Bail out: Savior or Killer?

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.

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’!

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.

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.

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

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.

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.

Should you refinance your mortgage?

Most mortgage loan officers would tell you that you should. They will tell you even more so now with mortgage rates coming down. But it is never that easy to answer this question. There are so many variables that go into making the correct decision. However; I will go through the basics.

On the home we would look at the current amount owed including all mortgages on the home and the payments associated with those mortgages. We would also look at the value of the property; it is important to know the equity position on the home.

On the situation we need to look at; how long the homeowner expects to stay in the home and if they need cash for other purposes.

On the borrowers we need to look at debt and credit information and risk tolerance.

You should look at the new rate and the closing costs. Never forget the closing cost.

Almost every call I receive from someone shopping for a mortgage starts with this question from the caller. I answer the phone and they say something like “I am calling around looking to refinance my home and I wanted to know what your rates are.” The reality is that rates are relative. Today you have adds to the rates for credit score, cash out, loan to value, second mortgages, when closing will occur, and loan amounts. So no one can quote you an accurate rate until they have a little information from you.

I heard a radio ad the other day and they quoted 5.5% on a 15 year fixed rate with an APR of 6.187%. Does that sound like a great deal? If you just hear the 5.5% fixed you would think it is an excellent deal. But to get that 5.5% if the APR is 6.127% on a 150,000 mortgage amount would cost $6800 in closing cost. Do you know how long it would take to get your money back on a deal like that? Let’s look at it.

You could get 5.875% on the mortgage with only $325 in closing costs.

The payment at 5.5% would be $1220.04
The payment at 5.875% would be $1249.56 or $29.52 more.

You take the closing cost for the 5.5% of $6800 and subtract out the closing costs from the 5.875% of $325 and you would pay $6475 more in closing cost for the 5.5%.

You then take the cost difference of the 5.5% of 6475 and divide the monthly savings of $29.532 into it or 6475/29.52 which give you 219. 35. The 219.35 is the number of months it takes to receive your money back from the additional cost. Yes it would take 219 months or just over 18 years to get your money back. Since this is a 15 year mortgage you would never recoup your cost. In this case you would want the higher rate with the lower cost.

Always look at the cost compared to the benefit. Since we are talking about money the benefit is almost always in the money.

There is a lot more to this which I will discuss at a later time.

Home Builders have they learned there lesson?

I was talking with a prospect the other day and he was trying to buy a home from a very large national builder. He put a substantial down payment down on a spec home. He did not like the builders financing options and wanted go to a lender that the builder did not own. His contract with the builder stated he could use any lender he chooses. However, he was told by the builder that they would not sell the house to him if he did not use their lender.

Why would a builder do this? They must be making a great profit on the financing and you know they are because their rates and terms are not competitive. Why does the contract state you can finance anywhere when they force you to finance with them? My guess is that the builder knows that they are in violation of RESPA but feels they can keep out of trouble if the contract says you can finance with anyone.

This is the type of behavior that got us in this credit crunch predicament in the first place. We need to stand up and put a stop to companies running over our rights as consumers. My advice since the government won’t put a stop to it, we as consumers must put a stop to it.

Stop buying homes with builders that want to control the financing, it is not in your or the countries best interest. Of course, it’s in the builder’s best interest or they wouldn’t be so deceptive and forceful.

I went through that because it shows that with all the talk some of the causes of the mortgage crisis are still alive and well. We need to put companies that disregard the laws of our country, put themselves ahead of their customers, and put our economy in danger out of business. Some will say I am over reacting but that is what I was told when I warned about the abuse of mortgage programs just a couple of years ago.

If you are buying a home from a builder protect yourself and the rest of us. Tell them you will not finance with their mortgage company. If they insist then do not buy from them. If they don’t care about us then we should not care about them.

What is going to happen with Fannie and Freddie?

We certainly have a dilemma with those two don’t we. We (us through our government) allowed both companies to do what they wanted with very little oversight and now that it back fired they want us to bail them out. We are being told that if we don’t it will send our economy into depression.

How did this happen?

I believe it started years ago. Back in the mid 90’s qualifying for a mortgage became easier. The rules were eased and home sales increased. Then huge national builders and some savvy large local builders figured out that owning your own mortgage company or having one in your back pocket would increase the approval rates and home sales. This occurred slowly and as it became more prevalent the rules were eased even further. Why, because everyone was making a lot of money. So what really happened was greed.

I had an associate of mine, who was living in an apartment at the time; bring me all the mailings he received from builders. Over a two year period from 2003 through 2005 he received on average 58 builder mailings each month. All the mailings sold the same thing buy a home with no money down, monthly payments below his rent, and credit did not matter. The message was if you had a pulse you could buy a home.

Could anyone with a pulse buy a home back then? Let’s look at some of the mortgage options and you decide.

- One day out of bankruptcy not a problem you could buy a home.
- Home foreclosed on. No problem you could buy a home.
- No income? We’ll use stated income and you can buy a home.
- Credit score 580, no money down? No problem you could buy a home.
- How about this finance 125% on a refinance of your home.

There were more programs that would horrify you but were used regularly just a few years ago.
What is going to happen with Freddie and Fannie? It looks like the We the People will bail them out. What’s up in the air? Our elected officials really want to run Freddie and Fannie. As bad as Freddie and Fannie have been run of late it is still better than the government runs any business they have tried to run. God help us if they take over.

In my next post I’ll talk about some of the items that caused this problem that are still being used today.

Mortgage rates are poised to drop!

Non-farm Payrolls were expected to come in with a loss of 75,000 jobs the actual number was a loss of 84,000 jobs. That’s a big miss. Along with that number we had the unemployment rate increase to 6.1% much higher than the 5.7% predicted. These bad economic reports are likely to move mortgage rates lower.

Currently rates are steady and this is due to profit taking in the 30 year mortgage back security bond market. Over the next few months I expect fixed rates (10 year term or longer) mortgage rates to drop near or below 6%.

Additionally there is very little chance that the Federal Reserve will change the federal fund rate this year. This means Prime would not increase. This should be good for home equity lines and credit card rates.

I think great days are ahead and it might behoove you to look at refinancing now or in the near future.

Where did GMAC go?

Big news today: GMAC is closing all of its mortgage offices.

In my area over 350 mortgage brokers did not or could not comply with a new law and shut their doors.

These changes show that the mortgage lending business is not out of the wood yet. It appears to me that we will have more failing giants in the business while local and regional banks will flourish. This in the long run will be good for all of us.

With these types of changes you will see more mortgage brokers leave the business. This will happen due to the way the mortgage business is set up. You have three types of lenders: you have direct lenders which are banks and you have two types of brokers.

The first type of broker is one that does not have the financial wherewithal to fund a mortgage. When they close on a mortgage it is immediately sold or usually closed in the investor’s name, if XYZ mortgage broker closes on a mortgage they have a direct lender like Countrywide fund the mortgage and the broker is paid for bring the customer to Countrywide.

Then you have brokers who have what is called warehouse lines. These lines allow the broker to close the loan in their name and take a little time usually less then 30 days to sell it to an investor. Brokers do not service the loans and at the end of the day need a direct lender (Bank) to stay in business. If the banks decide not to buy loans from the brokers they have no choice but to close down.

You must be wondering why an investor would stop buying loans from broker. That is a great question. Let say you own a business and 50% of your business comes from a company you pay when they sell your product. One day you decide to look at the delinquencies on the sales your company makes and the sales the outside company makes, you find that the outside company has a delinquency rate 100% higher then yours direct sales. Then you look into the reason why and find that it is due to misleading or inaccurate information given to you by the outside company. You would sever the relationship.

That is some of what has happened in the mortgage business and we are seeing the results. The unfortunate part of this scenario is that there are many honest and trustworthy brokers however, as the saying goes “one bad apple ruins the bunch”.

The rumors of my death has been greatly exaggerated

One question I’m asked every day: Rick how is business.

Everyone hears from the news media that the mortgage business is in trouble. They have pretty much declared our business dead.

The great Samuel Clemens (Mark Twain) upon reading about his death wrote to the newspaper that ran his obituary the following: "Gentleman, the rumor of my death has been greatly exaggerated." I say to all of you "the rumor of the death of the mortgage business has been greatly exaggerated."

In 2008 my mortgage production is up 100% over 2007. Our office mortgage production is up 300%. This is due to adding additional loan officers, excellent product, and hard work. Does that sound like a dead business to you?

Are there problems in the mortgage business? Definitely! Are there problems in most industries? Absolutely! However, problems do not equate to death. They show us areas that need to change, areas we need to work on and improve, but not dead areas. I believe that the business is better today than in the past few years. We are back to making mortgage loans that make sense.

As hard as it is for us individually and for the entire country to go through this mortgage and real estate ‘crisis’ as the media call it, we will be better for it. Lending was out of control at many lenders over the last decade. Now the pendulum has swing the opposite way and with any luck we will end up with the pendulum neither right or left but right down the middle. We will be making good loans to well qualified individuals and companies. The borrower will be investing a down payment into the process and will work hard not to lose that investment.

Yes there are better days ahead for American business and for the United States. So smile!

Home Builder Calling

I am getting calls now, that just a few short years ago, I would have told you I would never receive.

Builders are calling, developers are calling, and they are looking for money. These builders and developers just a couple of years ago would not talk with me. They would not take my calls. They did not need our money. However, times change, and it has changed greatly.

Builders cannot find money to build spec homes. Developers are wanted to sell home sites so they are trying to help. Developers are calling to see if we still loan on spec homes. These developers are willing to helping in the financing, putting their money and credit on the line.

What does this all mean? I believe this will seriously limit new construction and help eliminate the excess home inventory that exist today. It means that the real estate market will improve as home inventories decline.

Keep a positive outlook we are working our way out of the housing and mortgage crisis.

Where have Zero down mortgage's gone

It’s 2004, everyone want’s to buy a home and no one want’s to put a dime down. It doesn’t matter if it is a $50,000 home or a $5,000,000 mansion, zero down was the down payment of choice.

Fast forward to August 2008. It requires 3% down on FHA, 5% on conventional financing, and on Jumbo loans (loans above the conventional limit) you may be require to have 30% down. The only zero down program available today is VA. We still have prospect hoping for zero down but if they are not a veteran they are out of luck.

Zero down has gone the way of the punch cards for computers.

My advice in today’s market; if you want to buy a home you need to save the down payment.

Rates will go up and they will go down

“Rick what do you think rates are going to do” that was the questions from one of my newer loan officers. From the corner of the room we heard Keith one of my old timers yell “rates are going to go up and they are going to go down” and then he laughed. He laughed because he knew my answer.

He was correct too then I follow his mimicking of me with my standard example - “when I was in construction we gave one guarantee on concrete, we guarantee it will creak”. It is the same with rates the one guarantee is that rates will change. They will go up and they will come down.

But right now, today, rates are poised to drop.

With a little luck, and the fed’s keeping their noses out of the market we have a great opportunity for rates to lower.

Why, inflation. With oil settling down and the dollar gaining some traction, inflation looks to be under control. If all this comes to pass then rates should improve.

Keep your fingers crossed.

Mortgage Market Rollercoaster Ride. Thrilling!!!

The mortgage market has been like a rollercoaster this year with huge swings up and down but at the end of the ride you end up exactly where you started.

This week was no exception. We opened the week on the 30 year mortgage backed security bond market at 97.5 and ended the week at 97.875 just 37 basis points higher. But here is what happened during the week, on Wednesday the market moved from 97.5 to 98.625 that’s a whopping 112 basis points. That is huge. Even more remarkable the low for the week was 97.406 and the high was 98.625 that’s a change of 122 basis point. Remember when the bond market raises fixed rate mortgages rates decrease and as the bond market decreases mortgage rates increase.

As you can see just like a rollercoaster we go up, we go down, and end up right where we started.

You are probably wondering what happened to mortgage rates. We started the week with 30 year mortgage rates at 6.875% and ended the week at 6.75%. That’s not much of a movement. The biggest benefit of the swings this week is we broke a very strong resistance level which has turned into an equally strong support level and it keep the bond market from falling even further on Friday.

So stay tune, we may have an even rougher rollercoaster to ride next week.

Freddie and Fannie, what is really going on?

I keep hearing how much trouble mortgage giants Freddie Mac and Fannie Mae are in. They are losing billions of dollars and in danger of the going out of business or worse the government taking them over.

I don’t get it.

When we have a loan go into foreclosure at our bank we are required to buy the loan back from Freddie or Fannie. So they lose very little if one of our loans goes bad. As I understand it this is the agreement most lenders have with them.

So if the lender that makes the loan has to buy the loan back Freddie and Fannie don’t lose a dime.

Let assume that 50% of the lenders have this agreement and the other 50% do not (closer to 100% has to buy the loans back). Freddie and Fannie are protected by the lender buy back and by the mortgage insurance.

How much can they be losing on the homes they foreclose on?

I think there is something else going on. Something they are hiding from the rest of us.

I have heard several theories. One is they want their stock value down to buy back the company. Another theory I heard was that they are hiding monstrous fraud. I don’t know what it is but it does appear that something other than foreclosure losses are causing there financial problems.

What is your theory on the mysterious losses Freddie and Fannie seem to be accumulating?

What should Mark and Carol due?

Mark and Carol Doe called me today. They purchased their home several years ago and wanted to talk about getting ready to sell in the next couple of years. Mark told me they would like to sell today but there not in a financial position to do so due to the current housing market.

You see they have outgrown their home. Their two kids are getting bigger and they need more space. So what can they do to prepare for the move when it comes?

Let look at where Mark and Carol were and what they decided to do. Currently their 30 year fixed rate is 5.875% and they have 25 years left on the mortgage. They owe about $246,000 so their principle and interest payment is $1565. In two years they will owe $236,808.

They really have two good options:

Mark and Carol could go with a one year ARM at 4.5%. We keep the mortgage at 25 years and this gave them a principle and interest payment of $1365 per month which gives a savings of $200 per month. Since our closing costs are only $330 they are $2070 ahead after one year.

Then we assumed that the rate would go up to 5.25% in year two which would give them a principle and interest payment of $1461.50 or a savings of $103.50 per month or a savings of $3312 over the two year period.

Additionally, since the payoff on the loan they have currently would be $236,808 and the new loan payoff would be $235,400 they save an additional $1408. This gave Mark and Carol a total savings of $4720 over the two years they plan on being in the home.

A second good option we discussed was a 3/1 ARM at 5.25%. This gave them a fixed rate over the next three years so has a little additional feeling of security which increases the rate.

The principle and interest payment on the 3/1 ARM is $1352.50 the payment is lower because the 3/1 ARM has to be amortized over 30 years. So in this case over the two years they save $4770 after paying the $330 in closing costs. But they will owe $238,900 at the end of the two years so there total savings is $2500.

Mark and Carol decided on the one year ARM feeling the greater savings made up for the lower sense on security.

Do you think Mark and Carol made the correct choice?

Over Eating and the Mortgage Crisis!

I’m over weight. I keep thinking that I am going to quit eating the foods that are causing the problem. Yes, I could exercise more but what I really need to do is to stop eating donuts, cookies, cakes, and my biggest issue ice cream.

You may remember the first time you tasted a donut, cookie, ice cream, or potato chips. I certainly do. From that moment on I was hooked. I was a junk food addict. I needed my food fix and I didn’t let much get in the way. Even though I swim, bike, or walk and it takes hours to work off one donut I still have to have the donut. I know I shouldn’t. I know it will take an hour of working out to delete the effect of the donut, but I still eat it.

As I look at my eating problem I realize that this is exactly what got the mortgage business in trouble. They got hooked on higher yield and as time went on they wanted higher and higher yield. They forgot to exercise (Risk).

First, mortgage investors including big banks started eating (buying) lower and lower credit scores. Then they allowed stated income with credit scores below 700 and you could be a W2 employee. Finally they would invest in your mortgage even if you were one day out of bankruptcy. Yes, they were hook. They were junkies.

Unlike my weight problem these bad mortgage junkies are being bailed out by our government (which is us). They are taking our tax dollars to try and fix the problem.

This seems like a great thing to me. I eat what I want and then the government (you and I) bail me out. That would be great.

One last thing: Mr. and Ms. Congress, Mr. and Ms. Senate, Mr. President, please send my Junk food Junkie bail out check soon. I’m worried my eating junk food could take down our entire economy if not corrected soon.

Send Help (Money) Fast!!!

You are Losing Thousands of Dollars of Your Home's Equity!

At least that's what the news media would have you believe.

Look at these statistics of the top and bottom Metropolitan Areas for home appreciation ending March 31, 2008, and tell me how bad you think it is:

Top and Bottom Metropolitan Areas in Home Appreciation

------------- One Year------------ Five Year

Top 5...............8.63%..................54.14%

Bottom 5.......-20.65%..................43.19%

Top 10..............6.31%..................44.97%

Bottom 10......-19.95%..................45.36%

Top 20..............6.13%..................39.30%

Bottom 20......-16.65%..................52.03%


Based on these figures you are better off in the bottom markets then the top markets if you've had your home for a few years.

Let’s look at Indiana (where I live) over the last year our homes have appreciated at 2.24% and over the last 5 year we have appreciated 15.09%.

Would the bottom five cities trade places with us over the last 5 years. Never. How about the bottom ten. No way. What about the bottom 20. Absolutely not!

Here is my point, if you're market is down this year, you are still way ahead of much of the US over the last five years. In fact, if you have owned a home in the worst market (Merced, CA) over the last year you are down 24.68% but over the last five years you are still up 35.78% it would take the average home in Indiana over 10 years to see that kind of an increase.

I think we need to keep our heads and realize that appreciation rates of 20% or more per year are not sustainable over the long term and you will see down turns. But if the attributes that powered the high appreciation are still intact (beach, sun, mountains, ocean) then your market will come back and you will better off than then most of the country.

Keep your chin up and be happy. Better days are right around the corner.

Can you finance a home?

If you're like most of us you've heard it's getting hard to finance a home.
We hear that builders are having trouble selling home and part of the reason is problems with financing.

So how hard is it?

If you have good credit scores (over 680), have reasonable debt, have a down payment or equity, an income that supports the mortgage payment, and you have a good job history you will have no problem financing and will receive good terms. However, if you have bad credit below 620, do not have a down payment, and your job history is suspect, you will have problems.

You will also have problems if you are self employed and show little income on your tax returns. It will not matter if you have 850 credit scores. Stated income mortgages are dead.

If you do not have a down payment and cannot finance using FHA you are out of luck. Starting October 1, 2008 the gift program if funded by the seller goes away (Maybe) for FHA. So very soon you will need a minimum of 3.5% down.

What’s the bottom line? Most of us can still finance a home and it is best if you talk with a mortgage professional before you go looking for a home to see what you may need to do to have a smooth closing.

Quit your belly aching.

I have been beating up on lenders in this blog. So today, I am going to make some comments about the borrowers of these bad loans.

Most of you were not deceived. You knew your rate was high, you knew the rate would go up, you knew you had a prepayment penalty, and you did not care. Why, because you wanted the home. You wanted it so bad, that you were willing to accept the bad terms. Because for many of you that was the only way you would qualify for the loan. You didn't even invest any of your own money into the home. And now you want to blame everyone else and act like you didn't know what was going on.

Here is what you expected:

The home to go way up in value.

To make a killing off your home.

You were wrong.

The market quit going up at unrealistic levels, and now you want everyone else to feel sorry for you, and bail you out. I say, admit what you have done and suck it up. Yes, you made some bad decisions, work through them, and move on with your life. This is just a short moment in your life, learn from it.

I believe some of you were deceived. I believe some of you were taken advantage of and I believe most of you are just looking to blame someone else. Because that is what we do here in America.

I will repeat myself. Admit your mistake, work through it, get over it, and move on. You are better then you are acting and if you don't change you could take our whole economy down with you.

For you lenders out there that help cause our current housing and economic problems. I say: Admit your mistake, work through it, get over it, and move on. You are better then you are acting and if you don't change you could take our whole economy down with you.

How about our government they also had a hand in this. I say: Admit your mistake, work through it, get over it, and move on. You are better then you are acting and if you don't change you could take our whole economy down with you.

I pray, God will save us from ourselves.

Have a great day!!!

They did it again!

Countrywide faces FTC probe over their mortgage servicing practices.

I have to ask; why are customers still borrowing money from Countrywide? They have proven to be unreliable. This probe shows that they are hard to deal with once you have a mortgage with them. They are losing billions of dollars on foreclosures and yet people keep going to Countrywide for a mortgage. I don't get it.

If you bought a new car and every time you had problems with it you took it to the dealer. But they never fixed it right the first time and most time. Would you continue to take your car to that dealership? Would you buy your next car at that dealership ever if they were a few hundred dollars cheaper? I would think not!

So why do people keep going back to Countrywide or any of the lenders who have proven to be less then honest?

I think we don't fully understand the value of the company servicing our mortgages. Here is my advice: If you are looking for a mortgage call the servicing center, does a real person answer, if not how long does it take to talk with a real person. Are they friendly and interested in you and your problem (Tell them you don't know your account number and want to know your payoff). If they are hard to communicate with then find another lender. I don't care if you think you're getting a lower rate then you can anywhere else.

Don't sell your mortgage soul for a quarter percent in rate.

Stupid Stupid Mortgages

What in the world is going on!

Freddie Mac and Fannie Mae in trouble.

Too many mortgage companies out of business or in trouble to count. Who could have seen this coming. I saw it coming and I am sure you would have seen it coming to if you were in the mortgage business over the last few years.

Every time I tell someone the type of mortgages that were made back then they are dumbstruck. Why, the two programs below will give you some idea.

What do you think this:

Just tell me your income, I don't need those messy W2's or tax returns, you know they just give you misinformation anyway. We both know you make a lot more money then your tax returns show. As long as you have decent credit and tell me enough income I can finance you. What, you want to borrow $900,000 no problem how much do you make, and remember, you need to give me enough income. Great, $40,000 a month that should do it.

Does that sound like a mortgage you would like to fund out of your savings?

What about this one:

The payments to high, well we have a great program available to you. It is very flexible, you can chose to make one of four payments each month. You can decide to make a payment like its a 30 year fixed, or you can pay like its a 15 year fixed, your third option is to pay interest only, but the best option, and what 96% of all customers do, is make a very low payment that doesn't cover any principle and only covers some of the interest you owe. Some people call it negative amortization but I like to think of it as a way for you to get the home of your dreams. It doesn't really matter that you owe more on the home in a year then you borrowed because your home is going to go up, up, up in value, you're going to be way ahead of the game.

That's what many people were told. I guess being way ahead means bankrupt and the home foreclosed on.

That's not my idea of way ahead.

Here's my advice, if it sounds to go to be true, it probably is. Be smart find an honest trustworthy source for you major financial decision.