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Your Best Interest? Don’t Think So

June 30th, 2008

You see these schemes all the time — promoted by financial planners, savings institutions, and yes, lenders. It can feel like if you aren’t on some plan to pay off your mortgage early you’re missing the boat or being financially irresponsible.

Some motives are plain. These people actually charge you to set up an “early repayment plan — in one case $3,500 for a line of credit and some software. So they naturally want you to believe that paying off your mortgage early is a good thing and that only they can help you accomplish this. Just tell these sales guys you’ll pass, thanks very much.

The next group of perhaps well-meaning “advisors” is simply very conservative with investing and the type of risk involved. But there is risk involved with every investment decision. Most economists will tell you that a company or a household is actually healthier financially when they are carrying a reasonable amount of debt and when the funds are used for investing in assets (like maybe a house? mutual funds? college?) that grow and pay off later. By putting everything into your home and leaving no extra for investing you have “all your eggs in one basket,” and as we have seen recently that’s not always safe or prudent. Keep in mind also that unless you have no other debt you are probably better off paying debt that doesn’t offer any tax advantages and carries higher interest rates.

The final group of those egging you on to pay off your loan early are lenders. They have two reasons for this. First, the more equity you accrue in your home the safer the loan is for the lender. Think a “cushion of equity” is going to protect you from foreclosure if you lose your job? NO, it makes it easier for the institution to recover its investment by foreclosing and therefore LESS likely that it will be willing to work things out with you. Safer for the bank, less safe for you.

Additionally, once you put your money into paying down your mortgage early–whether it’s making an extra payment each year, making payments every 2 weeks, paying a few extra dollars each month, or any other scheme–you no longer have instant access to that money. Guess what? If you need it, your bank will charge you to get your money back out of the home, in the form of fees for a home equity loan or line of credit.

So how do you accomplish the goal of paying off your mortgage early? Simply by taking whatever extra you are planning to throw at the principal balance but putting it into an investment account instead. There are planty of safe, conservative investment vehicles available for risk-averse or older homeowners. Younger ones can afford to go for higher risk / return strategies. Talk to an investment advisor about a plan that incorporates your goals and your comfort zone. With this plan, you have access to the extra funds without paying, your lender has less leverage should you experience financial difficulties, and when you are ready to pay off the whole shebang you can do it with the funds you have invested.

Home Price Declines Widen Home Equity Woes

June 26th, 2008

In housing and mortgage news this week:

Despite the bad news/good news nature of the above developments, they are not as contradictory as they might seem. They do, however, have markedly different implications for existing home owners and potential buyers.

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Lease Options: Help for Buyers and Sellers

June 25th, 2008

Lease options may become all the rage this year. While the potential pitfalls of this alternative method of selling a home kept it from ever becoming popular, its time may have come. Why? Let’s look at market conditions right now. We have the following:

· Mortgage lenders requiring larger down payments.

· Soft real estate markets in much of the country.

· Almost 9% of homeowners behind on their mortgage payments or in default.

· Risk-based pricing in conventional mortgage lending, meaning those with lower credit scores, smaller down payments, or buying certain types of property (like condos or manufactured housing) pay a premium for loans.

· The unavailability of loan products such as stated income financing.

All of these factors make it harder for buyers to purchase homes no matter how badly they want to take advantage of today’s lower prices. And that keeps sellers, real estate agents, and lenders out in the cold as well — a no-win situation for all. Here are the most common reasons lease options weren’t done too often in the past, and why you might want to consider one now if trying to sell your home:

· Real estate agents didn’t like lease options because the full commission isn’t paid until the transaction closes, and that can take several years. Well, these days any commission beats no commission — you’ll probably find an agent willing to work with you to close on a lease option sale. And unless you are very comfortable with real estate investing and contracts you will want some help — an agent or real estate attorney can help you close the deal.

· If property values continue to decrease, the tenants will probably decline to exercise the option. Or you may not complete the transaction if the rental agreement isn’t honored or if the tenants’ credit or other problems derail the purchase. Angry tenants who lose their deposits may damage the property. However, at least for now you get a tenant willing to pay more than the market rate and you may sell your home in the end as well. Again, a good real estate agent can help you vet your purchasers and increase your chance of a successful transaction.

· In the past, with easy financing terms available, buyers saw no reason to wait before buying a home — making the lease option unnecessary. Today, would-be homeowners may well have to improve their credit scores, pay off debt, save a down payment, or find a way to prove their income before they can get a home loan. A lease option allows them to lock in today’s lower prices while they do this, ensuring they won’t be priced out of the market if real estate markets get stronger. Being willing to accept a lease option increases your pool of potential buyers.

· In the past, housing prices rose so quickly in some parts of the country that sellers were unwilling to agree to a transaction that seemingly gave all the advantages to the buyer — locking in a lower price, taking so much time before closing, and ultimately having the right to walk away should markets soften. Today, many desperate sellers would be more than willing to accept a lease option if it gets their property sold — it beats being forced into foreclosure.

So if you have a home you need to sell and aren’t having any luck, offer a lease option to bring in buyers. And by enlisting the help of reputable and experienced real estate professionals to handle the contact, escrow, and property management, you can be a lot more confident in completing the sale of your property.

Down Payment Assistance: The Road to Hell Is Paved with Good Intentions

June 23rd, 2008

It should have been great. One of those human-interest, touchy-feely, warm fuzzy stories that takes the edge off all the human misery that opens a normal news broadcast. It’s a tear-jerker: hard-working Americans economizing, working overtime, and dreaming of the day they can buy their family a home. FHA was created to help these mostly worthy families accomplish just that, and it worked for decades. People could use an FHA loan to buy a modestly-priced home with about 3% down instead of the conventional 20% – the major obstacle for most first-timers. But this tale from the Wall Street Journal is no tear-jerker.

Some homebuyers apparently found 3% too much to save, and community groups decided that these people deserved help with that final hurdle. And many of them were in fact “deserving.” So the community groups created “down payment assistance” programs designed to either lend or give certain qualifying home loan applicants that last few percent so they could get their homes. Even home sellers and lenders got into the act — “helping” borrowers with their down payments in order to get the property sold and the loan approved.

The problem is that these well-intentioned actions really changed the risk profile of the borrowers – recent data compiled by HUD demonstrates that borrowers who have nothing of their own invested in their homes are far more likely to walk away from their mortgages than those with similar socio-economic profiles who put even 2 or 3 percent into their house purchase. These guys either weren’t qualified to become homeowners in the first place or were less inclined to continue to make their payments if it wasn’t going to cost them to walk away. So they walked and let the lender foreclose. And their neighborhoods suffered. And FHA got stuck with the tab. For the first time since the agency’s inception it’s insurance premiums will be insufficient to cover its losses.

So those looking for down payment assistance may have to look harder, and it may soon be gone altogether for the purposes of FHA lending. And taxpayers, get ready: Kentucky Senator Jim Bunning warns, “As soon as we finish this bailout for banks and borrowers, the next taxpayer bailout will be of the FHA.”

Mortgage Fraud Crackdown A Good Sign for Industry’s Future

June 19th, 2008

What’s striking about recent mortgage news is how much of it is dominated by stories about investigations and indictments related to mortgage scams. Federal authorities have announced a nationwide crackdown, and local authorities have been active in many communities as well.

There were other, less dramatic stories on the mortgage front:

These other stories are worth reviewing, but ultimatly they are best put in context by the crackdown on mortgage scams.

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Mortgages and Women — This Isn’t the 50s!

June 17th, 2008

A recent article in Glamour magazine warns women that even if they are smart and make a lot of money mortgages can get them into trouble. The article tracked the travails of three women who all end up concluding that renting is the way to go and that home ownership was a mistake for them. The idea is that, unlike for men, owning a home means more to women than just an investment — and that emotional response leads us to make silly decisions about real estate and mortgages. Okay, I’m going to throw up now…..

I have a problem with both the conclusions the writer draws and the facts of the piece–there are too many things that don’t make sense. The first example is a woman who makes nearly $100,000 a year, did not get a stated income or sub-prime loan, and had a mortgage payment of about $2300 per month. That is a reasonable housing expense ratio by most underwriting standards. Yet the author decides that the lender’s decision was irresponsible and that it had some duty to save the homeowner from herself.

And there are other details about the story that leave unanswered questions. First, it states that the homeowner’s reason for missing payments was getting bronchitis, then breaking a wrist — but this borrower lives in California, where everyone has state disability insurtance. And she is a nurse, which means she probably has decent medical benefits. Finally, the homeowner bought her property with nothing down but the lender foreclosed anyway–after about a year she owed them over $32,000 in arrearages–equivalent to more than a year of mortgage payments! That’s a long time to have a free roof over your head. And finally, one more fact that smells funny–with no equity the lender doesn’t usually foreclose unless the borrower is completely unable or unwilling to work through a retention plan. Don’t think we got the whole story, just the usual “blame the lender” theme.

The lesson? Don’t believe everything you read, and don’t let a magazine tell you you are incapable of making a smart financial decision.

Fright or Fact? The Press Keeps Us All Guessing About Stated Income Loans

June 12th, 2008

This is an unusual Daily Pick because the article isn’t from today. In fact, it was published in the Las Vegas Review-Journal almost a year ago. The article claimed that passage of a new law in Nevada would make it illegal to grant a stated income mortgage. The Southern Nevada Chapter of the American Bankers’ Association fanned the flames further, implying that investors who purchase stated income mortgages originated in Nevada “risk jail time.” Therefore, those with stated income mortgages would be unable to refinance them, those who need them would be unable to get them, causing a real estate catastrophe.

Well, there is a catestrophe in Nevada, but there is very little evidence that it is the result of stated income mortgages. And today the loans continue to be available in the state. Rather, the state’s property market collapse is probably the simple consequence of an oversupply of housing brought on by more construction and speculation than could be supported by population growth. And stated income loans continue to be available, although like all mortgages they are more difficult to get and may cost more.

The bottom line for anyone considering mortgage financing is to ignore the hype, speculation, and hysteria. If you want to know what’s available and what you have to do to get it, go to the source — a reputable lending professional can get you the latest mortgage market pricing, product information, and underwriting guidelines — no rumor mill needed.

Jump in Mortgage Rates Overshadows Rebound In Application Activity

June 12th, 2008

A sharp jump in mortgage rates was the week’s most significant development.

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Local Governments Deserve Some Blame for Real Estate Chaos

June 9th, 2008

It has largely been ignored in the press — the role that the huge increase of new construction in some locales must have played in the real estate crash and subsequent mortgage havoc. Local governments in many areas seemed to care little about anything other than the increase in tax revenue they could realize when developers added houses to vacant land. A recent article in Seattle’s Puget Sound Business Journal appears to confirm that uncontrolled growth in response to rising home prices played a large part in the subsequent crash and damage to the economy.

Seattle and San Diego are two West Coast cities that experienced the mortgage crisis very differently. While builders in San Diego took out approximately 9700 building permits for single family residences each year from 2002 to 2006, Seattle granted only about 1,300. Growth-control legislation kept the lid on oversupply and cushioned the area from the crash that hit places like San Diego. Foreclosure and home value erosion was minimized, whil San Diego’s economic disaster has been well-documented nationally.

Residents in all counties wishing to protect their real estate investments would be smart to keep an eye on their elected officials and local growth plans. It would probably be unrealistic to expect the next group of supervisors or representatives to learn from this crisis and prevent the next one without some prodding from watchful citizens.

Foreclosure News Dampens Improving Economic Data

June 5th, 2008

Even though stocks have rallied lately on improved economic news, mortgage foreclosures continue to hang like a cloud over the scene.

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