Market Watch: Opportunities and Analysis

2010-04-18T07:07:00.000-07:00

At the suggestion of many of my readers I have changed the title of my newsletter. Although the effects of the subprime market fiasco are still felt today, I believe we have reached the bottom of the trough and will soon start the swing upwards. “The Market Watch: Opportunities and Analysis” is far more reflective of positive economic news that has been published recently in the form of strong corporate earnings, increased consumer spending and hiring in the technology sector. Hopefully this is will be a leading indicator for improvement in the housing market.

In addition to the real estate and interst rate market, this months edition covers disagreements between the White House and Banks over trouble mortgages, and real estate 10 year historical performance verses stock alternatives.

Home Buyer Credit Deadline
The tax credit for first time home buyers and other qualifying purchasers expires April 30th. Homes must be under agreement buy April 30th and close by Jun 30th. It will be interesting to see if there is a slow down in home sales after this date as there was with automobiles after the expiration of the “cash for clunkers” program.

High Loan to Value Refinance Programs
As part of the Governments making home affordable program, borrowers wit mortgages owned by Fannie Mae or Freddie Mac (which the majority of mortgages are) can refinance if the loan balance to home value on their first mortgage is under 105%, they do not have mortgage insurance, and they do not have a mortgage payment more than 30 days late in the past 12 months. Most of these programs are limited documentation and do not require documentation of income or assets. Verification of employment for at least on borrower is required.

I have access to a Fannie’s and Freddie Mac’s data base if you would like to determine if your mortgage may be eligible. To do so I will need:
• Full name and address including zip code;
• Mortgage Holder or Servicer;
• Approximate First Mortgage Balance.

Banks vs. The Whitehouse
Many interesting articles have been written over the past few weeks about the Whitehouse’s frustration with banks reluctance to write down mortgage balances for troubled homeowners. To date, Washington’s and bank’s efforts to work with the most severely troubled homeowners to reduce monthly payment in the form of lower rates and expanded amortization periods has not made much of a dent in the number of foreclosures. In addition, many borrowers who had loans modified are again behind in their payments. Washington would like banks to take the more drastic step of reducing mortgage balances as they believe those borrowers who are far underwater in the value of their homes as compared to the amount owed are more likely to walk away from their properties. Foreclosed properties reduce the value of all properties, so Washington contends it is for the public good to have loan balances reduced. The government, or tax payers, would pay for a portion of these types of modifications.

Banks are reluctant to reduce the balance on troubled mortgages on a wide scale basis. They see these reductions as unfair to the vast majority of homeowners who make their payments on time, and whose equity in their homes has also been reduced. They also may be fearful that initiating such a campaign would encourage those homeowners who are underwater and making payments on time to stop making payments. In my opinion banks are in a difficult position of determining what programs work best to keep troubled loans paying vs. the cost of foreclosure, while balancing the political and public fallout of banks perceived or actual role in the housing bubble and resulting Wall Street bailout. In addition, banks may be limited to what they can do since they are often only the custodian of mortgages and not the owner. Most of the underlying security or ownership has been divided up and sold throughout the world.

An equally interesting quandary is modifications of second mortgages, which include home equity lines of credit (HELOCs). The White House is also frustrated that more has not been done to modify these loans. There are many moving parts. Second mortgages by definition have a second lien position behind the first mortgage in the collateral of the house. Because of their priority lien position first mortgage owners think it is unfair that they are asked to modify their positions if the second mortgage holder does not modify theirs. In comparison to first mortgages, many second mortgages are owned directly by banks; therefore banks may be more reluctant to modify this type of loan and take the entire write down. Ironically, second lien holders in many cases may have more protection than first lien holders. While first lien holders have the collateral of only the home, second mortgage holders often have the ability to go after the homeowner personally for any of their losses. In most states, first mortgages are non recourse loans. This means that if a borrower defaults on the mortgage, the first mortgage holder can only look to the value of the home to satisfy his claim. This is also true of second mortgages used to purchase the home. However, many second mortgages were not used to purchase the property and may be recourse loans. In many states the second lien holder can look to other assets of the borrower to make up any deficiency if the loan is lost to foreclosure. This leverage may make second mortgage holders more reluctant to modify. It may also be a reason that some trouble home owners pay their second mortgages, but not their first.

The Real Estate Market
The S&P/Case-Shiller Home Price Indices were released for January, and the results are mixed, although in my opinion more positive than negative. Home prices, show that the annual rates of decline of the 10-City and 20-City Composites improved in January compared to December 2009. The 10-City Composite is unchanged versus where it was a year ago, and the 20-City Composite is down only 0.7% versus January 2009. Annual rates for the two Composites have not been this close to a positive print since January 2007, three years ago.

“…While we continue to see improvements in the year-over-year data for all 20 cities,
the rebound in housing prices seen last fall is fading. Fewer cities experienced month-to-month gains in January than in December 2009, on both a seasonally adjusted and unadjusted basis.” says David M.Blitzer, Chairman of the Index Committee at Standard & Poor’s.

In four cities – Charlotte, NC, Las Vegas, Seattle and Tampa – prices reached new lows following the financial crisis. Tampa and Las Vegas experienced some of the largest gains and declines in this cycle, while Charlotte and Seattle saw much more modest price booms and relatively late peaks. On a brighter note, San Francisco and Minneapolis are 15.2% and 12.9% above their trough values.

For most of the cities in the 20 City Composite, home values are at their 2003 fall values. Many home owners are interested in where their cities compare to the base value established in 2000. Washington, NY and Los Angeles have held up the strongest at values of 178.2%, 172.98%, and 171.27% above 2000, followed by San Diego and Boston. Detroit, at 72.1% is the weakest, followed by Cleveland and Las Vegas at 103.12 and 103.82.

To view the S&P Case-Shiller article, please visit http://www.standardandpoors.com/spf/CSHomePrice_Release_033056.pdf

Real Estate as a Comparative Investment
From the perspective of real estate as an investment, between January 31st 2000 and January 31st 2010, the Dow Jones Industrial average, the S&P 500, and the NASDAQ composite index decreased by 7.98%, 23.03%, and 45.51% respectively. The 10 City and 20 City Composite have increased 57.89% and 45.32% respectively during the same time period. As of January 2010, the NASDAQ has fallen 118.2% from its peak in February, 2000.The Dow Jones and S&P 500 are down 42.22% and 38.02% respectively from their peaks in July 2007. Residential real estate peaked in June/July of 2006. Through January 2010, the 10-City Composite is down 30.2% and 29.6%, respectively.

One might conclude that real estate has been a better investment than stocks. For some this is true. However, as mentioned in previous posts about the downside of leverage, most buyers of real estate borrow to make their purchase, while stock purchases are usually from savings and not on margin. Therefore, losses in real estate are magnified exponentially. Many homeowners who made their purchase after the fall of 2003 have seen the return on equity in their homes fall far more than the 10 city and 20 city figures. In addition, just as returns (or losses) are dependent upon the stocks or mutual funds owned, the returns or losses on real estate equity varied wildly by locale.

Mortgage Rates
The good news, particularly from my position of a loan officer, is the March 31st conclusion of the Federal Reserves $1.3 Trillion purchase of mortgage backed securities has not resulted in dramatically higher rates. This indicates there are both private purchasers of these securities, and the 10 Year Treasury Bond has remained fairly strong. With increasingly positive economic news, I do not expect low rates will last.

While fixed rate mortgages are still very low, conforming (not Jumbo) 5 Year and 7 Year adjustable rate mortgages are fantastic. If are certain you will be moving or refinancing within this time frame I strongly encourage you to contact me for an analysis of your monthly payment and interest savings with these products. In addition, pricing on all products including fixed rates has been such that the difference between paying no points and no closing costs is only .125% - .25% in rate. When you can lower your rate without closing costs, it is finding money.

If you are worried about “restarting the clock” to your pay off date, this is a non issue. I will simply provide you a monthly principal and interest payment amount to reach your pay-off date goal.

The Subprime Market Fiasco XIX

2010-03-18T14:22:00.000-07:00

Happy (almost) spring. With warming temperatures and clearing skies, many of us are turning our attention to our most valued asset – our current and future homes.

This issue covers lost opportunities by borrowers; the real estate market; and interest rates.

Borrowers Miss Out on Billions in Savings
An interesting article appeared in the March 3 Wall Street Journal discussing how home owners are missing out on billions of dollars in lower interest rates due to their inability to refinance, or important to me their belief that they could not or should not refinance. According to their source, Credit Suisse, around 37% of all borrowers with 30-year conforming fixed-rate mortgages—who collectively hold about $1.2 trillion of home loans—have mortgage rates of 6% or higher. Many could reduce their rates by a full percentage point if they refinanced at current rates, about 5%. More than half could lower their rates nearly three-quarters of a percentage point.

The article discussed at some length many borrowers' inability to refinance – mortgages that are underwater, poor credit, loss of jobs etc. It also mentioned that in many instances borrowers could refinance but believed it was not beneficial to due to loan to values that increased to greater than 80%. This threshold is the level where borrowers are required to purchase mortgage insurance. What the article did not mention is that this should not necessarily be a deterrent to refinancing.

I performed an analysis on the relative cost of mortgage insurance expressed as an interest rate percentage on a 30 year fixed conforming mortgage at loans to value of 85% and 90%. I found the interest rate equivalent is .35% and .65% respectively, which when added to current low interest rates often makes refinancing well worth paying the mortgage insurance. In addition, when the combination of principal payments and or appreciating value brings the loan to value below 80%, mortgage insurance can be removed. Mortgage insurance on conforming loans is not permanent.
FHA mortgages allow financing up to 96.5% with the cost of insurance equivalent to only .55% expressed as interest. However there is also an up-front premium that is paid, although it can be rolled into the loan regardless of the loan to value.

I have refinanced many of my clients into loans with mortgage insurance that has proven to be very economically beneficial. If you would like me to provide you an analysis to determine if refinancing is worthwhile to you, please let me know.

The Housing Market
Final numbers were announced for the S&P/Case-Shiller Home Price Indices for December, and values across the 20 cities monitored can best be described as stabilizing. The 3rd quarter decline for the 20 cities was 2.5% from fourth quarter 2008. However, the rate of decline has slowed significantly each quarter. The annual rates of decline reported in the first, second and third quarters of the year were -19.0%, -14.7% and -8.7%, respectively.

As of the 4th quarter of 2009, average home prices across the United States are at similar levels to what they were in the summer of 2003. For the month of December itself, actual values decreased from November in 15 of the 20 cities, led by Chicago at a 1.6% decline. However, on a seasonally adjusted basis, values increased in 15 of the 20 cities, led by Los Angeles at 1.4% and followed closely by Phoenix, San Diego and Las Vegas. To view the S& P press release for December and the 4th quarter, please go to http://tiny.cc/Ccl0n.

New Home sales decreased by 11% in January to record lows. While this may have a positive effect of reducing inventory if builders elect to slow the pace of construction, it does have an overall negative economic effect. According to the National Association of Home Builders each new home built, for example, creates about three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities,.

Interest Rates
Interest rates remain near record lows for conforming loans, but the Fed did reiterate earlier this week that they will discontinue their $1.25 trillion purchase of mortgage backed securities. Unlike other times they have mentioned the end of this program, there was no immediate increase to rates. This may be a positive sign that the private market is ready to step in and begin purchasing these securities upon the Fed’s exit. If so, rates may track ordinary economic trends and Federal Reserve interest rate actions rather than being influenced by government purchases.

• Jumbo Rates – The 30 year fixed is still the best “value” rate and depending upon loan to value and credit score is around 5.5%.
• Conforming Loans – While the 30 year is at or just under 5% for qualified borrowers, the 5 year ARM rate has dropped to 4% or under. The 7 year ARM has made a valiant return to value, and is often just .25% or so higher than the 5 Year.
• FHA – FHA loans are on par or close to the same rates as conforming loans for 30 Year fixed, 5 Year ARM’s and 7 Year ARM’s. I find this fairly remarkable given that they allow for a loan to value of up to 96.5% and are not driven by credit score.

What this means to you.
• Purchases – It is still predominantly a buyers market. This gives you the opportunity to make an aggressive offer, and negotiate inspection items fairly but aggressively. If you qualify for the first time home buyers tax credit or it’s addendum for buyers looking to move, remember the Purchase and Sale agreement needs to be signed by April 30th, and the purchase must close by June 30th.
• Refinances – You should always do (or ask me to) an analysis to see if it is worthwhile to refinance. There is no cost to do so. If you have been reluctant to inquire due to your loan to value, mortgage insurance payments can be part of the analysis.
• Contact me – I am happy to provide you a pre-approval letter or prepare a refinance analysis for you.

Please feel free to forward this newsletter to anyone you would like. I would also be happy to hear your opinions or answer any questions you or your colleagues may have. I can provide mortgages in all 50 states.

If you would like to see past postings, please visit my blog at http://gregorydwyer.blogspot.com

Kind regards,

- Greg

The Subprime Market Fiasco Part XVIII

2010-02-08T06:45:00.000-08:00

Punxsutawney Phil has seen his shadow and only six more weeks of winter remain. It also appears that the housing market is beginning to thaw with the spring market beginning early – most likely due to the first time home buyer credit which is scheduled to expire in June.

This issue covers mortgage underwriting and the need to have an expert loan officer working for you; the real estate market; and interest rates.

Underwriting

Many of you have heard horror stories over the past six to twelve months about obtaining a purchase or refinance mortgage. Some of you may have been outright declined, or felt like you were pulled through a meat grinder with request after request for more documentation and endless delays in closing your loan. The reason is simple – as Fannie Mae, Freddie Mac and other mortgage holders are hit with more and more loan defaults, they are auditing their loan pools and looking for mistakes, lies or omissions that entitle them to return the loans to the originators.

Reasons for returning loans are various and many – from misstating occupancy to poor documentation of income or assets. According to the Wall Street Journal and Barclays Capital, banks repurchased about $14.2 billion in loans from holders of mortgage-backed securities in the first nine months of last year, up from $3.6 billion in 2008. That certainly makes a dent in banks profits. Underwriters are the gatekeepers to loans that are sold, and they are making sure that all the “i”’s are dotted and “t”’s crossed. If any aspect of a loan is questionable, they will err on the side of caution and deny it.

Much, if not all of the underwriting heartaches and headaches can be prevented if you have a good loan officer that can navigate underwriting landmines. This begins with providing the underwriter a good loan package. I have often bemoaned the fact that in the mortgage business I do not utilize my MBA and background in accounting, taxation, and corporate finance. This experience is now invaluable when I take a new application and collect customer documents. Spending an hour to provide a detailed credit write up prevents hours of problem solving and may even save the mortgage from being declined. The write up includes an analysis of various forms of income when necessary, breaks down yearly income trends and averages, explains tax returns and self-employment income when necessary, and provides the underwriter a road map to the clients creditworthiness.

The pendulum has swung from the days of 100% no documentation financing to the other extreme. While this presents a more difficult environment, with good organization and proper documentation, it should not be a problem.

For those of you who have been declined, following you will find a link to a recent CNN article. It shows that even millionaires can be declined…..often because they did not have the right loan officer working their file. http://money.cnn.com/2010/01/20/real_estate/mortgage_woes_for_wealthy/

The Real Estate Market.

Stable? Improving? Tepid? Lackluster? Optimistic? Theses are the mixed messages used to describe the housing market in the past month. And since real estate is local, all the adjectives are accurate depending upon the locale and the type of housing. The coastal areas of California such as San Francisco, LA, and San Diego are improving, while inland California continues to suffer.

According to the S&P Case-Shiller Home Price Indices, one strong positive is that even in cities that showed a decline in value from October to November, the rate of decline compared to 2008 is far slower. Their Ten City and Twenty City indices are down 4.5% and 5.3% respectively, for November compared to 2008. An interesting aspect of the indices is that while there has been overall broad improvement, in November only five cities showed month over month improvement, and four cities – Tampa, Seattle, Charlotte and Las Vegas hit new four year lows. Conversely, Denver, Dallas, San Francisco and San Diego have values that are higher than one year ago. It is also important to note that November is a seasonal month, and when seasonably adjusted the numbers improved.

To view the city indices and related article, visit http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----#

The Economist, one of my favorite magazines (which for some reason is referred to in England as a “newspaper”) also had an interesting article on the world and US housing markets. The magazine has developed a fair-value measure for property based on the ratio of house prices to rents. The gauge is much like the price/earnings ratio used by stock market analysts. Just as the worth of a share is determined by the present value of future earnings, house prices should reflect the expected value of benefits that come from home ownership. These benefits are captured by the rents earned by property investors, which are equivalent to the tenancy costs saved by owner-occupiers.

Using this measure on the Case-Shiller numbers, The Economist believes the US housing market is back to the level where buying should be favored over renting. You can view the entire article at
http://www.economist.com/businessfinance/displayStory.cfm?story_id=15179388

A separate article in the Economist cites a Goldman Sachs analyst’s estimates that government intervention over the past year has raised the value of houses about 5% above where they otherwise would be. These interventions included the bailout of Fannie Mae and Freddie Mac, the purchase of $1.25 trillion of mortgage backed securities by the Fed, and the first time home buyers credit. The hope is that better underlying housing fundamentals such as sales price vs. rent, better economic output and an improving employment picture will off set the loss of some of these interventions and other factors weighing on the market such as new foreclosures.

Rates

The Wall Street Journal had an interesting piece earlier this month opining that if the Federal Reserve stopped purchasing mortgage backed securities at the end of March, as they have stated, that interest rates would increase and put a damper on the housing recovery. They believe that rates are already .25% higher on anticipation of such. Since the article was written on May 8th, rates bumped along and then increased immediately when the Fed reiterated last week they were ending the program. They eventually eased back when the stock market had several days of losses and investors fled for the safety of bonds. Some positive economic news yesterday and today have caused a slight up-tick.

While interest rates remain very low, I anticipate some day to day volatility. The bond and interest rate market move on any economic news. I expect any small downward movement in the near term to be far over shadowed by future upward direction. It is well recognized that the Federal Reserve has been keeping rates artificially low to help support the housing market. When/if they end this program, it is a near certainty that rates will rise with the private market purchasing mortgages at market prices. To view the WSJ article, see http://online.wsj.com/article/SB126291088200220743.html#printMode

What this means to you.

Not much different from last month. For many people, their home is their largest asset, and their mortgage their largest liability. Take the time to analyze your situation. Are you likely to move within the next 5 years and therefore can switch to a lower rate fixed adjustable rate? Are you in an adjustable rate mortgage which may expire in the next few years when rates are likely to be high and will adjust upward? Do you want the security of a fixed mortgage? In short, do you know your options?
• Purchases - If you are thinking about purchasing a home, real estate prices have shown stabilization in most areas. Do your research on your particular locale. In my opinion, the cost of higher interest rates in the future is more significant than the threat of fallen prices due to more foreclosures.
• Refinances – Act now. As predicted last report, rates are beginning to increase. You should always know your options. Look at the difference in interest savings and payment with different amortization options.
• Contact me – I am happy to provide you a pre-approval letter or prepare a refinance analysis for you. It is more important than ever to have a competent mortgage lender like me in your corner.

Please feel free to forward this newsletter to anyone you would like. I also welcome your opinions or comments, and will answer any questions you or your colleagues may have. I can provide mortgages in all 50 states.

Kind regards,

- Greg

The Subprime Market Fiasco Part XVII

2010-01-04T06:57:00.000-08:00

Happy New Year. The beginning of 2010 finds us with stable home prices in most real estate markets, a decline in the volume of new home sales, and the continuation of a low interest rate environment.

The Real Estate Market. – After several months of gains, the S&P composite index of home prices in 20 metropolitan areas was flat in October, falling short of expectations for a 0.2 percent rise. Only seven of the 20 cities in the composite index had month-over-month gains in prices in October, lead by Phoenix, San Francisco and San Diego. Those with the biggest declines were Tampa, Chicago and Atlanta.

Overall, most believe that there is a growing stabilization in house prices, even if it is at a slow pace. However, one overhang on the market is the record high level of foreclosures that have not yet been rectified or put on the market.
The annual rate of price declines improved, with the 20-city index dropping 7.3 percent from a downwardly revised 9.3 percent in September. All 20 metropolitan areas and both the 20-city and 10-city indexes showed smaller rates of decline in October compared with September. As of October 2009, average home prices across the United States are at similar levels to where they were in the autumn of 2003. From the peak in the second quarter of 2006 through the trough in April 2009, the 10-City Composite is down 33.5% and the 20-City Composite is down 32.6%. With the relative improvement of the past few months, the peak-to-date figures through October 2009 are -29.8% and -29.0%, respectively.

This last statement shows the potential adverse effect of leverage for many borrowers. While many of us suffered similarly large percentage declines in retirement and brokerage funds when the stock market declined in 2008 and 2009, most of those accounts did not use "margin" of borrowed money in our accounts. Therefore, to paraphrase Bill Belichick, the losses "were what they were". However, for homes purchased at the hight of the market, or refinanced with cash out, quite likely the average decline of 29% was magnified by 3, 4 or 5 times in a decline of equity due to the leverage of borrowing. If you purchased a home for $500,000 and put 20% down, your $100,000 of equity is lost, plus $45,000 more. If you put down less, the effect is more significant. This effect is dampened for many of us who were fortunate enough to also enjoy the run up in real estate prices, but is very real for those who were first time home buyers, 2nd home buyers or investors. It also has a very real effect on refinancing those homes and meeting tighter underwriting criteria.

Interest Rates – As mentioned in my last report, rates did begin to tick up. This was due to a combination of positive news in the economy, and bond investors fear of rising rates and inflationary pressures. Rates are still low, but the probability of a climate of rate increases is likely.

Many borrowers are using the opportunity of lower rates to convert to shorter term maturities - 15 year or even 10 year fixed vs. a 30 year amortization. These rates are typically several basis points lower than 30 year amortization and provide significant interest savings over the life of the mortgage. This tactic also provides a known rate of return over other investment opportunities, and dove tails with my strategy for many borrowers of picking a date they wish to be mortgage free by and tailoring the mortgage to such.

Rates with no points for borrowers with excellent credit and good Loan to Values are in the low 5% range for the 30 year fixed, the mid to upper 4% range for 20 and 15 Year Fixed, and the low to mid 4% range for the 10 year Fixed.

Some of the above rates can be provided with a discount to closing costs as well.

What this means to you.
• Purchases - If you are thinking about purchasing a home, real estate prices have shown stabilization in most areas. Do your research on your particular local. In my opinion, the cost of higher interest rates in the future is more significant than the threat of fallen prices due to more foreclosures.
• Refinances – Act now. As predicted last report, rates are beginning to increase. You should always know your options. Look at the difference in interest savings and payment with different amortization options.
• Contact me – I am happy to provide you a pre-approval letter or prepare a refinance analysis for you.

Please feel free to forward this newsletter to anyone you would like. I would also be happy to hear your opinions or answer any questions you or your colleagues may have. I can provide mortgages in any state but Texas, but I would be happy to offer a reference there.

Kind regards,

- Greg

The Subprime Market Fiasco Part XVI

2009-10-30T11:33:00.000-07:00

Another quarter has passed and the housing and mortgage markets are showing signs of life. Homes are more affordable than they have been in years, rates are low, and the government will most likely extend and expand the tax credit for home buyers.

The Housing Market
The overall consensus from most pundits is the housing market is at or near bottom and in many arrears has begun to show signs of a recovery. Existing home values have increased for several months and can be partly attributed to the first time home buyer credit. New home sales fell in September after 4 months of growth. Good news for those considering buying a new home, as a Senate committee voted on extending and expanding the credit to June 2010, increasing the maximum income to be eligible by a large amount, and expanding the program to include a $6,100 credit for existing home buyers who have owned their current home for more than 5 years. The bill still has to be voted on by the full Senate and House of Representatives, but sentiments are positive.

The greatest value decreases since 2006 highs have been in the sand states of Nevada, California, Arizona and Florida. Not surprisingly, these states were amongst the higher value growth states in the years prior to the downturn. Interestingly, most of these states foreclosure rates have begun to slow. A grey cloud hanging over the market is the expectation of further foreclosures in areas that have weathered the storm fairly well. This includes high end homes and is a result of the high unemployment rate and out of work home owners who have exhausted their reserves.

Interest Rates
The Fed’s continued purchase of 10 Year Treasury bonds and Mortgage Backed Securities (MBS) have kept rates low, probably artificially low. 30 Year fixed rate conforming loans are once again near 5%, and conforming Adjustable Rate Loans (ARMS) are in the 4’s. The 30 Year fixed Jumbo rates have finally dropped and are only .5% higher than conforming rates. This is the narrowest spread in over 1 year. There is renewed Jumbo activity as borrowers are taking advantage of either lowering their rates or converting to fixed rates from ARM’s in anticipation of higher interest rates in the future.

Rates are still driven primarily by credit score and loan to value, with other factors such as property type, occupancy and cash out also a factor. FHA activity remains strong as it is virtually the only source of high loan to value financing.

Longer term outlook for rates look higher as the Fed announced that they will not continue the purchase of 10 Year Treasury’s which has a direct effect on mortgage rates. In addition yesterday’s news of economic growth – even if stimulus driven – will begin to ignite talks of the Fed raising the overnight rate to head off inflation.

Government Help for Home Owners’ with High Loan to Value programs
Many of you have been waiting anxiously, as have I for the launch of the Fannie Mae/Freddie Mac refinance programs for loans up to 125% of value. Right now we can refinance loans formerly serviced by countrywide and owned by Fannie Mae or Freddie Mac up to a LTV of 105%. I have been told that we will be able to refinance any qualified loan owned by Fannie Mae or Freddie Mac up to 125% Loan to value sometime in November. I am keeping my fingers crossed that this time the date will not be pushed out. If you qualify for this program, please let me know.

Actions you should take.
If you are thinking of purchasing a house, do so in the next 8 months to take advantage of the government tax credit. Send me an email of give me a call and I will help you determine if you qualify.

If you have not yet refinanced, take a couple of minutes of your time and I will provide you with a cost benefit analysis that lays it out for you in black and white with dollar signs attached. If now is not the right time, I will also monitor rates for you and let you know when it is financially beneficial for you to do so.

The information I will need is as follows:
Estimated Property Value:
- Property Type (single family, condo,etc):
- Occupancy Type (primary residence, vacation, etc):
- State/County of property:
- First Mortgage Balance:
- First Mortgage Product (fixed, 5 Year ARM, etc):
- First Mortgage Rate:
- ARM Expiration Date:
- 2nd Mortgage Balance:
- 2nd Mortgage Rate:
- 2nd Mortgage Product:
- Was the 2nd mortgage acquired at the time of home Purchase?
- Estimated Credit Score

Please feel free to forward this newsletter to anyone you would like. I would also be happy to hear your opinions or answer any questions you or your colleagues may have. I can provide mortgages in any state but Texas, but I would be happy to offer a reference there.

Kind regards,

- Greg

The Subprime Market Fiasco Part XV

2009-07-29T17:46:00.000-07:00

In the three months since I have updated my thoughts on the mortgage and real estate market, the biggest change has been – stability. Stability of interest rates, stability in home prices and stability in what to expect from underwriting in terms of mortgage approval. I will touch upon these subjects as well as a personal endeavor - the Pan-Mass Challenge, a 192 mile bike-a-thon to raise money for cancer research.

Mortgage Rates. – After hitting close to an all time low in early spring, conforming mortgage rates (<417,000) have drifted along in the low to mid 5% range for 30 year fixed, with occasional spikes and troughs. Although rates change daily, they have held pretty steady with no more that .25% change in any one week. 5 Year ARM’s dipped to the low 4’s for quite a while, and are now edging back towards 5%. The wild card in rates is what is known as loan level adjusters. The most critical of these adjustors are loan to value and credit scores, followed by cash-out transactions.

Jumbo rates (>$417,000) have finally started to come down. A 30 year fixed jumbo is now under 6%. Although the gap between jumbo mortgages and conventional mortgage rates is still wider than historical norms, it is narrowing. I can only assume this is due to banks becoming more comfortable with their own balance sheets, or because of higher confidence that the secondary market which purchases these mortgages to eventually open up.

The savior for many borrowers has been FHA loans. FHA allows for both high loan to value (up to 96.5%), and lower credit scores. Although these loans due require an up front mortgage insurance fee (which can be rolled into the loan balance), their rates are very competitive with conforming rates. As a tax payer, my fear is that this program has been a catch all, and will eventually have a lot of non performing borrowers. Hopefully the amount of up-front mortgage insurance collected will be enough to offset any defaults.

My optimism for continued low rates is not bright. With the amount of money poured into the economy by the Federal Reserve combined with the Fed’ purchase of mortgage backed securities and treasury bills, I believe interest rates are artificially suppressed. If you are thinking about refinancing or if you have an adjustable rate mortgage that is coming due within the next 18 months, I would urge you to do so now.

Many of you have joined my rate watch program so that I can monitor rates for you and alert you when rates drop and it is economically advantageous for you to refinance. I have added a new feature for those of you who want to follow rate trends on your own. Every morning, and occasionally intraday I receive a very short notification of change in pricing on 30 Year Fixed Rates, 5 Year ARM’s and FHA loans. This is not a change in rate, but a change in pricing which is what determines rate. I have established a twitter account, www.twitter.com/todaysinterest. You can visit the site to sign up, and I will tweet these changes to you so can monitor changes and trends yourself.

High Loan to Value Loans. Many borrowers are frustrated that they can not take advantage of lower interest rates due to their high loan to value. (value of the home/loan size). If your mortgage was formally owned by Country Wide, and you do not have mortgage insurance, I can now refinance these loans up to a loan to value of 105%. In the next few weeks, I should be able to refinance any conforming loan, regardless of who owns it or where it was originated, or whether it has mortgage insurance. I am very excited about this program as it allows people who are qualified to refinance into a lower rate to do so. I look forward to updating you further on this.

Mortgage Approval and Underwriting. A key to being approved for a mortgage is making sure your loan officer is organized and efficient and has the ability to present your documentation and credit profile in an easy to read and underwrite package. They should almost due the underwriter’s work for them. Underwriting and processing is overwhelmed with the number of files they need to manage, and they are also squeezed by pressure to submit perfect files to Fannie Mae and Freddie Mac that will not be kicked back to the bank. Once they are kicked back, the bank owns them on their balance sheets. Condominiums add an additional level of difficulty and navigation that the loan officer must manage. Condominium approval can be difficult and time consuming, and takes constant monitoring. If you loan office is not responsive in getting back to you with rates, pricing, scenarios, etc, chances are he or she will not manage the underwriting rigors well, and your loan will not close in a timely manner, if at all.

Real Estate Market. This week we finally had good news on both new and existing home sales. Both showed positive signs with price increases in most metropolitan markets from May to June. Enough so that many pundits are daring to say that we may be at the bottom of the real estate market. That is not to say there are not still pockets of instability, as real estate is still local. Some areas of the country have lost over 50% in one year, while others have remained close to flat. The average yearly decline was 17%. If your geography had a big run up, chances are it had a big fall as well. While high unemployment could have a lasting effect on consumer confidence to purchase a home as well as add to the number of foreclosures, anecdotally I am beginning to see more activities from buyer. I am almost confident we are at the bottom.

Pan-Mass Challenge – Last year many of my readers were kind enough to contribute to my first Pan-Mass Challenge Bik-a-thon. The PMC is a 2 day long 190 mile bike-a-thon from Sturbridge, Mass. to Provincetown. The event has raised $239 million since its inception, with a record $35 million raised last year. 100% of the funds raised in 2008 went directly to the Jimmy Fund and the Dana Farber Cancer Institute. The event raises half of the totally yearly revenue for the Jimmy Fund.

Last year was my first PMC. I was motivated by my own affection for the Dana Farber after being treated there for Hodgkins in 1986. I was also motivated by guilt for wanting to “give back” to the Dana Farber, but always finding excuses not to do so. I was finally motivated by my sister Ellen, who after we lost both parents and a sister to cancer over a span of 7 years, rode her first PMC in 2007.

This year’s ride is motivated by a parents’ worst fear, a child with the threat of cancer. In September this past year, my 17 year old son had to come home from high school in AZ to have a tumor removed from his inner thigh. While we were told that it looked benign, there were several sleepless nights waiting for the test results, and secondary confirmation from Mass General as the tumor “was very unusual” and needed to be looked at by a second specialist. The doctors have no idea what caused the tumor. Although I was fairly certain I would ride again this year, that episode solidified my commitment.

I need your help. I have committed to raising $4,000 for this years August ride, and I am asking you for your donation. We are all pulled by our desire to help various charities, and for many of us, the current economy is challenge enough. Whether you contribute $5 or $100, every little bit helps. The easiest way to donate is to log on to PMC.org, click the egifts logo, at the top left corner of the page, sponsor rider GD0062 (me), and give generously. Alternatively, you can send checks made payable to Dana Farber Cancer Institute to my home address: 61 Fisher Street, Northboro MA, 01532.

I was told my many people that I ran into or corresponded with that they meant to donate last year but forgot or got side tracked. Please give now while it is on your mind.

This year I am using tweeter to provide updates during the ride. If you want to follow my progress, join me at www.twitter.com/panmasschal. I will limit the frequency of tweets as not to be too obnoxious.

I tell many people that Cancer has been a blessing in disguise. It taught me I can get through any challenge, prioritize what is important, appreciate the people in my life, always do my best, have fun and never sweat the small stuff. Please help give others the same chance I had.

Thank you for your support.

Please feel free to forward this newsletter to anyone you would like. I would also be happy to hear your opinions or answer any questions you or your colleagues may have. I can provide mortgages in any state but Texas, but I would be happy to offer a reference there.

Kind regards,

- Greg

The Sub-Prime Mortgage Fiasco - Part XIV

2009-03-18T14:14:00.000-07:00

We have seen some dramatic changes in the real estate markets, mortgage markets, and of course the stock markets since my last correspondence. I will try to be brief but informative in my narrative. I will start with the mortgage market as that is my primary expertise, and where most of your interest lay. I will touch upon interest rates; Fannie Mae and Freddie Mac loan level adjustors (points); pricing; and the two new programs announced recently to aid “at risk” home owners and those that are unable to refinance due to falling home values – or high Loan to Value ratio’s (LTV’s).

Interest Rates – Rates for conforming loans (those under $417,000, or in certain markets up to $727,500) have fallen back to historical lows – briefly touching 4.875% for those with excellent credit scores above 740 and LTV’s below 60%. As you may imagine, there were very few borrowers in this category. This low water mark was touched the morning the fed unexpectedly lowered their discount rate by .75% rather than the expected .50% cut. This rate was short lived, and seen as an over reaction. Rates again touched near 5% when the government announced their intention to dedicate specific monies of the purchase of mortgage backed securities. The base mortgage rate has fluctuated between 5.125% and 5.375% for the past 60 days.

Loan Level Price Adjustors – Fannie Mae and Freddie Mac have gone to a risk based pricing model using price adjustors based upon the profile of the loan and borrower. The two key components of the risk based pricing are loan to value and credit score. LTV’s are delineated between ranges of <60%,>75%, and multi-family homes. CREDIT SCORES OVER 740 NEGATE MOST OF THE LOAN LEVEL ADJUSTORS. Excellent credit has never been more important.

Pricing is the mechanism by which a bank gets paid when it sells its mortgages to Fannie Mae and Freddie Mac. Typically there has been a fairly linear increase in rate to a decrease in price. For instance, if there was a loan level price adjustor as mentioned above, this would be reflected as collecting the .25 points at closing, or collecting no points and increasing the interest rate by .125%. This linear relationship is very important in providing “no points, no closing cost” mortgages as banks have the ability to calculate the point equivalent of closing costs, and provide an option of allowing their customers to receive a higher interest rate without closing cost, or a lower rate with closing cost. For most of the past 60 days, the no closing cost option has been non existent as there was no linear relationship. Only full and limited closing costs options were available. In fact, the pricing was such that there was an incentive to pay points on top of closing costs to get the best rate/value. That is why you may have heard of so many people getting rates at 5% or better – they were usually paying points to do so. For the past week pricing has seemed to return to normal, with negative pricing available to absorb closing costs – and even some of the nasty loan level adjustors mentioned previously.

Many of you may have read about the Treasury’s “Home Affordable Modification” program, as well as the “Home Affordable Refinance program for those home owners with Fannie Mae and Freddie Mac mortgages with high LTV’s In a nutshell, the Modification program is for those “at risk” of foreclosure but have not yet missed a payment. “At risk” includes those who have an adjustable rate mortgage about to adjust to a higher rate, a lost job, have an LTV >105%, or show other financial hardship. You must also show you do not have the ability to pay the mortgage out of reserves, and the program is for owner occupied properties only. Modification includes the financial institution reducing the rate and/or principle balance owed to a level such that the borrowers housing debt (principal, interest, insurance and real estate taxes) equate to 38% of income. The government will then share in the cost of the bank or institution further reducing the debt to income ratio to 31%. In addition, if the borrower keeps current on payments, he or she will be rewarded with an additional $1,000 principal reduction each year for 5 years. Guidelines for the Home Affordable Refinance program should be out in early April. This will expand Fannie and Freddie’s ability to refinance loans owned by them, up to a LTV of 105%. I do not yet know what loan level adjustors or mortgage insurance may be, but should know within the next couple of weeks. If you fall into this category, please feel free to contact me. For the Loan Modification program, you must contact your loan service provider.

On a final note, if you are being squeezed by fallen home prices and tightening LTV requirements, as well as the hit by the loan level adjustors due to credit scores and LTV, consider an FHA loan. FHA still allows up to 96.5% financing, has no price adjustors for high LTV or low credit scores, and are the most easily refinanced mortgages there are if you need to do so. As long as you are paying your FHA mortgage on time, you can refinance regardless of your income or home value.

I have also taken advantage of the low interest rates for those of you in my “rate watch” program. Mortgage rates are at historically low levels. Feel free to contact me at any time to provide a refinanced analysis for you, and to add you to my program so that I can monitor the rates and timing or a refinance on your behalf.

I also appreciate all the referrals to friends, family, and co-workers that many of you have provided. Please keep them coming.

As always, I welcome your comments and suggestions.

Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.

2008-11-24T13:32:00.001-08:00

Two priests who take pleasure in smoking are having difficulty reconciling their desire to smoke with their commitment to daily prayers. They decide it is best to ask their bishop for guidance. The first priest broaches the subject with the bishop at that evening’s dinner and as he feared the bishop’s response was a resounding disapproval. The next day the first priest encounters the second smoking in the courtyard while saying his morning prayers. “Didn’t you hear” enquires the first “I asked the bishop if it is okay to smoke while praying, and he told me it is not”. “Why there’s your mistake”, responded the second priest “I asked the bishop if it was okay to pray while I smoked”.

I am reminded of this story as I analyze the fall in housing prices over the past two years. After witnessing the carnage, the large number of defaults, lost equity, and the number of homes upside down on their mortgages, I asked myself “is home ownership a good investment”? Like the story, it is all about perception. Historically, home ownership has been promoted as part of the American Dream. Lately, the news about foreclosures, falling values, and lack of mortgage financing makes that dream appear to be a nightmare.

I visited many mortgage and financial planning sites that have “buy vs. rent” calculators, and as you may imagine, they all came up with different answers. Most of the calculators are very general and not robust enough to encompass all the variables that contribute to the answer. Therefore, I developed my own model that takes into consideration the following factors:
- Purchase price;
- Down Payment;
- Real Estate Taxes;
- Hazard Insurance;
- Maintenance;
- Mortgage Interest Rate;
- Mortgage Insurance;
- Adjusted Gross Income, marital status and related tax bracket;
- Return on Investment Savings;
- Home Appreciation;
- Inflation;
- Rent Expense

These variables substantially affect the findings. In my analysis, I assume a Boston area Home Value to Rent ratio of 23x, which is one of the worst in the country. I also presuppose the average real home appreciation price index since 1950 of 1.24%, the average yearly inflation rate of 3.789%, a 30 year fixed interest rate of 6%, and average yearly returns on investment savings of 6%, 8%, 10% (hard to imagine in this market). Using two different scenarios, my findings are dramatically different.

The first scenario is a $350,000 purchase with 10% down, married, earning $100,000 of adjusted gross income. At the end of 30 years, the equity in their home is 12% more than the value of their investment portfolio at a 6% investment return, but 15% and 43% less at investment returns of 8% and 10% respectively.

Scenario two, with a purchase price of $700,000, 20% down, married, and an adjusted gross income of $200,000 had a far greater purchase advantage with home equity gains 117% and 35% greater than the rental investment portfolio when assuming investment returns of 6% and 8% respectively, and only 5% less at an investment return of 10%.

Why such a large advantage for the more affluent homebuyer? The answer is the power of compound interest. Under the first scenario with only 10% down, the buyer is paying mortgage insurance for the first 6 years or until enough equity is built up to cancel the insurance. In addition, the 2nd buyer is in an effective tax bracket of 28% vs. 25%, providing an additional 3% tax shelter on interest payments – which again is more prominent in the earlier years of the mortgage. Compounding these early year savings provides the better returns.

In analyzing all the data over the 30 year time period of the mortgage, I found some very significant information that is useful in making a purchase decision.

1.) The cash flow requirement or homeownership is far more than just paying principal and interest. When the cost of real estate taxes, insurance and maintenance is included, plan on adding up to another 50% of P&I to cash flow needs.

2.) The largest component of home ownership cash outlay is principal and interest. However, this is also the greatest advantage vs. renting. If amortized over 30 years this cost is fixed and does not change while rent is subject to yearly increases. This has a dramatic effect on homeownership vs. rent cash flow break-even.

3.) The purchase cash outlay includes payment of principal, which in effect is investment or equity building. When this component is removed reflecting a “net cash” or “expense” outlay, the break-even between purchasing and renting is far shorter.

4.) When analyzing purchasing vs. renting there are 3 different break-evens that should be considered.
a.) Equity vs. Investment Value;
b.) Total Cash outlay;
c.) Net Cash outlay.

5.) “Mortgage Free”. Once the mortgage is paid off, the difference in monthly cash flow is dramatic, and only continues to improve. Perhaps we should all think differently when purchasing a home, and view it as security in our retirement years, and an asset for our estate. In deciding how much house to purchase, and what size mortgage, we should look at payments with amortization payments based upon a desired age to be “mortgage free”. This may be 30 – 35 years for a 30 year old, but 15-20 years for a 45 year old.

I have included a couple of charts that clearly illustrates both the cash flow aspects of purchasing vs. renting, as well as the home equity buildup vs. investment return.
If you are interested in developing you own personal purchase vs. rent scenarios using your personal variables and input, please feel free to email me and I will send you a template.

As usual, please feel free to forward this email along to anyone you think may have interest. Along that note, I thank all of you who passed along my blog information to your contacts who you thought may be interested in signing up for my commentary through my blog. I also received many direct email requests to simply be added to the distribution list. If your contacts prefer this method, please ask them to email me directly and I will add them.

Have a wonderful Thanksgiving.

- Greg

The Sub-Prime Mortgage Fiasco - Part XII

2008-10-20T12:16:00.000-07:00

While last month’s message focused on the government takeover of Fannie Mae and Freddie Mac, the intervening month has provided us with the government take over of AIG, the bankruptcy of Lehman Bros., a controversial government bail out plan, a deepening and broadening systematic credit crisis that has spread worldwide, the loss of untold wealth in equity markets, and governments intervention throughout the world to prop up banks and financial institutions.

Although I have views on all of the above, the goal of my updates is to provide opinions and information on the mortgage and housing markets, so I will primarily focus on these areas.

Falling home prices, which initiated the credit crisis, are still at the heart of the financial crisis. The continuation of a negative feedback loop - tighter underwriting guidelines creating less qualified buyers which in turn creates less demand for purchases which leads to lower home values and more foreclosures and lower values and further tightening of guidelines…continues to take its toll. How do we stop this loop and continued slide? Market forces will solve some of the problems, as recent housing starts have reached there lowest level in almost twenty years. While this helps reduce housing inventory and aid in stabilizing pricing, it does have a negative effect on employment and the economy (but I don’t want to digress away from housing and mortgages).

Many pundits have stated that while Wall Street is being saved by the government, not enough is being done to help those with troubled loans. My thoughts are that dealing with the relatively few entities of Wall Street and finding a solution that will impact us all is a lot easier dealing directly with hundreds of thousands if not millions of individual home owners who if helped, only helps them. However, if action is taken to collectively help troubled home owners, it could help stabilize home prices, ease the credit crisis, and give us all a sense of security as to the value of one of our largest assets.

In the second presidential debate, the debates moderator Tom Brokaw asked each presidential candidate “…as president what sacrifices will you ask every American to make to help restore the American dream”? While each candidate provided their typical non-answer, it did get me thinking. The sacrifice I am willing to make is to support a plan to assist troubled home owners. This goes against every fiber of my being as I am a true believer in personnel responsibility. While a small percentage of troubled home buyers were “duped” into a mortgage that they ultimately could not afford, I believe the majority of troubled loans came as a result of borrowers obtaining a mortgage they simply could not afford, living beyond the means of their pay, or speculation on the housing market that did not bear fruit.

My plan, if I had any input, would be similar to McCain’s but with some major differences out lined as follows:
1) Purchase from Wall Street $200B - $300B of trouble mortgages at 90% of face value, not 100%.

2) Rewrite mortgages for qualified borrowers at the 30 Year Treasury Rate + 1% (currently this would be at a rate of about 5.25%) on a 30 year amortization.

3) Borrower’s note would be for the full note amount, not a discount, and I would add the closing costs and a 1.5% points for insurance to the loan balance similar to FHA Loans.

4) Mortgage interest would not be tax deductible.

5) Mandatory debt to income ratio’s not exceeding 40%.

6) If borrower could not qualify under new low rate, immediate and uncontested foreclosure.

7) Program could be administered through existing government agencies such as FHA.

I believe such a plan would have an immediate impact on both Wall Street and borrowers. It would limit the amount of further write downs of bad loans to 10%, and remove most of the loans that have already been marked down from bank balance sheets. It removes or limits the uncertainty and trepidation of further write downs by banks which is causing a reluctance to lend to one another. In many cases banks may even be able to post a profit instead of a further loss if they already wrote down the loans by more than 10%.

It would also dramatically slow the pace of foreclosures as billions of dollars of mortgages are rewritten to affordable terms. Many of these borrowers have or will adjust to mortgages at rates ranging from or increasing to 7% - 12%+.

Much of the money provided by the government (or taxpayer) would be recouped as the loans are paid off through maturity or when the property is sold. An obvious unknown is the gain from buying the notes at 90% of face value vs. losses from foreclosures on those that did not initially qualify or are foreclosed upon subsequently, as well as managing the administration of the process on only the 1% difference between borrowing costs and lending rate, plus the 1.5% in points. A second unknown is the character of the borrowers. Would they walk away from a new affordable mortgage if they still owed more on their homes than they are currently worth? An offsetting gain would be the loss of the interest deduction to these borrowers.

The only ones who do not benefit are the vast majority of us that pay our mortgages and other bills on time. Many would call this unfair, and it is. But I would support it.

With all that has transpired, there has been little impact on mortgage rates. Conforming loans (<$417,000) and jumbo conforming loans (vary by county) are still pretty decent with the rate on a 30 year fixed at 6.375% for the conforming, and about .25% higher for the conforming Jumbo. There is huge volatility, as the rates have swung from 5.875% 10 days ago, to 6.75% last week. Rates are also impacted by credit score and loan to value.

On the subject or conforming jumbo loans, if you are considering purchasing or refinancing to these new loan limits, there is a reduction in the maximum loan size allowed that will be announced in November. To take advantage of the current loan size, you must apply prior to November 1st.

Traditional Jumbo rates are horrendous 1% - 1.5% higher than conforming rates with the exception of the 5/1 Jumbo ARM - if you are a premium borrower – Credit score above 700, lower loan to value, excellent liquid assets, and strong debt to income ratios. If you fall within this category, you can still get a rate of 5.75% - 6% depending upon the day.

There is still a very large risk premium or spread built into mortgage backed securities. This spread should narrow as the credit crisis eases, and home values stabilize. There is also an unusual detachment between mortgage backed securities, the 10 year treasury, and equity markets. They have traditionally moved in a correlation to one another, but lately they have not – making anticipating mortgage rates on any particular day fairly difficult.

On a positive note, given the lackluster economy and falling commodity prices, I am no longer in fear of inflationary pressures. As many of my long time readers know, I had always viewed inflation as the greatest threat to rates.

As usual if you have any thoughts, comments, or questions, please do not hesitate to contact me.

Regards,

- Greg

Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.

The Sub-Prime Mortgage Fiasco - Part XI

2008-09-16T12:56:00.000-07:00

While the last few updates have been nuances on a continued theme of the credit crisis, this month’s analysis focuses on a truly historic financial event – our governments take over of Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac are the tail that wags the dog of the mortgage market. In fact they are almost half the dog, purchasing nearly half the mortgages originated. As Fannie Mae and Freddie Mac goes, so goes the mortgage market. It will be extremely important to keep an eye on both entities over the next few years as the outcome of their final disposition will have an effect on mortgage rates, politics, and perhaps your taxes.

Rates for conforming loans backed by Fannie and Freddie have fallen to their lowest level in several months and in the short term should stay favorable - other economic factors remaining stable. The lower rates are due to the reduction of the “risk premium” required by investors who purchase Fannie and Freddie bonds. While there was always an implied guarantee the government would back these entities if they were in financial trouble, the actual direct take over has lowed the risk premium by .5%.

Interestingly, the risk premium is still more than .5% over recent historical levels due to uncertainty and volatility related to the mortgage and housing markets. Once the housing market stabilizes and lenders are more confident in their collateral, the risk premium should fall further. I liken this to the National Football League adoption of a player salary cap. Player salaries are the largest expense for a team, and prior to the cap many owners were spending far too much on payroll. Some teams were losing significant money. These financially weak teams were a burden to the rest of the NFL, dragging down the value of all teams. With such cost uncertainty banks were reluctant to lend to football franchises. However, once the certainty of a fixed and capped salary expense was implemented, banks were more willing to finance teams and the value of all teams flourished.

Short term, the government is expected to pump up to $200 billion of dollars into Fannie and Freddie to support the purchase of new mortgages. It is hopeful that this increased liquidity will help keep rates fluid and spur some home purchase activity which will help stabilize the housing industry.

The Fed plans to increase the amount of mortgages held by Fannie and Freddie through 2009, and then begin to dramatically peer back their holdings, while deciding what to do with the two companies. This will have both political and perhaps economic bearing on home interest rates. If the government intends to completely privatize or shut down the companies leaving home mortgages entirety in the hands of banks and Wall Street firms, they will be asking the Private Sector to completely absorb 50% of the entire mortgage market. If these banks and institutions are as reluctant to lend as they are in the current market (Hence the expensive Jumbo mortgages that are not backed by Fannie and Freddie), we can expect higher rates in the future.

The flip side is many politicians would like to see Fannie and Freddie stay entirely in the hands of the government, and some have even expressed a desire to relax current lending standards to enable those who have been shut out of the purchase and refinance markets due to current tight credit could once again be eligible for mortgages. A government controlled Fannie and Freddie could keep mortgage rates low, with the risk of mortgage losses carried by taxpayers.

Additional good news on the mortgage front is the falling price of oil and other commodities. This has reduced my fear of runaway inflation which as I have voiced many times before, could increase rates dramatically. This is not to say that my inflation fears are gone, they are just on the back burner for now. Rising oil prices are just a hurricane, war, or strong global economic growth away.

The current falling rate environment has allowed me to convert several of you in my automated “rate watch” program to fixed rate products or new adjustable rate products in the last few days. While base mortgage rates are very low, “risk adjustors” which Fannie Mae and Freddie Mac have added to their pricing greatly affects the rate. The two most important adjustors are loan to value and credit score. If you are a participant in my program, please send me an email updating me as to your estimated home value, mortgage balance(s), and estimated credit score so I can provide you accurate analysis.

If you are not yet a part of my program, and would like me to monitor rates for you on a daily basis and contact you when you can lower your rate by refinancing and paying no points and no closing costs, please provide me the following information to the best of your knowledge.
1.) Estimated value of your current home;
2.) Property type (condo, single family etc);
3.) Occupancy type (owner occupied, second home, rental, etc.);
4.) Location of property (county, state);
5.) Balance on your current mortgage(s);
6.) Rates on your current mortgage(s);
7.) Current mortgage type – (30 year Fixed, 5 Year ARM, etc.) If adjustable, when does it adjust?
8.) Rate and Term or cash-out refinance. If you have a first and second mortgage and you would like to consolidate them, it is considered a cash-out refinance unless you acquired the mortgages at the same time, or you have not drawn down against the second mortgage in the last 12 months.
9.) Estimated credit score.
10.) Any other factor that you think is important that I know.

For more details on the “rate watch” program view my November, 2007 post on the subject.

Once again if you have any thoughts, comments, or questions, please do not hesitate to contact me.

Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.

The Sub-Prime Mortgage Fiasco - Part X

2008-08-08T10:23:00.000-07:00

Good Day,

Since this month’s report contains mostly negative mortgage news, I will keep my analysis of the mortgage and real estate market fairly short.

In the past month, we have seen further deterioration of financial institutions balance sheets in the form of unexpected mortgage and credit related loss reserves, most importantly with Fannie Mae and Freddie Mac who purchase a majority of originated conforming loan size mortgages. The continued uncertainty and lack of stability in the credit markets has led to a limited appetite for mortgage backed securities, a lessened supply of credit facilities, increased risk aversion, and the need for Fannie Mae and Freddie Mac to increase their pricing to offset past losses – all of which contribute to higher interest rates.

And now the good news….

The FHA has really stepped to the fore by expanding their maximum loan amounts, while keeping required borrowers equity at 3%. Their credit score requirements are also a lot less severe than with traditional lenders, and fair to poor credit is not punished as severely. Of course as a tax payer it causes some concern to me.

At least in some geographic areas, the housing market is beginning to stabilize. For instance in the Boston Market prices actually increased moderately. In addition, June’s existing home sales increased 5% nationally. Hopefully this trend will continue and we will see the bottom of the housing market shortly. I believe that future foreclosure’s will be the driving factor in the housing market, as foreclosures both increases housing supply and drive down pricing as lender’s want to liquidate foreclosed upon houses as quickly as possible.

The psychology of the housing bust has affected most of us more than the reality. We all need a place to live, so the actual value of our homes while we are alive is almost irrelevant. It is mostly only our heirs who stand to loose if housing price have not rebounded by the time of our demise, and personally I plan to live along time.

Very few of us have should have been hurt by the decrease in home values. Those who have been effected are:
- Older home owners with plans on downsizing to a less expensive home;
- Those who own second homes or investment properties;
- Those who used their homes as a piggy bank and took out home equity lines to sustain a life style above their income levels;
- Those who purchased in the last couple of years and would like to move but owe more than their homes are worth, and do not have the excess assets to make up for their loss of equity.
- Those whose adjustable rate mortgages are at or near their adjustment dates, and can not refinance into a longer period loan due to lenders loan to value guidelines.

The rest of us actually benefit from lower housing prices as it makes housing affordable for first time home buyers, as well as for existing home buyers who want to move up to previously unaffordable neighborhoods. Vacation homes are now more affordable, and investment properties are now usually cash flow positive as a result of higher down payment requirements, and lower prices.

While we are all leery of increasing interest rates over the last several months, the drop in home values far exceeds the cost of higher borrowing.

As usual, I look forward to any thoughts and comments, as well as any referrals to friends, family, and co-workers. I would be happy to run numbers and prepare various analyses for you. If you are already working with a different Chase Loan Officer, please continue to give him or her your support.

Kind regards,

- Greg

Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.

The Sub-Prime Mortgage Fiasco - Part IX

2008-07-02T07:25:00.000-07:00

Half way through the year and it’s déjà vu all over again! Wall Street still fears another round of financial institution write downs as the result of further deteriorating mortgage backed securities; oil prices continue to climb to record levels; inflation raises its ugly head; and the economy is lack luster. Ouch!

So what does the continuing bad news mean for the mortgage and housing markets? Unsettled is the word that most frequently comes to mind. As I have mentioned numerous times before, there is pull on rates in each direction between a weak economy, which generally leads to lower rates, and inflation fears, which leads to higher rates.

The economy pull towards lower rates is fairly weak. Even if the economy worsens, the Fed can not go much, if any lower in cutting rates. In addition, due to the continuing mortgage write down’s on Wall Street, the unknown value of underlying assets, and continued declining housing values in some markets, there is still no secondary market for mortgages, which keeps rates higher. The recent plunge in stock prices has been somewhat helpful to rates, as it modifies the risk of mortgage backed securities compared to alternative equity investments.

On the flip side of the equation is the inflationary pull towards higher interest rates. A few weeks ago, when the Fed mentioned inflationary fears that may lead to an increase in their overnight rates, mortgage rates jumped considerably. Even when the Fed backed off these statements, rates did not return to their previous levels. Rates are easing a bit now only because of the horrific stock market. A recent Economist article stated that worldwide, interest rates were actually net negative, meaning that interest rates were below worldwide inflation. A venture capitalist friend of mine just returned from a two week trip to Europe, the Middle East, and Greece, and his one sure takeaway was that there is severe inflation, and interest rates were going to go up. He referred his partner to me to refinance his adjustable rate mortgage, even though the rate does not adjust for eighteen more months.

Other prognosticators believe that the world wide economy will become so bad that the demand for goods and services will deteriorate to such a degree that inflation pressures will fall. I am not sure I like that scenario any better.

Not to be all doom and gloom, there are some positive events that have taken place in the mortgage markets. The FHA by increasing its loan limits to the same amounts as the new conforming loan limits has expanded their reach to borrowers in need of low down payment financing, and allow up to 97% financing. If it is a purchase transaction, 100% financing can be structured. The new conforming loan limits, which vary by county, have allowed many borrowers to stay below the more expensive jumbo loan amounts. While FHA loans also take into consideration recent credit history, they are not Fico score driven, which aids weak credit borrowers.

The “declining market” guidelines, which were a blanket reduction of loan to value limits in certain states have also been eased. They no longer exist for conforming loans, and Jumbo loans are restricted on a county by county and product basis, rather than per state.

Also, there is still a market for no income, no asset verification mortgages, poor credit, and or foreign nationals. The key is loan to value, which requires a significant owner’s contribution if you are purchasing, or solid equity in your home if you are refinancing.

The housing market continues to show expected declines on a year over year basis in both units sold and values, but it varies within states, within counties, and even within towns. There are very good buying opportunities for informed, patient buyers. Do your research.

If you have an adjustable rate mortgage coming due within the next year or two, I would strongly suggest considering refinancing now. I say this for two reasons. One is the aforementioned inflation possibilities that could lead to higher interest rates. The second is the London Interbank Offered Rate (LIBOR) which is the index that most ARM’s are tied to. Although it did not get too much press, this rate was kept artificially low due to incorrect reporting by member banks. Since the time of the discovery in late spring, the LIBOR rate jumped over .5%. I would be happy to put together an analysis for you if you have an adjustable rate mortgage that compares and contrast the cost of refinancing before your mortgage adjusts relative to various incremental rate increases, and provide you the break-even in number of months. I have already designed the template.

Last, if you have not already done so, I again urge you to join my automated “rate watch” program so that I can notify you when it makes economic sense to refinance. This takes the burden off of you monitoring rates and crunching the numbers, and puts it on me and my system. It is particularly important in this volatile market when a rate drop may last only a day or two – if not less. You can go to my past posts for more details. Or just shoot me an email letting me know that you want to be included, and I will provide you the information I will need about your current mortgage. It should take you less than a minute to provide.

Again, please feel free to contact me with any questions or scenario, and if you are already working with a different Chase Loan Officer, please continue to give him or her your support.

Regards, and Happy 4th!

- Greg
Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.

The Sub-Prime Mortgage Fiasco - Part VIII

2008-05-14T12:46:00.000-07:00

Since my last market commentary, we have continued to see unprecedented turmoil in both the mortgage and housing markets. After several months of frequent changes in mortgage guidelines, I am beginning to feel confident that we are settling in to the new market reality, and that the pace of change will slow. At least I am no longer looking over my shoulder on a daily basis to see what the next shoe to drop will be.

The shakeout from the sub-prime fiasco has not been pretty, and has had four major effects:

Mortgage products:

Sub-prime – virtually not existent
Limited documentation loans – Virtually non-existent
Home Equity Loans – Decreased maximum loan to value (LTV) allowed, reduced maximum debt/income ratios.
Prime Loans – Increased documentation and lower maximum LTV’s. The new LTV requirements are perhaps the most significant change as buyers may not have enough equity to put down on there purchases. In addition some borrowers who want to take advantage of the current refinance market cannot because the value of their home may have fallen, or the guidelines themselves have changed and they do not qualify under the new LTV’s.

Rates: While the Fed has continued to cut the discount rate over the last several months, and the 10 Year Treasury bill has dropped as well, there has not been a correspondent drop in rates. While they are still historically very low, there is a certain “risk premium” built into the rates, as investors are leery of mortgage backed securities. I see this weariness lightening up recently. Rates can be further classified into 4 separate categories:

Conforming Loans – These are Fannie Mae and Freddie Mac backed mortgages up to an amount of $417,000. Fannie Mae and Freddie Mac have recently introduced risk based pricing where you are either rewarded or punished for loan to value and credit score. The lower the LTV, the better the rate, the higher the credit score the better the rate. The maximum loan to value is typically 92% - 97%, but may be 5% less depending upon whether you are in a “declining market”. This will be address later in the update.
Jumbo Conforming – Fannie Mae and Freddie Mac have finally acted upon the much reported temporary increase in conforming loan limits above the $417,000 traditional loan limit. This increase is for 30 and 15 year fixed products, and the limit varies depending upon the county you live in. In high cost areas the limit may be as high as $729,750. Although there is a slight premium above the traditional conforming loan rate, it is a great alternative to Jumbo loans, and should be of particular interest to any borrower with an Adjustable Rate Mortgage in this loan range who is interested in changing to a fixed rate product.
Jumbo Loans. – There is still little if any secondary market for Jumbo mortgages (>$417,000), and most banks are keeping these in their own portfolio. The 30 year fixed is priced a full point above the conforming loan limit, which is about .5% higher than historical differences. The 5 Year ARM has very good pricing.
FHA Loans. They are back – and without stigma. The government has really stepped to the plate on this one. Loan limits have been increased (again depending upon county), the rates are in line with conforming rates, they are not credit score sensitive (although you need a recent history of timely payments), and you can borrow up to 97%. It is even possible to finance 100% of a purchase. There are no income maximums.

Housing: There is no denying that housing has continued to decline, and it is unclear if we have reached the bottom. The selling of foreclosed homes in certain areas has brought down values, and the tightening of credit criteria has taken some buyers (demand) out of the market. However, real estate is still local, and some areas are stable or increasing, even within “declining markets”. The pace of decline in new housing starts is beginning to slow, and hopefully will soon reach the level which in the past two housing downturns marked the end of the decline.

So what does it all mean to you?

Now more than ever, know yourself, and know your property or contemplated property. Rates are still historically very low, but it is very important to maintain solid credit, and to be able to document all income and assets. This will help both in getting approved for the loan and your rate.

Find out if your current home or the one you are contemplating buying is in a “declining market”. A declining market is one determined by Fannie Mae or a bank and is determined by economic forecasts that their will be continual decline. If the property is in a declining market, maximum loan to values are reduced by 5%. The declining markets are based upon county and not zip codes. As stated before, there are stable and increasing areas within these counties, but the county findings stand. If you are interested in whether you are in a declining market, send me your county and state and I will let you know.
If you are purchasing, keep your pre-approval letter up to date, and make sure it comes from the bank providing the loan, and not a broker. As underwriting criteria changes, if you qualified for a loan yesterday, you may not today. It is important that your lender stays on top of your file, and knows the guidelines.
If you are considering refinancing, be prepared to act swiftly. Rates are incredibly volatile, and change daily, and often inter-day. A rate that you thought may be available to you at one point in time can quickly go away. If you have not joined my rate watch program, please do so. I have successfully refinanced a large percentage of those who have joined my rate watch, as I have automated a daily rate watching program for them – when the rate reaches their desired target rate (typically .25% or better below their current rate, with no points and no closing costs) we pull the trigger. For more information, please read my past posting specifically on the rate watch program.
Be prepared for continued rate volatility. Even the hint of a stengthning economy or inflationary fears creates quick unfavorable rate increases.

As always, please feel free to pass this email along to any friends, family or co-workers who you feel may benefit from the information. And please feel free to contact me with any questions and comments. If you are already working with a Chase Loan Officer, please continue to support him or her.

greg.d.dwyer@chase.com

Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.

2008-02-27T11:35:00.000-08:00

The fallout from the Sub-prime fiasco continues to be a mess, as yesterday’s report on housing sales and prices continues to be depressing for the consumer.

A cool new term economist are using is “negative feedback loop”. Great phrase to throw out at a cocktail party. This is a behavioral pattern that is dampening both the housing market and the economy. When prices fall, buyers become apprehensive, creating less demand, further reducing prices. This is magnified by an increase in foreclosures which increases the supply of homes, and tightening credit standards by banks which creates a smaller qualified buying pool, again reducing demand. The result is further downward pressure on home prices, and increased consumer negativity – creating another loop.

In reality, while home prices are falling the perception of a horrendous market may be worse than the reality for most of us. Perhaps it is because of the election year that we are hearing so much about foreclosures and people loosing their homes. While we keep seeing headlines of huge percentage increases in foreclosures, it is an increase of a very small percentage to begin with. Therefore, the actual percentage of homes being foreclosed upon is very small, particularly if you take into consideration that it has been reported that 30% of homes are owned outright with no mortgages.

For the great majority of us, it is the tightening of credit markets due to the foreclosures and sub-prime mess which effects us most – in the form of consumer confidence and reluctance to spend that effects the overall economy, and more difficulty refinancing or purchasing a home. The biggest change in the mortgage credit market has been in loan to values. For a Jumbo Loan (>417,000) banks are requiring between 10% and 15% equity.

So what does the credit and housing markets hold for you in the coming months? Both uncertainty and opportunity.

1. Home buyers. If I was buying a home, I would be thrilled. I believe the national average is now a decline of over 10% since market highs. I equate this to entering the stock market at a time when the stock averages were off their record high points. Just like a stock investor, I would look for value, and a long term hold. For most of us, a house should be a home first and an investment second.

2. Refinancing. I expect continued volatility in the interest rate markets over the next several months. To continue the analogy of the stock market, instead of an investor, I would be a trader – looking for a quick profitable trade. Volatility creates opportunity. During the month of January, I was able to refinance many of you who joined my “rate watch” program into lower rate programs with no points and no closing costs – essentially giving you free money. Many of you hesitated, expecting the anticipated Fed rate cuts to also have a correlating effect on mortgage rates. I do not understand this hesitancy.

With a no point no closing cost loan, there is nothing to lose and everything to gain by refinancing. There are no prepayment penalties, so if rates go down further, you can refinance the very next month after closing into a lower rate – again at no cost. If rates go down prior to closing but after you lock, we have a very generous renegotiation policy to lower your rate – again no risk.

I have also come to realize that the general population has a belief that there is a direct correlation between the Fed lowering its overnight rate, and mortgage rates. There is not! Particularly with long term fixed rates. The Fed rate cuts only have a direct correlation to the interest rates on credit cards, and most Home Equity Loans which generally are tied to Prime rate which follows the Fed rate.

Mortgage rates, particularly the 30 year rate, is more closely correlated to the 10 Year Treasury Rate. Mortgage rates are driven by the demand for the “risk free” 10 Year Treasury, and the relative risks associated with mortgage backed securities compared to the 10 Year Treasury. In a strong economy investors are willing to take more risk and therefore the rate needs to be higher for the 10 Year to attract investors. In a weak economy, investors worry, and seek safety in the 10 Year, reducing the yield or interest rate. When the Fed starts talking about rate cuts, they are usually doing so because the economy is weak. It is during this time of talk and confirmation of a weak economy that rates are lowest. If the actual rate cut serves to stimulate the economy and investor confidence, the 10 Year (and interest rats) will go up after the Fed cut. This has happened with the last 3 Fed rate cuts.

Following you will find a graph of the 2 weeks prior to and after the last rate cuts. The graph contains the rates of the 30 year fixed, 5 year conforming ARM, and 5 Year Jumbo ARM. As you can see, the rate on the 30 year fixed decrease prior to the Fed emergency .75% rate cut on January 22, and went up thereafter, decreased in the days leading up to the monthly January 30 meeting where they cut the rate by a further .5%, and then went up thereafter.

3. Current Interest Rates – While rates are at historical lows, they are being pressured by the fear or inflation creeping into the market on the latest reports, creating an upward surge in recent weeks. As I have stated many times over the past several months, inflation has been my biggest concern as to rates. It continues to be an ongoing battle between a weak economy that will help lower rates, and the presence of inflation that will hurt them. The pull between the two of them is why I expect volatility in the market.

4. Rate Watch: For those of you who are on my rate watch list, I encourage you to provide me a contact phone number to go along with your email information. One the day of the severe rate drop in mid January I contacted those who could benefit by email with an analysis of their savings, and by the time over 30 of you replied back, the opportunity was missed. Although there is no cost to locking a rate, I will not lock a rate for you without a predetermined target rate ahead of time, or permission by email or phone call.

Those of you who are not on my automated “rate watch” list, I urge you to join. It will only take you a few minutes to provide me with the information I need that may literally save you thousands if not tens of thousands over the life of your mortgage. For the uninitiated, I have developed an automated system for keeping track of my clients’ current rate vs. market rate, and alerting them with a detailed analysis of their savings when rates are at a level to refinance with NO CLOSING Costs. It is effort free, and alleviates the need for you to keep track of interest rate changes and current no cost rates. The information I need, which can be emailed, is as follows:

- Estimated value of your current home;
- Property type (condo, single family etc);
- Occupancy type (owner occupied, second home, rental, etc.);
- Balance on your current mortgage(s);
- Rates on your current mortgage(s);
- Mortgage Product(s) – 30 year fixed, 5 Year Adjustable, HELOC, etc. If variable, when d0es your mortgage adjust?
- Rate and Term or cash-out refinance. If you have a first and second mortgage and you would like to consolidate them, it is considered a cash-out refinance unless you acquired the mortgages at the same time, or you have not drawn down against the second mortgage in the last 12 months.
- Estimated credit score.
- Any other factor that you think is important that I know.

As always, please feel free to pass this email along to any friends, family or co-workers who you feel may benefit from the information. And please feel free to contact me with any questions and comments.

Regards,

- Greg

greg.d.dwyer@chase.com
800442-7343 x262

Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.

The Sub-Prime Mortgage Fiasco and What it Means to You - Part VI

2008-01-16T07:52:00.000-08:00

The good news: Interest rates are down substantially, and if you received a mortgage in the last 2 years, want to combine first and 2nd mortgages, or you have and adjustable rate mortgage, now is the time to refinance.

The bad news: You may not be able to!

That may be a bit of an exaggeration for most borrowers, but the most substantial fallout of the sub-prime mortgage fiasco is that due to tightening credit standards, many qualified borrowers who are eligible to refinance simply can not.

As usual, the sins of a few (borrowers who should not have borrowed, lenders who should not have lent, and illiquid real estate investors) are being paid for by the rest of us solid home owners and would be home owners. The net effect to date:

Stricter lending guidelines: More detailed documentation of income and assets; lower loan to value minimums, less availability of 2nd mortgages and a trend towards the need to pay mortgage insurance for high loan to value mortgages.
Reduced home values: While easy credit, low rates, rising home prices, and investor speculation drove up home prices (it seems as if you had a pulse and a credit score you could get a mortgage), tightening credit and less qualified buyers are part of force driving housing values down.
Some qualified buyers can not refinance into lower rates: If you received a high loan to value mortgage, and/or your property value declined you may not be able to refinance because your loan to value ratio is now too high – particularly with lenders reducing the loan to value ratio’s they allow.
Higher Interest rates: The last time the 10 Year index was where it is today (4.25%) interest rates were .5% - 1.75% lower, depending upon the product. The reason for this is twofold. First is a general risk premium associated with buying mortgages as an investment – due to the current mortgage industry problems. The second is profitability. Agency loans (<$417,000) purchase by Fannie Mae and Freddieito Mac are now charging a premium for high Loan to Values and/or low credit scores to offset their previous losses and risk associated with these loans. Jumbo (>$417,000) rates are higher to offset the risks of banks keeping these loans on their balance sheets, as there is still no secondary market to sell jumbo products.
Less Competition: With many brokers, smaller lenders, and even Countrywide out of business or no longer in the market, there are less lenders for borrowers to turn to. I think long run this is positive, as it was the brokers and those companies that went out of business that caused a majority of the problems we currently face. And as super sports agent Scott Boras so famously said “it only takes two to make a competition”.

So what should you do? If you are thinking of refinancing, act now. Credit policies are tightening by the week. You may qualify for refinancing today, but not tomorrow.

If you are thinking of purchasing or refinancing, have all of your ducks in order. W-2’s, pay stubs, bank and brokerage statements, etc.

If you refinance, refinance with no points and no closing costs. Many of you are hesitating because you believe rates may go down further still. If you refinance with no points and no closing costs and rates do go down, simply do it again. This is your hedge. An important note: rates dropped on expectations of the last 3 rate cuts – and then rose after the actual cut due to other over riding economic news. Right now we have a tug of war between a weakening economy – which may lead to lower rates, and fear of inflation – which leads to higher rates. There are also indications of the worst of both worlds – Stagflation, or a weakening economy and inflation.

For those of you who missed it, I have initiated an automatic “rate watch” program which takes the burden off of you to both calculate at what rate it is advantageous for you to refinance, and then to monitor the rates on a daily basis. My program and I do that for you. If you are interested, please provide me the following to the best of your ability and I will initiate beginning today. I have been able to offer lower rates with no points and no closing costs to over 35% of those who have signed up. The rest procured their mortgages at a more advantageous time.

Estimated value of your current home;
Property type (condo, single family etc);
Occupancy type (owner occupied, second home, rental, etc.);
Location of property;
Are you in a mortgage tax state?
Balance on your current mortgage(s);
Current mortgage product (fixed, 5 Year ARM, etc). If variable, when does your mortgage adjust?
Rates on your current mortgage(s);
Rate and Term or cash-out refinance. If you have a first and second mortgage and you would like to consolidate them, it is considered a cash-out refinance unless you acquired the mortgages at the same time, or you have not drawn down against the second mortgage in the last 12 months.
Estimated credit score.
Any other factor that you think is important that I know.

I look forward to hearing from you.

Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.

"RATE WATCH"

2007-11-26T15:06:00.000-08:00

No news on the sub-prime fiasco today – although the fallout is still a daily story. Instead, I would like to focus on a new service I have developed.

Over the past several months many borrowers have contacted me regarding refinancing of their current mortgages. Their desire to refinance was based upon multiple reasons - the turbulence in the mortgage market, the tightening of credit, the public awareness of fluctuating rates, Adjustable Rate Mortgages coming due, and just the basic economics of “if I have a lower rate, I will save money”.

I am happy to announce that after several weeks of work, I have now automated the process of keeping track of all the variables that contribute to determining the interest rates that are available to a particular borrower. I am formally launching my “rate watch” program. The timing is excellent, as conforming (<$417,000), rates are at there lowest in 2 years.

Although the program is fairly complex, what it does is simple. It monitors for me (and you) interest rates on a daily basis, including all the important factors that contribute to an individual clients’ rate and closing costs. It then generates a daily report of those customers who are in a favorable position to refinance. I can then contact you by either phone, or email and let you know that market conditions are favorable for refinancing. You no longer have to watch rates and crunch the numbers yourself. I (or the program) will do that for you. Information you will receive include rate, payment, mortgage program (fixed, adjustable, interest only, etc.), and estimated closing costs. It will also include the rate and payment with no closing costs, as well as a break-even analysis to determine if it is beneficial to pay closing costs or not.

If you have an Adjustable Rate Mortgage approaching its adjustment date within the next few years, I can also provides you an analysis showing you the risk reward of refinancing now –even if it is at a rate higher than you currently have, verses waiting until the termination date and risking a higher rate at that time. Last, if you currently have a first and second mortgage, I can perform an analysis to determine if it is worth combining the two mortgages into one lower rate mortgage.

If you would like me to put you on my “rate watch”, please provide me as much of the following information as possible.

Estimated value of your current home;
Property type (condo, single family etc);
Occupancy type (owner occupied, second home, rental, etc.);
Location of property;
Are you in a mortgage tax state?;
Balance on your current mortgage(s);
Rates on your current mortgage(s);
Rate and Term or cash-out refinance. If you have a first and second mortgage and you would like to consolidate them, it is considered a cash-out refinance unless you acquired the mortgages at the same time, or you have not drawn down against the second mortgage in the last 12 months.
Estimated credit score.
Any other factor that you think is important that I know.

All of the above are critical to an accurate quote. Rates have fallen fairly dramatically in the last week – despite the risk premium attached to mortgage backed securities. I look forward to hearing from you.

The Sub-Prime Mortgage Fiasco and What it Means to You - Part V

2007-11-10T07:01:00.000-08:00

5 months and still in the news. The only positive aspect of the Sub-prime mortgage fiasco is that it gives me continued relevant mortgage and housing material to provide to you. Once again sub-prime related issues are dominating the financial news market. In recent weeks we have seen huge mortgage related write-offs by both Merrill Lynch and Citi (costing both CEO’s their jobs – nice severance packages though), as well as continuous problems with Countrywide and Washington Mutual, and losses by both Wells Fargo and Indy Mac. Yesterday two financial stalwarts, AIG and Morgan Stanley also announced mortgage related write downs – even though they are not direct lenders.

By comparison, Chase’s mortgage related write-offs were less than most analyst estimates, and we showed a solid profit for the most recent quarter. Relatively speaking, we are doing quite well.

So again, what does the renewed sub-prime mortgage facts and fears mean to you, and the mortgage and housing markets? Following, please find this months opinion.

Mortgage Related:
Conforming Loans (<$417,000). Thank goodness for Fannie Mae and Freddie Mac and their quasi government guarantee on these loans. Rates fluctuate almost daily, but in a limited range. For the last 60 days they have stayed between 6.125% and 6.375%. There is a constant battle between a slowing economy and potential Fed rate cuts which favor lower rates; and inflationary fears that lead to increased rates. The periods leading up to each of the last two rate cuts resulted in declining rates as the Fed meeting approached, followed by rising rates within days after the meeting.

Jumbo Loans (>$417,000). As stated previously, there is no secondary market for jumbo loans. The need for banks to keep these loans on their books forced an initial run up in jumbo rates. The across the board increase in jumbo rates that borrows pay combined with the total 75 basis points Fed reduction in the rate that banks have to pay for the money they borrower means one thing – big profits. Banks want these loans on their books. The key is to have a strong balance sheet to be able to underwrite and retain these loans. Fortunately (here comes my first plug) Chase has a very strong balance sheet. We are also starting to see the yield curve on mortgages steepen, meaning a wider spread in rates between shorter term Adjustable Rate Mortgages (ARM’s) and 30 year fixed mortgages. Our rates (this is the last plug – I still thing our rates are the best on the street) for 30 year fixed mortgages are in the mid-upper 6%, and our 5 and 7 year ARM’s are well under 6%.

Home Equity Loans – The recent rate reduction has reduced interest rates on Home Equity Lines of Credit by .25%. However, underwriting standards are getting tougher, and the total loan to value maximum is lower.

Mortgage Rate outlook. Call me a pessimist, but I am fearful that longer term, rates will begin to rise. Not terribly high, but higher than the current market. I think inflation will win out over a slowing economy if oil prices remain at their current levels. Although oil and wholesale food prices are not considered in calculating core inflation, I do not know how the ripple effect of higher prices of each can not ultimately filter through the economy. It would take a very large increase in our productivity to offset these price increases. I also have a secondary fear that you do not hear much about. With the weakening of the dollar and the gaining stability of emerging markets, $US backed debt securities will be less attractive to foreign purchasers of mortgage backed securities. Interest rates may have to be higher to attract these buyers.
Underwriting. Lenders are tightening their underwriting standards. Loans on the peripheral may be rejected, where previously they have been accepted. First time home buyers may have fewer options. Appraisals and appraised values will be more thoroughly scrutinized. It is important that you have a good loan officer who can prepare a solid credit write up for underwriters review.

Lenders – Aside from the continued number of direct lenders and brokers that are closing their doors, as mentioned earlier, many banks are getting pummeled as they deal with unprecedented mortgage write downs. Countywide can’t escape the news as even their CEO’s huge compensation is being bashed. Andrew Cuomo, the Attorney General of New York has started an investigation of Washington Mutual for colluding with appraisers to force appraisers to inflate home values. He has recommended that Fannie Mae and Freddie Mac not purchase Wamu loans unless they get separate 3rd party verification of home values.

Continued Credit Market Woes – The market is cautious of other shoes to drop. In addition to the expectation of more sub-prime write-offs, there are other debt related securities to worry about. The first is a mortgage product called an option ARM – a product I spoke about in my September message. As a reminder, option ARM’s allow the borrower 4 different option payments – including an introductory rate as low as 1%. The difference between the introductory rate payment and the effective or market interest rate (which is currently over 8%) is added to the mortgage balance each month. This is known as negative amortization. The Wall Street Journal ran a lengthy article at the end of October about option ARM’s in general, and Countrywide specifically, and their exposure to rising delinquency rates. Many, if not the majority of option ARM mortgages were low documentation mortgages. In addition, they often had loan to values approaching 90%. The perfect storm may be brewing. Falling home values, increasing mortgage balances, and payments that will reset (increase) to market rate over the next several years. It is estimated that between 2009 and 2011, $229 billion of option ARMS are scheduled to adjust. While the amount of option ARM’s originated were less than half the amount of sub-prime loans, and the delinquency rate has not approached those of sub-prime mortgages, these loans bear keeping an eye on, as the payment shock when the rates adjust to market rate is huge, and borrowers may not be in a position to sell their homes. Countywide has been the leading provider of Option ARM’s and Washington Mutual is also a big player in these loans.

Housing – The Market remains week October Existing home sales were off more than 36% from record sales in October 2005, and down 27% from last year. Toll Brothers reported this morning that for the first time in company history they will be taking a loss for the quarter for the first time in company history. In addition, for the first time in company history, cancelled contracts were greater than new contracts signed. The Biggest weakness was high end homes in the South and West. Tightening credit standards and the reduction in the availability of reduced documentation loans is affecting the market, as there are less available buyers. State legislation of mortgage brokers has the potential to make the pool of qualified home buyers even smaller. Today, Massachusetts is set to approve a law that severely restricts the ability of mortgage brokers to operate in Massachusetts. While they are my competitors, they fill in the nooks and crannies for borrowers that do not fit the profile of traditional banks like Chase. Without brokers filling these needs, it will further erode the number of home buyers, and further depress the home market. While the intention of Massachusetts may be good, this law will prevent the consumers that Massachusetts is trying to protect from even securing a mortgage, and will hurt home sales.

So what does this mean to you? Expect fluctuating rates over the next several months. Much like the stock market has fluctuated with varying economic data, mortgage rates will as well. If you have a variable rate mortgage, or are interested in consolidating a first and second mortgage, consider doing so now.

Work with a bank, not a broker. As evidenced by the anticipated Massachusetts law, brokerage firms may begin to be forced out of business. In addition, due to larger default rates with loans originated from brokers than by bank loan officers, many banks are reducing or ending their relationship with brokers.

If you are buying a house as a primary residence or second home, do not worry too much about deteriorating prices. You are buying a home, not an investment. Over time, real estate has always appreciated. One of the best pieces of advise I have ever received was not to count my house as an asset as part of my wealth. The reason for this is that you will always need a place to live. The value of the house should only be counted for your estate – or as part of your kids’ wealth.

As always, I always welcome your comments. If you or any of your friends, family, or co-workers is in the process of purchasing a home or refinancing, I would welcome the opportunity to speak with them.

Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.

The Sub-Prime Mortgage Fiasco and What it Means to You - Part IV

2007-10-12T09:32:00.000-07:00

Last month, I addressed the “stability” that had returned to the market place after the effect of the sub-prime fiasco and other credit woes rocked the financial markets in early and mid-summer. One month later, there is continued stability, but far more restrictive credit market, as well as some interesting collateral damage from the sub-prime problems. Following, please find this months summary.

Borrowers: – If you are a traditional “vanilla” borrower in the market for a conforming loan (<$417,000), with good credit, a strong loan to value ratio, and full employment, you remain in good shape. Rates have held steady over the past month, with very little difference in 30 year Fixed and Adjustable Rate Mortgages. Rates are still at their lowest since early spring. Borrowers with poor credit or without the ability to document income or assets will have very few places to turn. If you do manage to pass underwriting expect very high interest rates. Sub-prime rates may be as high as 12% - 13%. Products: Jumbo mortgage (>$417,000). Rates have dropped slightly as hoped, but in my opinion there is still room for rate improvement, as both banks and investors realize that the majority of jumbo loan borrowers are the cream of the crop – high income, good credit scores, and modest loan to values.
ALT-A (No Doc, Stated Income, Stated Asset, etc). There is continue fall out, as this market has been almost eliminated, and those still offering these products, including Chase, continue to tighten guidelines. Probably an over reaction, but it may take many months, if not longer, for lenders to re-enter this market.
FHA – The only growth spot for lenders, as many borrowers formerly steered towards higher rate sub-prime loans find they qualify for this government backed agency.

Lenders: - There is continued fallout as many lenders and brokers simply shut their doors. This is for 3 reasons.
Small lenders lines of credit from which they fund loans are being cancelled.
Brokers - Banks who wholesale mortgage products to brokers are canceling relationships or holding them to tighter underwriting standards than the banks retail arm, as they are discovering much of the abuse and “bad” loans were generated by brokers.
Economic – Some lenders and brokers without alternative streams of revenue are simply closing shop as revenue does not meet expenses, and they can not weather the storm.
Headline News – Countrywide and WAMU continue to receive horrendous press as their business and lending practices and/or treatment of trouble borrowers are further investigated.

Home Prices: - As expected, August home sales reports were disastrous:
New home sales and prices fell the most, with the greatest percentage drop in prices in over 20 years. Cancelled contracts are escalating.
Existing home prices faired better, with smaller declines.
Depending upon your perspective, the numbers may have been skewed by the sale of foreclosed homes included in the numbers. The drop in average price for those homes offered by realtors was not as dramatic.
The numbers are very regional. In the Northeast, there was actually a slight increase in average prices.

Collateral Damage
The sub-prime mortgage spread to have international ramifications, not just in the amount of sub-prime debt purchased by international investors, but by foreign banks and institutions that participated in the lending practices.
The home rental market. Rents are increasing due to an increased number of people who do not qualify for purchase mortgages, and from an unanticipated reduction in rental units due to foreclosures. When a bank forecloses on a home, they typically want the units empty. Therefore, upon taking over a foreclosed property, banks are immediately evicting tenants. Many of the foreclosed properties are 2-4 family units and small commercial residential units that investors purchase with little or no money down, and low introductory rates. With rates adjusting higher, and values falling, the owners can not refinance or sell their properties. Many of these properties are standing empty.

So again, what does this mean to you? Not much different than last month, with the exception of a little more predictability, and in many areas perhaps the bottom of the market.

If you are a home buyer, chose to work with a bank for your mortgage. Banks have a diversified stream of income, and are required to keep a strong balance sheet and reserves.
In many areas, real estate prices may have reached bottom. This could be the time to act, as sellers are tired or houses lingering on the market, and most have been priced reasonably. This may be a time of opportunity.
If you have an adjustable rate mortgage whose initial rate expires in the next couple of years, consider refinancing NOW! After an initial drop in rates with the Fed cut of the prime rate (it lasted one day), inflationary fears negated the hope for continuing falling rates. It will be a battle over inflation, a weakening economy, and international competition for asset backed debt that will determine future interest rates.
If you are a real estate broker – Remember, make sure that your pre-qualification letters are from a bank, not from a broker or mortgage company. At the least, have your clients provide a back up letter from a bank. It was reported that 30% of brokered transactions in August did not close. If your client is stuck at the closing table without funds, nobody wins.

As always, I welcome your comments.

The Sub-Prime Mortgage Fiasco and What it Means to You - Part III

2007-09-19T10:09:00.000-07:00

Last month, I addressed the turmoil that existed while the nation was in the heat of the fallout from the sub-prime market fiasco. I provided a quick summary of how we got to where we were, and what the likely landing place would be for borrowers, lenders, mortgage products, and home prices. Today, with more “stability” in the market from the perspective of new underwriting guidelines and steadier interest rates, please find the following update:

Borrowers: – If you are a traditional “vanilla” borrower in the market for a conforming loan (<$417,000), with good credit, a strong loan to value ratio, and full employment, you are in good shape. These are the loans that are sold to Fannie Mae and Freddie Mac, quasi-government agencies. The rates on these loans are now at their lowest since early spring. Borrowers with poor credit or without the ability to document income or assets will have very few places to turn too. Products: Jumbo mortgage (>$417,000). There is very little if any appetite for secondary investor market to purchase these loans from banks and mortgage companies. Therefore, the rates have risen substantially since the beginning of the credit crunch. Those banks who are still willing to write jumbo mortgages are pricing them at an interest rate high enough to appeal to Wall Street at a later date and/or at a rate they are willing to hold in their own portfolio. These rates may differ greatly from bank to bank. A self-serving plug here - Chase has the lowest jumbo rates on the street.

ALT-A (No Doc, Stated Income, Stated Asset, etc). There is no good news. Many lenders are not offering these products at all. Those who are have increased rates, and dramatically tightened underwriting standards. Credit score minimums have increased, loan to value ratios have decreased. Less than full documentation is available for only specific types of borrowers.

Lenders: - Not surprising, a great number of lenders have gone out of business or have reduced their product offerings. Over 150 lenders have closed their doors. These were primarily mortgage companies and brokers who did not have a diversified business model, and whose sole income came from mortgages.. In addition to American Home Lending, which shut its doors in July, Country Wide is suffering a severe financing crisis, and is offering only Fannie Mae and Freddie Mac eligible products. Washington Mutual (WAMU) yesterday reported they expected further fall out from some of their prior lending practices. Both WAMU and Countrywide were significant underwriters of “option arm” mortgages, which gave borrowers a choice of 4 payment options, including one which allowed for a below market interest rate cash payment, with the difference between market payment and the cash payment being ADDED to the borrowers mortgage balance each month. This is known as a negative amortization mortgage. Guess which choice of payment the majority of option arm borrowers chose!

Home Prices: - There was a national decrease in the prices of homes for the last quarter reported. The size or percentage of the decrease varied from locale to locale, with some locations even increasing. It is not believed that the full effect of the mortgage crisis has been felt, as the turmoil in August would not have effected July and August home sales. Contracts for new existing homes signed in August were the lowest in the 6 years that records have been kept.

So again, what does this mean to you?

If you are a new home buyer, chose to work with a bank for your mortgage. Banks have a diversified stream of income, and are required to keep a strong balance sheet and reserves.
If you are looking for a jumbo mortgage – shop. Lenders are being forced to keep their own jumbo loans, and the rates may vary dramatically from bank to bank. Also, ask your loan officer to run some numbers splitting you loan into a maximum conforming rate loan ($417,000), and a second mortgage for the balance. I have found for many of my clients that this can provide a significant savings over one jumbo mortgage.

If you have an adjustable rate mortgage whose intitial rate expires in the next couple of years, consider refinancing NOW! Rates for conforming loans have dropped to their lowest since early spring, after a pretty dramatic run-up in the late spring and early summer. Again your loan officer should be able to provide you a cost benefit analysis.

If you are a real estate broker – Make sure that your pre-qualification letters are from a bank, not from a broker or mortgage company. At the least, have your clients provide a back up letter from a bank. It was reported that 30% of brokered transactions in August did not close If your client is stuck at the closing table without funds, nobody wins.

As always, I welcome your comments.

Sub-Prime Mortgage Fiasco and What it Means to You - Part II

2007-08-10T08:28:00.000-07:00

In March, I wrote a brief synopsis of my expectations regarding the sub-prime market fiasco and its effects on the economy, housing and mortgage markets. While I was correct in my assessment, I underestimated the effect on the credit market, and hence mortgage rates.

Rates have risen steadily in the past 3 weeks across all product sectors, particularly Jumbo mortgages (those above $417,000) and alt-a, or limited documentation loans. The reason is uncertainty in the market. Conforming loans (those under $417,000) have an implied guarantee of the government through Fannie Mae and Freddie Mac which have kept rates relatively low. Jumbo, alt-a, sub-prime, and Home Equity Loans (HELOCS) do not. Jumbo mortgages are up almost 1%!

Investors who purchase these nonconforming loans in the secondary market are fearful of the unknown, and are waiting for the other shoe to drop. The same dispersion of mortgages across the world to global investors which has served to keep rates low by spreading risk, has now come back to haunt mortgage rates as these same investors do not know if there will be further foreclosures and mortgage defaults that are as yet unreported. They also worry that the problems will creep up from the sub-prime mortgages into alt-a and prime mortgage products, as HELOC default rates have also risen. As investors half a world away in Dubai, Hong Kong, London, and other areas keep reading about sub-prime woes and its effect in hedge funds and international bank, their fear intensifies, and they perceive a heightened risk in investing in any mortgage backed security. As a result, banks and mortgage companies have to keep raising there rates until the reward is high enough to offset perceived risk.

The credit crunch has had an unexpected effect on mortgage companies as well. American Home Lending, a top 10 national lender shut it doors abruptly and declared bankruptcy. This was not a lender with a tremendous amount of sub-prime loans. Independent mortgage companies are at risk of not having their credit lines funded (which is the money borrowers receive at closing), and there are daily reports of borrowers having their loans pulled days before closing. Just this morning Country Wide and Washington Mutual said difficult mortgage market conditions are likely to hurt operations in the near term.

So what does this mean to you?

If you are beginning to look for a mortgage, utilize the services of a larger major bank. This may sound self-serving as a loan officer for Chase, but large banks have the balance sheet and resources to hold there own mortgages if there is no secondary market, and do not have to worry about their credit lines being funded.
If you have a pre-approval from a mortgage company or mortgage broker, get a back up pre-approval and application from a major bank.
If you are near closing on a mortgage, make sure that the funds will be available, and who is funding the loan i.e.: a major bank.

As always, I welcome your comments.

The Sub-Prime Mortgage Fiasco and What it Means to You

2007-03-30T11:19:00.000-07:00

The “sub-prime” mortgage fiasco which has been leading the financial news headlines for much of the past few weeks have led many people to ask “what does it mean to me?” I have read dozens of articles on the subject, and listened to many financial pundits. Following is my take away of what it may mean to you.

The general economy - The risk of loss has been spread over many institutions, hedge funds, and portfolios. While some financial companies will be hurt, the effect on the overall economy will not be severe. However, if the downstream effect of housing sales and home values are hindered considerably by the fall out, a further slow down in the housing market may lead to an economic downturn. Please see below for more details.

Mortgage Rates - The bloom is off the rose for mortgage backed securities, as well as other asset backed securities. Therefore, in order to attract buyers to mortgage backed securities rather than the safe haven of US Treasuries, mortgage backed securities yields and hence, mortgage interest rates have to be higher. These higher yields are already built into current mortgage rates. Without the problems created by sub-prime loans, current rates would probably have dropped lower.

Credit. –

“A” Credit – Those who continue to pay there bills on time, and have a credit score of over 660 will continue to be able to borrower without a problem.
“Alt-A” – For those whose credit may not be perfect and/or need to use alternative income, asset, or no documentation status, I envision a small change. Mostly a tightening of credit score minimums and/or loan to value minimums.
Sub-prime borrowers will have far less access to credit.
Government Intervention – Could have an effect

Home Values – The effect of the sub-prime market on home values should be fairly negligible overall, but is driven by locale. For instance, the overall number of sub-prime loans in the North East is far smaller than in other areas of the country. The effect of both foreclosures and the reduction of the sub-prime purchase borrowing pool will not have as much impact as in other parts of the country. In other region, a higher percentage of sub-prime loans and foreclosures will put more houses on the market – again with a smaller purchase base. More supply and less demand could force down already falling prices in these areas. If this spirals too deeply, it could affect the general economy as well.

I would enjoy hearing your thoughts on the fall out from the sub-prime defaults.

All Trends Begin In California

2006-03-27T07:46:00.000-08:00

Today’s article in the Boston Globe – “The Internet is creating do-it-yourself home buyers, but agents find it useful too” - addressed a subject that I mentioned briefly a couple of weeks ago.

The article gives some good examples of how home buyers, sellers, and agents are using the internet to their benefit. However, the section of the article that jumped out at me is the numbers. 77 % of home buyers search the internet for prospective homes, and 1/3 of agents business in California comes from the internet verses traditional sources.

All trends begin in California and migrate east. This is true for fashion, music, mortgages and I assume real estate. As an example, the proliferation of both adjustable rate mortgages and interest only mortgages began in California, and migrated to the east coast and other “hot” markets. With the demographics of first and second time home buyers ever younger and internet savvy, it is important that we all stay intoned to the evolution of internet related real estate sites, as well as establishing our own web based presence.

Is The Real Estate Industry an Endangered Species?

2006-03-06T13:25:00.000-08:00

You may have read “Freakonomics” authors Stephen Dubner and Steven Levitt article that appeared in the Boston Globe and New York Time yesterday – “If real estate is prospering, chances are your agent isn’t”. About the only part of the article that had any accuracy is that median income for realtor’s has fallen during the real estate boom to just over $49,000, that there are two many agents, and that technology is changing the landscape for buying and selling homes.

The authors begin the article insulting real estate agents by referencing a Department of Justice lawsuit likening real estate agents to cartels and mafia. They then go on to explain how a real estate agent only performs 4 real functions: Setting the price of your home, finding potential buyers, prepping and showing the house, and handling the negotiations and contracts. This whole process takes 40 hours, for which the selling agent and listing agent would receive $15,000 apiece on a $500,000 house, assuming a 6% commission.

By extrapolating the author’s numbers and assuming the median realtor has a 50/50 split with the house and has an average sale price of $500,000, the average realtor has 6.5 transactions per year. Or if you take their numbers and a 40 hour work week, the average realtor only works 6.5 weeks per year. So my question is what the hell are you guys doing the rest of the time?

The author’s also portrayed the real estate industry as “about to join the endangered species list”, due to the internet and on-line data. They incorrectly compared the industry to travel agents, and stock brokers, who were in some instances displaced by online do it yourself web sites. These are poor comparatives, as travel agents worked in non-critical, low risk transactions where the average time per customer was minutes. As for do it yourself stock trading, as soon as the stock market bubble burst, Joe Average “expert” stock trader quit trading, and licked his wounds, forcing many of the online trading companies to consolidate with larger full service brokers, or go bankrupt.

Instead of being viewed as a threat to the industry, real estate brokers should view the proliferation of online information and data as an advantage, not a threat. The need for expert marketing, pricing, counseling and handholding will never be displaced. You now have the luxury of more time (and time is money) as buyers can narrow down house choices prior to viewing them live. You can communicate with customers 24 hours a day by email, and they can respond at their leisure. Geography is becoming irrelevant. Customers can educate themselves, and verify information you provide. The difference is that the consumer will be more educated and informed (and sometimes misinformed). The key will be in maintaining expertise, and staying one step ahead of your customers, as they will be armed with information, knowledge, and questions for which you will need to be prepared.

The Real Cost of a Change in Interest Rates

2006-02-17T11:35:00.000-08:00

Everyone knows that a projected rise in interest rates is a concern for both buyers and sellers in the housing market. But what is the real, hard cost of each increase, and what does it mean to the buyer and seller?

The real cost is dependent upon the amount of increase (or projected increase), the size of the mortgage, and the length of time the owner is expected to hold the mortgage, their tax rate, and the investment opportunity loss of paying a higher monthly mortgage payment.

For the purpose of illustration, lets take a look at a typical mid-high end Greater Boston purchase. $1,000,000 purchase, 25% down, $750,000 mortgage. We will look at interest rates ranging from 6% to 7.5%, in increments of one half percent.

Interest Rate 6.00% 6.50% 7.00% 7.50%
Payment $4,497 $4,741 $4,990 $5,244
5 Year Total 269,798 284,431 299,386 314,647
10 Year Total 539,595 568,861 598,772 629,293
20 Year Total 1,079,191 1,137,722 1,197,544 1,258,586
30 Year Total 1,618,786 1,706,584 1,796,317 1,887,879

5 Year Difference 14,633 29,588 44,849
10 Year Difference 29,266 59,177 89,698
20 Year Difference 58,531 118,354 179,395
30 Year Difference 87,797 177,530 269,093

Present Value (6%)
5 Year Difference 12,615 25,508 38,664
10 Year Difference 21,967 44,419 67,328
20 Year Difference 34,041 68,833 104,334
30 Year Difference 40,677 82,252 124,673

The table above shows a simple exhibit of change in monthly payments at the various interest rates, as well as the total payments over a 5, 10 20 and 30 year period. It also shows the difference in total additional payments over the same time frame. Since there is a time value of money, we have to discount those additional payments. I have used 6%, which is conservative compared to historical stock market returns. It also helps offset not including the tax benefit of additional interest payments.

The effect of potential interest rate increases that both buyers and sellers need to consider is twofold. First is affordability and mortgage qualifying, as important debt to income ratio's increase. The second and more important is the present value of the cumulative effects of the additional payments. I call this purchasing power.

Under the above scenario, a half point increase in rate is the equivalent of paying almost $13,000 more for the home if the mortgage is held for 5 years, $22,000 if held for 10 years, and $41,000 if held for 30 Years. A full point increase would result in loss of purchasing power of $25,000, $44,000, and $69,000 over a the same time frames. Another way of looking at the analysis is that for a typical 25% down mortgage, the buyer stands to lose purchasing power of 1.2% to 4% for every half % increase in rate, depending upon the amount of time they hold the mortgage.

Buyers should be aware of potential loss of purchasing power while they await "home prices to fall" before making offers, or negotiating price with sellers. Sellers should be aware when deciding what price to put their house on the market, re-pricing, and negotiating with buyers.

Are Interest Only Mortgages Getting a Bad Rap?

2006-02-08T10:12:00.000-08:00

There has been a plethora of newspaper articles, television reports and radio discussions over the last several months condemning interest only loans. I have even had clients reject interest only products out of hand because they "heard interest only loans were bad". But are they really?

The "experts" who criticize interest only products cite the fact that most interest only mortgages are tied to variable rate programs. In the current environment of rising interest rates, the borrowers may face substantial increases in their monthly payment if the fixed rate period of the mortgage ends and they begin amortizing the loan. The experts fail to mention the substantial savings the borrowers had during the fixed period of the loan as compared to getting a longer term loan, or that the borrower can refinance into another interest only loan.

Where the criticism is justified is in those cases where the loan officer knowingly puts a client in an interest only loan as the only way that a client can qualify for the mortgage. Shame on the loan officer. If the loan officer explains all of the nuances and potential future payments and the borrower knows he may not be able to afford the future payments – shame on them as well.

When used correctly, interest only products is one of the most dynamic innovations that have ever come to home financing. Correct utilization is based upon cash flow management – not affordability of the purchase. A hidden gem of these products is that although they lower your "required" monthly payments, they do not restrict you from making payments to principal. But unlike traditional amortizing loans, when you do make extra principal payments, the monthly required payments is recalculated based upon the new balance, whereas the amortizing loans payment never changes. This in effect reduces future monthly payments.

So who benefits most from these loans? Professionals, executives, self-employed, and commissioned sales people. I work with both partners in law firms and executives who earn a minimal monthly draw or salary to cover daily living expenses. These clients need to manage cash flow, and a reduced monthly mortgage payment is very beneficial. They are also awarded a large year end distributions or bonuses - which they use to pay down a significant amount of their mortgage balance – which again reduces the minimum payment for the following year, increasing cash flow.

Commissioned sales people and the self-employed often have income that fluctuates from month to month. For such clients, I set up an amortization schedule over 30 years, 20 years, or whatever they desire, and let them know how much principal they have to pay throughout the year to meet the schedule. On good months they make extra payments, and on difficult months, they make the minimum required payment.
Those with short term outlooks also benefit, as there concern in minimizing monthly payments – not paying off the mortgage. These include builders, renovators, and in some cases, real estate investors.

It's all about Cash Flow!