Wow its been a very busy two weeks. Starting November 25 rates took a dive and have stayed down to levels not seen since the beginning of the refi boom in 2002. About mid week, rates had only been lower on 5 days in the last 50 years and 6 days where they were the same. this should be some great news for the market but we haven't seen alot of buyers jump back in yet.
I've been so busy with refinances working morning and night. While this is good for business, the whole purpose of the Treasury buying plan was to pull buyers back in helping to reduce our bloated inventory and stabilize home prices. I'm already starting to see some signs of stabilizing home prices and I think we've reached the lowest point we're going to see so and only back up is where we should focus our attention.
You'll hear alot of professionals and economists give their opinion on the market saying we're going to see more declines, mortgages are few and far between, and credit is so tight; just to name a few. I'm not saying credit hasn't been tight, I'm just saying that the media does make it sound alot worse than it is creating even more fear. Fear is the worst thing we need right now.
What happened in the mortgage market needed to happen to flush out the risky loans, bad mortgage brokers, and corrupt title companies. I'm not happy about the record foreclosures but little was done to regulate these people. The few bad apples ruin it for everybody else. Loans are plentiful, especially government insured loans like FHA, VA, and Rural Housing loans.
When shopping for a mortgage make sure you work out your budget, that you have at least 3.5% down (this will be the new FHA requirment Jan 2009), and take into consideration costs that are associated with buying a new home. Its been communicated by the media that you can't get a loan unless you have 20% down. This is simply not true.
Copyright © 2008
Saturday, December 13, 2008
Wednesday, November 26, 2008
Super Low Mortgage Rates - What Happened?
I'm sure all of you have been seeing the news of how bleek the economy is. To me its blah, blah, blah, blah. But now the Treasury is stepping up to the plate in an effort to reduce mortgage rates to the point that people jump into the market and start buying or refinancing. This is going to pull the first time homebuyers back in and start getting some inventory off the market.
The Treasury announced a purchase plan of roughly 600 Billion dollars that they will use to buy mortgage-backed securities and government issued treasuries over the next couple of months. So what does this mean? How long will this last? I'm not sure but for those of you who don't know why this makes rates go down I'll explain briefly.
Mortgage rates are tied to mortgage-backed securities. These are bonds that are issued by Fannie and Freddie which contain securitized mortgage loans. Pools of loans are put together then packaged into securities and sold as bonds. Now there are three areas of risk with these, credit risk (default risk), IR (interest rate exposure), and early redemption (pre-payment). Now as rates go down, pre-payment is more likely because people can refinance into a lower rate. When pricing these bonds for sale we must take into consideration bond convexity. Bond convexity is simply the measure of sensitivity to the duration of a bond to changes in interest rates. So what does this mean? Well it means that to compensate the risk of payoff to investors these bonds are priced at a spread (fixed margin) over government treasuries, usually the 10yr bond.
So in order for the purchase of mortgage-backed securities to work effectively the Treasury will also buy government bonds to drive down their yields resulting in lower spreads, thus resulting in lower mortgage rates. They are hitting this thing from both sides
By purchasing both government and mortgage-backed bonds, the Treasury is essentially subsidizing mortgage rates. As they buy up these bonds, prices go higher resulting in lower yeilds. Lower yeilds mean lower mortgage rates. I can tell you its worked. I've taken eight loan applications over the last two days and I expect it to get better after Thanksgiving.
Keep in mind, when first time homebuyers are not buying homes this leaves the market flooded with inventory. The sellers of this inventory can't buy another home until they sell theirs and so on and so forth. So see the first time homebuyer is essential and will cause a domino effect once they've returned to the market.
Now not all first time homebuyers have vanished but most of them are on the sidelines not sure what to do. I can't stress enough that this is a cycle that we will come out of eventually. The government is doing what they can to stimulate the market and we should see housing begin to stabilize when inventory begins to come back down to healthy levels.
The trends, in some areas, are starting to show positive signs of improvement. The one thing the media leaves out is that there ARE STILL loan options out there and banks are lending. The media makes its sound as if financing has all but vanished. This is simply not true. If you are in the market NOW is the time to jump. Don't wait for it pass by. There has only been a handful of days in four decades where rates have been lower. Rates have dropped about a full point in the last two days. This doesn't mean they will stay down so make a move if you're on the fence.
Realtors start picking up the phones.
Happy Thanksgiving!
Copyright © 2008 by Dustin Swigart
The Treasury announced a purchase plan of roughly 600 Billion dollars that they will use to buy mortgage-backed securities and government issued treasuries over the next couple of months. So what does this mean? How long will this last? I'm not sure but for those of you who don't know why this makes rates go down I'll explain briefly.
Mortgage rates are tied to mortgage-backed securities. These are bonds that are issued by Fannie and Freddie which contain securitized mortgage loans. Pools of loans are put together then packaged into securities and sold as bonds. Now there are three areas of risk with these, credit risk (default risk), IR (interest rate exposure), and early redemption (pre-payment). Now as rates go down, pre-payment is more likely because people can refinance into a lower rate. When pricing these bonds for sale we must take into consideration bond convexity. Bond convexity is simply the measure of sensitivity to the duration of a bond to changes in interest rates. So what does this mean? Well it means that to compensate the risk of payoff to investors these bonds are priced at a spread (fixed margin) over government treasuries, usually the 10yr bond.
So in order for the purchase of mortgage-backed securities to work effectively the Treasury will also buy government bonds to drive down their yields resulting in lower spreads, thus resulting in lower mortgage rates. They are hitting this thing from both sides
By purchasing both government and mortgage-backed bonds, the Treasury is essentially subsidizing mortgage rates. As they buy up these bonds, prices go higher resulting in lower yeilds. Lower yeilds mean lower mortgage rates. I can tell you its worked. I've taken eight loan applications over the last two days and I expect it to get better after Thanksgiving.
Keep in mind, when first time homebuyers are not buying homes this leaves the market flooded with inventory. The sellers of this inventory can't buy another home until they sell theirs and so on and so forth. So see the first time homebuyer is essential and will cause a domino effect once they've returned to the market.
Now not all first time homebuyers have vanished but most of them are on the sidelines not sure what to do. I can't stress enough that this is a cycle that we will come out of eventually. The government is doing what they can to stimulate the market and we should see housing begin to stabilize when inventory begins to come back down to healthy levels.
The trends, in some areas, are starting to show positive signs of improvement. The one thing the media leaves out is that there ARE STILL loan options out there and banks are lending. The media makes its sound as if financing has all but vanished. This is simply not true. If you are in the market NOW is the time to jump. Don't wait for it pass by. There has only been a handful of days in four decades where rates have been lower. Rates have dropped about a full point in the last two days. This doesn't mean they will stay down so make a move if you're on the fence.
Realtors start picking up the phones.
Happy Thanksgiving!
Copyright © 2008 by Dustin Swigart
Friday, November 21, 2008
FHA vs Conventional
Not many people know the difference between conventional and FHA loans, and up until the recent market turmoil, FHA was a bad word in the housing market. What's the reason? FHA was a little archaic, with no modernized changes in many years, and the complex appraisal process made this program undesirable in a market flooded with no down payment programs.
Well I've got great news for you. I'm going to break down some differences between them. Now I won't be able to mention every single difference here, but I will give you some of the major differences in regards to rates, down payment, mortgage insurance, and underwriting differences.
Conventional loans are offered in many ways ranging from adjustable rates coming in 1,3,5,7,and 10 year hybrid arms, interest only loans, and 10,15,30, and 40 year fixed rate loans. FHA loans are offered in 3,5 yr arms and 15 and 30 yr fixed rate loans.
Some lenders offer different terms but these are the most common offered. Not ever lender will be the same in their product offerings.
So lets get into some of the differences now.
RATES:
Conventional loans in terms of pricing, or rates, have very high risk adjustments for lower credit scores and higher loan to values. Loan to values are calculated on purchases, as the loan amount divided by the purchase price. For example lets use a purchase price of $125,000 and a loan amount of $100,000. The loan to value would be calculated as 100,000/125,000 = 80%.
In this scenario the ltv (or loan to value) is 80% meaning the borrower is putting 20% down. The higher the ltv the higher the pricing. Lets say a borrower has a 650 credit score and they have 10% down, their rate would be considerably higher than someone with a 720 credit score and the same down payment. Conventional loans will also have pricing adjustments for multi-family properties, FHA does not.
MORTGAGE INSURANCE:
Conventional mortgage insurance is issued through private providers such as MGIC, Radian, RMIC, and PMI. These companies have their own guidelines when issuing mortgage insurance on conventional loans. In recent months all of them have gone to minimum credit score requirements and specific underwriting guidelines to mitigate risk. I've seen loans make it all the way to closing and fall apart because mortgage insurance could not be obtained. Mortgage insurance for multi-family properties will vary on conventional loans but will not be impacted on FHA.
Another note on this is unlike conventional loans that use private companies to obtain mortgage insurance, FHA is fully self funded by the upfront and monthly mortgage insurance premiums they collect. When comparing FHA you will see that the upfront costs associated with the loan are a little more expensive. This is because FHA will charge an UFMIP (up front mortgage insurance premium) that is equal to 1.75% (on purchases, streamline refinances are lower) of the base loan amount - I'll explain this in more detail under the down payment section. The monthly mortgage insurance premium will depend on the ltv. It'll will either range from .005% to .0055% of the loan amount. So for a $100,000 dollar loan amount the yearly mortgage insurance would be $500-$550 a year respectively. This is considerably lower than conventional which would range from .0075% - .0099% of the loan amount. Do the math that almost twice as much.
FHA 15 year loans have lower mortgage insurance, and if you put 10% down on a 15 yr loan, there is NO monthly mortgage insurance. This is not the case with Conventional.
Since FHA is fully self-funded, if you are approved for the loan, you're automatically approved for the mortgage insurance. This is not the case with the private mortgage insurance companies.
DOWN PAYMENT:
While as I write this we'll probably be in the process of receiving more changes, this is the most updated information available in regards to down payment. Conventional loans, non jumbo, which are loans above the annual Freddie Mac and Fannie Mae conforming limits, require 5% down payment. If the property is located in a declining market - which would be determined by the appraiser, Freddie or Fannie, or the MI company, you would need an additional 5% down payment. Below is the list of the conforming loan limits for 2009.
General max limits (for single family residences) are $417,000 and high cost areas $625,000.
For Alaska, Guam, Hawaii, and U.S. Virgin Islands, general is $625,000 and high cost is $930,000. For 2, 3, and 4 units these limits are higher. You can visit Fannie Mae's website at www.efanniemae.com for a full chart of loan limits.
For FHA, as of 2008, will be 3% down payment. Starting January 2009 minimum down will be 3.5%. Congress deliberated awhile on what to change the down payment requirements to on FHA loans. Ideas were thrown around for 1.5% or even $0 down. The fear was that FHA would be the new "sub-prime", so they changed it to 3.5%. The idea here is for people to have some skin in the game. If they've invested their hard earned money into the home, they are less likely to walk away from it without exhausting every avenue. FHA loan limits will vary by county and state and will adjust for high cost areas just as Fannie and Freddie do. You can find a detailed list at http://www.hud.gov/pub/chums/file_layouts.html
Now above I spoke about the UFMIP (up front mortgage insurance premium). How this would be calculated is to take the purchase price, in this case we'll use $100,000. You reduce this by the amount of down payment, for this example lets just say you are putting 3% down. This would be a base loan amount of $97,000. You then multiply this by the 1.75%, which equals $1697. This would be added to the base loan amount to get your total loan amount, which would equal $98,697. This is also the number used to calculate your monthly mortgage insurance. This was the additional up front cost I was talking about earlier. Even though you have this on FHA loans, the overall costs after a full analysis could be substantially lower versus using Conventional financing.
UNDERWRITING DIFFERENCES:
I could spend awhile on this section so I'll try to keep it short and sweet. Most lenders use Freddie Mac and Fannie Mae's automated underwriting systems, LP and DU - loan prospector and desktop underwriter - to evaluate loan candidates and shorten the time taken to make an underwriting decision. These systems have built in risk models that evaluate the data submitted and either give an approval or a denial based on that information.
FHA doesn't technically have a minimum credit score requirement, but this doesn't mean that you can get any credit score approved. When talking about having a no minimum credit score requirement, this is concentrating on those who do not have enough credit to pull a credit score. When this is the case, FHA underwriting guidelines will allow you to get what is called non-traditional credit references establishing a credit history with rent payments, utility payments, cell phone, etc. Not having a credit score will not eliminate the borrower from obtaining FHA insured financing. With the private mortgage insurance companies now implementing minimum credit scores for approval, FHA insured financing is the better option for the borrower.
While this isn't nearly all the differences when underwriting these loans, just know that FHA insured financing has more flexible guidelines then conventional loans, so this would be the better option for borrowers who've had credit issues in the past. This would provide them with low cost financing, making the purchase of the home more affordable, which is the goal of the program.
Please keep in mind this is only some of the major differences between the programs and you should still consult a professional when evaluating your options on buying home. This does not mean you shouldn't sit down at the dinner table with a piece of paper and write out ALL of your expenses, to determine if purchasing a home is right for you.
When being qualified for a loan, lenders only use debt reporting on the credit report for qualification purposes so please, do your due diligence and write out how much you have coming in and how much you have going out, taking into consideration things that may come up, before you invest savings, 401k, or other sources of funds into purchasing a new home.
Please be an informed buyer.
Copyright © 2008
Well I've got great news for you. I'm going to break down some differences between them. Now I won't be able to mention every single difference here, but I will give you some of the major differences in regards to rates, down payment, mortgage insurance, and underwriting differences.
Conventional loans are offered in many ways ranging from adjustable rates coming in 1,3,5,7,and 10 year hybrid arms, interest only loans, and 10,15,30, and 40 year fixed rate loans. FHA loans are offered in 3,5 yr arms and 15 and 30 yr fixed rate loans.
Some lenders offer different terms but these are the most common offered. Not ever lender will be the same in their product offerings.
So lets get into some of the differences now.
RATES:
Conventional loans in terms of pricing, or rates, have very high risk adjustments for lower credit scores and higher loan to values. Loan to values are calculated on purchases, as the loan amount divided by the purchase price. For example lets use a purchase price of $125,000 and a loan amount of $100,000. The loan to value would be calculated as 100,000/125,000 = 80%.
In this scenario the ltv (or loan to value) is 80% meaning the borrower is putting 20% down. The higher the ltv the higher the pricing. Lets say a borrower has a 650 credit score and they have 10% down, their rate would be considerably higher than someone with a 720 credit score and the same down payment. Conventional loans will also have pricing adjustments for multi-family properties, FHA does not.
MORTGAGE INSURANCE:
Conventional mortgage insurance is issued through private providers such as MGIC, Radian, RMIC, and PMI. These companies have their own guidelines when issuing mortgage insurance on conventional loans. In recent months all of them have gone to minimum credit score requirements and specific underwriting guidelines to mitigate risk. I've seen loans make it all the way to closing and fall apart because mortgage insurance could not be obtained. Mortgage insurance for multi-family properties will vary on conventional loans but will not be impacted on FHA.
Another note on this is unlike conventional loans that use private companies to obtain mortgage insurance, FHA is fully self funded by the upfront and monthly mortgage insurance premiums they collect. When comparing FHA you will see that the upfront costs associated with the loan are a little more expensive. This is because FHA will charge an UFMIP (up front mortgage insurance premium) that is equal to 1.75% (on purchases, streamline refinances are lower) of the base loan amount - I'll explain this in more detail under the down payment section. The monthly mortgage insurance premium will depend on the ltv. It'll will either range from .005% to .0055% of the loan amount. So for a $100,000 dollar loan amount the yearly mortgage insurance would be $500-$550 a year respectively. This is considerably lower than conventional which would range from .0075% - .0099% of the loan amount. Do the math that almost twice as much.
FHA 15 year loans have lower mortgage insurance, and if you put 10% down on a 15 yr loan, there is NO monthly mortgage insurance. This is not the case with Conventional.
Since FHA is fully self-funded, if you are approved for the loan, you're automatically approved for the mortgage insurance. This is not the case with the private mortgage insurance companies.
DOWN PAYMENT:
While as I write this we'll probably be in the process of receiving more changes, this is the most updated information available in regards to down payment. Conventional loans, non jumbo, which are loans above the annual Freddie Mac and Fannie Mae conforming limits, require 5% down payment. If the property is located in a declining market - which would be determined by the appraiser, Freddie or Fannie, or the MI company, you would need an additional 5% down payment. Below is the list of the conforming loan limits for 2009.
General max limits (for single family residences) are $417,000 and high cost areas $625,000.
For Alaska, Guam, Hawaii, and U.S. Virgin Islands, general is $625,000 and high cost is $930,000. For 2, 3, and 4 units these limits are higher. You can visit Fannie Mae's website at www.efanniemae.com for a full chart of loan limits.
For FHA, as of 2008, will be 3% down payment. Starting January 2009 minimum down will be 3.5%. Congress deliberated awhile on what to change the down payment requirements to on FHA loans. Ideas were thrown around for 1.5% or even $0 down. The fear was that FHA would be the new "sub-prime", so they changed it to 3.5%. The idea here is for people to have some skin in the game. If they've invested their hard earned money into the home, they are less likely to walk away from it without exhausting every avenue. FHA loan limits will vary by county and state and will adjust for high cost areas just as Fannie and Freddie do. You can find a detailed list at http://www.hud.gov/pub/chums/file_layouts.html
Now above I spoke about the UFMIP (up front mortgage insurance premium). How this would be calculated is to take the purchase price, in this case we'll use $100,000. You reduce this by the amount of down payment, for this example lets just say you are putting 3% down. This would be a base loan amount of $97,000. You then multiply this by the 1.75%, which equals $1697. This would be added to the base loan amount to get your total loan amount, which would equal $98,697. This is also the number used to calculate your monthly mortgage insurance. This was the additional up front cost I was talking about earlier. Even though you have this on FHA loans, the overall costs after a full analysis could be substantially lower versus using Conventional financing.
UNDERWRITING DIFFERENCES:
I could spend awhile on this section so I'll try to keep it short and sweet. Most lenders use Freddie Mac and Fannie Mae's automated underwriting systems, LP and DU - loan prospector and desktop underwriter - to evaluate loan candidates and shorten the time taken to make an underwriting decision. These systems have built in risk models that evaluate the data submitted and either give an approval or a denial based on that information.
FHA doesn't technically have a minimum credit score requirement, but this doesn't mean that you can get any credit score approved. When talking about having a no minimum credit score requirement, this is concentrating on those who do not have enough credit to pull a credit score. When this is the case, FHA underwriting guidelines will allow you to get what is called non-traditional credit references establishing a credit history with rent payments, utility payments, cell phone, etc. Not having a credit score will not eliminate the borrower from obtaining FHA insured financing. With the private mortgage insurance companies now implementing minimum credit scores for approval, FHA insured financing is the better option for the borrower.
While this isn't nearly all the differences when underwriting these loans, just know that FHA insured financing has more flexible guidelines then conventional loans, so this would be the better option for borrowers who've had credit issues in the past. This would provide them with low cost financing, making the purchase of the home more affordable, which is the goal of the program.
Please keep in mind this is only some of the major differences between the programs and you should still consult a professional when evaluating your options on buying home. This does not mean you shouldn't sit down at the dinner table with a piece of paper and write out ALL of your expenses, to determine if purchasing a home is right for you.
When being qualified for a loan, lenders only use debt reporting on the credit report for qualification purposes so please, do your due diligence and write out how much you have coming in and how much you have going out, taking into consideration things that may come up, before you invest savings, 401k, or other sources of funds into purchasing a new home.
Please be an informed buyer.
Copyright © 2008
Saturday, November 15, 2008
Wasn't The Bailout Money for Bad Mortgages?
Well we were all sold the fact the 700 billion dollar bailout was for troubled mortgage related assets. This topic should concern you since you and I will have to fit the bill for this as taxpayers. Now the money is being used to take minority positions in banks and other companies such as AIG.
Now you have the auto industry, city governments, state governments, and everybody else coming with their hands out looking for cash. The big three have been said to be burning through one billion dollars a month a piece. Now they want $25 billion dollars to get them through these troubling times.
Since when do we socialize losses and privatize profits? The TARP or Troubled Asset Relief Program was intended to buy toxic mortgage loans from struggling banks in attempt to help ease the credit crunch. Now the money is being used to take stakes in banks urging them to lend more. Instead banks are not lending and in some instances they are using this money to fund acquisitions of other banks.
Secretary of the Treasury Hank Paulson is now switching gears from his original plan and backed his decision by saying in an interview, "Our assessment at this time is that this is not the most effective way to use TARP funds," he told the nation Wednesday.
So what now? Wasn't the whole problem stemming from the mortgage industry with all these exotic mortgages and mortgage-backed securities? Frustrating as it is we must deal with it now. As you should be concerned about the actions of the government with the use of our taxpayer money I urge you to stay focused on your business.
Just to be clear mortgages have not dried up. Loans are still available to consumers. The percentage of FHA loans being originated is growing rapidly and will continue. These mortgage loans are never talked about by the media. So even though banks are struggling with bad loans on the books, this too shall pass, and the market will stabilize. If you are in the market to purchase a home now is still a great time to buy one.
Look at using FHA financing for purchasing your new home. If you have less than 20% down you will need mortgage insurance, you will come out better with FHA mortgage insurance anyway as this, in some cases, is half the cost monthly. FHA only requires a minimum of 3% down right now, then Jan 1 you will 3.5% down payment.
While conventional loans still have hefty delivery fees for credit score adjustments and loan to value adjustements, FHA rates will be more competitive.
You can find out more by visiting my website at www.53.com/mlo/dustin-swigart. You can also email me at dustin.swigart@53.com
Copyright © 2008 by Dustin Swigart
Now you have the auto industry, city governments, state governments, and everybody else coming with their hands out looking for cash. The big three have been said to be burning through one billion dollars a month a piece. Now they want $25 billion dollars to get them through these troubling times.
Since when do we socialize losses and privatize profits? The TARP or Troubled Asset Relief Program was intended to buy toxic mortgage loans from struggling banks in attempt to help ease the credit crunch. Now the money is being used to take stakes in banks urging them to lend more. Instead banks are not lending and in some instances they are using this money to fund acquisitions of other banks.
Secretary of the Treasury Hank Paulson is now switching gears from his original plan and backed his decision by saying in an interview, "Our assessment at this time is that this is not the most effective way to use TARP funds," he told the nation Wednesday.
So what now? Wasn't the whole problem stemming from the mortgage industry with all these exotic mortgages and mortgage-backed securities? Frustrating as it is we must deal with it now. As you should be concerned about the actions of the government with the use of our taxpayer money I urge you to stay focused on your business.
Just to be clear mortgages have not dried up. Loans are still available to consumers. The percentage of FHA loans being originated is growing rapidly and will continue. These mortgage loans are never talked about by the media. So even though banks are struggling with bad loans on the books, this too shall pass, and the market will stabilize. If you are in the market to purchase a home now is still a great time to buy one.
Look at using FHA financing for purchasing your new home. If you have less than 20% down you will need mortgage insurance, you will come out better with FHA mortgage insurance anyway as this, in some cases, is half the cost monthly. FHA only requires a minimum of 3% down right now, then Jan 1 you will 3.5% down payment.
While conventional loans still have hefty delivery fees for credit score adjustments and loan to value adjustements, FHA rates will be more competitive.
You can find out more by visiting my website at www.53.com/mlo/dustin-swigart. You can also email me at dustin.swigart@53.com
Copyright © 2008 by Dustin Swigart
Tuesday, November 11, 2008
What Is Your Rates and Fees?
I hear this all the time. Do you know what I hearing when I hear this? I hear the client asking what am I getting for my money? What service are you going to provide? I need more information.
I can't tell you how many lenders there in this market that have really low rates and fees. But I caution you when dealing with these companies; you will get what you pay for and you do sacrifice something to get the absolute lowest rate and fees. Many of these employees that work for them are paid by the hour and do not know a thing about the guidelines or different solutions that are available to you. They enter your information into a system that tells them whats best. There is no listening involved only data collecting.
These companies have a habit of selling not only your loan, but the servicing rights to your loan as well. What does that mean? The means your loan will get transferred to another lender, and possibly another lender after that.
Take Walmart for example. Walmart has the lowest prices but service is horrible proving that all they care about it sheer volume. You are not a customer to them, only a number. If they sell enough at a low price, they can make a profit.
H&R block is another example. What do you get with H&R block? You get the lowest tax preparation fees but do you get professional service? My point is when asking a lender for rate and fees, find out about who you are dealing with. Is your lender only a mortgage company? Are they a bank? Do you trust who you are doing business with?
What happened to service? To building a long-term relationship with your lender that not only stops with your mortgage; but also your checking, savings, investments, and insurance needs. The subprime mess is an example of not advising clients in the proper way on what solutions are best for them. Its our duty as originators to discuss the full details of the loan, including discussion on debt to income ratios, the responsibilities of a home owner - especially first time homebuyers - benefits and disadvantages, and resources to educate our clients.
Don't just settle for lowest rate and fees, please consider the long-term relationship with your originator and lender. Find out if they sell the servicing to their loans. They will have a servicing disclosure that will disclosure how many loans they've sold the servicing to in the last 3 years.
When shopping for a mortgage, shop for a professional. Why would you originate your loan with someone who doesn't even know how the market works? You are making the biggest purchase you'll ever make so make sure you dealing with a professional.
Ask questions, be informed of your choices, and make sure you trust your originator. Most lenders will have similar programs and similar rates, so think about the relationship. Shopping for a mortgage is not just about rates and fees.
Copyright © 2008
I can't tell you how many lenders there in this market that have really low rates and fees. But I caution you when dealing with these companies; you will get what you pay for and you do sacrifice something to get the absolute lowest rate and fees. Many of these employees that work for them are paid by the hour and do not know a thing about the guidelines or different solutions that are available to you. They enter your information into a system that tells them whats best. There is no listening involved only data collecting.
These companies have a habit of selling not only your loan, but the servicing rights to your loan as well. What does that mean? The means your loan will get transferred to another lender, and possibly another lender after that.
Take Walmart for example. Walmart has the lowest prices but service is horrible proving that all they care about it sheer volume. You are not a customer to them, only a number. If they sell enough at a low price, they can make a profit.
H&R block is another example. What do you get with H&R block? You get the lowest tax preparation fees but do you get professional service? My point is when asking a lender for rate and fees, find out about who you are dealing with. Is your lender only a mortgage company? Are they a bank? Do you trust who you are doing business with?
What happened to service? To building a long-term relationship with your lender that not only stops with your mortgage; but also your checking, savings, investments, and insurance needs. The subprime mess is an example of not advising clients in the proper way on what solutions are best for them. Its our duty as originators to discuss the full details of the loan, including discussion on debt to income ratios, the responsibilities of a home owner - especially first time homebuyers - benefits and disadvantages, and resources to educate our clients.
Don't just settle for lowest rate and fees, please consider the long-term relationship with your originator and lender. Find out if they sell the servicing to their loans. They will have a servicing disclosure that will disclosure how many loans they've sold the servicing to in the last 3 years.
When shopping for a mortgage, shop for a professional. Why would you originate your loan with someone who doesn't even know how the market works? You are making the biggest purchase you'll ever make so make sure you dealing with a professional.
Ask questions, be informed of your choices, and make sure you trust your originator. Most lenders will have similar programs and similar rates, so think about the relationship. Shopping for a mortgage is not just about rates and fees.
Copyright © 2008
Thursday, November 6, 2008
To My Realtors
We all know right now is tough. The sentiment out there in the market is that its horrible. While I agree its tough, I'll challenge the notion it's horrible. Now you must be thinking Dustin, what are you saying. Well let me explain. We all can remember when we got into the business your manager, or someone telling you to stick to the basics.
Even though we are in the people business, you sell homes, I sell the financing to purchase those homes, we have basics to which we must adhere to in order to become successful. I don't like the use of sales techniques to describe skills needed to become successful. To me it boils down to you having character, integrity, honesty, and a true passion to help others.
That's what I mean, the basic fundamental principles in any worthwhile and enjoying career. To right of this blog you'll see a section that says Realtor Educational Resources. I also have some links you can click that will take you to some neat sites with some great information on them. I surf the net looking for ways to improve my business and the business of my partners. I want to share with you some resources I found online that could help with your business right now. I want you to succeed and therefore I'll share anything I find that can be helpful to you and increase your business.
The good news is, the strong will survive in these times. The people who are committed will survive. The people who do not let opportunity pass them by, will see this as a time to hone your skills, fine tune your systems and make changes as needed, and develop a niche so you'll be seen as the expert in that area.
Don't let the media penetrate your mind and fill it with doubt, and doom and gloom. Do you actually think we'll stay like this forever? Absolutely not, and I will stress that if you don't prepare yourself for the upswing, you'll be left behind holding the bag as the market takes off.
Take this time to really get better and implement some systems that will help you succeed. For me reading books is a tremendous tool for me because I love to learn. Also in the section I mentioned above, there is a Real Estate Success Ebook you can get that will give you some more ideas for generating leads, marketing, and even listing presentations. One area I believe you cannot slack on is education. You must be the professional everybody trusts and has confidence in to be the go to person when they need real estate services.
So get the book and tell me some good news on how it helped you achieve a goal or goals. Preferably I want to hear that in plural form. Then after you reach those goals, write some more down and complete those.
To your success, I wish you happy selling. ;o)
Even though we are in the people business, you sell homes, I sell the financing to purchase those homes, we have basics to which we must adhere to in order to become successful. I don't like the use of sales techniques to describe skills needed to become successful. To me it boils down to you having character, integrity, honesty, and a true passion to help others.
That's what I mean, the basic fundamental principles in any worthwhile and enjoying career. To right of this blog you'll see a section that says Realtor Educational Resources. I also have some links you can click that will take you to some neat sites with some great information on them. I surf the net looking for ways to improve my business and the business of my partners. I want to share with you some resources I found online that could help with your business right now. I want you to succeed and therefore I'll share anything I find that can be helpful to you and increase your business.
The good news is, the strong will survive in these times. The people who are committed will survive. The people who do not let opportunity pass them by, will see this as a time to hone your skills, fine tune your systems and make changes as needed, and develop a niche so you'll be seen as the expert in that area.
Don't let the media penetrate your mind and fill it with doubt, and doom and gloom. Do you actually think we'll stay like this forever? Absolutely not, and I will stress that if you don't prepare yourself for the upswing, you'll be left behind holding the bag as the market takes off.
Take this time to really get better and implement some systems that will help you succeed. For me reading books is a tremendous tool for me because I love to learn. Also in the section I mentioned above, there is a Real Estate Success Ebook you can get that will give you some more ideas for generating leads, marketing, and even listing presentations. One area I believe you cannot slack on is education. You must be the professional everybody trusts and has confidence in to be the go to person when they need real estate services.
So get the book and tell me some good news on how it helped you achieve a goal or goals. Preferably I want to hear that in plural form. Then after you reach those goals, write some more down and complete those.
To your success, I wish you happy selling. ;o)
Wednesday, November 5, 2008
Mortgage Rates
So what in the world is going on with mortgage rates? We have so much volatility its hard to judge the direction. Keep in mind the market is highly emotional right now. From day to day you don't know what is going to happen.
I try to coach my buyers the best I can but sometimes the window of opportunity is only there for a couple of days and then gone again for a few weeks.
Many people do not realize that mortgage rates are determined by the secondary market for mortgage-backed securities. Let me explain what I mean and it will make more sense.
Lenders make loans to borrowers for mortgages, car loans, etc. Lenders can get their money from a few places. Deposits are the cheapest. This is why banks REALLY stress and focus on what is called core deposit growth.
Banks can also use short term funding like commercial paper or short term notes usually ranging from 90-120 days. They can also borrower from other banks. If the lender is publicly traded they can raise capital through the issuance of more shares or preferred shares. Preferred shares are a hybrid of stock and debt and are paid dividends by either a percentage or dollar amount per share. Example 8% preferred would pay 8% interest on the par value of shares held. If the pare value is $100, they would receive $8 dollars a share. If the stock is a $3 preferred, this would mean that the investor would get $3 per share regardless of the par value (example if the par value was $60). Issuing common shares would dilute common shareholder equity and is usually not seen favorably by investors with big positions within the company. This is a whole other topic.
So once the lender makes the loan they can either hold the loan on the books, a portfolio loan, sell the note to an investor such as Freddie or Fannie -- these are government sponsored entities with the sole purpose of providing liquidity in the mortgage market -- or they they can sell the note and then sell the servicing rights altogether. Selling the note and servicing provides fee income for the originator of the loan and then frees up the capital to go lend more moving all the risk to someone else.
Freddie Mac and Fannie Mae will then pool these loans together and package them into securities and sell them as bonds to investors worldwide. This is also to provide more liquidity to them so they can continue to buy more and more loans. The cycle just repeats itself.
Freddie and Fannie do have loan limits that are set by the Federal Housing Finance Agency, who on July 30 2008 was created by the Housing Recovery Act, to oversee Freddie, Freddie, and the Federal Home Loan Banks, to make sure the secondary market is functioning properly.
These MBS or Mortgage-Backed Securities are sold in the form of bonds. If you are not sure with how bond pricing works it can be a little confusing. When bond prices move up (which means investors are buying), the yield at which those bonds pay goes DOWN. Yes that's right price and yield move inversely from each other. When bond prices move down (which means investors are selling), the yield moves up. This can get really complicated because a bond has a stated interest rate or coupon, doesn't mean the investor will pay that. Market prices change all the time and if an investor wants a higher yield, that means the price has to come down.
So what does all this mean? Well it means that if the yields go up on the bonds, mortgage rates will follow the upward trend. This is because mortgages have a risk of prepayment either through selling the home or refinancing into a new loan. When this happens investors do not get the cash flow from the bond they anticipated so to compensate for that risk these bonds are traded at a spread of government bonds. Spread simply means a numeric figure, expressed in terms of basis points, over the index (the government bonds). Basis points are a fraction of percentages expressed as a unit of 100. Example 1 basis point is 1/100 of a percent. One hundred basis points would be equivalent to 1%.
Right now investors are skeptical of the condition of the economy and even though the government is pumping billions of dollars into the system it boils down to investors wanting higher returns for loaning their money. Bottom line don't play the guessing game. If you are in the market to purchase a home now is the best time to do so.
Why you ask? Even though we have price volatility, mortgage rates are still at historical lows and on top of that you have home prices that have fallen some 30% in some areas making more homes affordable. Don't waste time we will start to see home prices going back up soon so don't get left holding the bag trying to wait it out to the last minute and time the market.
As a warning please make sure you work the numbers of purchasing a home prior to making any offer. Speak with a professional, sit down and work out your budget. Make sure you can afford to make the payments and don't get caught in the trap many Americans did by splitting hairs just to buy a home. Homeownership is the American dream.
Thanks
Dustin
Copyright © 2008 by Dustin Swigart
I try to coach my buyers the best I can but sometimes the window of opportunity is only there for a couple of days and then gone again for a few weeks.
Many people do not realize that mortgage rates are determined by the secondary market for mortgage-backed securities. Let me explain what I mean and it will make more sense.
Lenders make loans to borrowers for mortgages, car loans, etc. Lenders can get their money from a few places. Deposits are the cheapest. This is why banks REALLY stress and focus on what is called core deposit growth.
Banks can also use short term funding like commercial paper or short term notes usually ranging from 90-120 days. They can also borrower from other banks. If the lender is publicly traded they can raise capital through the issuance of more shares or preferred shares. Preferred shares are a hybrid of stock and debt and are paid dividends by either a percentage or dollar amount per share. Example 8% preferred would pay 8% interest on the par value of shares held. If the pare value is $100, they would receive $8 dollars a share. If the stock is a $3 preferred, this would mean that the investor would get $3 per share regardless of the par value (example if the par value was $60). Issuing common shares would dilute common shareholder equity and is usually not seen favorably by investors with big positions within the company. This is a whole other topic.
So once the lender makes the loan they can either hold the loan on the books, a portfolio loan, sell the note to an investor such as Freddie or Fannie -- these are government sponsored entities with the sole purpose of providing liquidity in the mortgage market -- or they they can sell the note and then sell the servicing rights altogether. Selling the note and servicing provides fee income for the originator of the loan and then frees up the capital to go lend more moving all the risk to someone else.
Freddie Mac and Fannie Mae will then pool these loans together and package them into securities and sell them as bonds to investors worldwide. This is also to provide more liquidity to them so they can continue to buy more and more loans. The cycle just repeats itself.
Freddie and Fannie do have loan limits that are set by the Federal Housing Finance Agency, who on July 30 2008 was created by the Housing Recovery Act, to oversee Freddie, Freddie, and the Federal Home Loan Banks, to make sure the secondary market is functioning properly.
These MBS or Mortgage-Backed Securities are sold in the form of bonds. If you are not sure with how bond pricing works it can be a little confusing. When bond prices move up (which means investors are buying), the yield at which those bonds pay goes DOWN. Yes that's right price and yield move inversely from each other. When bond prices move down (which means investors are selling), the yield moves up. This can get really complicated because a bond has a stated interest rate or coupon, doesn't mean the investor will pay that. Market prices change all the time and if an investor wants a higher yield, that means the price has to come down.
So what does all this mean? Well it means that if the yields go up on the bonds, mortgage rates will follow the upward trend. This is because mortgages have a risk of prepayment either through selling the home or refinancing into a new loan. When this happens investors do not get the cash flow from the bond they anticipated so to compensate for that risk these bonds are traded at a spread of government bonds. Spread simply means a numeric figure, expressed in terms of basis points, over the index (the government bonds). Basis points are a fraction of percentages expressed as a unit of 100. Example 1 basis point is 1/100 of a percent. One hundred basis points would be equivalent to 1%.
Right now investors are skeptical of the condition of the economy and even though the government is pumping billions of dollars into the system it boils down to investors wanting higher returns for loaning their money. Bottom line don't play the guessing game. If you are in the market to purchase a home now is the best time to do so.
Why you ask? Even though we have price volatility, mortgage rates are still at historical lows and on top of that you have home prices that have fallen some 30% in some areas making more homes affordable. Don't waste time we will start to see home prices going back up soon so don't get left holding the bag trying to wait it out to the last minute and time the market.
As a warning please make sure you work the numbers of purchasing a home prior to making any offer. Speak with a professional, sit down and work out your budget. Make sure you can afford to make the payments and don't get caught in the trap many Americans did by splitting hairs just to buy a home. Homeownership is the American dream.
Thanks
Dustin
Copyright © 2008 by Dustin Swigart
Friday, October 31, 2008
Are We At the Bottom in Housing?
Well experts are scratching their heads to answer this question. We've seen home prices drop some 27%-30% since the 4th quarter of 2006. But really if you look at the data the majority of the declines came from the west and east coasts, mostly California and Florida. Take these states out and you have a flat market. In some markets prices are actually increasing. So is there a bottom? How do you know?
I really believe if we can get the media to start telling good news, consumer confidence will come back and "the markets" state of mind will change. All the bad publicity housing has been getting has caused a shift in thinking keeping people on the sidelines. I can't stress this enough that NOW is the time to buy a home. The government is giving a tax credit for first time homebuyers and when they begin to jump back into the market, you'll see a domino effect upward.
In the midst of the RED HOT real estate boom home prices were skyrocketing and rates were low. Now you have the same low rates but home prices have come down so why not take advantage of the opportunity. Don't listen to the hype that makes news, work the numbers and realize that this is only a correction, a hefty one, but a correction that will not last too much longer.
The media wants you to believe that home financing options have vanished. This simply not true. FHA, which stands for Federal Housing Authority, was enacted in 1934 to help stimulate a flat housing market. FHA provides low down payment, low interest, affordable financing for not only first time homebuyers but repeat buyers alike. FHA is ran by the Department of Housing and Urban Development and operates fully on self-generated income that costs the taxpayers zero. The insurance premiums, called UFMIP or upfront mortgage insurance premium, is charged on every loan and is put into an account to which the program is funded.
FHA has mortgage insurance on a monthly basis as well, similar to PMI or private mortgage insurance issued by private companies such as Radian, PMI, MGIC, and RMIC. This mortgage insurance is at a much lower cost than conventional mortgage insurance and in some instances is half the cost.
The media doesn't talk about this program of course and its important that we get some stigmas out of the way. FHA in its old days was a little more strict on the property guidelines. They would require a very long form of an appraisal called a VC sheet. This sometimes made it difficult for the Realtors and buyers because certain guidelines required additional inspections and repairs not figured into the sales price that would delay closing or cost the seller more money than they anticipated. This was for the protection of the buyer so that they were not moving into a home that needed a lot of repairs and that would put a strain on the new homeowner. Realtors and builders grew to hate the program and tried to find other avenues of financing. Since 2006 FHA has loosened its guidelines to change with the market and has made it easier to close on a home using FHA financing.
With the explosion of 100% purchase programs FHA became obsolete. Do not be afraid of this program because this is an excellent way to get low cost, low down payment financing to purchase a home. The problems we are having came from the provisions in the Community Reinvestment Act in 1995, which made banks make more and more loans to people who really couldn't afford them. Very very lax underwriting guidelines fueled by greed on Wall Street with exotic mortgage-backed bonds and collateralized debt obligations that have crippled names like Merriyl Lynch and Bear Stearns.
We've seen some consolidation in the this industry and I believe we'll see more coming down the pike. So are we at a bottom? I honestly believe the worst is behind us and we'll see an upward trend in the coming quarters. Don't listen to the hype on the news, if you are in the market talk to a mortgage professional and work the numbers.
For information on FHA loans please visit my site, www.53.com/mlo/dustin-swigart.
Have a great weekend!!!
"We all have the seeds to personal growth within us, but very few ever realize the important role circumstances play in nurturing those seeds to trees of opportunity."
Dustin Swigart
Copyright © 2008 by Dustin Swigart
I really believe if we can get the media to start telling good news, consumer confidence will come back and "the markets" state of mind will change. All the bad publicity housing has been getting has caused a shift in thinking keeping people on the sidelines. I can't stress this enough that NOW is the time to buy a home. The government is giving a tax credit for first time homebuyers and when they begin to jump back into the market, you'll see a domino effect upward.
In the midst of the RED HOT real estate boom home prices were skyrocketing and rates were low. Now you have the same low rates but home prices have come down so why not take advantage of the opportunity. Don't listen to the hype that makes news, work the numbers and realize that this is only a correction, a hefty one, but a correction that will not last too much longer.
The media wants you to believe that home financing options have vanished. This simply not true. FHA, which stands for Federal Housing Authority, was enacted in 1934 to help stimulate a flat housing market. FHA provides low down payment, low interest, affordable financing for not only first time homebuyers but repeat buyers alike. FHA is ran by the Department of Housing and Urban Development and operates fully on self-generated income that costs the taxpayers zero. The insurance premiums, called UFMIP or upfront mortgage insurance premium, is charged on every loan and is put into an account to which the program is funded.
FHA has mortgage insurance on a monthly basis as well, similar to PMI or private mortgage insurance issued by private companies such as Radian, PMI, MGIC, and RMIC. This mortgage insurance is at a much lower cost than conventional mortgage insurance and in some instances is half the cost.
The media doesn't talk about this program of course and its important that we get some stigmas out of the way. FHA in its old days was a little more strict on the property guidelines. They would require a very long form of an appraisal called a VC sheet. This sometimes made it difficult for the Realtors and buyers because certain guidelines required additional inspections and repairs not figured into the sales price that would delay closing or cost the seller more money than they anticipated. This was for the protection of the buyer so that they were not moving into a home that needed a lot of repairs and that would put a strain on the new homeowner. Realtors and builders grew to hate the program and tried to find other avenues of financing. Since 2006 FHA has loosened its guidelines to change with the market and has made it easier to close on a home using FHA financing.
With the explosion of 100% purchase programs FHA became obsolete. Do not be afraid of this program because this is an excellent way to get low cost, low down payment financing to purchase a home. The problems we are having came from the provisions in the Community Reinvestment Act in 1995, which made banks make more and more loans to people who really couldn't afford them. Very very lax underwriting guidelines fueled by greed on Wall Street with exotic mortgage-backed bonds and collateralized debt obligations that have crippled names like Merriyl Lynch and Bear Stearns.
We've seen some consolidation in the this industry and I believe we'll see more coming down the pike. So are we at a bottom? I honestly believe the worst is behind us and we'll see an upward trend in the coming quarters. Don't listen to the hype on the news, if you are in the market talk to a mortgage professional and work the numbers.
For information on FHA loans please visit my site, www.53.com/mlo/dustin-swigart.
Have a great weekend!!!
"We all have the seeds to personal growth within us, but very few ever realize the important role circumstances play in nurturing those seeds to trees of opportunity."
Dustin Swigart
Copyright © 2008 by Dustin Swigart
Saturday, October 25, 2008
Credit is Starting to Ease
As we all know we've been hammered everyday about the economic conditions we face. It's funny though how, when speaking about mortgages, the media fails to talk about government backed loans. They only talk about Fannie and Freddie but leave out Ginnie, which backs FHA securitized loans.
We still have financing available for first time homebuyers and marginal credit loans through financing with FHA, VA, and USDA rural housing loans. When talking with prospective buyers I keep hearing how "scared" people are to make a move. After I explain some of the conditions in the market and why the stock market is so volatile they settle down and understand what is happening with market dynamics.
The automobile industry used to be the main driver of the economy and signaled the dominance of manufacturing in our economy. Well now the main driver is housing. Yep that's right back in 2001 after the 9/11 attacks government was reluctant to impose regulation on the only part of the economy that appeared to be thriving, the red hot real estate market. Now we are facing the problems that all the credit default swaps, collateralized debt obligations, and other derivatives, that have caused problems for the banks and institutions that had them on their balance sheet.
We are in a flushing out phase and it will end, just not immediately. The Housing Recovery Act of 2008 made great strides to modernize FHA and come out with a tax credit for first time homebuyers in order to get them back into the market. Lets face it we need the first time homebuyers back in to purchase bloated inventory so we can start the domino effect again.
I want to explain a little bit about what is going on in the credit markets. I believe through education, you can ease your prospects minds with important information and convert more leads into sales.
Lets start with the credit markets. Credit markets are vital for individuals and businesses who need to access credit in order to purchase goods and services, make payrolls, expand business operations, make capital expenditures, school loans, and more.
The most important spread being watched right now is the LIBOR/OIS Spread. This is the spread between dollar LIBOR (london inter bank offered rate) and the Overnight index swap rates. This is a good indication of the willingness of banks to lend to each other. To give you a comparison before the credit crunch the LIBOR/OIS spread was 11bps (bps mean basis points which is 1/100th of a percent, example 11 basis points is .11% - 100bps is 1%.) The higher the spread the less likely banks will lend to each other. This week it closed at an a staggering 331bps but dropped from 341bps, which means we are seeing slight improvement.
Now what about all the selling? Well with the craziness in the market and Hedge Funds, investment vehicles for the wealthy, are deleveraging their positions and being forced to sell due to redemptions from their wealthy clients. Hedge funds are down about 19% ytd (estimate), some hedge funds after fees return 20%-26% annually. Hedge funds make their money in the stock market, credit markets, and derivative markets but in some cases borrow heavily to invest and hedge their bets. That's fine and dandy in an economic boom but in a slowdown like this they must sell and deleverage their positions causing downward pressure in the markets and then also selling on the down side, short selling, put options, etc, to keep from losing money from long, bullish positions, which causes more downward pressure. Not to mention mutual fund clients are selling their positions to meet growing redemptions from their clients as well. Thus creating the volatile environment we find ourselves in.
If you had some extra money laying around right now would be the best time to invest in real estate, and stocks pounded and are now undervalued.
The moral of the story, educate your clients in contrary to what is being splattered on the media, we are in election time and some news stations with political agendas are attempting to make this look like this is all the Bush Administrations fault and are attempting to make it sound so HORRID. Both parties failed to take action but many attempts were made but shot down by democrats in Congress. Right now is the best time to buy a home and with the Treasury recently being given 1.1Trillion dollars in buying power to purchase mortgage-backed securities (the main driver of mortgage rates) we should see some easing in the rate volatility here shortly as well.
If I can help with anything feel free to call or email me. Stay positive, do your homework on the market, this kind of thing happened in 1987 as well but how soon we forget.
God Bless!
We still have financing available for first time homebuyers and marginal credit loans through financing with FHA, VA, and USDA rural housing loans. When talking with prospective buyers I keep hearing how "scared" people are to make a move. After I explain some of the conditions in the market and why the stock market is so volatile they settle down and understand what is happening with market dynamics.
The automobile industry used to be the main driver of the economy and signaled the dominance of manufacturing in our economy. Well now the main driver is housing. Yep that's right back in 2001 after the 9/11 attacks government was reluctant to impose regulation on the only part of the economy that appeared to be thriving, the red hot real estate market. Now we are facing the problems that all the credit default swaps, collateralized debt obligations, and other derivatives, that have caused problems for the banks and institutions that had them on their balance sheet.
We are in a flushing out phase and it will end, just not immediately. The Housing Recovery Act of 2008 made great strides to modernize FHA and come out with a tax credit for first time homebuyers in order to get them back into the market. Lets face it we need the first time homebuyers back in to purchase bloated inventory so we can start the domino effect again.
I want to explain a little bit about what is going on in the credit markets. I believe through education, you can ease your prospects minds with important information and convert more leads into sales.
Lets start with the credit markets. Credit markets are vital for individuals and businesses who need to access credit in order to purchase goods and services, make payrolls, expand business operations, make capital expenditures, school loans, and more.
The most important spread being watched right now is the LIBOR/OIS Spread. This is the spread between dollar LIBOR (london inter bank offered rate) and the Overnight index swap rates. This is a good indication of the willingness of banks to lend to each other. To give you a comparison before the credit crunch the LIBOR/OIS spread was 11bps (bps mean basis points which is 1/100th of a percent, example 11 basis points is .11% - 100bps is 1%.) The higher the spread the less likely banks will lend to each other. This week it closed at an a staggering 331bps but dropped from 341bps, which means we are seeing slight improvement.
Now what about all the selling? Well with the craziness in the market and Hedge Funds, investment vehicles for the wealthy, are deleveraging their positions and being forced to sell due to redemptions from their wealthy clients. Hedge funds are down about 19% ytd (estimate), some hedge funds after fees return 20%-26% annually. Hedge funds make their money in the stock market, credit markets, and derivative markets but in some cases borrow heavily to invest and hedge their bets. That's fine and dandy in an economic boom but in a slowdown like this they must sell and deleverage their positions causing downward pressure in the markets and then also selling on the down side, short selling, put options, etc, to keep from losing money from long, bullish positions, which causes more downward pressure. Not to mention mutual fund clients are selling their positions to meet growing redemptions from their clients as well. Thus creating the volatile environment we find ourselves in.
If you had some extra money laying around right now would be the best time to invest in real estate, and stocks pounded and are now undervalued.
The moral of the story, educate your clients in contrary to what is being splattered on the media, we are in election time and some news stations with political agendas are attempting to make this look like this is all the Bush Administrations fault and are attempting to make it sound so HORRID. Both parties failed to take action but many attempts were made but shot down by democrats in Congress. Right now is the best time to buy a home and with the Treasury recently being given 1.1Trillion dollars in buying power to purchase mortgage-backed securities (the main driver of mortgage rates) we should see some easing in the rate volatility here shortly as well.
If I can help with anything feel free to call or email me. Stay positive, do your homework on the market, this kind of thing happened in 1987 as well but how soon we forget.
God Bless!
Thursday, October 23, 2008
The Mastery Of Credit Scores
We all know how important credit as become. In this day in age where all that is used by lenders is credit score, an accompanying story and relationship has become a thing of the past. With the new instruments on Wall Street such as credit default swaps and other derivatives make it nearly a necessity to have a high credit score in order to even look at you as a candidate for financing.
The most frustrating part about this is that it takes years to build credit and just minutes to destroy it. Then after something happens it can take years to rebuild it. In many instances there are situations where credit inaccuracies, which are highly common, can prevent you from getting the financing you need whether it be for a business or personal usage. There have been laws put in place to help consumers like the FACT act and the FCRA act but without detailed knowledge of these acts, which most consumers don’t, trying to remove inaccuracies is time consuming, frustrating, and result in consumers just giving up.
The FACT act stands for the Fair and Accurate Credit Transaction Act and FCRA stands for the Fair Credit Reporting Act, the FACT act was passed in 2003 and amended the FCRA act in order to provide more regulation that consumers can get one free copy of their credit report each year. With hundreds of provisions in each act it’s a stretch to require consumers to know these statutes inside and out. So how does a consumer become educated in this? With the internet you can find out just about anything but sometimes this comes with a price, some expensive some not.
You could always hire and attorney but this can be expensive as well. I know you’ve seen it, the many “credit repair companies” out there promising they can remove negative remarks some can help some not at all. Some of these companies are very expensive others are fairly cheap. The most important thing to remember, when dealing with credit, is to monitor your credit report and pay your bills on time.
I’m going to give you some resources that I’ve found online to be helpful in helping me “Master” my knowledge in the area of credit scores. The credit reporting companies provide you with information and also offer credit monitoring every month for a low fee and offer unlimited credit reports to help you take control of your credit.
The one thing that is frustrating is not KNOWING the algorithm at which they calculate your score. I’m going to give you a guide below as to what your score is comprised of and what information the credit scoring companies use in order to calculate your score. However this does not give you the concrete formula to which they use. Really to maintain great credit keep revolving balances low, don’t get into too much debt, and pay things off as fast as possible.
We are all bombarded everyday with “specials” and “once in a lifetime offers”, this is just targeted marketing designed to make you believe you can’t live without it or you are lesser of a person if you don’t buy it NOW. Please don’t fall for this. Now that is not to say some of the books and products that are marketed to you are not valuable, I’m merely saying don’t run to “every” special once in a lifetime offer that is presented to you, use your better judgment. The key is to spend less than you make and I know sometimes this can hard when we “justify” it in our minds by thinking we can handle the payments. But when you have this payment and that payment and then you have to borrower money to make this payment, you know where I’m going with this.
We are in the age of “automated underwriting systems” that help expedite credit decisions for lenders to improve time efficiency and lower costs. The problem with these systems is they are driven by score and your credit history, they cannot read your story. So for an example banks didn’t use these systems, they would evaluate your score based you and what you have to say. Keep in mind that underwriters looking at your application do not see you or know you therefore all they go by is what’s on paper. This is a huge disadvantage for the consumer but there are some advantages as well, including speed, efficiency, which improve customer service and the overall experience. KNOW your credit score and become educated in this area because its only going to get more complicated especially with the growing financial problems in the economy surrounding credit.
So lets get to some of information I have for you and resources you can use to help you with the “Mastery of Your Credit Score”.
BCS Alliance offers a credit kit that is 101 pages total and gives you some of the information I’m going to share with you now. I paid $14.99 for it; a small price to pay for information that could save you tens of thousands of dollars in the future.
Credit Scores
750 or higher – considered excellent credit
660-749 – considered good credit
620-659 – considered fair credit
350-619 – considered poor credit
How Credit Scores are Determined?
35% - Past payment history - Late payments, charge offs, bankruptcies, etc.
30% - Outstanding debt – amounts owed on all accounts, number of accounts with balances, debt-to-credit limit ratio, etc.
15% - Length of credit history – Time since accounts were opened, time since last activity, time since last delinquency.
10% - Recent credit applications – Types of new accounts, recent inquiries, and how many inquiries.
10% - Account mix – Types of various accounts (car loans, credit cards, mortgages, etc.)
Factors that are NOT used are demographic information, salary, type of job, etc.
To purchase this credit kit go to http://www.bcsalliance.com/
Remember if you keep you expenses low and keep more than you spend, you can gradually increase your credit score overtime and when a need arises you will have no problem obtaining credit and you will pay substantially less in interest and finance charges because of your good credit history.
Thanks again!
“The key to life is accepting challenges. Once someone stops doing this, he’s dead.”
Bette Davis
The most frustrating part about this is that it takes years to build credit and just minutes to destroy it. Then after something happens it can take years to rebuild it. In many instances there are situations where credit inaccuracies, which are highly common, can prevent you from getting the financing you need whether it be for a business or personal usage. There have been laws put in place to help consumers like the FACT act and the FCRA act but without detailed knowledge of these acts, which most consumers don’t, trying to remove inaccuracies is time consuming, frustrating, and result in consumers just giving up.
The FACT act stands for the Fair and Accurate Credit Transaction Act and FCRA stands for the Fair Credit Reporting Act, the FACT act was passed in 2003 and amended the FCRA act in order to provide more regulation that consumers can get one free copy of their credit report each year. With hundreds of provisions in each act it’s a stretch to require consumers to know these statutes inside and out. So how does a consumer become educated in this? With the internet you can find out just about anything but sometimes this comes with a price, some expensive some not.
You could always hire and attorney but this can be expensive as well. I know you’ve seen it, the many “credit repair companies” out there promising they can remove negative remarks some can help some not at all. Some of these companies are very expensive others are fairly cheap. The most important thing to remember, when dealing with credit, is to monitor your credit report and pay your bills on time.
I’m going to give you some resources that I’ve found online to be helpful in helping me “Master” my knowledge in the area of credit scores. The credit reporting companies provide you with information and also offer credit monitoring every month for a low fee and offer unlimited credit reports to help you take control of your credit.
The one thing that is frustrating is not KNOWING the algorithm at which they calculate your score. I’m going to give you a guide below as to what your score is comprised of and what information the credit scoring companies use in order to calculate your score. However this does not give you the concrete formula to which they use. Really to maintain great credit keep revolving balances low, don’t get into too much debt, and pay things off as fast as possible.
We are all bombarded everyday with “specials” and “once in a lifetime offers”, this is just targeted marketing designed to make you believe you can’t live without it or you are lesser of a person if you don’t buy it NOW. Please don’t fall for this. Now that is not to say some of the books and products that are marketed to you are not valuable, I’m merely saying don’t run to “every” special once in a lifetime offer that is presented to you, use your better judgment. The key is to spend less than you make and I know sometimes this can hard when we “justify” it in our minds by thinking we can handle the payments. But when you have this payment and that payment and then you have to borrower money to make this payment, you know where I’m going with this.
We are in the age of “automated underwriting systems” that help expedite credit decisions for lenders to improve time efficiency and lower costs. The problem with these systems is they are driven by score and your credit history, they cannot read your story. So for an example banks didn’t use these systems, they would evaluate your score based you and what you have to say. Keep in mind that underwriters looking at your application do not see you or know you therefore all they go by is what’s on paper. This is a huge disadvantage for the consumer but there are some advantages as well, including speed, efficiency, which improve customer service and the overall experience. KNOW your credit score and become educated in this area because its only going to get more complicated especially with the growing financial problems in the economy surrounding credit.
So lets get to some of information I have for you and resources you can use to help you with the “Mastery of Your Credit Score”.
BCS Alliance offers a credit kit that is 101 pages total and gives you some of the information I’m going to share with you now. I paid $14.99 for it; a small price to pay for information that could save you tens of thousands of dollars in the future.
Credit Scores
750 or higher – considered excellent credit
660-749 – considered good credit
620-659 – considered fair credit
350-619 – considered poor credit
How Credit Scores are Determined?
35% - Past payment history - Late payments, charge offs, bankruptcies, etc.
30% - Outstanding debt – amounts owed on all accounts, number of accounts with balances, debt-to-credit limit ratio, etc.
15% - Length of credit history – Time since accounts were opened, time since last activity, time since last delinquency.
10% - Recent credit applications – Types of new accounts, recent inquiries, and how many inquiries.
10% - Account mix – Types of various accounts (car loans, credit cards, mortgages, etc.)
Factors that are NOT used are demographic information, salary, type of job, etc.
To purchase this credit kit go to http://www.bcsalliance.com/
Remember if you keep you expenses low and keep more than you spend, you can gradually increase your credit score overtime and when a need arises you will have no problem obtaining credit and you will pay substantially less in interest and finance charges because of your good credit history.
Thanks again!
“The key to life is accepting challenges. Once someone stops doing this, he’s dead.”
Bette Davis
I'm evaluating a multi-media course on blogging from the folks at Simpleology. For a while, they're letting you snag it for free if you post about it on your blog.
It covers:
It covers:
- The best blogging techniques.
- How to get traffic to your blog.
- How to turn your blog into money.
Friday, October 17, 2008
Questions and Answers to $7,500 Tax Credit
$7,500 First Time Homebuyer Tax Credit
1. How does a tax credit work?
Reduces income tax liability.
Credits are claimed on an individual's income tax return.
Maximum credit amount is $7500.
2. Who can use the new tax credit?
First-time homebuyers or individual who has not had an ownership interest in a principl residence in the previous three years.
3. What if my taxes due on my return are less than $7500?
The difference would be treated as an overpayment and the purchaser(s) would receive a tax
refund.
4. Is there an income restriction?
Based on tax filing status.
Single or head of household < $75,000.
Joint filing < $150,000.
5. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?
No, individuals making up to $95,000 and joint filers making up to $190,000 are eligible for a partial tax credit.
6. Is the amount of the credit tied to the price of the home?
Yes, credit is 10% of the cost of the home, maximum credit of $7,500.
Amount of credit is same for all taxpayers, married or single.
7. Are there property location restrictions?
Property must be located within the United States.
8. How do I apply for the credit?
Claim the credit on the appropriate IRS form 1040, or any special forms the IRS requires.
No pre-purchase authorization, application or similar approval process.
9. Can I use the credit amount as part of my downpayment?
Cannot claim the credit any earlier than the 2008 tax return that will be filed in 2009.
10. What is the repayment feature of the credit?
There is no precedent for repayment of a tax credit created for individuals at this time.
11. Terms for repayment?
Repaid in increments of 6.67% of the amount over 15 years.
12. When do I make a repayment?
Credits taken in 2008 will not be repaid until 2010.
13. Can the IRS put alien on my property for the amount of the credit repayment?
The statue does not grant the IRS that authority.
14. What if I sell my home before the 15-year repayment period?
Any amount of the unpaid credit will be reduced from any proceeds.
If there is a loss or the gain from the sale is less than the amount of the repayment then the liability is forgiven.
15. Any other exceptions to repayment?
If the person dies before credit is repaid the amount is disregarded
There are special adjustments to people who sell as part of a divorce and/or homes that are part of an involuntarily conversion.
16. If I received a refund of a portion of the tax credit because my total tax liability was less than the amount of my tax credit, do I have to repay the amount of the refund?
Yes
This should cover most of the questions. I do not see anything on the IRS website as of yet regarding this but you can call the IRS directly.
1. How does a tax credit work?
Reduces income tax liability.
Credits are claimed on an individual's income tax return.
Maximum credit amount is $7500.
2. Who can use the new tax credit?
First-time homebuyers or individual who has not had an ownership interest in a principl residence in the previous three years.
3. What if my taxes due on my return are less than $7500?
The difference would be treated as an overpayment and the purchaser(s) would receive a tax
refund.
4. Is there an income restriction?
Based on tax filing status.
Single or head of household < $75,000.
Joint filing < $150,000.
5. Do individuals with incomes higher than the $75,000 or $150,000 limits lose all the benefit of the credit?
No, individuals making up to $95,000 and joint filers making up to $190,000 are eligible for a partial tax credit.
6. Is the amount of the credit tied to the price of the home?
Yes, credit is 10% of the cost of the home, maximum credit of $7,500.
Amount of credit is same for all taxpayers, married or single.
7. Are there property location restrictions?
Property must be located within the United States.
8. How do I apply for the credit?
Claim the credit on the appropriate IRS form 1040, or any special forms the IRS requires.
No pre-purchase authorization, application or similar approval process.
9. Can I use the credit amount as part of my downpayment?
Cannot claim the credit any earlier than the 2008 tax return that will be filed in 2009.
10. What is the repayment feature of the credit?
There is no precedent for repayment of a tax credit created for individuals at this time.
11. Terms for repayment?
Repaid in increments of 6.67% of the amount over 15 years.
12. When do I make a repayment?
Credits taken in 2008 will not be repaid until 2010.
13. Can the IRS put alien on my property for the amount of the credit repayment?
The statue does not grant the IRS that authority.
14. What if I sell my home before the 15-year repayment period?
Any amount of the unpaid credit will be reduced from any proceeds.
If there is a loss or the gain from the sale is less than the amount of the repayment then the liability is forgiven.
15. Any other exceptions to repayment?
If the person dies before credit is repaid the amount is disregarded
There are special adjustments to people who sell as part of a divorce and/or homes that are part of an involuntarily conversion.
16. If I received a refund of a portion of the tax credit because my total tax liability was less than the amount of my tax credit, do I have to repay the amount of the refund?
Yes
This should cover most of the questions. I do not see anything on the IRS website as of yet regarding this but you can call the IRS directly.
Tuesday, October 14, 2008
FHA's Comeback
One of the things I want to talk about is FHA loans. This program up until earlier this year had maybe 2% penetration into the market place. Reason for this is the influx of money, from investors, into the mortgage market thus creating a plethora of alternative loan programs that were giving borrowers more options. These loans include no income verification loans, stated income an asset loans, piggyback loans to avoid pmi, and others.
The market became very creative and helped fuel a red hot real estate market that set record sales for 5 years in row. Many people don't realize that while the market was creative in providing alternative loan programs to borrowers, lax underwriting guidelines and fraudulent activity created the majority of the mess we now see today. A severe decline in home values played and is playing a major role itself. I'm not going to talk about a lot of bad news here I think we get enough of that already from the media. Lets face it bad news makes the front page. My intent is to provide information about a old but new program that many steered away from but now is one of the only high loan to value options left.
Lets talk about the benefits of an FHA loan.
1. No minimum credit score- FICO scores over the last 15 or so years have been used heavily by lenders to determine the creditworthiness of a borrower to repay a loan. Being in the people business for 7 plus years now and pulling credit and looking over credit reports I can tell you it doesn't give a very good indication. The system is designed to give you a snapshot in time of what borrowers score is and not a trend of creditworthiness. I say this because I've pulled credit on someone with a 700 credit score and 6 months later they have one late payment and their score dropped to 550. Now is that a good indication of the borrowers ability to pay back a loan? Let me answer that for you NO! With FHA you don't need a minimum credit score to qualify however common sense is needed here. A 400 credit score is highly unlikely to get approved. Now this year FHA has added risk-based premiums to their upfront mortgage insurance and that is credit score driven but overall there is not a minimum criteria for a score to qualify.
2. Low Down payment - With FHA, up until Oct 1, 2009, only has to contribute 3% down payment. After October 1 it goes up to 3.5%. The 3% can come from a relative as a gift or borrowers own funds. This is powerful because right now in the conventional world you need a minimum of 5%, if the property is located in a declining market as indicated by the mortgage insurance companies, you'll then need 10% down. Not to mention you need over a 680 credit score to get the mortgage insurance approved. You might be approved for loan but can't get the insurance. Which moves me into my next benefit.
3. Low mortgage insurance - FHA handles their own mortgage insurance so if you are approved your loan will have the mortgage insurance on it. FHA mortgage insurance also is at a lower expense then conventional and if you put 10% and take out a 15 yr fixed loan no monthly mortgage insurance is required.
4. No income restrictions - For the first time home- buyer group this is huge. Most first time home-buyer programs are designed to meet the needs of low to moderate income borrowers. Well if you make more than the income limit these programs are unavailable to you. FHA has no income restrictions to qualify.
5. Purchase or refinance new or existing 1-4 unit homes - This is a big plus. You can still get 97% on the purchase of a 1-4 unit primary residence. Conventional requires more down payment on multi-unit properties. On cash out refinances there are limitations to loan to value.
6. Financing for manufactured homes - With the credit tightening in the mortgage market some areas have an ample supply of manufactured homes. The same 97% guidelines apply on these but they must meet FHA guidelines and be on a permanent foundation.
7. You can use a non-occupying co-borrower - This is a forgotten rule but if you can have a non-occupying co-borrower, as long as they are a relative, sign on the loan and the borrower can still get the maximum financing of 97%. This is limited to 1 unit properties if the ltv is over 75%. Certain restrictions apply.
These are just a few of the many benefits to FHA financing. It provides a solution for many borrowers needs and helps them fulfill the American Dream of owning a home. I've been in the industry over 4 years now and I love providing solutions for my clients to purchase their first or next home. I get great joy out of what I do.
Stay tuned for more of my blogs and industry news. I've never been a big fan of bad news I like to spread good news but we are facing problems in the housing industry but i believe it when I say its a cycle and we'll survive this storm and come out of it with better times. Remember the market is what you make it. There are still many opportunities out there you just have to change your marketing strategy, do things a little differently, try something new to see what works and what doesn't.
Never become victim of all the bad news because you can sure find a lot of it. Now is the time to become more proficient at what you do and become a trusted adviser to your clients and business partners.
God Bless
"Whether you think you can or you think you can't, either way you're right"
Henry Ford
Copyright © 2008
The market became very creative and helped fuel a red hot real estate market that set record sales for 5 years in row. Many people don't realize that while the market was creative in providing alternative loan programs to borrowers, lax underwriting guidelines and fraudulent activity created the majority of the mess we now see today. A severe decline in home values played and is playing a major role itself. I'm not going to talk about a lot of bad news here I think we get enough of that already from the media. Lets face it bad news makes the front page. My intent is to provide information about a old but new program that many steered away from but now is one of the only high loan to value options left.
Lets talk about the benefits of an FHA loan.
1. No minimum credit score- FICO scores over the last 15 or so years have been used heavily by lenders to determine the creditworthiness of a borrower to repay a loan. Being in the people business for 7 plus years now and pulling credit and looking over credit reports I can tell you it doesn't give a very good indication. The system is designed to give you a snapshot in time of what borrowers score is and not a trend of creditworthiness. I say this because I've pulled credit on someone with a 700 credit score and 6 months later they have one late payment and their score dropped to 550. Now is that a good indication of the borrowers ability to pay back a loan? Let me answer that for you NO! With FHA you don't need a minimum credit score to qualify however common sense is needed here. A 400 credit score is highly unlikely to get approved. Now this year FHA has added risk-based premiums to their upfront mortgage insurance and that is credit score driven but overall there is not a minimum criteria for a score to qualify.
2. Low Down payment - With FHA, up until Oct 1, 2009, only has to contribute 3% down payment. After October 1 it goes up to 3.5%. The 3% can come from a relative as a gift or borrowers own funds. This is powerful because right now in the conventional world you need a minimum of 5%, if the property is located in a declining market as indicated by the mortgage insurance companies, you'll then need 10% down. Not to mention you need over a 680 credit score to get the mortgage insurance approved. You might be approved for loan but can't get the insurance. Which moves me into my next benefit.
3. Low mortgage insurance - FHA handles their own mortgage insurance so if you are approved your loan will have the mortgage insurance on it. FHA mortgage insurance also is at a lower expense then conventional and if you put 10% and take out a 15 yr fixed loan no monthly mortgage insurance is required.
4. No income restrictions - For the first time home- buyer group this is huge. Most first time home-buyer programs are designed to meet the needs of low to moderate income borrowers. Well if you make more than the income limit these programs are unavailable to you. FHA has no income restrictions to qualify.
5. Purchase or refinance new or existing 1-4 unit homes - This is a big plus. You can still get 97% on the purchase of a 1-4 unit primary residence. Conventional requires more down payment on multi-unit properties. On cash out refinances there are limitations to loan to value.
6. Financing for manufactured homes - With the credit tightening in the mortgage market some areas have an ample supply of manufactured homes. The same 97% guidelines apply on these but they must meet FHA guidelines and be on a permanent foundation.
7. You can use a non-occupying co-borrower - This is a forgotten rule but if you can have a non-occupying co-borrower, as long as they are a relative, sign on the loan and the borrower can still get the maximum financing of 97%. This is limited to 1 unit properties if the ltv is over 75%. Certain restrictions apply.
These are just a few of the many benefits to FHA financing. It provides a solution for many borrowers needs and helps them fulfill the American Dream of owning a home. I've been in the industry over 4 years now and I love providing solutions for my clients to purchase their first or next home. I get great joy out of what I do.
Stay tuned for more of my blogs and industry news. I've never been a big fan of bad news I like to spread good news but we are facing problems in the housing industry but i believe it when I say its a cycle and we'll survive this storm and come out of it with better times. Remember the market is what you make it. There are still many opportunities out there you just have to change your marketing strategy, do things a little differently, try something new to see what works and what doesn't.
Never become victim of all the bad news because you can sure find a lot of it. Now is the time to become more proficient at what you do and become a trusted adviser to your clients and business partners.
God Bless
"Whether you think you can or you think you can't, either way you're right"
Henry Ford
Copyright © 2008
Wednesday, October 8, 2008
Are We Headed to The Point of No Return?
Well in one week we lost Freddie Mac, Fannie Mae, Lehman Brothers, and Merrill Lynch, some of the biggest financial firms in the country and the world. And now there are talks that Morgan Stanley will merge or be bought out as well, and then there was one, Goldman Sachs. Out of the five biggest investment firms in the nation only one may be left standing. So what happened? Well its complicated but simple. These firms used leverage to maximize profits while the housing boom was in full steam. Let me explain. Some of these firms borrowed up to $30 dollars for every dollar in assets and while this is a very risky strategy, it can pay big dividends if executed properly. It’s called trading on the equity or using leverage.
See companies get a tax break on interest expense paid to its creditors. For instance you have net income before taxes but after expenses of say $2 million dollars and an interest expense of $150,000. That $150,000 is deducted from the $2 million and then you are taxed on the difference. This will increase the bottom line by using the interest expense as a deduction. Companies have quite a few ways to raise capital to finance its operations but the two main ways is to issue stock or issue debt. Issuing stock dilutes shareholder ownership but is a cheaper way to raise capital. But by issuing more shares net income now has to be spread over more shares outstanding lowering its EPS or earnings per share. By issuing debt and not issuing stock the company can reflect a higher EPS, more income spread over fewer shares of common stock outstanding.
This is all fine and dandy when revenues are growing but in sharp economic downturns this can cause the insolvency of a company very quickly. Take Countrywide for example, this company operated on leverage and when investor confidence eroded, they started to dump shares of Countrywide reducing its market cap by billions of dollars in a matter of a few short weeks. When creditors wouldn’t renew their notes, and after they tapped their lines of credit, the company was then bought out by Bank of America for $4 billion in stock.
This may seem very frightening and the media has made the word mortgage an ugly word claiming that the subprime mess caused it all. Well that’s only a small piece of the puzzle. In 2006, which was the peak of the subprime boom, 20% of all originations were considered subprime, roughly $800 billion dollars. While this is surely a lot of money it pales in comparison to the roughly $3 trillion dollars in mortgage originated in that year. Alt-A is becoming a recent problem, which represented 13% of originations in 2006, and was responsible for the majority of Fannie and Freddie losses in the past quarters. However in the midst of all this bad publicity there are still a great percentage of subprime borrowers making their payments. The real cause of this financial problem was the greed on the Wall Street, bad news causing naked short selling driving down the stock prices of financial stocks, and the lack of transparency in risky securities like CDO’s (collateralized debt obligations).
The value of these assets were grossly overestimated and was shown clearly by the liquidation by Merrill Lynch for 22 cents on the dollar which pushed them to a huge loss in their last quarter.
Regardless of what is going on right now it is still a great time to buy a home. Right now interest rates are still at historical lows and prices have retracted in some areas in the double digits. The cost of waiting right now in this volatile market is too great to let it pass you buy. Its funny how they talk about how hard it is to obtain a mortgage but the media never wants to talk about FHA insured mortgages. Its being estimated now that FHA originations, after only being a mere 2% in 2006, will skyrocket to 30-35% for 2008 and even more in 2009. FHA insured mortgages are a great way to get into a home with little down payment and competitive interest rates. Conventional loans right now are being hit heavy with credit score and ltv adjustments to pricing that drives the interest rate up for borrowers who have less than 740 credit scores. Don’t wait now is the time to take advantage of this market cycle.
Copyright © 2008
See companies get a tax break on interest expense paid to its creditors. For instance you have net income before taxes but after expenses of say $2 million dollars and an interest expense of $150,000. That $150,000 is deducted from the $2 million and then you are taxed on the difference. This will increase the bottom line by using the interest expense as a deduction. Companies have quite a few ways to raise capital to finance its operations but the two main ways is to issue stock or issue debt. Issuing stock dilutes shareholder ownership but is a cheaper way to raise capital. But by issuing more shares net income now has to be spread over more shares outstanding lowering its EPS or earnings per share. By issuing debt and not issuing stock the company can reflect a higher EPS, more income spread over fewer shares of common stock outstanding.
This is all fine and dandy when revenues are growing but in sharp economic downturns this can cause the insolvency of a company very quickly. Take Countrywide for example, this company operated on leverage and when investor confidence eroded, they started to dump shares of Countrywide reducing its market cap by billions of dollars in a matter of a few short weeks. When creditors wouldn’t renew their notes, and after they tapped their lines of credit, the company was then bought out by Bank of America for $4 billion in stock.
This may seem very frightening and the media has made the word mortgage an ugly word claiming that the subprime mess caused it all. Well that’s only a small piece of the puzzle. In 2006, which was the peak of the subprime boom, 20% of all originations were considered subprime, roughly $800 billion dollars. While this is surely a lot of money it pales in comparison to the roughly $3 trillion dollars in mortgage originated in that year. Alt-A is becoming a recent problem, which represented 13% of originations in 2006, and was responsible for the majority of Fannie and Freddie losses in the past quarters. However in the midst of all this bad publicity there are still a great percentage of subprime borrowers making their payments. The real cause of this financial problem was the greed on the Wall Street, bad news causing naked short selling driving down the stock prices of financial stocks, and the lack of transparency in risky securities like CDO’s (collateralized debt obligations).
The value of these assets were grossly overestimated and was shown clearly by the liquidation by Merrill Lynch for 22 cents on the dollar which pushed them to a huge loss in their last quarter.
Regardless of what is going on right now it is still a great time to buy a home. Right now interest rates are still at historical lows and prices have retracted in some areas in the double digits. The cost of waiting right now in this volatile market is too great to let it pass you buy. Its funny how they talk about how hard it is to obtain a mortgage but the media never wants to talk about FHA insured mortgages. Its being estimated now that FHA originations, after only being a mere 2% in 2006, will skyrocket to 30-35% for 2008 and even more in 2009. FHA insured mortgages are a great way to get into a home with little down payment and competitive interest rates. Conventional loans right now are being hit heavy with credit score and ltv adjustments to pricing that drives the interest rate up for borrowers who have less than 740 credit scores. Don’t wait now is the time to take advantage of this market cycle.
Copyright © 2008
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