the meanwhile, keep drinking your bottled water, sodas, and those beverages that come in glass containers. Save those CRV beverage containers for Evan. It saves the environment and helps Evan.
Check the Warrior Women website on Sunday for our brand new fundraising effort. It is a fashion must. Your children will not want to start school without our Evan's newest fashion accessory! Check it out at www.evanthewarrior.com You can also make a donation via PayPal by clicking on the tip jar. Also, while you're visiting our site, please take a moment to click on the ads in the sidebar. Evan gets paid per click through. This is a way for you to donate to Evan and his family for free. It takes just minutes from your day. Please do this daily even if we've not yet updated our site! Thanks.
If you would like to make a direct donation to Evan at Washington Mutual, his account number is: 395-173464-5. You can also mail a check directly at the address below. Thank you sincerely!
Also, Evan loves getting snail mail. You and your children can write him letters, draw pictures, etc. and mail them to:
Evan the Warrior Hutchison
P.O. Box 800883
Santa Clarita, CA
91380
www.carepages.com evanthewarrior
Thank you, with our most abundant graciousness. Please know that Kimberly, Evan, and Ryan are profoundly grateful for all the support and care they've received. My daughter said the other day, "Mom, it's good to know there are still good people in this world." She's right it is. We have proof that there are at least 300 really good people involved with Evan. Not to mention the countless strangers who stop at his site everyday and cheer our warrior on.
Evan's Warrior Women and The Hutchison Family.
Betsy Tobon
Sarah Eaton
Kathy Hare
Lori Rosales
Athena Styers
Alisa Doucette
Kimberly Hutchison
Evan's Warrior Women
www.evanthewarrior.com
Beating ALL one nasty cell at a time
First of all we would like to thank you for caring about Evan. He is doing well. He is fighting for his cure like a champ. You can keep updated on his website that he and mom maintain at www.carepages.com sitename: evanthewarrior He loves receiving messages.
Second, wow! We are thrilled to have so many of you. Please know that we will do our best to keep everyone updated on our Fundraising efforts for Evan. We have been dubbed Evan's Warrior Women. We have begun fundraising efforts already and we have some really exciting events planned. You can keep up with the fundraising efforts at www.evanthewarrior.com also, if you ever have any questions you can email us at evanswarriorwomen@gmail.com We promise to do our best to answer and be prompt. Please be patient if it takes a while though.
Tomorrow, we are holding our last Recycling day for the summer. We will be continuing this monthly. For those of you that have been participating thank you! Please collect all your CRV beverage containers and bring them to Highlands tomorrow, Saturday, August 4th from 9-11 a.m. We will come to you, so if you like you don't even need to get out of your car! This has been a great way of raising funds for Evan and his family.
Evan, his mom Kimberly, and big brother Ryan are looking to move back to Santa Clarita this month. They need our help in finding a rental in the Tesoro Del Valle area. They need to be close enough to Rio del Norte for Ryan to walk to and from in the times that Kimberly is with Evan at appointments. Realtor Ray at http://www.scvhometeam.com/ has been working extremely hard for Evan's family. He needs our help in finding available rentals for a 2 year lease for Kimberly. If you know of anything, please contact Realtor Ray through his website. The sooner we can help Evan get back to his comfort zone, the better he'll do.
Also, since this is our first mass mailing, please let us know if you are on the list more than once or there is a better email to contact you at.
Hopefully, we'll see a bunch of you on Saturday. In the meanwhile, keep drinking your bottled water, sodas, and those beverages that come in glass containers. Save those CRV beverage containers for Evan. It saves the environment and helps Evan.
Check the Warrior Women website on Sunday for our brand new fundraising effort. It is a fashion must. Your children will not want to start school without our Evan's newest fashion accessory! Check it out at www.evanthewarrior.com You can also make a donation via PayPal by clicking on the tip jar. Also, while you're visiting our site, please take a moment to click on the ads in the sidebar. Evan gets paid per click through. This is a way for you to donate to Evan and his family for free. It takes just minutes from your day. Please do this daily even if we've not yet updated our site! Thanks.
If you would like to make a direct donation to Evan at Washington Mutual, his account number is: 395-173464-5. You can also mail a check directly at the address below. Thank you sincerely!
Also, Evan loves getting snail mail. You and your children can write him letters, draw pictures, etc. and mail them to:
Evan the Warrior Hutchison
P.O. Box 800883
Santa Clarita, CA
91380
www.carepages.com evanthewarrior
Thank you, with our most abundant graciousness. Please know that Kimberly, Evan, and Ryan are profoundly grateful for all the support and care they've received. My daughter said the other day, "Mom, it's good to know there are still good people in this world." She's right it is. We have proof that there are at least 300 really good people involved with Evan. Not to mention the countless strangers who stop at his site everyday and cheer our warrior on.
Evan's Warrior Women and The Hutchison Family.
Betsy Tobon
Sarah Eaton
Kathy Hare
Lori Rosales
Athena Styers
Alisa Doucette
Kimberly Hutchison
Evan's Warrior Women
www.evanthewarrior.com
Beating ALL one nasty cell at a time
Wednesday, August 01, 2007
SoCalMLS Participates in New Mega-Data Sharing Group
Anaheim, CA (August 1, 2007) – In an unprecedented cooperative effort, Southern California MLS (SoCalMLS) has signed a joint data sharing agreement with nine other MLS organizations in California, forming the California MLSAlliance.
This new MLS gateway provides agents and brokers with a single source for accessing real estate information throughout much of California. Members of SoCalMLS, the nation’s second largest MLS, will now have increased exposure to more buyers for their listings, and they will be able to provide detailed listing information from a larger geographic area and increase the pool of real estate experts to whom they can refer customers.
Combining information from ten MLSs into one database, the new California MLSAlliance system was launched today and is now available to over 150,000 brokers and agents, providing access to more than 2.5 million active listings and off-market properties throughout the state. The system is developed and managed by real estate technology provider eNeighborhoods, a Dominion Enterprises company.
In California’s progressive real estate market, brokers and agents conduct business throughout the state, often across the traditional MLS boundaries. With the new MLSAlliance system, brokers and agents who belong to one of the 45 local real estate associations serviced by the ten participating MLSs can now search one system to find listings spanning across the state. The joint data access agreement between the MLSs extends a blanket offer of compensation and cooperation to all authorized participants within the California MLSAlliance.
“With an increased focus on super regionalization, statewide and national databases, the California MLSAlliance is a great demonstration of the willingness and ability of MLSs to work together for the common good,” said Russ Bergeron, CEO of Southern California MLS. “With a little work on our part, and the development efforts of our partners at eNeighborhoods, we have opened up access to millions of listings for our combined membership. That's what cooperation is all about.”
“These ten MLSs deserve praise for the decisive and progressive steps they have taken to improve access to real estate information in California”, said Andy Woolley, vice president of eNeighborhoods. “They’re not just talking about it, they’ve made it happen, delivering to their customers the largest compilation of MLS data anywhere in the world.”
In addition to SoCalMLS, the other participants include the Bay Area Real Estate Information Services, Inc. (BAREIS MLS®), Combined L.A./Westside MLS (CLAW), CRISNet Regional MLS, East Bay Regional Data (EBRD), Greater South Bay Regional MLS, iTech MLS, MetroList Services, Multi-Regional MLS (MRMLS), and San Francisco Association of REALTORS®. The MLSAlliance now unites Alameda and Contra Costa counties, San Francisco, across the Golden Gate Bridge to Marin and on to the wine country, the Sacramento metropolitan area and Orange, Los Angeles, Riverside and San Bernardino Counties in Southern California.
“This is just the first step in increasing the scope and breadth of coverage of MLS services throughout the state” added Bergeron, “allowing our customers to better serve the buyers and sellers who rely on real estate professionals to guide them through this most important transaction.”
This new MLS gateway provides agents and brokers with a single source for accessing real estate information throughout much of California. Members of SoCalMLS, the nation’s second largest MLS, will now have increased exposure to more buyers for their listings, and they will be able to provide detailed listing information from a larger geographic area and increase the pool of real estate experts to whom they can refer customers.
Combining information from ten MLSs into one database, the new California MLSAlliance system was launched today and is now available to over 150,000 brokers and agents, providing access to more than 2.5 million active listings and off-market properties throughout the state. The system is developed and managed by real estate technology provider eNeighborhoods, a Dominion Enterprises company.
In California’s progressive real estate market, brokers and agents conduct business throughout the state, often across the traditional MLS boundaries. With the new MLSAlliance system, brokers and agents who belong to one of the 45 local real estate associations serviced by the ten participating MLSs can now search one system to find listings spanning across the state. The joint data access agreement between the MLSs extends a blanket offer of compensation and cooperation to all authorized participants within the California MLSAlliance.
“With an increased focus on super regionalization, statewide and national databases, the California MLSAlliance is a great demonstration of the willingness and ability of MLSs to work together for the common good,” said Russ Bergeron, CEO of Southern California MLS. “With a little work on our part, and the development efforts of our partners at eNeighborhoods, we have opened up access to millions of listings for our combined membership. That's what cooperation is all about.”
“These ten MLSs deserve praise for the decisive and progressive steps they have taken to improve access to real estate information in California”, said Andy Woolley, vice president of eNeighborhoods. “They’re not just talking about it, they’ve made it happen, delivering to their customers the largest compilation of MLS data anywhere in the world.”
In addition to SoCalMLS, the other participants include the Bay Area Real Estate Information Services, Inc. (BAREIS MLS®), Combined L.A./Westside MLS (CLAW), CRISNet Regional MLS, East Bay Regional Data (EBRD), Greater South Bay Regional MLS, iTech MLS, MetroList Services, Multi-Regional MLS (MRMLS), and San Francisco Association of REALTORS®. The MLSAlliance now unites Alameda and Contra Costa counties, San Francisco, across the Golden Gate Bridge to Marin and on to the wine country, the Sacramento metropolitan area and Orange, Los Angeles, Riverside and San Bernardino Counties in Southern California.
“This is just the first step in increasing the scope and breadth of coverage of MLS services throughout the state” added Bergeron, “allowing our customers to better serve the buyers and sellers who rely on real estate professionals to guide them through this most important transaction.”
Wednesday, July 11, 2007
NAR sees Sales Volume and Price Drops in Future
{Note: Ray Kutylo and the SCV Home Team do not necessarily believe that the following has specific value to our local real estate market. The National Association of Realtors works with national averages and macro-trends, which may or may not be applicable to Southern California and the Santa Clarita area.]
Existing-home sales are expected to drop 5.7 percent this year, with the median existing-home price falling 1.4 percent to $218,800, the National Association of Realtors reported today in its latest forecast.
And new single-family sales are expected to drop 17.7 percent this year after an 18.1 percent drop in 2006, with the median price of new homes dropping 2.6 percent this year to $240,100.
The forecast anticipates six consecutive quarters of year-over-year existing-home median-price declines to end in the first quarter of 2008, with median existing-home prices growing 1.8 percent for the full year in 2008 compared to 2007. New-home prices are expected to rise 2.2 percent in 2008.
The numbers represent a slight adjustment from the association's last forecast in June, which projected a 4.6 percent decline in existing-home sales and an 18.2 percent decline in new single-family home sales this year compared to last year, and for existing-home prices to fall 1.3 percent and new-home prices to fall 2.3 percent compared to last year.
The association's forecast released today calls for 6.11 million existing-home sales this year, compared with 6.48 million last year. There are 865,000 new-home sales projected this year, compared with 1.05 million in 2006.
Housing starts are projected to drop 20.6 percent this year to 1.43 million compared with 1.8 million in 2006, with single-family starts dropping 23.3 percent and multifamily starts dropping 8.8 percent. Housing starts are expected to rise 0.6 percent in 2008 compared to 2007, with single-family starts declining 1.3 percent and multifamily starts rising 7.6 percent.
The rate for a 30-year fixed mortgage is expected to be 6.5 percent for 2007, up from 6.4 in 2006, and to climb to 6.6 percent in 2008. The association expects the federal funds rate to average 5.3 percent in 2007, up from 5 percent in 2006, and to fall to 4.9 percent in 2008.
Growth in the U.S. gross domestic product is projected at 2 percent in 2007, compared with a 3.3 percent growth rate last year, and GDP is forecast to grow 2.8 percent in 2008.
The unemployment rate is expected to average 4.6 percent in 2007, unchanged from last year, according to the NAR forecast, and to rise slightly to 4.7 percent in 2008.
Inflation, as measured by the Consumer Price Index, is projected at 2.6 percent in 2007, down from 3.2 percent last year, and is expected to lower to 2.4 percent in 2008. Inflation-adjusted disposable personal income is projected to rise 3 percent this year, up from a 2.6 percent gain in 2006, according to the report.
Existing-home sales are expected to drop 5.7 percent this year, with the median existing-home price falling 1.4 percent to $218,800, the National Association of Realtors reported today in its latest forecast.
And new single-family sales are expected to drop 17.7 percent this year after an 18.1 percent drop in 2006, with the median price of new homes dropping 2.6 percent this year to $240,100.
The forecast anticipates six consecutive quarters of year-over-year existing-home median-price declines to end in the first quarter of 2008, with median existing-home prices growing 1.8 percent for the full year in 2008 compared to 2007. New-home prices are expected to rise 2.2 percent in 2008.
The numbers represent a slight adjustment from the association's last forecast in June, which projected a 4.6 percent decline in existing-home sales and an 18.2 percent decline in new single-family home sales this year compared to last year, and for existing-home prices to fall 1.3 percent and new-home prices to fall 2.3 percent compared to last year.
The association's forecast released today calls for 6.11 million existing-home sales this year, compared with 6.48 million last year. There are 865,000 new-home sales projected this year, compared with 1.05 million in 2006.
Housing starts are projected to drop 20.6 percent this year to 1.43 million compared with 1.8 million in 2006, with single-family starts dropping 23.3 percent and multifamily starts dropping 8.8 percent. Housing starts are expected to rise 0.6 percent in 2008 compared to 2007, with single-family starts declining 1.3 percent and multifamily starts rising 7.6 percent.
The rate for a 30-year fixed mortgage is expected to be 6.5 percent for 2007, up from 6.4 in 2006, and to climb to 6.6 percent in 2008. The association expects the federal funds rate to average 5.3 percent in 2007, up from 5 percent in 2006, and to fall to 4.9 percent in 2008.
Growth in the U.S. gross domestic product is projected at 2 percent in 2007, compared with a 3.3 percent growth rate last year, and GDP is forecast to grow 2.8 percent in 2008.
The unemployment rate is expected to average 4.6 percent in 2007, unchanged from last year, according to the NAR forecast, and to rise slightly to 4.7 percent in 2008.
Inflation, as measured by the Consumer Price Index, is projected at 2.6 percent in 2007, down from 3.2 percent last year, and is expected to lower to 2.4 percent in 2008. Inflation-adjusted disposable personal income is projected to rise 3 percent this year, up from a 2.6 percent gain in 2006, according to the report.
Tuesday, July 10, 2007
Mortgage Market Woes Continue: Commentary About Stability Amid Chaos
Mortgage market commentary
Monday, July 09, 2007
By Lou Barnes
Inman News
Mortgages have been remarkably stable in the 6.75 percent-6.875 percent area while the all-powerful 10-year T-note has run in a much wider range: 10 days ago touching 5.32 percent, on Tuesday trading briefly at 4.99 percent, and today an early burst to 5.22 percent.
Two lessons here. First, inject volatility into a system, as did the 10-year's rocket in June from 4.6 percent to the levels above and you'll have high volatility for quite a while. By "volatility" I mean true up-and-down action, not the Wall Street standard explanation to a client who has lost his shirt in a straight-line move.
Second, Treasury volatility versus stable mortgages is the signature of market uncertainty about the inflation/growth outlook, and grave concern about credit quality. In this week alone we've gone from strong buying of Treasurys in response to revelations of the magnitude of the mortgage-derivative mess to sell-everything-you've-got on news of a healthy economy.
The economic health is a bit of a puzzle. We've got the worst housing recession in at least 15 years (pending sales in May fell to the lowest level since September '01, a tough month), but its effects are still confined. Mortgage rates jumped a half percent in June, yet applications for mortgages are rock steady. The twin surveys by the purchasing managers' association appeared to be tailing, but both rebounded well in June, manufacturing to 56 from 55, services from 58 to a strong 60.7.
How are we pulling this off with oil at $70? Personal incomes are stagnant, in May a net loser after inflation. One big propellant in the early '00s was home-equity extraction: the Fed's newest numbers show home-equity-line-of-credit balances shrinking in the 1st quarter this year for the first time in modern memory. In Friday's news, June payrolls gained an as-expected and healthy 135,000 jobs, but April and May were revised way up, driving credit-frightened money back out of bonds just bought.
I do not have an answer to the "why" in our still-good economy, except that the globe overall is in the best economic health ever and helping to float our boat.
In the housing-mortgage furball, one of the deep fears for this stage was/is that a rapid retrenchment in credit standards would make a bad situation worse. When the credit pendulum swings all the way to one side, the return move rarely stops on sensible center. However, this time may be a first-ever. Mortgage terms and pricing are tougher than six months ago, and underwriters are running scared (especially in appraisal review), but pretty much everything available then still is today.
If you want a subprime horror, you can still have it: the FICO bar has gone from the 500s to 620-ish, roughly the minimum range that experienced landlords will consider acceptable for a tenant. The off-the-shelf piggybacks are as they were, except the 1st-to-2nd rate spread is about 1 percent wider (2 percent for sub-680 FICOs), causing little damage because the 2nds are so much smaller than the 1sts. "No-Docs" are still out there, spreads to "A" paper about a half-percent wider.
Stated-income, interest-only, "option" ARMs with negative amortization feature -- all unchanged except for FICO-rate relationship at the outer edge of applicant/deal strength. One hundred percent financing in general is harder to find, and pricey, but it should be.
Supply is still good for three reasons. First, most mortgages are good and safe investments. Second, the global credit markets are still desperate for yield and still don't grasp the extent of risk in edgy mortgage product; FICO-rate re-pricing will continue as that risk comes clear.
Third, the regulators, bless them, have failed altogether to tighten standards. Whether wise inaction during pendulum-swing, or near-total ineptitude, the mortgage underwriting "guidances" promulgated in the last year by the Fed (at the head of a puzzled mob: OFHEO, the FDIC, the Comptroller, the Office of Thrift Supervision, the National Credit Union Administration) have been completely ignored by the mortgage industry. A reasonable response, given equally complete lack of enforcement.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
Monday, July 09, 2007
By Lou Barnes
Inman News
Mortgages have been remarkably stable in the 6.75 percent-6.875 percent area while the all-powerful 10-year T-note has run in a much wider range: 10 days ago touching 5.32 percent, on Tuesday trading briefly at 4.99 percent, and today an early burst to 5.22 percent.
Two lessons here. First, inject volatility into a system, as did the 10-year's rocket in June from 4.6 percent to the levels above and you'll have high volatility for quite a while. By "volatility" I mean true up-and-down action, not the Wall Street standard explanation to a client who has lost his shirt in a straight-line move.
Second, Treasury volatility versus stable mortgages is the signature of market uncertainty about the inflation/growth outlook, and grave concern about credit quality. In this week alone we've gone from strong buying of Treasurys in response to revelations of the magnitude of the mortgage-derivative mess to sell-everything-you've-got on news of a healthy economy.
The economic health is a bit of a puzzle. We've got the worst housing recession in at least 15 years (pending sales in May fell to the lowest level since September '01, a tough month), but its effects are still confined. Mortgage rates jumped a half percent in June, yet applications for mortgages are rock steady. The twin surveys by the purchasing managers' association appeared to be tailing, but both rebounded well in June, manufacturing to 56 from 55, services from 58 to a strong 60.7.
How are we pulling this off with oil at $70? Personal incomes are stagnant, in May a net loser after inflation. One big propellant in the early '00s was home-equity extraction: the Fed's newest numbers show home-equity-line-of-credit balances shrinking in the 1st quarter this year for the first time in modern memory. In Friday's news, June payrolls gained an as-expected and healthy 135,000 jobs, but April and May were revised way up, driving credit-frightened money back out of bonds just bought.
I do not have an answer to the "why" in our still-good economy, except that the globe overall is in the best economic health ever and helping to float our boat.
In the housing-mortgage furball, one of the deep fears for this stage was/is that a rapid retrenchment in credit standards would make a bad situation worse. When the credit pendulum swings all the way to one side, the return move rarely stops on sensible center. However, this time may be a first-ever. Mortgage terms and pricing are tougher than six months ago, and underwriters are running scared (especially in appraisal review), but pretty much everything available then still is today.
If you want a subprime horror, you can still have it: the FICO bar has gone from the 500s to 620-ish, roughly the minimum range that experienced landlords will consider acceptable for a tenant. The off-the-shelf piggybacks are as they were, except the 1st-to-2nd rate spread is about 1 percent wider (2 percent for sub-680 FICOs), causing little damage because the 2nds are so much smaller than the 1sts. "No-Docs" are still out there, spreads to "A" paper about a half-percent wider.
Stated-income, interest-only, "option" ARMs with negative amortization feature -- all unchanged except for FICO-rate relationship at the outer edge of applicant/deal strength. One hundred percent financing in general is harder to find, and pricey, but it should be.
Supply is still good for three reasons. First, most mortgages are good and safe investments. Second, the global credit markets are still desperate for yield and still don't grasp the extent of risk in edgy mortgage product; FICO-rate re-pricing will continue as that risk comes clear.
Third, the regulators, bless them, have failed altogether to tighten standards. Whether wise inaction during pendulum-swing, or near-total ineptitude, the mortgage underwriting "guidances" promulgated in the last year by the Fed (at the head of a puzzled mob: OFHEO, the FDIC, the Comptroller, the Office of Thrift Supervision, the National Credit Union Administration) have been completely ignored by the mortgage industry. A reasonable response, given equally complete lack of enforcement.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
Monday, July 09, 2007
Pros and Cons of Owning Rental Property
A closer look at investment purchases
Friday, July 06, 2007
By Robert J. Bruss
Inman News
What is the best investment you ever made? Common stocks? Bonds? A small business? Your house? Other real estate?
Chances are your most profitable investment has been your personal residence. If you have yet to purchase your own home, today's "buyer's market" is an excellent time to do so.
However, if you already own your house, why not take advantage of current market conditions to buy one or more houses as rental investments? Let your tenants buy those houses for you by using their rent payments to pay the mortgage and other expenses.
WHY BUY RENTAL HOUSES?
Realizing that profitable rental houses (and most other real estate investments) are long-term investments for at least five years, consider the advantages of such investments.
Your list of benefits will likely include probable appreciation in market value (although the home sale market is "flat" in many cities today), income tax shelter, maximum leverage to control the property with little cash, tax-free and tax-deferred sales benefits, and pride of ownership.
Yes, there are possible rental-house disadvantages unless you carefully qualify tenants before they move in to ensure they pay the rent on time and won't "trash" your property. But sound property management techniques minimize this risk and hold repair costs down by providing tenant incentives to avoid damaging your rental houses.
HOW TO GET STARTED BUYING RENTAL HOUSES.
The easiest way to acquire a sound, well-located rental house is to buy one as your personal residence.
That might sound unusual. However, the key reason is buying your own home for owner-occupancy is the simplest way to purchase for little or no cash on the most affordable mortgage finance terms.
After owning and living in your home for a few years, perhaps fixing it up to add market value, then you can convert it to a rental house and move on to another house purchased the same way, eventually establishing a portfolio of rental houses.
Or, thanks to the tax magic of Internal Revenue Code 121, after living in the house at least 24 months and then moving out to rent it to tenants, you will have up to 36 months to decide if you want to keep the house as a rental or sell it and claim up to $250,000 (up to $500,000 for a qualified married couple) tax-free principal-residence-sale profits.
THE FORGOTTEN RENTAL-HOUSE TAX-SHELTER BENEFITS.
Most prospective rental-house investors realize these properties can provide income tax benefits, but they are often hazy as to the details.
Thanks to the unusual benefits of the depreciation tax deduction for estimated wear, tear and obsolescence, most rental houses show a paper tax loss. The reason is that depreciation is a noncash-expense tax deduction, which requires no actual payment, as is necessary for mortgage payments, property taxes, insurance and repairs.
Current tax law allows depreciation deductions for rental properties over 27.5 years. Commercial properties require a 39-year depreciable useful life.
For example, suppose you buy a $250,000 rental house, allocating $50,000 to the nondepreciable land value. Dividing the $200,000 cost of the structure, each year for 27.5 years you can deduct on Schedule E of your income tax returns about $7,300 without having to pay in cash even $1 for any actual depreciation expense.
The likely resulting tax loss from the rental house, after paying the operating expenses from the rental income, is deductible up to $25,000 annually if your adjusted gross income (AGI) from other sources is less than $100,000. Between $100,000 and $150,000 AGI, the amount of deductible rental-property loss gradually declines.
But any unused rental-property tax loss can be "suspended" and saved for use in future tax years or when the property is eventually sold.
UNLIMITED DEDUCTIONS FOR REALTY PROS.
However, "real estate professionals" can claim unlimited property-loss deductions from their other ordinary taxable income. If you spend at least 750 hours per year (about 14 hours per week) on your real estate activities, you may qualify for unlimited Schedule E deductions from your rental houses and other realty investments.
A real estate sales license is not required. Full-time real estate investors, property managers, builders, contractors and leasing agents can qualify. Either spouse is eligible.
For example, suppose a married physician earns $500,000 AGI. Normally, he would not be entitled to any Schedule E tax loss deduction from his rental houses because his AGI exceeds $150,000. However, if his wife manages their properties and she spends more than 750 hours annually supervising those investments, making management decisions, inspecting properties for possible purchase, and supervising sales and exchanges of their properties, they can qualify for unlimited "real estate professional" deductions on their joint income tax returns.
AVOID TAX WHEN SELLING YOUR RENTAL HOUSES.
If you quickly buy and sell rental houses or other real estate after fewer than 12 months of ownership (called "flippers"), your capital gains will be taxed at ordinary income tax rates up to 35 percent plus state taxes.
However, if you own the property more than 12 months, then the maximum federal capital gain tax rate is currently only 15 percent, plus state taxes.
But various tax-avoidance methods are available to cut or eliminate these taxes. In addition to the principal-residence-sale tax exemption of Internal Revenue Code 121 (if the house was owner-occupied to meet the statute's requirements), tax-avoidance consideration should be given to tax-deferred exchanges and installment sales.
Also, remember that any unused annual property-tax losses from rental properties are "suspended" for use in future tax years or when a property is sold. Your tax adviser can provide full details.
Personally, I have sold several rental houses at considerable profits with no tax due because my suspended tax losses sheltered my capital gains from taxation. More information is available in my brand-new special report, "Pros and Cons of Investing in Rental Houses and Condominiums," available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant delivery at www.BobBruss.com.
Friday, July 06, 2007
By Robert J. Bruss
Inman News
What is the best investment you ever made? Common stocks? Bonds? A small business? Your house? Other real estate?
Chances are your most profitable investment has been your personal residence. If you have yet to purchase your own home, today's "buyer's market" is an excellent time to do so.
However, if you already own your house, why not take advantage of current market conditions to buy one or more houses as rental investments? Let your tenants buy those houses for you by using their rent payments to pay the mortgage and other expenses.
WHY BUY RENTAL HOUSES?
Realizing that profitable rental houses (and most other real estate investments) are long-term investments for at least five years, consider the advantages of such investments.
Your list of benefits will likely include probable appreciation in market value (although the home sale market is "flat" in many cities today), income tax shelter, maximum leverage to control the property with little cash, tax-free and tax-deferred sales benefits, and pride of ownership.
Yes, there are possible rental-house disadvantages unless you carefully qualify tenants before they move in to ensure they pay the rent on time and won't "trash" your property. But sound property management techniques minimize this risk and hold repair costs down by providing tenant incentives to avoid damaging your rental houses.
HOW TO GET STARTED BUYING RENTAL HOUSES.
The easiest way to acquire a sound, well-located rental house is to buy one as your personal residence.
That might sound unusual. However, the key reason is buying your own home for owner-occupancy is the simplest way to purchase for little or no cash on the most affordable mortgage finance terms.
After owning and living in your home for a few years, perhaps fixing it up to add market value, then you can convert it to a rental house and move on to another house purchased the same way, eventually establishing a portfolio of rental houses.
Or, thanks to the tax magic of Internal Revenue Code 121, after living in the house at least 24 months and then moving out to rent it to tenants, you will have up to 36 months to decide if you want to keep the house as a rental or sell it and claim up to $250,000 (up to $500,000 for a qualified married couple) tax-free principal-residence-sale profits.
THE FORGOTTEN RENTAL-HOUSE TAX-SHELTER BENEFITS.
Most prospective rental-house investors realize these properties can provide income tax benefits, but they are often hazy as to the details.
Thanks to the unusual benefits of the depreciation tax deduction for estimated wear, tear and obsolescence, most rental houses show a paper tax loss. The reason is that depreciation is a noncash-expense tax deduction, which requires no actual payment, as is necessary for mortgage payments, property taxes, insurance and repairs.
Current tax law allows depreciation deductions for rental properties over 27.5 years. Commercial properties require a 39-year depreciable useful life.
For example, suppose you buy a $250,000 rental house, allocating $50,000 to the nondepreciable land value. Dividing the $200,000 cost of the structure, each year for 27.5 years you can deduct on Schedule E of your income tax returns about $7,300 without having to pay in cash even $1 for any actual depreciation expense.
The likely resulting tax loss from the rental house, after paying the operating expenses from the rental income, is deductible up to $25,000 annually if your adjusted gross income (AGI) from other sources is less than $100,000. Between $100,000 and $150,000 AGI, the amount of deductible rental-property loss gradually declines.
But any unused rental-property tax loss can be "suspended" and saved for use in future tax years or when the property is eventually sold.
UNLIMITED DEDUCTIONS FOR REALTY PROS.
However, "real estate professionals" can claim unlimited property-loss deductions from their other ordinary taxable income. If you spend at least 750 hours per year (about 14 hours per week) on your real estate activities, you may qualify for unlimited Schedule E deductions from your rental houses and other realty investments.
A real estate sales license is not required. Full-time real estate investors, property managers, builders, contractors and leasing agents can qualify. Either spouse is eligible.
For example, suppose a married physician earns $500,000 AGI. Normally, he would not be entitled to any Schedule E tax loss deduction from his rental houses because his AGI exceeds $150,000. However, if his wife manages their properties and she spends more than 750 hours annually supervising those investments, making management decisions, inspecting properties for possible purchase, and supervising sales and exchanges of their properties, they can qualify for unlimited "real estate professional" deductions on their joint income tax returns.
AVOID TAX WHEN SELLING YOUR RENTAL HOUSES.
If you quickly buy and sell rental houses or other real estate after fewer than 12 months of ownership (called "flippers"), your capital gains will be taxed at ordinary income tax rates up to 35 percent plus state taxes.
However, if you own the property more than 12 months, then the maximum federal capital gain tax rate is currently only 15 percent, plus state taxes.
But various tax-avoidance methods are available to cut or eliminate these taxes. In addition to the principal-residence-sale tax exemption of Internal Revenue Code 121 (if the house was owner-occupied to meet the statute's requirements), tax-avoidance consideration should be given to tax-deferred exchanges and installment sales.
Also, remember that any unused annual property-tax losses from rental properties are "suspended" for use in future tax years or when a property is sold. Your tax adviser can provide full details.
Personally, I have sold several rental houses at considerable profits with no tax due because my suspended tax losses sheltered my capital gains from taxation. More information is available in my brand-new special report, "Pros and Cons of Investing in Rental Houses and Condominiums," available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant delivery at www.BobBruss.com.
Saturday, June 30, 2007
How To Avoid Foreclosure and Keep Your Home
YOU’RE NOT ALONE IF YOU’RE HAVING
TROUBLE PAYING YOUR MORTGAGE
The housing boom led to a record homeownership rate of
nearly 70 percent, but some homeowners now face problems
making their mortgage payments and can’t refinance their
loans. Over the last few years, lenders invented new types of
mortgages to help families buy their first homes and refinance
their existing mortgages. Many of these mortgages helped
families without cash for a down payment, or with less-thanperfect
credit, qualify for loans known as “subprime” loans.
Subprime loans have a higher interest rate and higher costs,
such as prepayment penalties. A very popular, widely available
mortgage product is the hybrid adjustable rate mortgage
(ARM). Hybrid ARMs have an initial period with a lower
interest rate (“teaser rate”) followed by significant increases
over the remainder of the loan. The hefty payment increase is
often called “payment shock” because the borrower is surprised
by the size of the increase and can’t afford the new payment.
If you are having trouble paying your mortgage for any reason,
or expect problems, you should work with experts and your
lender to find a solution now. If you fall behind and don’t take
action, the lender will foreclose on your home. If that happens,
you may lose your home and all of the money you have already
invested in it. The sooner you act, the better the chances you
will avoid foreclosure.
The Center for Responsible Lending estimates that 2.2 million
American households with subprime mortgages have lost or
will lose their homes as monthly payments rise on high-risk
mortgages. These families stand to lose as much as $164 billion
of equity in their homes.
This brochure will help you understand your options and give
you tips on how to avoid losing your home—regardless of
what kind of mortgage you have.
MORTGAGES WITH “PAYMENT SHOCK”
Mortgages like these can give you a “payment shock”:
• 2/28 and 3/27 Mortgages. A 2/28 or 3/27 adjustable rate
mortgage gives the borrower a fixed payment for the initial
two- or three-year period before adjusting the mortgage up as
often as every six months. After the initial “teaser rate” period,
your mortgage payments typically adjust up every six months.
• Interest-Only Mortgages. An interest-only mortgage lets
you pay only the interest on the loan for the first 5 or 10
years and nothing to pay off the loan amount (principal).
After the interest-only period, the mortgage requires much
higher payments covering both interest and principal that
must be repaid over the remaining years of the loan.
• Payment Option Adjustable Rate Mortgages. Payment
option mortgages let the borrower decide how much to pay
each month. You can even pay less than the interest, and add
the unpaid interest to the total amount of principal you owe.
Or you can pay just the interest or an amount sufficient to
pay off the loan in 15 or 30 years. These mortgages can have
an especially big payment shock.
Be careful if your mortgage has any of the following features:
• A “teaser rate” or “no interest” period that expires and leads
to a big jump in your monthly payment.
• An option to pay less than the full interest due in any given
month. Taking that option makes the amount you owe go up
instead of down, since the interest you don’t pay is added to
your loan balance.
• An adjustable interest rate with very high or no limits on the
amount your payment can go up.
• A payment that doesn’t include an amount for paying
property taxes and homeowners insurance. This means
you may be hit with big bills you didn’t expect.
HOW REALTORS® CAN HELP
REALTORS® are in the business of helping people become
homeowners and want to do everything they can to make
sure you can afford to stay in your home.
• The best and least expensive option will often be working
with the current lender (or the “loan servicer” hired by the
lender to oversee your loan). Read more about your
options in the next section.
• If your current lender isn’t willing or able to help, you may
be able to refinance your current mortgage with another
lender. REALTORS® can help you find responsible lenders
that make fair and affordable loans.
• To address the growing foreclosure problem, especially
with subprime loans, some state and local governments
and nonprofit organizations are offering financial assistance.
Ask your REALTOR® or counselor about who to call.
• Counseling agencies are in the business of helping
borrowers like you. Check out Counseling Resources
for some ideas.
• Remember, you should shop just as carefully for a
mortgage as you do for a car or anything else you buy.
Getting the lowest possible rate and fees can save you
many thousands of dollars over the life of the loan.
• Sometimes the only option is selling the home. Of course, no
one is better at helping a seller than a REALTOR®. It is better
to sell than go through foreclosure because it will be easier to
qualify for credit in the future and buy another home.
• Be wary of advertisements like “Cash for Houses/Any
Situation” or “We Buy Houses for Cash.” Consumer
groups have learned that many of these are scams that
bait homeowners with the promise of rescuing them from
imminent foreclosure. Unfortunately, the “rescue” often
involves the borrower signing over the house and the
family being evicted from their home.
TALK TO YOUR LENDER
Talking to the lender, or “loan servicer” that collects the
payments, should be one of your first steps. The earlier you
call, the better your chance to work out a solution. Here are
some options:
• Forbearance. Lenders may let you make a partial
payment, or skip payments, if you have a reasonable plan
to catch up. Tell your lender if you expect a tax refund, a
bonus, or a new job.
• Reinstatement. Reinstatement refers to making a payment
that covers all your late payments, usually at the end of a
forbearance period.
• Repayment Plan. If you can’t afford reinstatement, but
can start making payments to catch up, the lender may let
you pay an additional amount each month until you are
caught up.
• Loan Modification. Your lender may agree to amend your
mortgage to help you avoid foreclosure.
The options include:
° Adding all the missed payments to the loan amount
and increasing the monthly payment to cover the
larger loan.
° Giving you more years to pay off the loan, lowering
the interest rate, and/or forgiving part of the loan, to
lower your monthly payment.
° Switching from an adjustable rate mortgage to a fixed
rate mortgage, so you aren’t exposed to increases in
your monthly payment.
° Requiring amounts for taxes and insurance to be
included with your monthly mortgage payment so you
avoid big bills in addition to your mortgage.
• Sign Over the Property to the Lender in Exchange
for Debt Forgiveness. This can hurt your credit, but is
better than having a foreclosure in your credit history.
ADDITIONAL RESOURCES
For immediate advice, call 888.995.HOPE to speak to a
counselor on how to avoid foreclosure. Available in English and
Spanish, 24/7. Or visit www.995hope.org for more information.
HUD Resources:
• For a list of HUD-approved counseling agencies, by state,
go to www.hud.gov/counseling.
• HUD’s Internet page—“How to Avoid Foreclosure”—is
aimed at borrowers with FHA-insured mortgages, but can
help other borrowers as well. Go to www.hud.gov/foreclosure.
Freddie Mac: “Keeping Your Home, Protecting Your
Investment.” Go to www.freddiemac.com and search for
this brochure by typing in the full name of the brochure.
Ginnie Mae: For a simple calculator to help homebuyers
estimate how much they can afford to spend, read “How
Much Home Can You Afford?” http://www.GinnieMae.gov.
“Looking for the Best Mortgage” is a brochure issued by
11 federal agencies on how to shop, compare, and negotiate
the best deal on a home loan.
www.federalreserve.gov/pubs/mortgage/mortb_1.htm.
Americans for Fairness in Lending: To find consumer
resources related to a variety of lending issues, go to
www.affil.org.
Consumer Handbook on Adjustable Rate Mortgages
(the “CHARM” booklet) issued by the Federal Reserve
Board (FRB) and the Office of Thrift Supervision (OTS).
http://www.FederalReserve.gov. At the FRB site, click
on “publications and education resources” and then on
“consumer information brochures.”
Credit-reporting agencies:
• Equifax 800.685.1111 www.Equifax.com
• Experian 888.397.3742 www.Experian.com
• TransUnion 800.916.8800 www.TransUnion.com
Go to www.AnnualCreditReport.com to ask for a free copy
of your credit report, once a year, or call 877.322.8228.
COUNSELING RESOURCES
Non-profit organizations dedicated to helping consumers
avoid foreclosure can be invaluable.
• NeighborWorks® organizations work with the
Homeownership Preservation Foundation to support a
nationwide assistance number—888.995.HOPE. You can
speak with a counselor, day or night, to help you get back
on track financially. (English and Spanish)
• Reputable counseling agencies, such as NeighborWorks®
organizations, can help you avoid foreclosure. Look up
your nearest NeighborWorks® organization at www.nw.org.
• The U.S. Department of Housing and Urban Development
(HUD) website has a list of HUD-approved counseling
organizations, by state (www.hud.gov/counseling). We
recommend that the list be used as a starting point to
find good counselors. You also can call 800.569.4287
or TDD 800.877.8339.
• Watch out for questionable counseling companies
who advertise that, for a minimal fee, they will assist
homeowners by hiring a lawyer to defend the foreclosure
in court or negotiate lender assistance on the borrowers’
behalf. You should call a HUD-approved counseling
organization, a local NeighborWorks® organization,
or 888.995.HOPE before you pay or sign anything.
TROUBLE PAYING YOUR MORTGAGE
The housing boom led to a record homeownership rate of
nearly 70 percent, but some homeowners now face problems
making their mortgage payments and can’t refinance their
loans. Over the last few years, lenders invented new types of
mortgages to help families buy their first homes and refinance
their existing mortgages. Many of these mortgages helped
families without cash for a down payment, or with less-thanperfect
credit, qualify for loans known as “subprime” loans.
Subprime loans have a higher interest rate and higher costs,
such as prepayment penalties. A very popular, widely available
mortgage product is the hybrid adjustable rate mortgage
(ARM). Hybrid ARMs have an initial period with a lower
interest rate (“teaser rate”) followed by significant increases
over the remainder of the loan. The hefty payment increase is
often called “payment shock” because the borrower is surprised
by the size of the increase and can’t afford the new payment.
If you are having trouble paying your mortgage for any reason,
or expect problems, you should work with experts and your
lender to find a solution now. If you fall behind and don’t take
action, the lender will foreclose on your home. If that happens,
you may lose your home and all of the money you have already
invested in it. The sooner you act, the better the chances you
will avoid foreclosure.
The Center for Responsible Lending estimates that 2.2 million
American households with subprime mortgages have lost or
will lose their homes as monthly payments rise on high-risk
mortgages. These families stand to lose as much as $164 billion
of equity in their homes.
This brochure will help you understand your options and give
you tips on how to avoid losing your home—regardless of
what kind of mortgage you have.
MORTGAGES WITH “PAYMENT SHOCK”
Mortgages like these can give you a “payment shock”:
• 2/28 and 3/27 Mortgages. A 2/28 or 3/27 adjustable rate
mortgage gives the borrower a fixed payment for the initial
two- or three-year period before adjusting the mortgage up as
often as every six months. After the initial “teaser rate” period,
your mortgage payments typically adjust up every six months.
• Interest-Only Mortgages. An interest-only mortgage lets
you pay only the interest on the loan for the first 5 or 10
years and nothing to pay off the loan amount (principal).
After the interest-only period, the mortgage requires much
higher payments covering both interest and principal that
must be repaid over the remaining years of the loan.
• Payment Option Adjustable Rate Mortgages. Payment
option mortgages let the borrower decide how much to pay
each month. You can even pay less than the interest, and add
the unpaid interest to the total amount of principal you owe.
Or you can pay just the interest or an amount sufficient to
pay off the loan in 15 or 30 years. These mortgages can have
an especially big payment shock.
Be careful if your mortgage has any of the following features:
• A “teaser rate” or “no interest” period that expires and leads
to a big jump in your monthly payment.
• An option to pay less than the full interest due in any given
month. Taking that option makes the amount you owe go up
instead of down, since the interest you don’t pay is added to
your loan balance.
• An adjustable interest rate with very high or no limits on the
amount your payment can go up.
• A payment that doesn’t include an amount for paying
property taxes and homeowners insurance. This means
you may be hit with big bills you didn’t expect.
HOW REALTORS® CAN HELP
REALTORS® are in the business of helping people become
homeowners and want to do everything they can to make
sure you can afford to stay in your home.
• The best and least expensive option will often be working
with the current lender (or the “loan servicer” hired by the
lender to oversee your loan). Read more about your
options in the next section.
• If your current lender isn’t willing or able to help, you may
be able to refinance your current mortgage with another
lender. REALTORS® can help you find responsible lenders
that make fair and affordable loans.
• To address the growing foreclosure problem, especially
with subprime loans, some state and local governments
and nonprofit organizations are offering financial assistance.
Ask your REALTOR® or counselor about who to call.
• Counseling agencies are in the business of helping
borrowers like you. Check out Counseling Resources
for some ideas.
• Remember, you should shop just as carefully for a
mortgage as you do for a car or anything else you buy.
Getting the lowest possible rate and fees can save you
many thousands of dollars over the life of the loan.
• Sometimes the only option is selling the home. Of course, no
one is better at helping a seller than a REALTOR®. It is better
to sell than go through foreclosure because it will be easier to
qualify for credit in the future and buy another home.
• Be wary of advertisements like “Cash for Houses/Any
Situation” or “We Buy Houses for Cash.” Consumer
groups have learned that many of these are scams that
bait homeowners with the promise of rescuing them from
imminent foreclosure. Unfortunately, the “rescue” often
involves the borrower signing over the house and the
family being evicted from their home.
TALK TO YOUR LENDER
Talking to the lender, or “loan servicer” that collects the
payments, should be one of your first steps. The earlier you
call, the better your chance to work out a solution. Here are
some options:
• Forbearance. Lenders may let you make a partial
payment, or skip payments, if you have a reasonable plan
to catch up. Tell your lender if you expect a tax refund, a
bonus, or a new job.
• Reinstatement. Reinstatement refers to making a payment
that covers all your late payments, usually at the end of a
forbearance period.
• Repayment Plan. If you can’t afford reinstatement, but
can start making payments to catch up, the lender may let
you pay an additional amount each month until you are
caught up.
• Loan Modification. Your lender may agree to amend your
mortgage to help you avoid foreclosure.
The options include:
° Adding all the missed payments to the loan amount
and increasing the monthly payment to cover the
larger loan.
° Giving you more years to pay off the loan, lowering
the interest rate, and/or forgiving part of the loan, to
lower your monthly payment.
° Switching from an adjustable rate mortgage to a fixed
rate mortgage, so you aren’t exposed to increases in
your monthly payment.
° Requiring amounts for taxes and insurance to be
included with your monthly mortgage payment so you
avoid big bills in addition to your mortgage.
• Sign Over the Property to the Lender in Exchange
for Debt Forgiveness. This can hurt your credit, but is
better than having a foreclosure in your credit history.
ADDITIONAL RESOURCES
For immediate advice, call 888.995.HOPE to speak to a
counselor on how to avoid foreclosure. Available in English and
Spanish, 24/7. Or visit www.995hope.org for more information.
HUD Resources:
• For a list of HUD-approved counseling agencies, by state,
go to www.hud.gov/counseling.
• HUD’s Internet page—“How to Avoid Foreclosure”—is
aimed at borrowers with FHA-insured mortgages, but can
help other borrowers as well. Go to www.hud.gov/foreclosure.
Freddie Mac: “Keeping Your Home, Protecting Your
Investment.” Go to www.freddiemac.com and search for
this brochure by typing in the full name of the brochure.
Ginnie Mae: For a simple calculator to help homebuyers
estimate how much they can afford to spend, read “How
Much Home Can You Afford?” http://www.GinnieMae.gov.
“Looking for the Best Mortgage” is a brochure issued by
11 federal agencies on how to shop, compare, and negotiate
the best deal on a home loan.
www.federalreserve.gov/pubs/mortgage/mortb_1.htm.
Americans for Fairness in Lending: To find consumer
resources related to a variety of lending issues, go to
www.affil.org.
Consumer Handbook on Adjustable Rate Mortgages
(the “CHARM” booklet) issued by the Federal Reserve
Board (FRB) and the Office of Thrift Supervision (OTS).
http://www.FederalReserve.gov. At the FRB site, click
on “publications and education resources” and then on
“consumer information brochures.”
Credit-reporting agencies:
• Equifax 800.685.1111 www.Equifax.com
• Experian 888.397.3742 www.Experian.com
• TransUnion 800.916.8800 www.TransUnion.com
Go to www.AnnualCreditReport.com to ask for a free copy
of your credit report, once a year, or call 877.322.8228.
COUNSELING RESOURCES
Non-profit organizations dedicated to helping consumers
avoid foreclosure can be invaluable.
• NeighborWorks® organizations work with the
Homeownership Preservation Foundation to support a
nationwide assistance number—888.995.HOPE. You can
speak with a counselor, day or night, to help you get back
on track financially. (English and Spanish)
• Reputable counseling agencies, such as NeighborWorks®
organizations, can help you avoid foreclosure. Look up
your nearest NeighborWorks® organization at www.nw.org.
• The U.S. Department of Housing and Urban Development
(HUD) website has a list of HUD-approved counseling
organizations, by state (www.hud.gov/counseling). We
recommend that the list be used as a starting point to
find good counselors. You also can call 800.569.4287
or TDD 800.877.8339.
• Watch out for questionable counseling companies
who advertise that, for a minimal fee, they will assist
homeowners by hiring a lawyer to defend the foreclosure
in court or negotiate lender assistance on the borrowers’
behalf. You should call a HUD-approved counseling
organization, a local NeighborWorks® organization,
or 888.995.HOPE before you pay or sign anything.
Beware of Predatory Loans!
For most families, buying a home is the biggest and smartest
purchase they ever make. One of the keys to success is getting
an affordable home loan with fair terms and reasonable costs.
Unfortunately, home buyers need to be aware that some loans
are not in their best interest. When loans hurt instead of help,
they can quickly lead to foreclosure and even bankruptcy.
There is no single definition of predatory lending, because the
term covers a wide range of abusive practices. Some practices
may be predatory for one borrower but not for another,
because everyone’s circumstances are different. Predatory
lenders often take advantage of first-time homebuyers and
others who may be vulnerable to high-pressure sales tactics.
This article will help consumers learn about the risks of
predatory loans and how to avoid them. REALTORS® can
provide information about predatory lending, refer clients
to reputable housing counseling organizations, and encourage
families to make informed decisions about how to finance
their homes.
Responsible lenders play a vital role in helping families achieve
homeownership, but consumers need to make sure they are not
dealing with a predatory lender. Some unscrupulous lenders are
only interested in taking as much money as possible, and are
not concerned about whether loans are affordable, sustainable,
and truly helpful to home buyers and homeowners.
WHAT ARE SOME OF THE PROBLEMS CONNECTED TO PREDATORY LENDING?
Nearly all predatory lending occurs in the “subprime market,”
where loans are sold to people with less than ideal credit
histories, such as a short work history, high debt, and a record
of late payments on credit cards or other debt. Subprime loans
have played an important role in helping millions of consumers
achieve homeownership, but, unfortunately, some lenders abuse
their role and take unfair advantage of vulnerable borrowers.
Here are a few examples of problems with predatory loans:
High interest rates and fees. Predatory lenders often
charge extremely high interest and fees that are added into
the total amount of the loan the borrower must repay. These
lenders charge what they can get away with, not a fair
amount based on the credit history of the borrower.
Broken promises/“bait and switch.” Sometimes home
buyers are offered a new loan or a refinance of an existing loan
that seems to meet all of their needs only to find that interest
rates and fees have changed when they get to the closing table.
Agreeing to last-minute changes can cost thousands of dollars
and result in a loan they just can’t afford.
Loans that start low and go high. Adjustable rate loans
are popular in today’s market, but many that seem to be
affordable are likely to have steep cost increases in the
future. Avoid “payment shock” by considering whether
you can pay for the loan both now and in the future.
Loan “flipping.” Too many homeowners are persuaded to
refinance their mortgage, sometimes repeatedly, when there
is no real benefit. Even when a family receives some cash
from a refinance, the gains should be weighed against the
costs of excessive fees and a higher loan amount. Often a
borrower has other options, such as obtaining a second
mortgage instead of refinancing the entire existing mortgage.
Steering. Some families who receive subprime loans could
qualify for a much more affordable home loan. Predatory
lenders use aggressive sales tactics to steer families into
unnecessarily expensive loan products.
SHOP FOR THE LOWEST-COST LOAN
REALTORS® develop relationships of trust with the families
they serve, and can help you avoid predatory loans by
encouraging careful shopping.
Ask these important questions:
• What is my credit score? Can I have a copy of my credit report?
• What is the best interest rate today? Do I qualify?
• Is the loan’s interest rate fixed or adjustable?
• What is the term (length) of the loan?
• What are the total loan fees?
• What is the total monthly payment? Does this include property taxes and insurance? If not, how much will I need each month for taxes and insurance?
• Is there an application fee? If so, what is it, and how much is refundable if I don’t qualify?
• Are there any prepayment penalties? If so, what are they and how long do they last?
POSSIBLE WARNING SIGNS OF A PREDATORY LOAN
• Sounds too easy. “Guaranteed approval” or “no income
verification” regardless of borrower’s current employment,
credit history, and assets. These claims indicate the lender
doesn’t care about whether you can afford to make the
payments over the long haul.
• Excessive fees. Higher lender and/or mortgage broker
fees than are typical in your market. Because these costs
can be financed as part of the loan, they are easy to
disguise or downplay. On competitive loans, fees are
negotiable. It is common for home buyers to pay only one
percent of the loan amount for prime loans. By contrast, a
typical predatory loan may cost five percent or more.
• Large future costs. High-risk adjustable rate mortgages
where the payment rises a lot after a short introductory
period are seldom appropriate for families who already
have had problems repaying other loans. Home buyers also
should avoid a large single “balloon” payment (a lump sum
due at the end of the loan’s term).
• Closing delays. The lender deliberately delays closing so
the commitment on a reasonably-priced loan expires.
• Over-valued property. Inflated appraisals that allow
excessive fees to be included in the loan and result in the
borrower owing more to the bank than the home is worth.
• Barriers to refinancing. Prepayment penalties that make
it hard for a borrower to refinance in order to pay off a
high-cost loan by taking advantage of a low-cost loan.
• No down payment loans. These loans may be split into
two mortgages, with one having a much higher cost. Home
buyers should be sure they can afford the payments.
• Unethical document management. An ethical lender or
broker will always require you to sign key loan papers, and
they will never ask you to sign a document dated before
the date you sign it.
Getting the right loan for you is just as important as getting the right house for you!
Call Ray Kutylo and the SCV Home Team at 661-287-9164 and let's get started!
OTHER IMPORTANT RESOURCES FOR YOU...
Fannie Mae: “For Home Buyers & Homeowners”
at http://www.fanniemae.com/.
Freddie Mac: “Buying and Owning a Home”
at http://www.freddiemac.com/.
Ginnie Mae:
For a simple calculator to help homebuyers estimate how
much they can afford to spend, read “How Much Home
Can You Afford?” at http://www.ginniemae.gov/.
HUD Housing Counselors:
For a list of counseling agencies, by state, approved by the
Department of Housing and Urban Development (HUD),
go to www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.
Credit-reporting agencies:
• Equifax 800.685.1111 http://www.equifax.com/.
• Experian 888.397.3742 http://www.experian.com/.
• TransUnion 800.916.8800 http://www.transunion.com/.
Go to http://www.annualcreditreport.com/ to ask for a free copy
of your credit report, once a year, or call 877.322.8228.
See also, http://www.ftc.gov/.
“Looking for the Best Mortgage” is a brochure on how to
shop, compare, and negotiate the best deal on a home loan.
The brochure is a joint effort of 11 federal agencies,
including the Federal Trade Commission (FTC), the Federal
Reserve Board, HUD, and the Department of Justice.
www.federalreserve.gov/pubs/mortgage/mortb_1.htm.
Consumer Handbook on Adjustable Rate Mortgages
(the CHARM booklet) issued by the Federal Reserve
Board (FRB) and the Office of Thrift Supervision (OTS).
http://www.federalreserve.gov/. At the FRB site, click
on “publications and education resources” and then on
“consumer information brochures.”
ADDITIONAL RESOURCES
The National Association of REALTORS® (NAR):
For information on NAR’s Housing Opportunity Program,
go to www.REALTOR.org/HousingOpportunity.
The Center for Responsible Lending (CRL):
For information about predatory mortgage lending practices,
including “The Seven Signs of Predatory Lending,” go to
http://www.responsiblelending.org/.
Other brochures to help consumers shop for the best
mortgage:
• NAR and CRL have issued two other brochures:
• “Specialty (Non-Traditional) Mortgages: What Are
the Risks and Advantages?”
• “Traditional Mortgages: Understanding Your Options”
• NAR and the Federal Housing Administration of the U.S.
Department of Housing and Urban Development have
issued a brochure on “FHA Insured Mortgages.” FHA
mortgages provide a safe and affordable option for
homebuyers.
You may view, download, and order these brochures. Go to:
http://www.realtor.org/housopp.nsf/pages/mortgages
purchase they ever make. One of the keys to success is getting
an affordable home loan with fair terms and reasonable costs.
Unfortunately, home buyers need to be aware that some loans
are not in their best interest. When loans hurt instead of help,
they can quickly lead to foreclosure and even bankruptcy.
There is no single definition of predatory lending, because the
term covers a wide range of abusive practices. Some practices
may be predatory for one borrower but not for another,
because everyone’s circumstances are different. Predatory
lenders often take advantage of first-time homebuyers and
others who may be vulnerable to high-pressure sales tactics.
This article will help consumers learn about the risks of
predatory loans and how to avoid them. REALTORS® can
provide information about predatory lending, refer clients
to reputable housing counseling organizations, and encourage
families to make informed decisions about how to finance
their homes.
Responsible lenders play a vital role in helping families achieve
homeownership, but consumers need to make sure they are not
dealing with a predatory lender. Some unscrupulous lenders are
only interested in taking as much money as possible, and are
not concerned about whether loans are affordable, sustainable,
and truly helpful to home buyers and homeowners.
WHAT ARE SOME OF THE PROBLEMS CONNECTED TO PREDATORY LENDING?
Nearly all predatory lending occurs in the “subprime market,”
where loans are sold to people with less than ideal credit
histories, such as a short work history, high debt, and a record
of late payments on credit cards or other debt. Subprime loans
have played an important role in helping millions of consumers
achieve homeownership, but, unfortunately, some lenders abuse
their role and take unfair advantage of vulnerable borrowers.
Here are a few examples of problems with predatory loans:
High interest rates and fees. Predatory lenders often
charge extremely high interest and fees that are added into
the total amount of the loan the borrower must repay. These
lenders charge what they can get away with, not a fair
amount based on the credit history of the borrower.
Broken promises/“bait and switch.” Sometimes home
buyers are offered a new loan or a refinance of an existing loan
that seems to meet all of their needs only to find that interest
rates and fees have changed when they get to the closing table.
Agreeing to last-minute changes can cost thousands of dollars
and result in a loan they just can’t afford.
Loans that start low and go high. Adjustable rate loans
are popular in today’s market, but many that seem to be
affordable are likely to have steep cost increases in the
future. Avoid “payment shock” by considering whether
you can pay for the loan both now and in the future.
Loan “flipping.” Too many homeowners are persuaded to
refinance their mortgage, sometimes repeatedly, when there
is no real benefit. Even when a family receives some cash
from a refinance, the gains should be weighed against the
costs of excessive fees and a higher loan amount. Often a
borrower has other options, such as obtaining a second
mortgage instead of refinancing the entire existing mortgage.
Steering. Some families who receive subprime loans could
qualify for a much more affordable home loan. Predatory
lenders use aggressive sales tactics to steer families into
unnecessarily expensive loan products.
SHOP FOR THE LOWEST-COST LOAN
REALTORS® develop relationships of trust with the families
they serve, and can help you avoid predatory loans by
encouraging careful shopping.
Ask these important questions:
• What is my credit score? Can I have a copy of my credit report?
• What is the best interest rate today? Do I qualify?
• Is the loan’s interest rate fixed or adjustable?
• What is the term (length) of the loan?
• What are the total loan fees?
• What is the total monthly payment? Does this include property taxes and insurance? If not, how much will I need each month for taxes and insurance?
• Is there an application fee? If so, what is it, and how much is refundable if I don’t qualify?
• Are there any prepayment penalties? If so, what are they and how long do they last?
POSSIBLE WARNING SIGNS OF A PREDATORY LOAN
• Sounds too easy. “Guaranteed approval” or “no income
verification” regardless of borrower’s current employment,
credit history, and assets. These claims indicate the lender
doesn’t care about whether you can afford to make the
payments over the long haul.
• Excessive fees. Higher lender and/or mortgage broker
fees than are typical in your market. Because these costs
can be financed as part of the loan, they are easy to
disguise or downplay. On competitive loans, fees are
negotiable. It is common for home buyers to pay only one
percent of the loan amount for prime loans. By contrast, a
typical predatory loan may cost five percent or more.
• Large future costs. High-risk adjustable rate mortgages
where the payment rises a lot after a short introductory
period are seldom appropriate for families who already
have had problems repaying other loans. Home buyers also
should avoid a large single “balloon” payment (a lump sum
due at the end of the loan’s term).
• Closing delays. The lender deliberately delays closing so
the commitment on a reasonably-priced loan expires.
• Over-valued property. Inflated appraisals that allow
excessive fees to be included in the loan and result in the
borrower owing more to the bank than the home is worth.
• Barriers to refinancing. Prepayment penalties that make
it hard for a borrower to refinance in order to pay off a
high-cost loan by taking advantage of a low-cost loan.
• No down payment loans. These loans may be split into
two mortgages, with one having a much higher cost. Home
buyers should be sure they can afford the payments.
• Unethical document management. An ethical lender or
broker will always require you to sign key loan papers, and
they will never ask you to sign a document dated before
the date you sign it.
Getting the right loan for you is just as important as getting the right house for you!
Call Ray Kutylo and the SCV Home Team at 661-287-9164 and let's get started!
OTHER IMPORTANT RESOURCES FOR YOU...
Fannie Mae: “For Home Buyers & Homeowners”
at http://www.fanniemae.com/.
Freddie Mac: “Buying and Owning a Home”
at http://www.freddiemac.com/.
Ginnie Mae:
For a simple calculator to help homebuyers estimate how
much they can afford to spend, read “How Much Home
Can You Afford?” at http://www.ginniemae.gov/.
HUD Housing Counselors:
For a list of counseling agencies, by state, approved by the
Department of Housing and Urban Development (HUD),
go to www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.
Credit-reporting agencies:
• Equifax 800.685.1111 http://www.equifax.com/.
• Experian 888.397.3742 http://www.experian.com/.
• TransUnion 800.916.8800 http://www.transunion.com/.
Go to http://www.annualcreditreport.com/ to ask for a free copy
of your credit report, once a year, or call 877.322.8228.
See also, http://www.ftc.gov/.
“Looking for the Best Mortgage” is a brochure on how to
shop, compare, and negotiate the best deal on a home loan.
The brochure is a joint effort of 11 federal agencies,
including the Federal Trade Commission (FTC), the Federal
Reserve Board, HUD, and the Department of Justice.
www.federalreserve.gov/pubs/mortgage/mortb_1.htm.
Consumer Handbook on Adjustable Rate Mortgages
(the CHARM booklet) issued by the Federal Reserve
Board (FRB) and the Office of Thrift Supervision (OTS).
http://www.federalreserve.gov/. At the FRB site, click
on “publications and education resources” and then on
“consumer information brochures.”
ADDITIONAL RESOURCES
The National Association of REALTORS® (NAR):
For information on NAR’s Housing Opportunity Program,
go to www.REALTOR.org/HousingOpportunity.
The Center for Responsible Lending (CRL):
For information about predatory mortgage lending practices,
including “The Seven Signs of Predatory Lending,” go to
http://www.responsiblelending.org/.
Other brochures to help consumers shop for the best
mortgage:
• NAR and CRL have issued two other brochures:
• “Specialty (Non-Traditional) Mortgages: What Are
the Risks and Advantages?”
• “Traditional Mortgages: Understanding Your Options”
• NAR and the Federal Housing Administration of the U.S.
Department of Housing and Urban Development have
issued a brochure on “FHA Insured Mortgages.” FHA
mortgages provide a safe and affordable option for
homebuyers.
You may view, download, and order these brochures. Go to:
http://www.realtor.org/housopp.nsf/pages/mortgages
Friday, June 29, 2007
Tighter Lending Rules May Backfire
Part 1 of 2: Can feds make mortgages more affordable?
Monday, June 25, 2007
By Jack Guttentag Inman News
(This is Part 1 of a two-part series.)
Case histories of subprime loans that have gone to foreclosure often generate righteous indignation. With benefit of hindsight, many if not most of them look as if they never should have been made. Such indignation is one important motivator for recent demands that government should require that all home mortgages be "affordable."
While affordability is a difficult concept to define rigorously, one well-defined affordability rule has emerged with the approval of bank regulators, community groups and many legislators. It applies to adjustable-rate mortgages, or ARMs, which have more than their proportionate share of foreclosures.
In many cases, lenders assess the ability of ARM borrowers to make their payments at the initial interest rate, which is artificially low. When the rate increases, the payment also increases and may become unaffordable.
I will use the 2/28 ARM, the most widely used instrument in the subprime market, to illustrate. The rate is fixed for two years, after which it is adjusted every six months to equal the value of the rate index at the time of the adjustment, plus a margin, which is fixed for the life of the loan. Any rate increase may be limited by a rate-adjustment cap.
For example, assume the initial rate is 6 percent; the index is one-year LIBOR, which currently is about 5.4 percent; the margin is 6 percent; and the adjustment cap is 3 percent. If the index remains unchanged, the rate after two years will rise to 9 percent, the maximum permitted by the cap, and six months later to 11.4 percent. Assuming a 30-year mortgage, the payment will increase by 32.7 percent in month 25, and by another 21.3 percent in month 31. The borrower may not be able to manage such formidable increases.
The affordability proponents propose that lenders should be required to qualify borrowers at the fully indexed rate, or FIR, which is the current value of the index plus the margin, rather than the initial rate. In the example, the FIR is 5.4 percent + 6 percent = 11.4 percent. The logic is that borrowers who at the outset can meet the payment calculated at the FIR will find it affordable 24 or 30 months later when the rate increases.
The requirement, however, would have little impact because it can be so easily (and legally) evaded. This may be a good thing because the consequences of an effective rule might well be unacceptable.
Borrowers are qualified using maximum ratios of mortgage payment plus other housing expenses to income. Assume the maximum ratio is 36 percent and that the borrower taking out the 2/28 ARM described above barely qualifies -- his ratio is 36 percent -- when the payment is calculated at 6 percent. Calculating the payment at the FIR of 11.4 percent would push the ratio to 51 percent, making the borrower ineligible.
The maximum ratio, however, remains within the lender's discretion. This means that a lender who wants to make the loan has only to increase the maximum ratio to 51 percent and, presto, the borrower qualifies at the FIR. This would be a completely legal evasion. In the subprime market, ratios of 50-55 percent are not uncommon.
In principle, government could close this escape valve by freezing the qualification ratio, and 25 years ago this might have been possible. Ratios of 36 percent and 28 percent, measured with and without nonmortgage debt service, were then more or less the norm. As underwriting systems have evolved, however, maximum ratios have proliferated. They now vary from one loan program to another, and with other factors that affect risk, such as credit score, down payment, type of property, and loan purpose.
Government intrusion into this very complex process in order to make the FIR rule effective would be a disaster, and nobody has suggested it.
Proponents of the FIR rule either don't realize how easily the rule can be evaded, or are satisfied to go through the motions. If the rule was effective, they might be forced to confront a really thorny issue.
Any government underwriting rule that is more restrictive than those selected by lenders, and which cannot be evaded, will reduce the number of households who qualify for loans. Of this group that is cut from the market, some would lose their homes through default and foreclosure had they received loans. This is the intended benefit of the more restrictive rule. A larger number, however, would have become successful homeowners under the previous rules and are now denied this opportunity. This is the unintended but inescapable cost of the restrictive rule.
To prevent one foreclosure by tightening standards, we prevent a larger number of successful loans. I don't know what that number is, or what society should view as an acceptable number. These questions have been studiously avoided.
Next week: Unaffordable loans that are in the public interest.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com/.
Monday, June 25, 2007
By Jack Guttentag Inman News
(This is Part 1 of a two-part series.)
Case histories of subprime loans that have gone to foreclosure often generate righteous indignation. With benefit of hindsight, many if not most of them look as if they never should have been made. Such indignation is one important motivator for recent demands that government should require that all home mortgages be "affordable."
While affordability is a difficult concept to define rigorously, one well-defined affordability rule has emerged with the approval of bank regulators, community groups and many legislators. It applies to adjustable-rate mortgages, or ARMs, which have more than their proportionate share of foreclosures.
In many cases, lenders assess the ability of ARM borrowers to make their payments at the initial interest rate, which is artificially low. When the rate increases, the payment also increases and may become unaffordable.
I will use the 2/28 ARM, the most widely used instrument in the subprime market, to illustrate. The rate is fixed for two years, after which it is adjusted every six months to equal the value of the rate index at the time of the adjustment, plus a margin, which is fixed for the life of the loan. Any rate increase may be limited by a rate-adjustment cap.
For example, assume the initial rate is 6 percent; the index is one-year LIBOR, which currently is about 5.4 percent; the margin is 6 percent; and the adjustment cap is 3 percent. If the index remains unchanged, the rate after two years will rise to 9 percent, the maximum permitted by the cap, and six months later to 11.4 percent. Assuming a 30-year mortgage, the payment will increase by 32.7 percent in month 25, and by another 21.3 percent in month 31. The borrower may not be able to manage such formidable increases.
The affordability proponents propose that lenders should be required to qualify borrowers at the fully indexed rate, or FIR, which is the current value of the index plus the margin, rather than the initial rate. In the example, the FIR is 5.4 percent + 6 percent = 11.4 percent. The logic is that borrowers who at the outset can meet the payment calculated at the FIR will find it affordable 24 or 30 months later when the rate increases.
The requirement, however, would have little impact because it can be so easily (and legally) evaded. This may be a good thing because the consequences of an effective rule might well be unacceptable.
Borrowers are qualified using maximum ratios of mortgage payment plus other housing expenses to income. Assume the maximum ratio is 36 percent and that the borrower taking out the 2/28 ARM described above barely qualifies -- his ratio is 36 percent -- when the payment is calculated at 6 percent. Calculating the payment at the FIR of 11.4 percent would push the ratio to 51 percent, making the borrower ineligible.
The maximum ratio, however, remains within the lender's discretion. This means that a lender who wants to make the loan has only to increase the maximum ratio to 51 percent and, presto, the borrower qualifies at the FIR. This would be a completely legal evasion. In the subprime market, ratios of 50-55 percent are not uncommon.
In principle, government could close this escape valve by freezing the qualification ratio, and 25 years ago this might have been possible. Ratios of 36 percent and 28 percent, measured with and without nonmortgage debt service, were then more or less the norm. As underwriting systems have evolved, however, maximum ratios have proliferated. They now vary from one loan program to another, and with other factors that affect risk, such as credit score, down payment, type of property, and loan purpose.
Government intrusion into this very complex process in order to make the FIR rule effective would be a disaster, and nobody has suggested it.
Proponents of the FIR rule either don't realize how easily the rule can be evaded, or are satisfied to go through the motions. If the rule was effective, they might be forced to confront a really thorny issue.
Any government underwriting rule that is more restrictive than those selected by lenders, and which cannot be evaded, will reduce the number of households who qualify for loans. Of this group that is cut from the market, some would lose their homes through default and foreclosure had they received loans. This is the intended benefit of the more restrictive rule. A larger number, however, would have become successful homeowners under the previous rules and are now denied this opportunity. This is the unintended but inescapable cost of the restrictive rule.
To prevent one foreclosure by tightening standards, we prevent a larger number of successful loans. I don't know what that number is, or what society should view as an acceptable number. These questions have been studiously avoided.
Next week: Unaffordable loans that are in the public interest.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com/.
Thursday, June 28, 2007
Mold... Hazard or Hype?
In the real estate industry, mold has become a factor that may hurt a deal. Some agents are afraid to recommend a mold inspection, the neglect of which can expose them to unforeseen liability in the future.
Everybody wants to live in a healthy home environment. Mold problems can affect the health of your client’s family and the value of their new home. Unfortunately, the subject of mold has become quite blown out of proportion over the past few years.
There are situations that can arise as a result of improper care and maintenance. The trick is learning how to deal with mold and moisture issues based on facts and not hysteria or hype. The biggest mistake you can make is to neglect to take care of a moisture intrusion or mold issue immediately and sufficiently.
What to Look For:
As a homeowner, you should take the time to perform your own inspection of the property and look for any signs of prior water damage. There are certain indicators you can look for to yourself. All mold problems stem from a moisture problem so you should check for stains around the windows and doors, look in the bathrooms for moisture stains due to leaks or floods and locate any poor caulking jobs that do not properly seal fixtures and therefore allow moisture to get into the walls or floors. Also check for any signs of moisture damage to the walls, ceilings or floors. Upon finding any such conditions, a formal inspection is recommended.
You should also look for evidence of condensation or poor ventilation. When a room is not properly ventilated, condensation can form leading to potential mold problems. Check the bathrooms to ensure that there is either an exhaust fan or a window installed. Kitchens should have an exhaust fan as well. Test any fans to ensure that they are in working condition.
Be on the lookout for leaks and if you find any ensure they are repaired as quickly as possible. You are likely to find leaks under stoves, refrigerators, dishwashers & washing machines and under kitchen and bathroom sinks. A leak in any location can lead to a mold problem if improperly handled.
In many cases a musty smell can indicate a mold problem. The smell can be a result of a dirty HVAC filter, a prior leak or flooding which was not properly dried out, or a current situation, such as a leaky pipe in the walls. You may not be able to locate where the smell is coming from. In that case a mold inspection should definitely be recommended in order to determine the source of moisture and the extent of the situation.
Mold problems should not create unnecessary concern or panic. One way to protect your interest and reduce concern is hire a mold inspection company that is independent from the other companies that do repair work and/or lab analysis. This removes potential for conflict of interest.
Remember that there is a solution to every problem and that many times that solution may be as simple as house cleaning or changing out an air filter. Don’t expose yourself to liability in the future. Find a mold inspection company that you can trust and reduce your liability.
By Chris Wrightsman – CEO of Mold-Check Professionals. You can contact Chris at 818/951-9120
Everybody wants to live in a healthy home environment. Mold problems can affect the health of your client’s family and the value of their new home. Unfortunately, the subject of mold has become quite blown out of proportion over the past few years.
There are situations that can arise as a result of improper care and maintenance. The trick is learning how to deal with mold and moisture issues based on facts and not hysteria or hype. The biggest mistake you can make is to neglect to take care of a moisture intrusion or mold issue immediately and sufficiently.
What to Look For:
As a homeowner, you should take the time to perform your own inspection of the property and look for any signs of prior water damage. There are certain indicators you can look for to yourself. All mold problems stem from a moisture problem so you should check for stains around the windows and doors, look in the bathrooms for moisture stains due to leaks or floods and locate any poor caulking jobs that do not properly seal fixtures and therefore allow moisture to get into the walls or floors. Also check for any signs of moisture damage to the walls, ceilings or floors. Upon finding any such conditions, a formal inspection is recommended.
You should also look for evidence of condensation or poor ventilation. When a room is not properly ventilated, condensation can form leading to potential mold problems. Check the bathrooms to ensure that there is either an exhaust fan or a window installed. Kitchens should have an exhaust fan as well. Test any fans to ensure that they are in working condition.
Be on the lookout for leaks and if you find any ensure they are repaired as quickly as possible. You are likely to find leaks under stoves, refrigerators, dishwashers & washing machines and under kitchen and bathroom sinks. A leak in any location can lead to a mold problem if improperly handled.
In many cases a musty smell can indicate a mold problem. The smell can be a result of a dirty HVAC filter, a prior leak or flooding which was not properly dried out, or a current situation, such as a leaky pipe in the walls. You may not be able to locate where the smell is coming from. In that case a mold inspection should definitely be recommended in order to determine the source of moisture and the extent of the situation.
Mold problems should not create unnecessary concern or panic. One way to protect your interest and reduce concern is hire a mold inspection company that is independent from the other companies that do repair work and/or lab analysis. This removes potential for conflict of interest.
Remember that there is a solution to every problem and that many times that solution may be as simple as house cleaning or changing out an air filter. Don’t expose yourself to liability in the future. Find a mold inspection company that you can trust and reduce your liability.
By Chris Wrightsman – CEO of Mold-Check Professionals. You can contact Chris at 818/951-9120
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