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.

Getting scarce loans will now be scarier

Kathleen Pender, in the San Francisco Chronicle, wrote last Sunday that “tougher rules mean loans could become more scare (sic), more expensive or both.” I just had to love the typo.  Scary, scarce, and costly – just what the consumer wants in a mortgage, just what the consumer needs to have confidence in the lending industry.  Uh, I don’t think so.

Here’s what’s happening: 

• • FHA mortgage insurance premiums are going up to bolster FHA’s capital reserves.  This could mean an extra $63/month on a $300K loan.
   
• • Loan limits for FHA and Fannie and Freddie loans will drop to $625,500 on October 1.
   
• • Fannie/Freddie fees to lenders will increase, a fee that will be passed along to consumers.  On a $300K loan, this would amount to $750 to $1500.
   
• • Starting April 1, either the lender can pay a set fee to the broker for brokering the loan or consumers can pay the broker directly, but not both. If consumers couldn’t understand compensation or comparing lenders and loans before, they aren’t going to have it any easier.  And anyone with a loan amount of $300K or less will likely be less well-served going forward. They often need the most help.
   
• • Lenders who securitize loans will have to retain a 5% interest in the portfolio they securitize. That means less money to lend.
   
• • As always, the wealthy don’t have to participate:  There are lenders out there now who will lend money to a borrower who is willing to put money into an account with this lender equal to the loan amount, and not require the borrower to make a mortgage payment. For 10 years.  So, if you’re wealthy and your income is lousy due to the economy, but you have the assets, the rules don’t apply to you.  This is the epitome of the saying, “lenders only lend to those who don’t need the money.”  We’ve come full circle. 

 

Until the secondary mortgage market improves for lenders willing to do loans that are not sold to Fannie and Freddie, the number of loans available and the ease of finding them is going to get worse. If you want a good loan, you might think about getting it now.

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.

I’m not saying you shouldn’t have dreams and goals.  What I’m saying is that the chances that you’ll success in achieving those dreams and goals will increase if you don’t take action in January.  Set whatever wishes, goals, and dreams you want for 2011.  Write them down. Put them in a box somewhere where you’ll see it no sooner than February 2nd.  Then, go back to your long winter’s nap.  In February or March, open these notes up, and start sowing the seeds that will make those dreams come true this year.  In the Northern Hemisphere, in this time of the year, it is hard to grow anything.  It’s dark. It’s cold.  We just crossed over the longest night of the year (winter solstice, December 21st).

All things grow better in light and warmth.  Your resolutions do, too.  And it takes the pressure off during a season when you don’t need more.  Enjoy the nap.

This decision – heck, any decision – has been much anticipated so that people could do their end-of-the-year planning.  The good news is that it also comes with some direction about the estate tax so we can all move forward with estate tax planning as well.

What should you do?

You have probably been talking to your accountant about this contingency, and now you need to act.  If this means shifting income from this year to next, taking more expenses this year, converting an IRA to a Roth, etc., you now need to make all that happen before the end of the year.   (As if you didn’t have enough to do already.)

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.

But my mom told me to get one!

Of course she did.  Or your dad did or your grandmother, or whoever you take familial financial advice from.  They all told you to put 20% down on your house, get a 30-year fixed-rate mortgage, make extra payments, and get it paid off as soon as possible.  If I’ve heard it once, I’ve heard it a thousand times.  “I’m financially conservative,” my clients say, as if I’ve ever had a client come in and say the opposite.  No one—not one person!—has ever come into my office and said, “I like taking risk, let’s be risky.”

Here’s how I define financially conservative:  Managing one’s finances such that one has the ability to weather any financial storm or take advantage of a financial opportunity.  That means managing one’s cash and cash-flow to one’s best interests.

The 30-year fixed-rate mortgage is risky.  The risk?  That interest rates remain low. When you get an adjustable rate mortgage, you’re gambling that interest rates go down. When you get a fixed-rate mortgage, you’re gambling that interest rates are going up.  Gambling is gambling.  At times, your odds are better.  Right now, interest rates are historically low and the odds are on your side that rates will go up, maybe even considerably so.  But maybe they won’t.  I can’t tell how many years have gone by in which I’ve been saying that.  Probably since 2002.  I can’t tell you how many of my clients have refinanced at least once in that time period to get a lower rate.  And spending the money to do so.

Be conscious about what you’re doing.  The perceived “risk” that you’re really managing is unpredictability of payment.  For whatever reason, people love to know what their payments are going to be month-to-month.  If you’re going to be in your home less than 10 years, there might be a better way to manage that risk.  Imagine this:  You make your payment to the mortgage company and then “make a payment to yourself” by setting money aside into a cash account so that if in the future your payments go up (or you have to deal with another financial emergency or opportunity), you have the money available to meet that payment if you cannot do so out of income.  By doing so, you are money ahead and financially more secure.

The good, the bad, the ugly, and my directions for use

The good: This is a great product for those who have 25% equity in their homes, have positive cash-flow annually if not monthly, and are committed to paying off their mortgage aggressively.  I find it a more financially sound strategy than taking out a standard 30-year fixed-rate loan and making extra principal payments.  The 30-year fixed-rate loan is an extremely expensive loan over time. The Homeownership Accelerator is far less expensive and serves the client rather than the lender.  The product is also kept with an investor.  There are no Fannie/Freddie underwriting guidelines in play.

The bad:  The one aspect that I don’t like is that I believe that once you’ve paid off the mortgage to a particular level, it is arguable by the IRS that the interest is no longer deductible for a portion of the loan balance.  Now, there are relatively so few people using this loan that the IRS is unlikely to waste its time trying to figure out what is/not deductible.  You’re probably safe.

The ugly: The only thing that scares me about this loan is that it’s an equity line and lenders are notorious for reducing or closing down equity lines these days. In my conversations with the folks at HOA, the chances of the equity line being closed or reduced are slim because the underwriting is strict and it’s only issuing loans where it knows its collateral is sound. You’re probably safe.

Directions for use:  Take a look at the videos. Talk to your mortgage professional.  Talk to your financial advisor.  You must have 25% equity, good credit, positive cash-flow, and a willingness to try something “new” (it’s new here, but my Australian counterparts have 30% of their clients in this loan).  Use the loan to capture low daily interest calculations.  Do not change your spending habits.  Take the savings that you do reap and make additional investments. Over time, your loan balance will go down faster, your investments will increase faster, and you will be in a “debt-free” place (as you have the ability to pay off the loan with assets at a moment’s decision) sooner.

The Law of Unintended Consequences in action?!  Sort of….

I have to admit that I didn’t see these kinds of opportunities coming.  Please understand that I have for many years been advising clients not to pay down their mortgages aggressively, to save their money, to keep multiple assets growing in different markets. I have been defining “financially secure” not as a home paid-off, but as having enough money in the bank to weather any financial storm or take advantage of any financial opportunity.

I would not have guessed that perhaps one of the greatest opportunities for that cash would have been to settle mortgage debt for pennies on the dollar, retain the asset, get a fixed rate loan, and continue on the original plan for keeping the property.  Or, for those who took great risk at the peak of the last economic boom and borrowed a truck load of money on credit cards to start a business, to have them be able to start again.

I’m not saying that any of these decisions to negotiate credit are what these investors planned or would have preferred or had an easy time making. Each of them got into their investments with the idea that it would pay off in the traditional way over many years of hard work and/or appreciation.  I’m not saying that their credit won’t be impaired.  What I’m saying is that because they kept cash on-hand, they now can take advantage of the financial “opportunity” that is sitting before them.  I won’t go so far as to call it the catbird seat, but it’s not such a horrible place to be.