The Emergency Fed Rate Cut

Before the market opened today the Feds announced a .75% drop in the Fed Funds Rate and the Discount Rate.

If you are keeping score at home, here's what your scorecard should look like:

• Fed Funds Rate: 3.5%
• Discount Rate: 4%
• Prime Rate: 6.5%

Your Home Equity Line of Credit just dropped from 7.25% to 6.5%

This was the first time they dropped by that much since 1984.

Here's their Official Statement: LINK

They cited as a key factor,

"weakening of the economic outlook and increasing downside risks to growth"

and then pointed the flying fickled finger of fate at

"incoming information indicates a deepening of the housing contraction as well as some softening in labor markets"

The markets are set to open much lower today. Don't forget, the Feds are meeting again next week. And many are still expecting further cuts!

I've said this before - We're in for a wild ride. Fasten your seatbelts!

You Only THINK You Were Approved

 You better start paying attention.  This is not a post about Sub Prime.  Sub Prime has it's woes, and it doesn't matter if it's rightfully deserved or not, Sub Prime is in a world all it's own. 

Or so we thought.

On Monday, trading for a American Home Mortgage, a large ALT-A Lender was halted on the floor of the NYSE.  The stock was tanking after it's financial backers said they would not continue with their backing.  Remember, AHM was not a Sub Prime Lender, they were primarily ALT-A.

I have personally never done a loan through AHM.  It looks like I never will.  But here's the really scary part.

Every Lender is scrambling.  No matter if it's the biggest (Countrywide) or the smallest, no matter if they do only the highest quality A Paper loans. They are all scrambling right now.  They are tightening guidelines, deleting programs and making WILD adjustments all in an effort to make sure they are the "prettiest one at the dance".

We're talking all the big girls.  And who are they?  According to Inside Mortgage Finance, the top 10 list for originators for the first half of 2007 are

1. Countrywide ($245 billion),
2. Wells Fargo ($148 billion),
3. CitiMortgage,
4. Chase,
5. Bank of America,
6. WAMU,
7. Wachovia,
8. IndyMac,
9. GMAC,
10. and American Home Mortgage ($34 billion, now pretty much toast)

It reminds me of a Backpacking quote I always liked, "When you suddenly come face to face with an angry Grizzly, remember you don't have to run faster than the bear, just faster than your buddy!"

Tuesday, Wednesday, and Thursday this week, every lender sent flurries of emails and faxes out to their brokers and loan originators.  Every Lender.

They deleted this, they modified that.  What was ok yesterday is no longer ok today.  Even from this morning to this afternoon. 

Now Pay Attention...

• Already approved for a loan?  Just about any loan, chances are pretty good the guidelines for that loan changed this week.  Your Approval may no longer be valid.
• Did you lock your rate?  That lock was for those particular guidelines, your loan may now have an additional "hit" that it didn't have before you locked.
• Did you already sign the loan papers?  - When the backers of AHM pulled the plug AHM had $300 Million ready to fund.  All of those deals went straight into the trash.  "Sorry for any inconvenience - we don't have any money to lend you.  Have a nice day!"
• Pre-Qualified?  Guess again.  Go back to your Mortgage Professional and start again.
• 'We're just thinking..."   Thinking about buying or refinancing?  If I may make one suggestion.  DO NOT Hesitate!  Get off the couch and do it right now.   This has been the craziest week I have ever seen in 14 years.  If you are sitting on the fence for whatever reason right now let me ask you this, "Do you really think it's going to get better in the coming days, weeks or months?"  Not a chance!

A self serving note: 

I am a Mortgage Broker, (I was a Mortgage Banker years ago).

I can fund loans through all the big lenders and so many more little lenders.  At one point I had over 7,000 loan programs at my disposal.  While a Mortgage Banker has certain advantages at times, right now, at this point in time, with the volatility in the marketplace as it is, I thank my lucky stars I have the flexibility when a door slams shut (as so many have closed this week), to switch lenders and find a still open door.  

It may be just my personal opinion, but if you are not working with a Professional Mortgage Broker today, you may be in for a big disappointment tomorrow.  The sad part is that I know so many wonderful, ethical, professional Mortgage Bankers who may get caught up in all this, and it has nothing to do with them or their company.  It's the financial backers of that company that they are all scrambling for.  The losers will be the borrowers as well as the professional mortgage originators working for that company.

 

 

 This bears repeating (sorry about the pun)

Here's Gretchen Morgenson (a Pulitzer Prize NY Times Author) explaining the relationships between Lenders and the "backers".  While they are talking about Sub Prime, the same relationships apply. You can read more about it here: Asking the Question

 Part One:

 

 Part Two:

FHA is not Fannie Mae

"Borrowers with subprime loans are now ending up in foreclosure twice as often as borrowers with FHA-insured loans, said Brian D. Montgomery,  assistant secretary for housing and the federal housing commissioner for HUD.

Of the 10 states with the highest percentage of FHA-insured loans, only three (Texas, Indiana and Utah) also rank among the top 10 for foreclosures, new federal data show. The FHA's current strong position follows a sharp dip in its market share. Between 1996 and 2006, the FHA's share dropped 25 percentage points, from 32% to 7%, among minority borrowers, the same class of borrower that (according to the Center for Responsible Lending) provided the single-largest rush into the subprime mortgage market.

The GAO report linked the drop in FHA's share of the overall mortgage market to the popularity of adjustable-rate mortgages and other unconventional loan products generally disallowed in the FHA program, and the hassle of filing the paperwork to do an FHA loan.

Many originators found the fees on interest-only and zero-down payment loans, which the FHA won't insure, higher than with government loans. In an interesting footnote, the National Association of Mortgage Brokers told GAO that many of its members couldn't afford to meet the FHA's financial requirements for brokers writing FHA-insured loans: a brokerage business must have a minimum net worth of $63,000 and provide annual audited financial statements. "

While this is the National story, the local or Bay Area spin is that FHA (and it's loan limits) will not work with so many of our local loan amounts. 

Fees aside, financial requirements aside.  FHA will work for the 1 Bdrm Condo in Bay Point or Oakland, but it won't work for the 4 bdrm Rancher in Walnut Creek.  The loan amounts are simply too high.  The same can be said for VA.   FHA has some great programs and really can do some great things.

The buzz in the media these days seems to be "FHA, It's your answer to the subprime collapse" .

The truth is, while that's correct it just doesn't apply to the bay area for so many situations. 

Remember, a Conventional, Conforming Fannnie Mae (or Freddie Mac) loan is capped at $417,000.  Anything above that falls into a Jumbo Loan. There's plenty of loan programs that will do that.

FHA is not Fannie or Freddie.  The two are completely different, not connected.  There is no Jumbo FHA.

of Puddles and Pools...

Long term mortgages and the rates and terms they carry are determined by a couple of different factors.

While many people mistakenly think the Fed's control mortgage rates they are in fact determined by Mortgage-backed securities (M.B.S.).

M.B.S.'s are created by pooling loans and selling bonds with coupons based on the mortgage rates. 60% of the mortgage bonds in the U.S. are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. We've all heard of them before - right?

Yields, or rates on 10-year Treasury securities are typically used to track long term mortgage rates. Investors typically use Treasury yields as a benchmark for value, but it's the M.B.S.'s that create the actual interest rates. Factors such as supply and demand are always important.

When we talk about these large pools of money, we're talking about really large pools.
(imagine Trillions of Dollars).
Large pools of anything tend to move slow and steady.

Fannie, Freddie and Ginnie are not the only players in the 30 yr. fixed game.
There are significantly smaller "puddles" of money that need to be diversified and invested in real estate.
(now imagine Billions or Millions)

These "puddles" may be controlled by large insurance companies, investment funds, pension funds and so on.

Every now and then one of these companies has a "puddle" they desperately need to have invested.

Rule Number One of "Pools & Puddles" is...
Like water, always keep the money moving - stagnant money earns nothing.
This applies to big business and small.



Two months ago, I was approached by a representative who had a "Puddle".
He needed to move this "puddle".
To entice the rapid deployment of this "puddle" they reduced the rate.
Once again, supply and demand.

Now since they didn't want to compete head to head with F & F, that would be bad business.
They went outside of F & F's sandbox. They went "Jumbo".
(a Jumbo loan is anything above the limits of F & F, currently $417,000)

Surprisingly, the rate at which this "puddle" was offered was a full 1% lower than other Jumbo rates and even below F & F rates! -

Wow!

I told everyone of my prior clients.
Needless to say, that "puddle" dried up pretty quick. It's now gone.

I don't think I've ever seen this before in my 14 years.
They have a new "puddle".

This one's just about the same.

• It's a 30 Yr. Fixed Jumbo.
• Fully lockable.
• No tricks, no gimmicks, simple stuff.
• Purchase or Refinance.
• Owner Occupied Only.

Yes, you don't have to have a Jumbo to use it, and there is an Interest Only option.

Hands down there may not be a better loan out there for the long term owner right now.
But is it right for you? Perhaps. Only by running the numbers can anyone really say.

Remember, it's a puddle not a Pool - Not available at you local bank - and it's first come first served.

There's only so much room in a Puddle - jump in while the Puddling is good.

Neg Am Disclosures - a little too late?

"The Federal Reserve Board is considering potential revisions to Reg Z, including: (a) simplifying and clarifying Regulation Z's adjustable rate mortgage disclosures, to make them easier for consumers to understand and use; (b) requiring a "worst-case" payment disclosure; (c) requiring additional disclosures in connection with negatively amortizing loans; and (d) changing Regulation Z's timing requirements for transaction-specific, non-purchase loan disclosures."

The upcoming boom in foreclosures is being forecasted by many professionals.
Nothing new there.
But as I have said before, the underlying reasons for this upcoming boom is largely due to good people who were sold bad loans for all the wrong reasons by unscrupulous loan originators. It's a industry wide problem. Everyday I get countless mail and spam advertising rates as low as 1%. I'll bet you do too.

The problem is that so many bay area homeowners have bought into loans like these or similar. They may have refinanced a couple of years ago into an adjustable rate mortgage with a 2 or 3 year fixed rate period. But that was a couple of years ago and now those fixed periods are running out and these same owners will now see there monthly payments rise incredibly. When that happens the first thing they will do is seek another refi. This time though they'll have a harder time qualifying. Many factors go into a qualification. Income, Debts, Debt Ratios, Loan to Value Ratios, and so on. If their house has declined in value, what was a good enough debt ratio and loan to value ratio may not be good enough this time.

In the last refi they may have had enough equity to pay off all their consumer debt.
This time they might not have the equity yet have run the credit card balances back up again.

They might be left with no choice but to sell or continue on paying their new much higher monthly payment. That's when we'll see the foreclosures really start!

So now that the cows have left the barn...
The fed's is thinking maybe the consumer should have a little more disclosure?

I'm all for that, but aren't they a little late?

The Foreclosure Crunch

This is part Three in a Four part series of articles detailing the changing mortgage market.

The Foreclosure Crunch

The Foreclosure Crunch is closely related to the LTV Crunch.

In fact, both crunches fuel on each other.

I would suggest you first read the LTV Crunch before you dive into this easy concept.

Now where to start?
Hmmmmmm .....

Let's start with the 3 TRILLION in Adjustable Rate Mortgages that we know are just about ready to change, or recast in the next year. That's a huge number! And yes, it is a national number but it is going to have an enormous impact of home loans in here in Contra Costa. I mentioned we know these loans are set to change but what does that mean?

As an example, let's say you financed a couple of years ago. The best rate and term your broker found you was 5.625% fixed for 3 years (or 5, 7, or perhaps 10). It was fixed at a time in history where the rates were the lowest. That's the good part. the bad part is that the loan now is set to adjust to the current rate environment. And rates are higher now than they were then. That means the monthly mortgage payment is going to go up. How much? On a POA it could be as much as double or triple! Other loans might be a bit more manageable.

Like explained in the LTV Crunch, and the Credit Crunch, these borrowers may not be able to refinance into anything! When that happens they can either:

• Live with it and try to meet their obligations,
• List their home for sale,
• or fall behind and go into Foreclosure
  

I can tell you that many of the people I have dealt with are already strapped for disposable income. Trying to keep your head above water is a temporary situation at best. If that payment continues to rise what do you think is going to happen?

Our local housing market is somewhat crowded already. How long do you think it will take a homeowner to sell right now? Not a pretty picture is it?

That leaves Foreclosure.

But let's just say you have an ARM.
You also have a great job, plenty of cash, and overall you are doing just fine.
Maybe you last refinanced or bought with an equity position of around 20%?
This possibly can't effect you - can it?

Wrong!

Try this...

1. Go to google maps and pull up your property.
2. Now draw a circle 1/4 mile around your home.
3. Now count the number of homes in that circle.

If any of those homes in that circle sell for under market value, go under, REO or sell at auction. your home just lost value as well. If it loses too much your ability to refinance into something manageable may be compromised no matter what YOUR personal financial situation is.



How about those people on the fringe of your circle? Their values are related to those 1/4 mile further away, and so on, and so on.
So really, a foreclosure many many miles away could domino into your home!
Bummer, eh?

"Yeah Mike, but I live in an upscale neighborhood. We don't have those kind of people around here."
Wrong again.

I did a little research locally.
I went to the County Records.
I asked for a list of homeowners who...

• Live in a single family home (no condos)
  
• In the Lafayette, Orinda, Moraga, Walnut Creek, Alamo, Danville, Pleasant Hill and Concord area.
• Who have an Adjustable Rate Mortgage at least 3 years old with A Paper lenders.
• I also limited the search to the first 1,500 names.
  

Surprise!
My list started in upscale Lafayette (just because that's what I listed first) and never left!

WOW!

So if you think your neighborhood is safe, if you think you are safe, consider yourself now informed.

It's not all bad news though.

I've said it before and I'll say it again,
"If homeowners are proactive now, they can navigate a soft landing. If they are not, they could find themselves in situations outside their control that could lead to personal financial disasters like bankruptcy and foreclosure."

If you do not know what kind of a mortgage you have, if there is any chance at all, I urge you to seek out a professional review ASAP. Only a Professional Mortgage Planner will be able to give you an objective opinion on where you stand.

The LTV Crunch

This is part Two in a Four part series of articles detailing the changing mortgage market.

The LTV CRUNCH

L.T.V. is simply an acronym for Loan to Value.
This is a surprisingly simple computation resulting in a percentage.

Let's assume you have bought a home valued at $800,000.
To buy that home you took out a loan for $640,000.
Your LTV is going to be 80% - easy right?
We took the loan amount and divided it by the value.

LTV has a cousin. CLTV - the C standing for "Combined".
That brings the other loans you might have into the equation, loans tied to the property like a Line of Credit.

Using our example, let's now assume you have a 1st Mortgage of $640,000 and a HELOC (Home Equity Line of Credit) for $80,000.
Now you owe $720,000 on your $800,000 home.
That's a CLTV of 90% right? Following so far?
Pretty easy stuff.
Now we're going to twist it a bit.

The Maximum LTV or CLTV is determined by the Guidelines.
The Guidelines are a set of rules detailing all the parameters of what loans the lender will do.

"Who cares what the Guidelines say?"
For one, the Underwriter who approves your loan does.
Underwriters live by the Guidelines.
To paraphrase the heavy metal band "Faith No More" They care a lot!

And to make matters worse, I have news for you. The Guidelines are changing.
They are getting tighter and tighter.
A year ago, a typical Guideline might have said something akin to "The maximum LTV on this product is 80% with a maximum CLTV of 100%"
To a loan officer that means this program will allow an 80% first mortgage and a 20% second.

That was then - this is now.

That same text might have a completely different tone today.
"The maximum LTV on this product is 80% with a maximum CLTV of 90%".

That doesn't sound so bad does it?

But wait there's more! (one of my favorite infomercial lines)

The value on your home is determined by the sales price of others around it.
That's called the Comparison Approach of Appraisal.
This is an important concept.

Going back to our example.
Your home was valued at $800,000 and you had a CLTV of 90%.
Let's now assume you need to refinance.
Your present loan is about to recast and your payment is going to go up.

The appraiser comes in, does his thing, and comes back with a value of only $750,000!
Why?
The other homes in your area that have sold in the last 3 to 6 months, sold for less. That's why.
Your home value is a direct result of the recent sales prices of other like homes in your area.

Important Concept #2:
As the value of your home decreases, your LTV increases.
Conversely, if your home value increases - your LTV decreases.

But I digress, let's go back to your refinance.
The appraisal comes back at $750,000 and now your CLTV is not the 90% it was but instead it's 96%. The aforementioned Guidelines for the loan that you are applying to clearly state a Maximum CLTV of 95% or worse yet 90%.

The result? - You cannot qualify for that loan and must find another loan program, another alternative, or live with it. This is because of two things. The guidelines changed, and foreclosures and financially distressed homeowners in your area have lowered the value of your home by selling at prices lower than your market value. Both items clearly outside of your control.

The Moral of the Story:
What's going on around you, in the country and in your neighborhood, no matter what your personal financial situation might be, can have drastic implications on you and your financial situation.

I am an optimist. I look at this as an opportunity for those that are prepared to rise above.
I have been recommending to all my past clients to review their mortgage plans, examine their goals and needs, and make adjustments to those plans sooner than later, if need be.

The Credit Crunch

You may hear from time to time about the Transparency of Real Estate.
There are people and companies marketing this term daily.
It refers to the general idea of the borrower or clients ability to see and know what is happening "behind the scenes".

I'm all for that!

In the broader sense, I like to see behind the scenes in the greater mortgage world.
I'm one of those types that wants to know how a company is doing.

• Are they in good financial health?
• Do they have great customer service?
• Or are they hurting and teetering on the brink?

Many times the things I see as a Mortgage Broker go virtually unnoticed by the general public.
One of which is the tightening of credit guidelines across the board.

Welcome to Part One - The Credit Crunch!

Make No Mistake!
This will and does effect everyone, no matter how good or how poor your credit is.

WAMU (Washington Mutual) issued a statement to the press recently that went unnoticed by the mainstream. In that statement, they said they were "emphasizing higher-quality loans to boost earnings and cut risk after its home loans unit lost $113 million from January to March."

I can see why it went unnoticed.

Here's what you need to know:
Just how much are they "emphasizing"?
How about 70%? Yeah - 70%!

Let's put it this way.
WAMU is one of the biggest lenders nationwide.
The loan you qualified for to buy your home, or the loan your 99 neighbors have is no longer available - period!

How will this effect you?

Follow the bouncing (snow) ball here...

• Maybe not you, but when any of your 99 neighbors need to refinance in the coming months they are going to be in for a little shock.
• They will not qualify for a refinance - plain and simple.
• They will be forced to keep their loans.
• Their payments will increase (3 trillion ARMS are set to recast in the next 18 months).
• They will be forced to try and sell.
• The market will not be able to absorb the new inventory at the prices they need to sell for.
• Your neighbors will go into foreclosure.
• The value of your home is determined by the sales (comps) of others like it in the neighborhood. When those houses sell due to hardship they are not selling at top dollar are they?
• This drives down home values in even the best neighborhoods.
• When the values drop, so does another key factor in the mortgage equation, Loan to Value
  

And that's part 2 of this series... The LTV Crunch

Jargon - R- Us

I had to laugh as I sent out an email to wholesale reps this morning describing a difficult loan I was working on.

I laugh because of the H.D.C. (High Density Conversations) we use in the business.







Here's my scenario:

• Purchase, SFR, $1.9 Million, 63% LTV,
• SIVA, 1099, or possibly No Ratio,
• Assets sourced not seasoned,
• 615 Middle
• Prior NOD on 10/02.
• 1x60 9/02, 5x30 10/02, 8/02, 2/02, 9/01, and 8/01
• Sold and rented since.
• VOD, VOR, and LOE ready.
• Loan Contingency 3/30
• COE 4/18
• Need 2/28 or 3/27 with 2 or 3 yr PP

How's that for HIGH DENSITY conversation?
Did you get it all?

My Wholesale Reps did.
We should have an approval sometime tomorrow!

The Envelope Please...

Ok, so it's not so dramatic as that.

The Fed's as predicted - are keeping rates the same.
Here's a link to the press release: LINK
or you can just read it here.

Tame comments in the dialog section regarding inflation concerns.



















12:30 Update: Did you see what happened to the market when they read the "Tame" comments ? Dropped like a rock!

The Fed's and You

When we say the Fed's, we're talking about the FOMC.

That stands for the Federal Open Market Committee.
Sometimes they'll be called the Federal Reserve Board.
And then sometimes they are called other words to nasty to print here.

No matter what you call them they quietly go about their business.
They meet behind closed doors, they do very little interviews, and the twelve member board generally speaks through one voice, that of it's Chariman, Ben Bernanke.

With all this lack of fanfare and sensationalism, the entire business world watches and waits on their every move.

Let's put it this way,...
Take Britney Spears, Lindsay Lohan, Jennifer Aniston, Jessica Simpson, Angelina and Brad, Tom Cruise and his woman, end every other one not named here but had their picture on one of the grocery lines trash mag covers over the last year. Add everyone who didn't make the cover but had a picture on the inside. Heck, just for good measure we'll even throw in Madonna!
Now let's roll them all into one person - and call that The Fed.

Now take everyone who watches Wall Street, everyone who works on Wall Street, everyone who invests in Stocks, Bonds, Mutual funds. Everyone who runs a company or has a part in running a company. Every business student, every business teacher, every business writer, every business reporter, every business watcher and reader. Add all pension and retirement watchers. Add every bank VP. Add just about every person in the world who is mindful of the business world and what goes into it.
Round them all up (picture the Verizon commercials with the mass of people lined up).
All these people are The Paparazzi.

They follow the Lindsay's, and Britney's everywhere they go.
They listen to everything they say.
By the time Jessica sneezes, the head office already has the report.
These people are ruthless in finding out what the Fed thinks, what the Fed's might do next.

Is that a good analogy?

And yet with all this hoopla, the Fed's really do just one little thing.
They set the Fed Funds Rate - that's the rate in which the Feds lend money to the big institutions.

Now just like, "Why Britney shaved her head", there's much more to the story than just that.
The Fed Funds Rate influences the Discount Rate which influences the Prime Rate, which influences the private school K-Fed's kid is going to enroll in.
(I was just kidding about that last part)

But the Prime Rate effects you and I.
It's what our Home Equity Loan is tied to.
It's what our small balance commercial loan is tied to.
It's the loadstar of short term rates.

Do we need to become Paparaza of the Fed's?
No.
But we do need to mindful of what they are thinking and doing.
They'll be announcing today (11:15 AM Pacific Time) one of three things:

1. That they either have lowered rates,
   
2. They have raised rates or,
3. They have left rates the same.
   

The mindful people think they'll keep them the same, this time around.
Personally, I like this kind of stuff far better than reading the tabloids!

Volatility Kills

Volatility.

In Chem class we learned volatility was about how fast something went from liquid to vapor.
"The higher the volatility the faster our beaker of blue stuff evaporated."
I know that because that's exactly what Susie D. (my lab partner) wrote down for Problem 17 on the big test.
And that's exactly what I wrote too. Ok, so I was a "team" player.
And then that led to Mr. Wisner bringing in my parents for a... shall I use the word, "Volatile" meeting?

So there I was, hopelessly wishing that any of the participants, Mr. Wiz, my parents, or even myself, were a little more volatile.
I for one certainly would have liked to have vaporized at that moment in time.

Flash forward to my wine sommelier moments...
"Next we want to gently swirl the wine in our glasses.
This volatizes the esters of the wine.
This aerates the wine and releases its aroma and bouquet."
You can imagine it was a much more pleasant 'volatile" time in my life.

Equity traders, option traders, and the like speak glowingly of volatility.
To them volatility is a chance to get in or out of the market or stock.
Long or short, call or put, if a stock is flat or sideways it's hard to make money on it.
Volatility, financially speaking, "refers to the standard deviation of the change in value of a financial instrument with a specific time horizon."
Thank you Wikipedia
If you are on the wrong side of a volatile trade you could see your whole portfolio go to vapor.

Now let's talk about Volatility in Mortgages.
This is deadly stuff.
Yes, rates go up and down that doesn't change.
Sometimes the rates go up and down with greater speed and velocity.
There's another V word - Velocity.

But the warning I want to get across is this.
Small moves in rates, combined with the ever tightening credit window, combined with higher and higher debt, combined with flat or minimal appreciation rates will yield a highly charged, highly Volatile marketplace.

There are people I come across each and everyday who have questionable loans for their particular goals.
2/28, 3/27. 3/1 ARMs, POAs, Interest Only's -
Don't get me wrong, they are all good loans for the right person at the right time, but so often I see them with the wrong person at the wrong time.
I see volatility.

I have someone who came to me to refi last week.

• They have minimal credit,
• they have to "state their income",
• credit cards are close or at the limit,
• they have a new boat payment,
• just a little money in the bank,

Oh, and their loan amount now is the same as their home value.
All they want to do is get into a loan that will not adjust. (Theirs is about to start adjusting)

They up the Creek and there is no Fixed Rate Paddle, or any paddle for that matter.

You could say they are on the extreme side.
But I see many, many other borrowers just a couple steps away from them.
Borrowers who over the last 2 or 3 years have grown very comfortable with a Minimum Payment, or an Interest Only payment.
When it's time for them to get into something fixed - even with good credit, good income, there may no longer be a fixed paddle available.
It's not all about rates, the credit window has volatility too.
Right now with the sub prime issues the volatility of the credit window is high. And that window is closing!

When it comes to mortgages:

• Volatility in appreciation,
• Volatility in interest rates,
• Volatility in the underwriting guidelines,
• Volatility in the credit window,
• Volatility in pretty much anything can kill.

Be careful out there.

Buy, Hold or Sell

We're doing another Investing in Real Estate 101 seminar this weekend.

This one will be at the local Marriott in their largest room.
And guess what?

I just found out we're overbooked!
Not only are we sold out, we're really oversold!
"I'm sorry Mr. and Mrs. Smith we're going to have to bump you to a later flight, Oooops, I mean seminar."
Room capacity is 120.

Let's just say, we're going to be cozy in there!

The good news: More than 100 people are going to get some solid education in investing.
The bad news: You are probably not going to be one of them.

So just in case, here's a quick synopsis of what we're covering and why.

One of the cornerstone ideas in investing in RE that we push is cashflow.
You must have proper cashflow.

Investment in anything means looking at your ROI, "Return On Investment".
If you don't get a good ROI, why invest in the first place?

How do you get a return in RE?
Only two ways I know of:

1. Cashflow
2. Appreciation

Think about that for a minute.

What do we see in the marketplace these days?

Flippers?
Let's talk about appreciation in terms of flipping.
Flipping is, buying low, then turning around and selling higher.
It's not that easy of course.

Sometimes you need to buy low, invest big $ to fix and fluff, just to be able to sell higher - right?
We'll that's "Appreciation".
The cashflow in flipping comes into play when the first mortgage payment is due.
No rental income means total negative monthly cashflow.
That's ok for the short term if the flip yields enough appreciation.

The greatest ROI comes from the strategy of Buy and Hold.
You know this. Look back over the years and during good times and bad, property just keeps on chugging along.
Yeah, we're in the bad now, but take a step back and look at a wider view.
Somebody somewhere said ( I can't remember right now) that property values at least double every ten years, as an average, since the 1930's.
Never less than double.

As a real example let's look purchasing a $500,000 income property and holding for 10 years.
Let's assume you put down 100,000 (20%), have good cashflow, and you never pay a dime towards principal.
Let's also assume we have a dismal appreciation rate over the course of those 10 years of only 5% each year.

Now let's look at the numbers:
Present Value would be what you have in it now - $100,000
after 10 yrs appreciation the market value or Future Value would be $820,088
subtract the loan amount of $400,000 and you'll have $420,088 in equity right?

Now go put that in a calculator and see what your ROI was.
Oh, here's an online one I found: LINK
What did you find out?

Your ROI was 15.43% right?
That's each and every year and at a very dismal 5% appreciation rate.
Still don't believe it?
Take any regular calculator, or an 8th grade math student (Hey Emily, i have a project for you...),
and start by adding 15.43% of 100,000 to itself.
The first one is going to be easy $15,430 added to 100,000 is 115, 430.
Now add 15.43% of that to the total and so on and so on.
Do it 10 times and you'll come up with $420,088 give or take a penny.

But is 5% appreciation too small?
You might think so. Most professionals would agree with you.
We may never see triple digit appreciation again, but what about double?

Go back and do the same at 10% a year.
Now at year 10 the same property is worth roughly a cool $1.3 Million!
Subtract the loan amount of 400,000 and that leaves 942,355 to be exact.
Pop that in the ROI calculator.
WOW!
25.15%

And that folks, is why Buy and Hold makes so much sense.

Yeah, I know.
I left out Inflation, Taxes, 1031 Exchanges, Realtor Fees, and so much more.
Let's not cloud the issue, the point is more about the "WHY".
Why anyone would want to buy and hold RE.

But there's a catch.
To properly buy and hold, you need to be able to HOLD.
Anyone can buy.
I have 107% financing to prove it.
This is where the Cashflow comes in.

Proper cashflow allows the investor to hold.
It may provide anywhere from a decent or minimal income each month.
But the real returns are usually found in the appreciation, not in the cashflow.

That in a nutshell is the seminar presentation you are probably going to miss.

Odds are on the Fed's (part II)

Staying the same.

Here's the actual press release:



Federal Reserve Release, Press Release
Release Date: January 31, 2007


For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.

The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.

December Existing Home sales

I wanted to wait till the existing home sales figures came out this morning at 7 to post.

I'll be able to get into it deeper later but for now here's just the bare the facts.

Remember though that this report comes from the National Association of Realtors, (NAR) and is a national number. That means to a reader here in the SF Bay Area, these numbers may be a little skewed.
What happens in Podunk, doesn't always happen here.

"Sales of existing homes fell modestly in December, closing out a year in which demand for homes slumped by the largest amount 24 years.

Separately, the number of new claims for U.S. jobless aid jumped a larger-than-expected 36,000 last week, a government report showed, its biggest one-week rise in 16 months.

The National Association of Realtors said the pace of existing home sales fell 0.8% in December to a 6.22 million-unit annual rate, a slightly bigger decline than had been expected.

However, the inventory of homes for sale was down 7.9% to 3.508 million units at the end of December.

Analysts had expected home resales to fall to a 6.25 million-unit pace from the 6.28 million-unit rate initially reported for November.

The national median home price of existing homes was unchanged from a year earlier, holding at $222,000.

"The blood-letting in housing continues, although at a lessening pace -- on trend," said T.J. Marta, a fixed-income strategist at RBC Capital Markets. "Despite the downside surprise, this data series supports the notion that the trough in housing and overall U.S. growth is past, having occurred in Q3 '06."

For all of 2006, home sales slipped 8.4%, the sharpest decline since 1982, when they fell 17.7%."


If that sounded like gibberish - here's the scoop:
Existing Home Sales were down.
Key word in that was "sales".
Many times we forget what says.
That sentence means the actual number of units sold over that period of time was less than previous.

Two things come into play here, how many houses sold, and how much they sold for.
Two very distinct items.


The law of supply and demand then says rates should move lower (lower demand right?)
WRONG.
While the number of sales fell almost 1%,
The median and average price of homes either stayed the same (year over year) or rose slightly.

To the traders, the feds and all those who in some way effect the bond markets, and hence mortgage backed securities, this is a better report than you may think.

To those people, this is what they see in that report:
Over the last year, with headlines blazing "HOUSING BUBBLE TO BURST?",
we as a nation saw ZERO decline in median house prices!

"The national median home price of existing homes was unchanged from a year earlier, holding at $222,000. "

Inventories need to correct, and the number of units sold may be down or up, but in the end no loss in value. Nationally speaking, How cool is that?


I'll get back to what all this means and more importantly what it means to us here in the bay area later when I get the local data...

Stay tuned.

Crystal Ball Anyone?

The news this week that the mortgage world seems to be talking about has to do with the economic forecast from two of the biggest insiders.

Last week it was Freddie Mac issuing it's forecast.

This week, the Mortgage Bankers Association released its economic forecasts for the next three years.

These projections did not differ substantially from those set out last week by Freddie Mac, however, here is a summary of the report.

• Real GDP growth will average about 3.0 percent in 2007, 3.3 percent in 2008 and 3.4 percent in 2009.
• Fixed mortgage rates are expected to rise to about 6.5 percent by the end of 2007 and to remain around that level through the forecast period.
• Existing-home sales will decline by about 7 percent and new home sales 8 percent relative to 2006. Both categories are projected to rebound in 2008 by about 3 percent and a further 1 percent in 2009.
• Existing home price appreciation will slow significantly over the next three years. Median prices for both new and existing homes should remain relatively flat next year and rise about 2 percent in 2008 and 2009.
• Purchase mortgage originations will reach $1.33 trillion in 2007 and remain flat in 2008. Refinance loans will total $1.06 trillion in 2007 and then decline to $957 billion in 2008. Purchase originations should edge up slightly the next year while refi originations should decline to about $800 billon.
• Total residential mortgage production in 2007 will be $2.39 trillion, declining by about 5 percent from an estimated $2.51 trillion in 2006. Total mortgage originations are expected to decline an additional 4 percent to $2.29 trillion in 2008 and drop another 6 percent to $2.15 trillion in 2009.

A couple of things to remember here.

1. Both these companies have a vested interest in the housing market.
2. This is a wild guess on both their parts, nobody can accurately tell you what tomorrow is going to be like. Not in terms of rates, or GDP growth, or anything else they have listed.
3. This is a national report, the bay area is special, we a have a certain amount of insulation that places like Podunk, MO doesn't have. Our appreciation is going to always be different.
   

I'd be pleased as punch if rates stayed where they say they will for the next 3 years.
I'll also tell you this - don't count on it.
If anything rates cannot stay the same.
Just by the nature of the beast.

Here's a chart I throw up on the screen in seminars:


You can click on that and make it really bigger, but do you see any period in time when rates stayed the same?
Not me.

Rates will change.
They'll either go up or down but they will always change.
Get used to it.

Sub-Prime Lenders

The Typical Thought:
A "Sub-Prime" or "B-Paper" lender is someone who lends money to those who do not qualify for prime market rates because of blemished or limited credit.

But the truth is that it doesn't always mean that.
Sub-Prime refers to anything other than Prime.





In any loan there are 4 quadrants that go into an approval:

1. Credit: Both in quality and quantity, FICO, tradelines, proportion of balances to credit limits, collections, lates, public recordings and other items.
   
2. Income and Expenses: Job history, length of employment, W-2 or 1099, bonuses, overtime, full time permanent, DTI, and other factors go into the income side.
   
3. Assets: Not to be confused with Income - this is what you have in the bank as reserves, how much is liquid, how much is not, and so on.
4. Property: Single family House or a Double wide mobile home? Equity you have in the house, LTV, CLTV, HCLTV.

An "A Paper" loan on a house generally means that you are covered in all 4 of these quadrants.
Come up short on one and you could easily be kicked out of A Paper.
I know, there are exceptions to every rule, but I'm making a gross generalization here.

There is also a category of loans called Alt-A that handles some of the fall out but in general terms, if you cannot cover all the bases you might be looking at a Sub-Prime loan.

This doesn't make them bad loans.
Many times it's the only way to accomplish what you need to do at the time.
First time home buyers, divorce, bankruptcy, identity theft, job loss, cash out, no reserves, and so many other factors can put an otherwise wonderful loan into sub-prime.

Much like PMI, which caught a bad rap for some reasons yet is a valuable tool in getting to where you want to be, Sub-Prime is catching the heat in the news today.

Here's the problem, because Sub-Prime lenders by nature have to accept more "problems" in the course of doing loans, they naturally have a more relaxed documentation style.
Translation: It's easier to "pull the wool over their eyes".
Not that I would, but if it's possible, you know that there are plenty of loan officers that would lie through their teeth to get a loan done.

The Sub-Prime lenders know this, yet look the other way because that's what they are supposed to do.
"So you work at McDonalds flipping burgers and you are stating you make $100,000 a year? OK, you're approved!"
(It really isn't that bad but it's close)

Obviously the Sub-Prime lender is going to need to make more money in doing riskier loans.
They'll make more on the rate and the fees.

If they make enough bad loans though it'll come back to bite them no matter what they charge.
And that's what's been happening.

In the news you'll see headlines detailing their demise.
Here's a quick list off the top of my head:

• OwnIt Mortgage - a relative startup that never really got off the ground
• Mortgage Lenders Network USA - Stopped taking new wholesale business
• SecuredFunding - Would do a HELOC behind a Neg Am Loan, also stopped