The Chinese have a proverb: “May you live in interesting times.” And we are living through interesting times indeed.
Whatever the political posturing regarding the current rescue plan, some believe a plan needs to be passed. We are told credit markets are frozen and banks are going to go bust every day. If this is happening it is not totally because of "toxic" mortgages. It has a lot to do with FASB 157, also known as "mark to market".
Each day lenders must mark their assets to the marketplace. It's like you having to appraise your home everyday and if your neighbor was under duress because they got very ill, divorced, lost their job and was forced to sell their home quickly they may have sold it super cheap. Now, does that mean your house is worth that super cheap price? Clearly not. Why? Because you are not under duress. You have the time to sell your home and get a more normal price, which more accurately reflects true market conditions. But "mark to market" does not allow for this, which creates a vicious cycle.
Why is this so bad? Because as lenders mark down their assets, the amount that they have loaned previously becomes much riskier in relation to their assets. For example, say a bank has $1 million in assets and say they have $15 million in loans outstanding. Their ratio is an acceptable 15 to 1. But should they take a paper write down of $500 thousand due to "mark to market" requirements, their ratio suddenly changes to 30 to 1. This is because their assets are now only $500 thousand after taking the paper loss, while their loans outstanding are $15 million. And at 30 to 1 this bank is viewed as a risky investment. So the stock price starts to get hit, it becomes harder to borrow, and most importantly harder to make money. The bank is then forced to sell some of its loans to reduce its ratio...at cheap prices. And this makes the vicious cycle continue.
And a quick look at the holdings of these loans show that 95% are problem free. Additionally, the Credit Default Swaps (CDS) that are used with the pools of mortgages are relatively safe. But this requires a bit of understanding. You see, when a pool of mortgage loans is put together, it isn't just A paper or B paper etc….it's everything. It’s got some A paper, B paper, C paper…and even what looks like toilet paper. An "A" investor buys the whole pool but because they are an "A" investor their safety is greater because they can avoid the first 20% (an example) of defaults. So they own the whole pool but are sheltered from the first batch of defaults, and for this they get the lowest rate of return. As you can figure from here the more risk investors want to take, the higher the return. So the investments are relatively safe, but the accounting rules currently place undue pressure on the banking institutions.
Now add to all this, the opportunistic “shorting” done on the financial stocks, much of it illegal because those shorts did not legitimately borrow shares (called naked shorting), and you exacerbate this whole problem. Thank goodness for the recent temporary ban on shorting in the financial sector. As for the plan, the government is the only one who can step in to do this. Is it the right thing to do only time will tell.
This is not easy to understand for the general public. In fact, most politicians don't get this either. That's why it is a difficult bill for them to vote on.
If this is done we are being told that it will take some time but the markets will stabilize. As for the real estate and mortgage industries, it will take a bit of time but we will make it through this. Rates will remain attractive and the influx of credit availability will help the housing market gradually improve.
Will this ultimately be the medicine needed to improve the situation overall or will it kill us? Only time will tell.
Friday, October 3, 2008
Wednesday, October 1, 2008
Bail Out, Rescue, or Screw the Tax Payer
The Politicians couldn’t sell us on the bail out.
The news media couldn’t sell us on the bail out.
Wall Street couldn’t sell us on the bail out.
So they changed the name and they think that will sell us on the bail out.
I have believed for most of my career that the words we use make a difference. But in the last six years I have changed my belief. I do not think a minor change in verbiage makes the sale. I hope we the people are not foolish enough to ok the bail out because the geniuses in Washington now call it a rescue.
In 1991 when I begin my new home sales career we called a home we built on speculation a spec home. One day a high priced sales consultant tells the owner of the company that ‘spec’ was a bad word. So we changed it to 'market home'. They thought by changing what we called the home we would be changing how a prospect felt about that home and that someone would buy it because we called it a market home and not a spec home. I am embarrassed to say that I believed this ridicules thought. Calling it a market home does not change the home, it does not change the home site, and it does not change the price. It does not change the salability of the home. It is folly.
That was the start of a major revolution in home building. You had to watch what you called everything. Is it a home or a house, a community or neighborhood, a lot or a yard, I no longer believe it matters?
It sounds good for a high priced sales trainer to come in and tell us that one of the problems we have is the words we use. It is easy to train on, it is easy to change, and it is completely ineffective.
What you need to do is sell. That right listen to the prospect, get to know them, get to understand them, and then you will help them make the best decision for them. And guess what you will sell a whole bunch of product in the process, you will make a bunch of friend, and they will refer you like crazy.
And don’t fall for our politicians changing what they call the bail out. Rescue may sound better but the results are the same. We the tax payers get screwed. If they wanted to be honest they would call it ‘screw the tax payer’!
The news media couldn’t sell us on the bail out.
Wall Street couldn’t sell us on the bail out.
So they changed the name and they think that will sell us on the bail out.
I have believed for most of my career that the words we use make a difference. But in the last six years I have changed my belief. I do not think a minor change in verbiage makes the sale. I hope we the people are not foolish enough to ok the bail out because the geniuses in Washington now call it a rescue.
In 1991 when I begin my new home sales career we called a home we built on speculation a spec home. One day a high priced sales consultant tells the owner of the company that ‘spec’ was a bad word. So we changed it to 'market home'. They thought by changing what we called the home we would be changing how a prospect felt about that home and that someone would buy it because we called it a market home and not a spec home. I am embarrassed to say that I believed this ridicules thought. Calling it a market home does not change the home, it does not change the home site, and it does not change the price. It does not change the salability of the home. It is folly.
That was the start of a major revolution in home building. You had to watch what you called everything. Is it a home or a house, a community or neighborhood, a lot or a yard, I no longer believe it matters?
It sounds good for a high priced sales trainer to come in and tell us that one of the problems we have is the words we use. It is easy to train on, it is easy to change, and it is completely ineffective.
What you need to do is sell. That right listen to the prospect, get to know them, get to understand them, and then you will help them make the best decision for them. And guess what you will sell a whole bunch of product in the process, you will make a bunch of friend, and they will refer you like crazy.
And don’t fall for our politicians changing what they call the bail out. Rescue may sound better but the results are the same. We the tax payers get screwed. If they wanted to be honest they would call it ‘screw the tax payer’!
Tuesday, September 30, 2008
Bailout and Home Builders
The Bailout for the financial sector is not completed and now the homebuilding sector is asking for help.
They contend that the $7500 tax credit for first time home buyers did not stimulate demand and they want a $15,000 tax credit for all home buyers.
I don’t know if they get it. They were one of the biggest causes of the current crisis.
Why do I say this? Just a few years ago builders figured out how to work the financial system. They started their own mortgage companies or partnered with lenders and then advertised for low quality borrowers. You remember the ads. No money down, bad credit, in bankruptcy, one day out of bankruptcy, etc. these ads worked very well and brought lots of buyers who under normal circumstances could not qualify for a mortgage. Then the builder who was making a huge profit on the home pressured their own people or their partner lender to make the loans. These builders lined their pockets with millions of dollars using this tactic.
If you don’t believe what I am saying all you have to do is drive through builder communities that were built within the last 6 years and count all the foreclosures. Now that their bad practices are biting them back they want relief.
Here is what I think should happen to make sure we do not end up in the same financial situation that the Country is in today.
First we must eliminate builder owned mortgage companies by making that an illegal practice.
Second, we need to eliminate recommended lenders that pay to do business with the builder. The builder hides this illegal activity by saying the lender is paying for advertising but everyone knows that the lender is paying for mortgages. Which happens to be illegal?
Third, the government needs to eliminate computer underwriting. This is one of the main causes of the current crisis. Once the computer underwriting was instituted the ratios that a borrower could have went up dramatically. I saw mortgage application with back ratios above 60% turned down by our bank (because we manually underwrite) and that same borrower would be approved and close with another lender who used this automated system. Now those lenders need bailed out.
Forth, they need to increase the funding for the SEC to enable them to do there jobs. This can be done by letting the SEC keep the fees it currently collects from public companies.
Fifth we need to have mortgage brokers as strongly regulated as other financial institution. Many brokers have acted like it's the wild, wild, west. You have read the stories of inflated home values, fraud, and a variety of illegal activities. They need regulation.
If we change our ways we can turn this ship around and get this economy moving again.
They contend that the $7500 tax credit for first time home buyers did not stimulate demand and they want a $15,000 tax credit for all home buyers.
I don’t know if they get it. They were one of the biggest causes of the current crisis.
Why do I say this? Just a few years ago builders figured out how to work the financial system. They started their own mortgage companies or partnered with lenders and then advertised for low quality borrowers. You remember the ads. No money down, bad credit, in bankruptcy, one day out of bankruptcy, etc. these ads worked very well and brought lots of buyers who under normal circumstances could not qualify for a mortgage. Then the builder who was making a huge profit on the home pressured their own people or their partner lender to make the loans. These builders lined their pockets with millions of dollars using this tactic.
If you don’t believe what I am saying all you have to do is drive through builder communities that were built within the last 6 years and count all the foreclosures. Now that their bad practices are biting them back they want relief.
Here is what I think should happen to make sure we do not end up in the same financial situation that the Country is in today.
First we must eliminate builder owned mortgage companies by making that an illegal practice.
Second, we need to eliminate recommended lenders that pay to do business with the builder. The builder hides this illegal activity by saying the lender is paying for advertising but everyone knows that the lender is paying for mortgages. Which happens to be illegal?
Third, the government needs to eliminate computer underwriting. This is one of the main causes of the current crisis. Once the computer underwriting was instituted the ratios that a borrower could have went up dramatically. I saw mortgage application with back ratios above 60% turned down by our bank (because we manually underwrite) and that same borrower would be approved and close with another lender who used this automated system. Now those lenders need bailed out.
Forth, they need to increase the funding for the SEC to enable them to do there jobs. This can be done by letting the SEC keep the fees it currently collects from public companies.
Fifth we need to have mortgage brokers as strongly regulated as other financial institution. Many brokers have acted like it's the wild, wild, west. You have read the stories of inflated home values, fraud, and a variety of illegal activities. They need regulation.
If we change our ways we can turn this ship around and get this economy moving again.
Sunday, September 28, 2008
Should this mortgage have been approved?
It seems that I hear the same question from my customer’s every day. The question asked the most in our current economic environment is “is there money available and are rates and cost still low”.
Money is still available to those borrowers that should be able to borrow money. It is not available to those borrowers that never really qualified but were given mortgages just a few years ago. Here is an example in the Indianapolis Star there was an article with the headline “Housing crisis has spread to well-to-do” and the article talks about a borrower in Sarasota, Florida. He bought a home for $2.5 million in 2003 and is currently behind on his $10,500 monthly payment. The article claims that he is losing his home because he lost his job at an auto-sales chain.
Let’s look at the facts. When qualifying a borrower for a mortgage the first item we look at is the income to debt ratio. The first ratio is the new mortgage payment (which includes principle, interest, taxes, insurance, and homeowner association dues) we use 26% as the guideline for this ratio. The back ratio is made up of the mortgage payment plus all other minimum debt payments. We like the back ratio to be 36%.
Let’s look at the front ratio for this Sarasota, Florida borrower. We take the $10,500 mortgage payment and divide it into gross monthly income ($250,000/12 = $20,833). The equation looks like this $10,500/$20,833 = 50.4%. This means that this person was spending over 50% of his gross income to make his mortgage payment. That ration is way too high and this borrower should have never been allowed to borrow this much money. They did not lose their home because he lost his job they lost the home because they could not afford the home on their income.
This mortgage would not be made today.
Now let’s talk about rates and closing costs. Rates have increased artificially due to the market. Freddie Mac and Fannie Mae just added a .50 adverse market condition fee which raised mortgage rates a 1/4%. Costs have not gone up at our Bank but I have seen many lenders raising closing costs. There is no reason for these increases that I can see but you should be aware of the situation.
Money is still available to those borrowers that should be able to borrow money. It is not available to those borrowers that never really qualified but were given mortgages just a few years ago. Here is an example in the Indianapolis Star there was an article with the headline “Housing crisis has spread to well-to-do” and the article talks about a borrower in Sarasota, Florida. He bought a home for $2.5 million in 2003 and is currently behind on his $10,500 monthly payment. The article claims that he is losing his home because he lost his job at an auto-sales chain.
Let’s look at the facts. When qualifying a borrower for a mortgage the first item we look at is the income to debt ratio. The first ratio is the new mortgage payment (which includes principle, interest, taxes, insurance, and homeowner association dues) we use 26% as the guideline for this ratio. The back ratio is made up of the mortgage payment plus all other minimum debt payments. We like the back ratio to be 36%.
Let’s look at the front ratio for this Sarasota, Florida borrower. We take the $10,500 mortgage payment and divide it into gross monthly income ($250,000/12 = $20,833). The equation looks like this $10,500/$20,833 = 50.4%. This means that this person was spending over 50% of his gross income to make his mortgage payment. That ration is way too high and this borrower should have never been allowed to borrow this much money. They did not lose their home because he lost his job they lost the home because they could not afford the home on their income.
This mortgage would not be made today.
Now let’s talk about rates and closing costs. Rates have increased artificially due to the market. Freddie Mac and Fannie Mae just added a .50 adverse market condition fee which raised mortgage rates a 1/4%. Costs have not gone up at our Bank but I have seen many lenders raising closing costs. There is no reason for these increases that I can see but you should be aware of the situation.
Wednesday, September 17, 2008
Freddie, Fannie, and AIG
Dear Mr. and Mrs. US Government,
I think it’s admirable that you are helping all these poor corporations in their times of need. Just a few years ago these same corporations showed how much heart they had and bail me out. They didn’t even care that I had just come out of bankruptcy and had lots of credit problem. I just told them how much money I made (I made it up I really didn’t make that much) and they gave me a mortgage. It certainly wasn’t my fault that we had bad credit, I had just made some decisions that turn out to be somewhat risky. Unfortunately those risky decisions turn on me, through no fault of mine, it really wasn’t my fault.
I remember back then fondly. I applied at an apartment complex and was turned down because of my bad credit but the nice lady there told me that I should buy a home. She said that buying a home didn’t require the same high standards for credit, job stability, or income that apartment complexes had. So I went to a large builder in town, they hooked me up with their lender and WOW I moved into my new home.
These guys really helped me out back then. Now they did charge me a high interest rate, it was like 9% on the first mortgage and like 13% on the second but I didn’t have to put any money into the home. This was really helpful when home prices took a dive because I didn’t lose anything when I gave the home back.
Yes, I am suing them now because I don’t remember them telling me about the ARM rate increasing, the pre-payment penalty, or how much my payment would increase when the rate went up and property taxes kicked in. It really wasn’t fair. I was naive and I do not have a history of making poor decision.
I have made most of my decisions by watching what you do. I noticed that when you want something you don’t care if you can afford it. You go ahead and buy it and worry about paying for it later. I think that really works well for me. I’m not sure how you do it but you always seem to have the money to pay for everything. It’s like you print the stuff. I wish I could do that.
Sorry I’ll get back on track. I applaud you for bailing out these guys. You are showing you really care about. It’s not there fault they’re in trouble; they were doped into putting their money into risky investments.
Take me for an example. Who would have thought that I wouldn’t be able to pay for my home? They didn’t know my income was half of what I said. They also couldn’t have known that after my bankruptcy I wouldn’t be able to pay my mortgage payments. They certainly couldn’t have seen home prices dropping. So I say bail em’ out.
Or, wait a minute, I have a better idea. Why don’t you take all that money and bail me and my cohorts out? You could pay off our mortgages we could stay in our homes and the money goes to the lenders. That would take care of the housing crisis, the liquidity crisis, and save many homeowners. Man I like that a lot better.
Yes! I say, “BAIL ME OUT”!
Sincerely,
Itsnot Mi Fault
I think it’s admirable that you are helping all these poor corporations in their times of need. Just a few years ago these same corporations showed how much heart they had and bail me out. They didn’t even care that I had just come out of bankruptcy and had lots of credit problem. I just told them how much money I made (I made it up I really didn’t make that much) and they gave me a mortgage. It certainly wasn’t my fault that we had bad credit, I had just made some decisions that turn out to be somewhat risky. Unfortunately those risky decisions turn on me, through no fault of mine, it really wasn’t my fault.
I remember back then fondly. I applied at an apartment complex and was turned down because of my bad credit but the nice lady there told me that I should buy a home. She said that buying a home didn’t require the same high standards for credit, job stability, or income that apartment complexes had. So I went to a large builder in town, they hooked me up with their lender and WOW I moved into my new home.
These guys really helped me out back then. Now they did charge me a high interest rate, it was like 9% on the first mortgage and like 13% on the second but I didn’t have to put any money into the home. This was really helpful when home prices took a dive because I didn’t lose anything when I gave the home back.
Yes, I am suing them now because I don’t remember them telling me about the ARM rate increasing, the pre-payment penalty, or how much my payment would increase when the rate went up and property taxes kicked in. It really wasn’t fair. I was naive and I do not have a history of making poor decision.
I have made most of my decisions by watching what you do. I noticed that when you want something you don’t care if you can afford it. You go ahead and buy it and worry about paying for it later. I think that really works well for me. I’m not sure how you do it but you always seem to have the money to pay for everything. It’s like you print the stuff. I wish I could do that.
Sorry I’ll get back on track. I applaud you for bailing out these guys. You are showing you really care about. It’s not there fault they’re in trouble; they were doped into putting their money into risky investments.
Take me for an example. Who would have thought that I wouldn’t be able to pay for my home? They didn’t know my income was half of what I said. They also couldn’t have known that after my bankruptcy I wouldn’t be able to pay my mortgage payments. They certainly couldn’t have seen home prices dropping. So I say bail em’ out.
Or, wait a minute, I have a better idea. Why don’t you take all that money and bail me and my cohorts out? You could pay off our mortgages we could stay in our homes and the money goes to the lenders. That would take care of the housing crisis, the liquidity crisis, and save many homeowners. Man I like that a lot better.
Yes! I say, “BAIL ME OUT”!
Sincerely,
Itsnot Mi Fault
Monday, September 15, 2008
Lehman files for bankruptcy after 158 years
Lehman files for bankruptcy! This was a 158 year old company.
Freddie Mac and Fannie Mae in conservatorship!
Bank of America to acquire Merrill Lynch!
Greed does affect us!
Greed is what took these institutions down. They invested in very risky mortgage loans and those mortgage loans destroyed these companies. This is not the last we’ll hear of destroyed mortgage investors.
We have known for quite sometime that the waters had not settled and we were still in trouble in the financial markets. These announcements prove that correct. And rumors have it that there are more big fish ready to implode.
One example is AGI the insurance giant. They have to raise cash now or they will go under.
How can you benefit in these rough economic times?
With the fall of Freddie and Fannie it appears there is an opening for those of us with good credit and higher mortgage rates to refinance our homes. Mortgage rates are falling and the 30 year fixed rate looks to be headed to the lows of 2003 when we hit the lowest rates in 45 years.
Or
Buy a home. If you have to sell yours you may not receive the price you would have received two or three years ago but you will also not pay the price you would have paid two or three years ago. With mortgage rates dropping and home prices depressed it is the best time in decades to purchase a home.
You can take advantage of the greed of the past. Refinance or Purchase a home today.
Freddie Mac and Fannie Mae in conservatorship!
Bank of America to acquire Merrill Lynch!
Greed does affect us!
Greed is what took these institutions down. They invested in very risky mortgage loans and those mortgage loans destroyed these companies. This is not the last we’ll hear of destroyed mortgage investors.
We have known for quite sometime that the waters had not settled and we were still in trouble in the financial markets. These announcements prove that correct. And rumors have it that there are more big fish ready to implode.
One example is AGI the insurance giant. They have to raise cash now or they will go under.
How can you benefit in these rough economic times?
With the fall of Freddie and Fannie it appears there is an opening for those of us with good credit and higher mortgage rates to refinance our homes. Mortgage rates are falling and the 30 year fixed rate looks to be headed to the lows of 2003 when we hit the lowest rates in 45 years.
Or
Buy a home. If you have to sell yours you may not receive the price you would have received two or three years ago but you will also not pay the price you would have paid two or three years ago. With mortgage rates dropping and home prices depressed it is the best time in decades to purchase a home.
You can take advantage of the greed of the past. Refinance or Purchase a home today.
Thursday, September 11, 2008
It's Refinance Time!
Volatility remains in the mortgage bond market and that means mortgage rates are volatile also. I know it seem funny because with all the volatility rates are moving very little and that is because the movements happen through out the day and by days end rates are only a little up or a little down.
In Indiana people say “if you do not like the weather wait a few minute and see if you like that weather better”. It is the same way right now with mortgage rates. If you don’t like what you see, wait a little bit and see if you like that better.
My take is still the same I believe rates will continue on a downward trend. I also think it is a good time to refinance and buy a home and that will continue for the next six months to a year.
Get ready its refinance time.
In Indiana people say “if you do not like the weather wait a few minute and see if you like that weather better”. It is the same way right now with mortgage rates. If you don’t like what you see, wait a little bit and see if you like that better.
My take is still the same I believe rates will continue on a downward trend. I also think it is a good time to refinance and buy a home and that will continue for the next six months to a year.
Get ready its refinance time.
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