As mortgages become harder to come by, with lenders ratcheting up income and down payment requirements, those starting out could get discouraged–or they could get together. Co-ownership of their home is becoming an acceptable way for promising young people to make a housing investment while prices are low. Most of them are in the early stages of careers and they fully expect to make more in the future. So why not make their initial home investment pay big as well?

Pros of Co-Ownership. Co ownership means that two incomes are used for qualifying, so the borrowers may buy a home that neither could afford on his or her own. Pooling assets for a larger down payment also makes them eligible for cheaper financing, lower mortgage insurance premiums, and better rates.

Pitfalls primarily come into play when there is a change in situation. What if one owner loses a job? Or if the co-owners are romantically involved and going their separate ways, things could get messy when business issues become personal. The worst problems can be averted by establishing an account for paying the mortgage, taxes, and insurance. This account should be built up until there are at least three months’ of emergency funds in it. It should be accessible only with the signatures of both owners.

Agree to Disagree by putting eventualities and consequenses in writing. If one party leaves, for example, will the property be put on the market? Rented? Rented to the remaining party? Can either owner sell his / her interest to someone else? Can that someone else move in?

Many people say it takes money to make money. In this case, it might take money to save money–spend a little with a lawyer before becoming a co-owner of a home.

It should have been hailed as good news. Instead, the move by 30 year mortgage rates back below 6% was largely overshadowed by other events:

• In quick succession, the government launched a huge mortgage bailout package and a half-point cut in interest rates, and considered direct intervention in banks.
• None of the above calmed financial markets, as stock market declines actually accelerated upon passage of the mortgage relief bill.
• Even the price of oil came under such pressure that OPEC called an emergency meeting.

So what is a mortgage shopper to do? Take advantage of lower rates, or stay on the sidelines until the world financial turmoil subsides?

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According to the Wall Street Journal, a new type of home  financing has come to town. And you don’t need equity to get it. It works this way: An investment company advances you funds–10 to 15% of the current value of your house. You make no payments. You have use of the money until you sell your home. Then, the finance company gets half of your equity. Some of them require that you pay back the funds you were advanced, others do not.

All of them require that you maintain and pay your taxes on the property, and that you don’t sell for a minimum number of years without paying a stiff penalty. In addition, you cannot refinance or take on additional home equity debt without their approval. However, if your home doesn’t increase in value you are not penalized and in some cases won’t even have to pay the loan back!

So, if you desperately need money and have no equity, this loan could be a life saver. Otherwise, it could be a very expensive way to borrow. Consider the following scenario:

You have a $500,000 home, and borrow $50,000 with an appreciation exchange loan. In ten years, your home is worth $750,000 (at less than 5% appreciation this is not an unbelievable picture). Well, you sell the home and have to repay the $50,000–and an additional $125,000, for a total of $175,000 to borrow $50,000 for ten years. If you invested that $50,000, you’d have to earn a return of nearly 13% to break even! Most people would consider 13% pretty expensive for mortgage financing. But it’s less than most credit card loans, many private student loans or small business loans.

 And it makes home value depreciation almost a good thing….

Mortgage rates, which had enjoyed a sustained downtrend through mid-September, rose for the second consecutive week, as of October 2, 2008.

This rise was despite the fact that the mortgage bailout bill seemed to have edged a step closer to passage by achieving overwhelming Senate approval. The rise also appeared to occur into the headwind of bad economic news, as factory orders were reported to have dropped sharply in August, while new jobless claims rose.

The contradiction is that the bailout bill is supposed to give lenders more confidence, while interest rates in general typically fall during an economic slowdown. Despite this, mortgage rates rose. So what is going on here?

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Most mortgage borrowers know that underwriters look at their debt-to-income ratios when determining how much home they qualify to buy. But most don’t know that Fannie Mae and Freddie Mac give them “extra credit” for any non-taxable income they receive. According to Fannie Mae and Freddie Mac underwriting guidelines,this income can be “grossed up” or increased by 25%. Because it’s not taxable it’s worth more to you–and more to your underwriter. So whether it’s a government pension, interest on muni bonds, Social Security, child support, or whatever–make sure you tell your loan officer that the income is tax-free. And be prepared to supply documents proving it. You might find yourself able to afford more than you thought.

Today the Federal Home Loan Bank released the 11th District Cost of Funds Index for 2008. At 2.693% it is lower than July’s index, which was 2.698%.

The COFI is computed from the actual interest expense by the Arizona, California, and Nevada members of the Federal Home Loan Bank of San Francisco that meet the Bank’s criteria for inclusion in the COFI (”COFI Reporting Members”). Interest rates on many adjustable rate mortgage loans are determined by this index.

This should be a source of relief to those with monthly ARMs (like many payment option ARMs) who can’t refinance due to a lack of equity in their homes. At least their rates are not increasing and have in fact dropped slightly. Homeowners who avoid the temptation of the minimum payment on these loans and make the fully-amortized payment most of the time don’t face the same well-publicized payment jump that others have.

As of September 19, 2008, HUD formulated an official “Buy and Bail” policy. This was done in response to a common fraud perpetrated on banks by homeowners in declining markets. They would buy a new house for much less than was owed on their current home, indicating on the application that the current home would be converted to a rental (and use the proposed rental income to qualify for the new purchase). Of course, once they got the new cheaper home they just gave the old house back to the bank–never intending to make both payments. The new policy was created to thwart such fraudulent activity while still allowing those with good intentions to buy new homes before selling old ones.

So if you own one home, are buying another as a primary residence, and wish to use FHA financing, you have new rules to deal with. If you are converting your current home to a rental property, you will be able to include the rental income in your ratios if at least one of the following is true:

1. You are relocating with a new employer or transferring to a different location for your current employer, and the new job is not within a reasonable commuting distance.

2. You have at least 25% equity in the existing property. This can be shown with a current appraisal (for example, you owe $150,000 on the property and an appraisal shows the value is $200,000). Alternately, you if you have paid down your mortgage to 75% of the original purchase price you also qualify to count rental income when qualifying for your new mortgage. So, if you bought a home for $200,000 and took a loan for $190,000, once you have paid the balance down to $150,000 you qualify to count the income. You will not need an appraisal and will not be penalized if your house value has decreased.

These guidelines allow those with little equity in their homes to convert them to rentals and count the income when applying for a new home loan–as long as they truly need to move. Those with more equity have no restrictions because it is less likely that they would abandon an assets in which they are substantially invested.

As congress debated the Wall Street bailout, there seemed to be an underlying assumption that some kind of package was necessary to put liquidity back into the mortgage lending industry. The general impression is that tougher lending standards have made mortgages scarce, and indeed, the number of existing home sales continued to slip in August. Taken at face value, these stories might be enough to scare potential home buyers out of the market, at least long enough for the bailout package to kick in. However, before heading to the sidelines, those potential home buyers would do well to ask two key questions:

• Are new mortgages really that scarce?
• Will things be better or worse once government rescue efforts take hold?

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Okay, politicians can rail against lenders all they want, as Massachusetts Attorney General Martha Coakley did today. She claims lenders aren’t doing enough for borrowers in trouble because they have not written down the loan balances (reduced the principals) despite the fact that home values have dropped. Well, don’t hold your breath, Martha. When housing values increased, did your lender get to increase the balance of your loan and share in your good fortune? No? Then why do you expect these companies (who are owned by shareholders who are regular folks just like you) to share in the losses created by mindless real estate speculation?

So if you have amortgage in trouble, claiming hardship just because your home value has gone down probably isn’t going to cut it. Not should it. If you want your lender to offer a constructive solution you need to be realistic as well.

There’s an old saying that it’s an ill wind that blows nobody any good. It applied this week, as the whirlwinds on Wall Street had an unexpected benefit for mortgage shoppers.

• Insurance giant AIG became the latest addition to the string of financial failures, the taxpayer cost of which is rapidly rising
• Leading economic indicators declined by more than expected in August
• Along with a slowing economy, inflation also backed off rapidly in August
• Lower inflation gave interest rates room to fall, so mortgage rates took another impressive step downward over the past week

While mortgage shoppers should not ignore the gathering economic and financial clouds, those lower mortgage rates should remain their primary focus.

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