You can buy a house and you can get a mortgage

Here is what we have been able to do in the mortgage world lately:

• More and more lenders are making appraisals easier.  We are able to use AXIS appraisals, which are based in the Bay Area (fewer Fresno- and Martinez-based appraisers doing appraisals in San Francisco).
 
• We have a lender that will do 90% loans to $979,750!!  That means we can do a purchase of a $1,088,000 home with 10% down.
 
• Rates are still low.
 
• Lenders are still lending on live-work lofts.
 
• Lenders are still doing recent condo-conversions (TICs to condo).
 
• We have lenders that will still fund in the name of an LLC or corporation.
 
• We have two banks that will underwrite and approve a borrower based upon his/her assets and derive an analytical income for qualifying for the loan versus using income derived from tax returns.  This is like a stated-income loan for those with lots of liquid assets.
 
• We have banks that will allow for a community second mortgage or an employer second mortgage, such as the SF Mayor’s Office of Housing program or Kaiser employee loans.
 
• Most condos can be FHA approved by sending in FHA approval packages to the California office or HUD.  Turn-around time is 2-4 weeks.

The rest of the market?  Just as tedious as it’s ever been.  If you have to get a mortgage, hang in there.  The paperwork is oppressive and the conditions are often silly, but it will happen. Call us if you need some help.

A better economy usually means higher rates

Remember, this is a blog—oversimplification will prevail.

Lesson #1:  Rates are driven by the mortgage-backed securities (MBS) market.  MBSs are more similar to bonds than stocks.  Money managers who have to produce returns for their clients invest in stocks (more risky but higher returns) and bonds (less risky but lower returns).  When money managers think companies will produce higher stock returns, they invest in stocks. When the economy shows signs of improvement, company stock prices tend to rise.  So, said another way, when the economy shows signs of improvement, that generally means stock prices will rise, which will cause money to flow to stocks and not bonds (or MBSs).

Lesson #2:  When bond prices decrease, mortgage interest rates worsen.  A bond’s price and its yield are inversely related. That means that when the bond price goes down, the yield goes up (and vice-versa).  Mortgage interest rates track with the yield.  So, as bond prices go down, the yield goes up, mortgage interest rates go up.  The price of a bond will go down when there’s less demand for it.  If money flows to stocks, that means it moves away from bonds.  As bonds are in lower demand, the price will drop, and the yield will increase.  Remember, mortgage interest rates track to the yield.  To review: the less demand for bonds (or MBSs), the lower the price, the higher the yield, the higher mortgage interest rates will go.

The Million Dollar Question: Will the economy improve that much this year?  This is where my crystal ball gets fuzzy.  I think the nightmare of the financial crisis of 2008 is over.  We’re stabilizing.  High unemployment is a problem, and I see it getting slightly better.  I’m a believer that the consumer tends to drive the economy and if they have money to spend, the economy picks up.  I’m a believer that until we start to support the small business person, who employs most of the people in this country, unemployment will remain stagnant and the recovery will be sluggish.  The Fed’s quantitative easing (QE2) and the financial stability of the European countries are the wildcards here.  Given all that, I’m predicting that the economy has a good year and rates will increase a bit to 5.5% on the 30-year.

And by the way, let me put this back into perspective for you.  5.5% is still historically pretty doggone good.  So, if you’ve been “left out” of this past year’s refinance opportunities, this will still be a great year to get it done.  Give us a call.

Review your refinancing opportunities

What we’re talking about here is loans over $730,000, which are those that are not bought by Fannie Mae and Freddie Mac.  Just because the loans are available doesn’t mean that everyone gets one.  You still have to go through the relatively stressful process that loan underwriting is these days and prove that you can pay the loan back (and then some, it seems).  Expect to produce documentation over and over again, expect your appraisal to come in low, expect the lender to want to see 20-40% in equity.  It’s a tedious process and potentially worth it.

These conditions are strict compared to five years ago, but the fact that more loans are being made is a good sign.  While perhaps not a loosening of credit standards to something more reasonable, it is a loosening of credit.  The reason that is significant is that it means the secondary market for mortgages is starting to show signs of life again.

To oversimplify (remember, this is a blog), there are two major “consolidators” of mortgages—(1) the government agencies that buy loans at $730K and below and (2) private consolidators that buy loans at $730K and above.  When these “consolidators” buy mortgages from lenders and securitize them, they infuse the lender with cash to make more loans.  Expand your geographical horizons for a minute to remember that there are far more loans in the country made for less than $730K than there are over that amount.  In the recovery from the “financial meltdown,” the under-$730K consolidators have had more opportunity to re-establish confidence in the buyers of these mortgage securities, so the consolidators have had an easier time loosening up money for loans at $730K and lower.

The larger-loan consolidators have lagged behind simply because there is less of a secondary market in which to sell these loans.  To see that more of these loans are being made suggests that there are more confident buyers of larger-mortgage securities, which in turn gives the larger-loan consolidators money, which in turn allows them to buy more loans from lenders, which in turn allows those lenders to lend again to someone else that needs a loan for $730K or higher.

While the days of getting a mortgage by putting a fog on a mirror are nowhere close to returning, this sign of life in the jumbo market is a good thing.  If you couldn’t refinance before, you might want to see if you should refinance now.

But interest rates are so low!

Yes, I know.  But interest rates don’t matter. Stop chasing sexy interest rates while forsaking good financial decision-making.

I’ll also wager that the same familial financial advice-givers that told you to get the 30-year fixed-rate mortgage also told you not to spend money on depreciating assets, like a fancy car.  They say that it’s not financially prudent to throw a lot of money at something that you don’t have for very long and is ultimately disposable. (This particular piece of advice I agree with, by the way, but I will also concede that fancy cars are fun to drive and are a nice luxury item to purchase with disposable income.)

Please, please, please see the inconsistencies in these two positions. 

My clients who are in adjustable rate mortgages are saving a truckload of money right now, both in their mortgage balances, payments, and lack of refinancing fees.  Their interest rates are in the 3’s or lower.  For all of you who just read that sentence and are secretly and smugly thinking about how smart you are for getting a fixed-rate mortgage at 4.5% because interest rates are going up, I ask you these questions:  How do you know and when will it happen?  Those questions are important.

Look at this math:  The longer a rate is fixed, the higher the interest rate.  The longer the term of the mortgage, the more the bank makes.  A 30-year fixed-rate mortgage at 4.5% has an interest charge that is 82% of the original loan amount.  In the first five years, you pay 25% of the total interest charge.  In most cases, the loan balance isn’t cut in half until after year 20.  No kidding.  Here’s another fun math factoid of mine: A $500K loan, fixed at 3% has a payment of $2108.  In five years, the loan balance is $445K.  The same $500K loan, fixed at 6% has a payment of $2998.  In five years, the balance is $465K (yes, $20K higher after making $53K more in payments).

What does this mean?  If you’re going to take out a home loan for 10 years or less, the adjustable rate mortgage mostly likely puts you money ahead.  You’ll pay less overall and chip away at the principal faster such that in higher interest-rate years, you’ll be paying a higher interest rate but on a lower loan amount.  It still makes sense to take the adjustable, even in a low interest-rate environment. In fact, I would argue, especially so in a low interest-rate environment.

The 30-year fixed-rate loan is the Cadillac of mortgages—big, expensive, and probably disposed of in 10 years or less through sale or refinance.  If you won’t buy a fancy car, why are you buying a fancy mortgage?  I know, it is humbling to think about.  Your familial financial advice-givers mean well.  They do.  Sometimes they just don’t know what they don’t know.  Now you do.

You should always make a car payment

Typically, this question is asked from a money-saving perspective:  Will I save more money buying or leasing?  I believe the decision tree looks like this:

1. First, you should always be making a car payment, even if you own the car outright.  If you borrow money to buy or lease the car, you’ll make a payment. But you should do this if you own the car.  Why?  Because buying a new car with cash is like going to a big party and not having a hangover the next day (this analogy is not mine, it’s Kathyrn Amenta’s).  It feels really great.  In 10 years, you’re going to want to have this party again, so you should be saving each month enough money so when you need a new car, you can buy another in cash.  If you’re thinking about buying just to avoid the car payment, that’s the wrong place from which to make a decision.  You will always have a car payment. Even if you borrow money to buy the car, when the loan is paid off, start making those payments to yourself.
    
2. Second, what do you usually do with cars?  I’m the first to admit that I engage whole-heartedly in the American infatuation with the automobile.  I love to drive fun, fast cars.  But when it comes to what I own, I buy cars and hold them as long as I can and run them into the ground.  Let’s face it:  It’s a depreciating asset.  My commitment is 10 years or more to a car.  If this is you, buy.  If you like new cars or if you need it for image purposes professionally, lease.
    
3. Third, do you have kids?  Kids are notoriously hard on cars.  They dent them with their bicycles, they throw up in them, they eat in them and leave their crumbs behind, they crawl all over the inside leaving scratches and bruises.  If you have school-aged kids or younger, buy.  Otherwise, you run the risk of a penalty when you turn the car in at the end of the lease.  If you don’t have kids and you take pretty good care of your car, you might want to lease.
    
4. Fourth, do you drive a lot of miles each year?  If so, buy.
    
5. Fifth, run the numbers, but don’t stress.
    
6. Finally, decide how you feel about the environmental impact.  (What you should do to protect the environment is probably best left to another professionally.  I can amateurishly weigh the argument for/against a new car, but that’s not helpful.)
    

Now that you’re committed to the payment, if you don’t have kids and you don’t drive a lot of miles, in a low interest rate environment, I can make a strong argument for leasing.  You’ll get a new car with all the new features and safety equipment every three years.  If you love that new car smell, you’ll almost always have it.  Let’s face it.  That’s pretty fun.

Drive safely.

The following statements are not true

The mortgage business is a highly commoditized, highly competitive place.  I have no illusions about that.  I did however get lulled back into an illusion that every mortgage salesperson has the same level of advice, expertise, and service that Scott and I do.  That illusion has been blown, once again.  There’s nothing better than a respectable competitor to learn from.  There’s nothing worse than dealing with a “peer” that you’d be afraid to be seen eating lunch with.

I would never hire the person on the other end of the phone based on personality, but I’ll leave the personal out of this.  This poor sot probably has to deal with 20-50 calls like mine every day because he was well practiced, down to the verbal tics, in handling all my questions and objections.  However, I would never advise anyone to do business with him or his company because his sales tactics included the following paraphrased sentences, none of which was true:

     * You’re getting the best rate and preferred treatment because you were
        referred by your existing lender. (May grace befall upon the borrowers
        who are not preferred.)

     * You’re getting the best rate because we’re not a middleman and we go
        direct to Fannie Mae and Freddie Mac to get the best rate for you.

     * You’re getting the best rate because you qualify for special government
        programs, and we’re one of few companies that can offer these
        programs.

     * I can guarantee that we’re providing you the best rate.

     * I’ve closed over 1000 loans, and therefore I have the experience to tell
        you that this new loan is in your best decision you could make.

     * Why do you need to waste your time confirming with someone else who 
        doesn’t have experience in the business that I’m offering the best rate? 
        You’re a busy person.  Why don’t we just go ahead and wrap this up.

     * I’m a busy person. I was working on several other applications when
        you called.  I didn’t expect this call from you today.  I’m going to be
        busy tomorrow.  Can we set up a time when you’ll be around so I can be
        sure to reach you to follow up?

No sensitivity to the fact that my friend is sick.  Apparently not enough experience to notice the fact that my friend is in her upper-60s and might be receiving Social Security Income to quality.  And clearly not confident that he was offering the best deal because he was pushing for the commitment so hard it finally repulsed me.  It wasn’t even my loan, and I have pretty thick skin.

The lesson? If you have seniors in your life, make sure they get help with their financial affairs. The world moves very quickly, they often make decisions much more slowly, and they require more time to digest information and comprehend it.  Our culture wants speedy decisions, not quality ones.  The second lesson:  Don’t believe everything you hear from your own lender.

Mortgage Brokers Are an Asset to Lenders

What you need to understand is that mortgage brokering was the first outsourcing of mortgage services 30 years ago.  Lenders thought that if they could get a cheap sales force to send them loans that would be more profitable.  Think about it:  If a lender doesn’t have to pay to keep floor space, lights, a computer, toilet paper, coffee and benefits for a mortgage salesperson, it can make more on each loan.  So it outsourced everything but underwriting and document drawing to someone who would find the consumer, teach the consumer, hand-hold the consumer, and close the consumer and never pay that person unless the loan arrived at the bank.  It’s coming back into fashion.  Why?

     * Cheap sales force, easy to roll out new products.

     * Brokers build stronger relationships.

     * Brokers are more dependable, educated, and knowledgeable.

My favorite part of the article?  An author singing to the choir. This is what I have been saying for a year now:  “Plus, the brokering industry is curing itself naturally of its worst faults. During the real estate boom, all kinds of people flocked into the mortgage business, many of whom received little training and had no real industry knowledge. Those folks are gone, leaving the grizzled veterans who understand the business model and will do the right thing for the customer because they understand the value of long-term relationships.”

Have you called your friendly neighborhood mortgage broker lately?

When we look just at the numbers from 2009, it feels and seems like a great year.  But it’s been tough—more regulation, daily underwriting guideline changes, new rules around appraisals, and loan files that are scrubbed with a toothbrush.  We’re lucky to be able to channel our loans through a company that has had the foresight and fortitude to survive, but it’s been twice the work for half the money.  And it’s getting worse.

The unfortunate part about all these changes is that they don’t serve the consumer at all.  Loans take more time and are more expensive.  There are fewer options in loan products and lenders.  The paperwork and the confusion have only increased.

The good news in this is that the market and the increased regulations have driven out the bad apples in the business.  There’s no more low-hanging fruit, so those who didn’t know what they were doing or were doing it badly have long since left the business.  In a way, the market alone has solved a lot of the problems that were created in the subprime and “stated income, stated assets” loan profile industry.  Those of us who continue to run a high quality business have survived.

The sad part about it is that I’m starting to see the really good people—true mortgage professionals who provide great advice and care for their clients—start to consider leaving the business.  The loan process is too complicated and sophisticated for anyone to learn in a 60-day escrow. Most financial planners understand the basics of loans, but often rely on mortgage professionals to help them integrate the loan choice into a client’s overall long- and short-term financial plans.  Where will good advice come from if not from a seasoned mortgage professional?

What can you do?  If you’re politically inclined at all, write your Congress representatives and tell them that you believe the Federal Reserve’s proposal to fix the income of mortgage professionals on any size loan will not serve consumers (particularly those with lower loan amounts), that you appreciate the work of mortgage brokers and bankers, and that the regulations put in place so far have not served the industry well.