Secretary Donovan Questioned By Senate Banking Committee

Earlier this month Secretary Donovan was questioned by the Senate Banking Committee on the financial health of the FHA Mortgage Insurance Fund.  A report released in November showed the agency was in the red $16.3 Billion dollars and it appears will need a bailout..

When Donovan was questioned, he could not promise FHA would not need a bailout but rather said we'll know more when the President's budget is released...

So in others words..like I said in my previous post HERE FHA is in deep doo doo..

Donovan however cautioned the committee not to make too drastic of changes to how the fund insures mortgage's as to not stall the recovery. "We are seeing a recovery, but it is still fragile," Donovan told the Senate Banking Committee. "We don’t want to hurt the market and in turn the FHA fund by going too far and stopping that recovery."

The agency's capital reserve account has dropped significantly since 2006 to -1.44% ending fiscal year 2012.  Under law the ratio needs to stay at 2%.  If that's not insolvency folks, I don't know what is... and clearly I don't know anything..

Sen. Richard Shelby (R-Ala.). "It is time for serious reform of the FHA before it needs a taxpayer bailout, if it isn’t too late already."

What types of changes need to be made? "A determination would not be made until the end of the 2013 fiscal year", Donovan said.

Haha...that means kicking the can down the road a bit and worrying about it later.  This seems to be the answer to all the issues we face is...let's just kick it down the road a bit and "see what happens".

Donovan said Congress could help the FHA by making some changes that the agency is unable to do on its own such as lowering max loan amounts (which Donovan is in favor of) as he noted, loan limits were reduced for Fannie and Freddie but not FHA which is putting more pressure on the fund in higher costs areas. 

What's interesting is nobody really thinks there is a problem but Wharton School of Finance Real Estate Professor Joseph Gyourko, thinks otherwise... "FHA is currently leveraged 41-to-1 -- which is higher than either Lehman Brothers (31-to-1) or Bear Stearns (38-to-1) when they collapsed"

Not to mention FHA is backing a proposal from the President to have Congress open up the Streamline Refinance to borrowers with non GSE and FHA mortgages and allow them to refinance into FHA insurance.. The min credit score? 580..

So not only is the fund in trouble but we're planning on expanding the refinance program that will further deplete funds, open up to more riskier borrowers, and then what? None of it makes any sense it will only  allow the banks to make even more money hand over fist which is what they've done since this whole thing began..

Yes - we've had a lot of banks collapse but those were competitors to the big mega banks and is the same thing that happened in the 1907 Panic; thousands of bank failures occurred but all that really happened was consolidation into bigger banks.   At that time private capital was taking profits away from the banks so something had to be done about so a widespread panic was induced which eventually led to the passing of the Federal Reserve Act (further consolidating power into the hands of the mega banks in New York) just a short 7 years later..

The name of the game is power folks..We as consumers pay more to keep FHA afloat so banks can continue to make money hand over fist.  They are purging the system of all its life until nothing is left bankrupting it all.

Just keep that in mind..

You want real truth..visit here.. Stop living in the matrix..

D...out..

How Can Realtors Sell Renovation

Selling Renovation

This is becoming so hot right now with all the foreclosures on the market but you have very few lenders who know how to originate, process, and close these.  Aside from that, you have few loan officers who are specialists in this area (and by the way you want to be working with a specialist) which creates issues because loan officers not familiar with the process on these are "winging it" and this is where your horror stories come from.

So work with a specialist!

Anyway...the topic for today is how can Realtors sell this in the marketplace.  Part of my continuing education class curriculum is going over how to sell this and quite frankly it's really easy.  You're doing it right now and you don't even know it.  Here's how..

When you're taking a client through a property do you ever make suggestions on carpet, paint color, or possible improvements they can make to the home to "make it theirs"? Use phrases such as "add your own personal touch"?

Sure you do.  What you're doing is selling renovation financing already it's just you're not connecting the dots with the client which is letting them know they have a way to do this now instead of later and over time (this is where you direct them to the specialist you've teamed up with to explain further, just leave it at that)

Let's face it...

They may say they are going to do it but over time that intent diminishes because life is busy, they will get distracted with other things and it will never get done; so by letting them know that this is an option now and that they can finance the cost of repairs into the loan along with their purchase - and they can move into the property and quickly begin and finish their desired improvements, is really really powerful and motivating.

Why? This creates the vision in their mind what the home will look like completed and we all know visuals are extremely powerful and will move people to action.  You're selling feelings here.  Besides, I would rather make the home my own then rely on the seller making improvements or "settling"on a house that was newly renovated that isn't just right but "will do" paying a premium for that house... and heck maybe over time even redoing those renovations to satisfy my own liking...

What a waste of time, money, and effort.  I would utilize the opportunity to do it now and turn the home I "just like" into the one "I really love" now.

More Ways To Sell Renovation

That's just one way.  Another way is to overcome property condition objections.  Ever have somebody walk in and before they even see the rest of the house, and say "nope, no way, carpet is ugly, cabinets gotta go, I'm done here"? 

Yea, you've been there before.  Use this as a tool to again, describe in short, what they can do.  Find out if that's really the objection.  

If the area is great, price is great, school district is good (if applicable) just ask this simple question to intrigue them and get them thinking... If I could show you a way where you could replace all of these ______ (whatever it was they had a problem with) brand new roll it into your loan and have it done the way you want, and have it done right after closing, would you be interested in knowing more and would you want to move forward on this home?

Spark interest; find out what is really bothering them about the house.  Will this always work? Will this be the answer for everybody? No, of course not but just like in baseball, can't hit the ball unless you take the bat off the shoulder and swing.  Same goes here, you won't know unless you ask...it's just another tool in your toolbox you can use to sell more homes.

Properties in need of repairs

Renovation financing is perfect for those "ugly properties" that need repairs just to get the financing done because standards, lets face it, have tightened up.

Instead of avoiding these, if you have a client interested in one of these properties, you should be smiling from ear to ear as they are already sold on this property and plan to make improvements as they want "the good deal" since it needs repairs. 

This is where you sell renovation financing and let them know they are creating additional equity through the improvements and they are able to obtain the financing with a low down payment solving two problems - purchasing the property and renovating it - all in one loan.

Example:

Purchase price - $50k

Estimated repairs - $40k

As is value - $50K due to condition

After-improved value - $120k once fixed up (which by the way is how we base their maximum financing off of, after-improved value which is why this option is so appealing)

Options to buy - cash as financing it with a regular loan will not fly due to repairs needed

Money needed for repairs - $40k

Total cash out of pocket - $90k

Now Using Renovation Financing See the Difference

Same as above for price and repairs so total NEW purchase price- $90k

After-improved value - $120k

Down payment on loan (depending on program) - either 3.5% or 5% (investor loans 20 and 25%) based on the $90k

Total cash needed - 3.5% of $90k = $3,150 5% of $90k = $4,500 + any closing costs that are not covered by the seller.

Difference $90k in cash OR

Put down $3,150 to $4,500 and use renovation financing to get this property.

Total equity - $30k
Total money out of pocket saved = $THOUSANDS

Not too shabby huh?

Either pay $90k out of pocket to pay cash and fix up or use renovation financing with minimal cash out of pocket and use banks money at low interest rates.  Fully amortized loan over 30yrs

Option 2 is definitely the smarter one.  This is an easy sell.

Some More Options

Now you can use this loan to sell updates to a badly outdated property as well.  Needs completely updated to modern standards - no problem - you can do anything from light to moderate (painting, carpet, cabinets, to plumbing, electrical) all the way up to tearing the house down and rebuilding on same foundation.  Has mold or lead based paint? No problem there either - done! 

More complex properties such as mixed use or manufactured - done! 

Conclusion

So you see, there are many ways to sell this and we are in a very wet, muddy, crazy marketplace right now but there is a way for you rise above the competition and dominate this piece of the market and do very well because I'll tell ya...

Nobody else is focusing on this at ALL.  They are scared of it.  That's because of the stories that they've heard and been told but then again were they working with a specialist and what was the whole story, would be two questions I'd be asking. 

Don't be scared of it - learn it, sell it, dominate, and have a monster successful 2013 because again, this will be the next real estate trend...

You can read When To Use Renovation Financing post as well here.. http://swigartsmortgagejournal.blogspot.com/2012/10/when-to-use-renovation-financing.html

Dustin

FHA Fund In Deep Doodoo

FHA's Finances

You're probably laughing at the title but it's true folks...FHA is in DEEP doodoo (my spelling I don't care) and has been for a long time.

Rueters released an article recently stating that unless FHA does something soon it will be drawing money from the Treasury...

So what's new in Washington? More taxes, more bailouts, more losses being covered up and now FHA will increase fees yet again to try to shore up the balance sheet and avoid a so called bailout.  However what's the difference right? All of us as consumers are bailing them out by paying higher fees for the mortgages.

The fund is a total disaster and the program is so outdated it's had little changes since it's inception in the 30's.  They know it needs restructured but choose to kick the can down the road. (just like everthing else, ha)

FHA now insures 1.2M mortgages and their share of the market has increased to 15% from 5% in 2006. The article went on to say that it missed needing to draw from the Treasury due to $1B in settlements from servicers...hmmm.. could that be why Wells was the next target?

Estimation is the fund will not be back to it's 2% capital ratio requirement until sometime in 2017...this just strengthens my prediction we're not going to see rates go anywhere upward - they just can't - anytime soon; they're relying too much on new activity and higher fees to keep the ponzi going.

Plus with the lawsuits they're hoping to generate some more revenue for the fund.

We're playing a dangerous game of Russian roulette here.    Just see this quote from Maxine Waters below

"At a time when the private market constricted, the FHA stepped up, providing crucial liquidity and access to the mortgage market," said Representative Maxine Waters, a senior Democrat on the House Financial Services Committee.


She warned against taking any actions that would "precipitously" choke off loan availability.

Oh yea...they know what's up.  If we choke off credit - crash and burn baby...

So What Mindset Should You Have About All of This?

So what does this mean for those in the industry? Consumers? Well folks you can't change it; it's happening and you're not personally going to do anything about it so if you're shopping for a loan and all you qualify for is FHA, you're just going to have to take it from behind...and you'll be forced to like it.

If you're in the business like I am I know what's going on and I understand it.  For the consumer I know it's hard as you don't go through it every day like we do.

The good news, because I try to focus on the good because you'll cause nothing but anxiety and stress if you don't, is that there is a real opportunity to utilize a program FHA offers and to take advantage of it.

What is it? It's the 203k renovation program.  I've said in earlier posts that this will be the new real estate trend, and it already is beginning to be, for some time to come.  Without going into full detail as my blog post will explain, you can buy a fixer upper and finance the cost of the improvements into the loan...
and your maximum financing is based on after improved value of the property...This is an awesome program but it does suck that it will be more expensive now...

However - if you find a property that is priced well below market value and put the right improvements into it, you CAN create instant equity.  Go here for details and read my blog post on it. 

Again folks, please keep in mind it's not your loan officer or realtor who caused all this mess...(see below)


Yeah Buddy!



It's these guys...they know, knew it, and let it happen because there buddy lobbyists were filling their pockets full of cashish. 

Stayed tuned and lets see what happens now that the election is over and we'll get to hear some nice juicy stories like we've been like the General Petraeus's little affair and whatever else they want to release now that Obama is back in for 4 more years.

Hold your hats...







FHFA Releases Plan on Fannie and Freddie

Yesterday the FHFA (Federal Housing Finance Agency) released it's plans for the ailing government sponsored enterprises, aka GSE's, and it's no surprise the whole report is blah, blah, blah.  Its the same ole crap we've been hearing - they are going to stabilize markets and increase fees to shore up the GSE's portfolios.  Yea, while they still suck money from the Treasury as they hemorrhage cash, still losing money, while the housing market just muddles along.

So basically they have no long term plan just alot of lip service.  The execs will still keep getting paid the big bucks to run the mortgage market into the ground.  Next month Fannie is raising it's delivery fees yet again.  This cost is spread to the consumer making it even more expensive to get a mortgage loan.  FHFA says it's "market risked-based" pricing but really it's nickel and dime everyone to death because we're bankrupt.

No wonder they keep coming out with these refinance programs so they can keep churning the books with the refi's and yielding higher delivery fees.  The FED keeps pumping the cash into the system helping fuel the refinance frenzy we have going on.  Obama wants to yet again modify the refinance program to allow all non GSE owned mortgages to qualify. 

Read my previous post http://swigartsmortgagejournal.blogspot.com/2012/09/obamas-refinance-plan-take-four.html on the Obamafi program(s) for details.  The market is a mess right now.  We still have lending tightening up more; problems with appraisals; lenders are short staffed and for the sake of profit do not want to hire more people.  I know people in the business working like a slave just banging their heads against a wall with all the hoops you have to jump through to get loans done these days.  It's a struggle from beginning to end.

You can find the story regarding the "strategic plan", if you want to call it that here to read for yourself and formulate your own opinion.  I don't think much will be accomplished until after the November election with regards to Obama's proposal for the new refinance program; or legislation on FHA with changes to mortgage insurance premiums yet again.  Too many distractions right now and the smear campaigns are heating up as we near November election time. 

The New Real Estate Trend

What is the next real estate trend? You can ask many and you'll get many answers.  As a professional in the business I can tell you that I see renovation as the next trend for the coming years.  Why?

• Aged inventory - many houses are old, have not been updated which includes kitchens, bathrooms, plumbing, HVAC, and could really use a face lift.
• Foreclosures galore! The market is saturated with foreclosed REO properties that need repairs.
• Older homes with outdated floor plans or are too small compared to other homes in the area (by the way part of the renovation process can include adding square footage to the property through an addition to home)
• Can add a personal touch to make it yours - turn a home you just like into one you love
• Many homes with health or safety violations or hazards which can be remedied through renovation
• Many many more reasons.

So what can be done about it? Well you can call it a secret (not really) but a program that has been around since the 80's - the 203k (no this isn't like your 401k) - allows the for the purchase of the property plus the cost for repairs to be rolled into one loan, one payment, and your maximum mortgage is based on the post-renovation value.  This is a little known loan through FHA and 203k is simply just the section of the act (the National Housing Act) for the program just like the 203B is the "regular" or "normal" FHA loan we've all grown to know very well.

Especially since the housing debacle and Conventional financing has tightened up; more people are getting FHA insured loans.

So you can literally turn this

and even this

into this

and even this

Now you're probably thinking..."yea right, that looks nothing like the other houses." But yes you can do this (turn ugly into stunning). 

You can do anything from light to moderate repairs (kitchen and bathroom updates) to more major renovations like foundation work, and even tearing the house down and rebuilding on the same foundation. 

With the 203k you just can't do anything consdered "luxury" repairs in nature like a gazebo, hot tub, or install a swimming pool. The key to this is after-improved value - which is the home will be comparable in it's renovated state to other properties in the area.

This doesn't mean build a 6 bedroom home in a 3-4 bedroom market, however if you wanted to change the design and floor plan of the property and make a major renovation you can. 

There are so many things you can do with this type of financing.  By the way FHA isn't the only one that has this program available.  Very close versions of this are available in the Conventional world through Fannie Mae and Freddie Mac but most lenders do not offer this type of financing. 

I think you'll see that change as this piece of the market explodes over the next few years.

One word of advice that I caution people looking to obtain this financing:

MAKE SURE you are working with a specialist.  The reason is they work with these loans daily and a specialist only originates these loans.  You'll have many originators that "dabble" with these loans and only do a few a year vs a specialist who originates these on a daily basis so they are knowledgeable of the intricacies of the program and have a system in place to take you from application to closing with very few, if any, hiccups.

Don't be a guinea pig and search out a specialist.  This should be your first question to the loan officer.  If they are not a specialist ask if their company has one and if not - move on and don't waste anymore time. 

Not all lenders have the same guidelines; some will have what is called credit overlays, meaning they have tighter guidelines than the published FHA guidelines on the program.

I will do a series of blog posts on this, since it will, and already is becoming, a hot topic.  There is much to talk about, so you can be prepared and armed with information when approaching your lender for a renovation loan request.

God Bless

P.S. if you like this blog check out my other blog http://www.livingwithnolimits.net

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

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