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I’ve noticed industry folks switch over to the bubble bloggers’ opinion that a house, used as a primary residence, should never be thought of as an “investment”.  Witness my compadre and colleague Sean Purcell:

Homeowners, on the other hand, should not be playing games with their home. I used to believe in the home as an investment, but I have joined a 12 Step program, made my amends and changed my wicked ways. Your personal home is not an investment and debt on that home is BAD. No matter what we think is going to happen, the best bet as a homeowner is to own your home outright and not be concerned with temporary gyrations in the marketplace. Then your only concern is the government taking your home through criminal abuse of eminent domain… but that’s another post altogether.

I’ll just stick with my usual contrarian opinion; I think you should leverage the heck out of your home today, especially if you plan to live in it for a decade or so.  Here’s why:

1. mortgage rates are artificially low and probably won’t be low this time next year.
2. inflation seems likely which means you’ll be repaying a loan made in today’s dollars with devalued future dollars
3. although there is a supply/demand imbalance, and it is likely that scads of houses have yet to come on the market, eventually, this downward cycle in real estate will reverse.
4. home equity is still a dead investment which earns no return. Diversifying that home equity into an investment that returns more than the mortgage rate is a good arbitrage play.
5. if we’ve learned anything from this decline, a highly leveraged home transfers the “market risk” to the lender and away from the home owner.
6. the mortgage interest deduction, while potentially in peril, is likely to remain the last and best middle-class tax break

I suggest that you should bet the house limit with these conditions:

1. be certain you can afford to make the payment, regardless of what happens to the value
2. diversify the money you withdrawal into an investment NOT tied to the housing market
3. you might not try this if your house is in a market that seems perpetually doomed
4. if your working life or expected hold time of the house is less than ten years, this strategy might not be suitable for you

There is FAR too much doom and gloom surrounding real estate as an asset class.  The negativity is understandable but overblown.  While there are over 18 million vacant houses, there are a lot of bargains to be had right now in promising markets.  I just can’t understand how a large down payment versus a large mortgage with cash-in-the-bank puts borrowers in the enviable position of being able to control their financial future.

A free-and-clear home will certainly keep you away from many risks but a leveraged property, with a properly managed investment account could provide for a much more comfortable retirement in later years.

Caveat Emptor.

I pre-approved a buyer with a VA home loan last summer and she’s been having a tough time getting an offer accepted.  Many Southern California sellers are banks or upside-down sellers who need bank approval for a short sale.  There is a strong bias against accepting offers with government financing among asset managers, lender loss mitigation departments, and even equity sellers because of the myths associated with “mandatory seller-paid costs”.

I’ve been encouraging buyer’s agents to ask the listing agent to call me before presenting the an offer with government financing so that we can discuss the financial implications of the loan to the seller.  In some cases, I attach a copy of How To Get An Offer Accepted With An FHA or VA Mortgage with the pre-approval letter so that we can debunk the most common myths associated with government financing:

• The low down payment requirement means less skin in the game
• The (misguided) perception that the seller must pay for some or all of the buyer’s closing costs
• The (false) belief that VA and FHA appraisers are (a) less generous in their valuations and (b) more restrictive in the remarks about property condition.

The key phrase a buyers’ agent can insert into the residential purchase offer that addresses the financial responsibility of the seller is:

Seller not responsible for any buyer closing costs, regardless of the selected loan program.  All agency-related “non-allowable” costs to be borne by lender.

This language addresses the non-allowable closing costs issue pretty well with sellers.  When they realize that their financial responsibility is nil, they are more open to the offer.

If you’re having problems getting an offer accepted, with government financing, use that phrase in your offer and ask your agent to highlight it with a bold marker.  That seems to be working here in Southern California.

VA mortgages are a great way for those who served in the United States Armed Forces to purchase a home.  Many Southern California sellers have rejected offers using VA financing because they believe they are required to pay certain closing costs for the buyer.  We call those closing costs “non-allowables” because the VA won’t insure the loan if the veteran pays them.

Those VA non-allowable closing costs are not limited to but include:

• Underwriting Fee
• Processing Fee
• Mortgage Broker Fee
• Administration Fee
• Tax Service Fee
• Wire Fee
• Escrow Fee

If the VA won’t allow the veteran to pay those fees but lender’s charge them, how do they get paid?

Sellers can pay those costs, real estate agents can pay them or the loan originator can absorb them.  I recommend that buyers and their agents ask the lender for a  good faith estimate for a “no junk fee” VA home loan prior to presenting an offer to the seller.

On a $400,000 VA home loan, the non-allowable closing costs could be as much as $4000 in California.  That equals approximately 1% of the loan amount.  If a wholesale VA mortgage rate were 5% today, the lender has two options:

• charge a $4,000 discount fee, in addition to the normal 1% loan origination fee, to absorb the VA non-allowable closing costs OR

• the buyer might elect to accept a higher mortgage rate (about .25%) so that the yield spread premium can absorb those VA non-allowable closing costs

Some real estate brokerages, like Redfin, offer a commission rebate.  That rebate can be used to pay some or all of the VA non-allowable closing costs.

Finally, the seller can but is not required to pay up to 4% of the loan amount of the buyer’s closing costs.

Take it easy on us, folks.  Mortgage rates are tough to predict on a  quarterly basis let alone a weekly one.  Three times this year, I changed my long-term bias from floating, to locking, then back to floating.  Moreover, a long-term floating bias is still going to have times when it makes sense to “get while the getting’s good” and lock immediately.

My September 2009 mortgage rates outlook examines that very conundrum.  In short, I’m locked for all closings before October 7, 2009 but floating longer-term closings.  There is a substantial pricing difference between a 60-day rate lock and 30-day rate lock (usually as much as a .5% discount fee).  That means that it would cost $1500 more to lock a rate, for a $300,000 loan, for 60 days rather than it would for 30 days.  That’s why we try to “play the rate game” with y’all when we offer mortgage rates prognistications.

Rate lock management is about managing RISK, not trying to manage the rate. Simply put, we KNOW we can’t catch the absolute bottom of the market but we try to analyze how economic, political, and financial markets’ forces might affect those rates between the time you apply for a loan and when you close.  THAT is the mark of a true mortgage professional.

In August, you saw a difference between Tom Vanderwell’s bias and mine.  Tom advises that the inflationary pressures, not limited to but including the increase in money supply, higher taxes, and commodities-push inflation could propel mortgage rates higher.  I ultimately agree with Tom but believe that the probability of a prolonged (or double-dip) recession will keep conforming mortgage rates below 6% for the rest of the year and possibly into the first half of next year.

…and I can STILL be wrong. If I am, you’ll see me change my bias faster than Madonna changes lovers.  I’ll give you an example of where Tom’s current bias will save his customers money while my current bias will cost my customers money; when the federal mortgage rates subsidy expires.  We could wake up Tuesday to find out the Fed prematurely arrested that program.

Let me reiterate what I said at the beginning of my tenure on Mortgages Unzipped; professional mortgage originators WILL understand:

• which market moves mortgage rates
• which impending economic figure release will move the market
• how to measure a customer’s tolerance for the risk of mortgage rate fluctuations
• how to renegotiate a rate-lock, for the customer’s benefit, in volatile markets

Look for the mortgage professional with the guts to answer the all important question:

What do you think mortgage rates are gonna do, in the next 30 days?

It could save you, literally… thousands of dollars to your closing costs.  What we write in public isn’t as important as the personal advice you receive when engaging us for your next mortgage transaction.  What we write in public demonstrates HOW we develop our lock management strategy.

If you think working with a real mortgage professional is expensive, wait until you see how much an amateur can cost you.

If June, 2009 was the month of disaster for mortgage rates, July, 2009 is the month of the recovery.  Mortgage rates jumped from under 5% to close to 6%, in June, while they have plummeted to the sub-5% level in ten short days.

Will mortgage rates rise or drop this summer? Listen to my 90-second opinion here.

Keep something in mind as you listen; my advice is not a svengali-like prediction.  Rather, my advice examines the market movements, from the heart and mind of a former securities trader, with the sole purpose of mitigating risk and looking for reward.  I think you’ll find that I’m more worried about risk than I am of the potential reward.

Are rates going to go higher?  Listen and proffer your argument below.

I wasn’t sure about the new trend of higher mortgage rates.  The nagging thought was that the Fed would continue or expand it’s open checkbook policy, buy mortgage bonds, and keep home loan rates artificially low.

When the whole market melted down, I said “don’t panic“; it was good advice.  Mortgage rates, which jumped from 4.625% to 5.5% in one week, retreated to 5%.  I jumped on that opportunity.  I’ve been cautiously optimistic for lower mortgage rates in late June.

Ben Bernanke’s testimony yesterday spooked me. I’m not so sure he wants to be Sugar Daddy Ben anymore.  I think he’s cutting back on the subsidies.  This signifies a change in “BIAS” for me.  Since January, I’ve been “biased” towards lower mortgage rates because of the milky Federal teat from which to nurse.

Will I still find an opportunity to float rather than lock? Certainly.  As long as there are traders, overreactions will provide that opportunity.  I think those opportunities will be fewer for the duration of 2009.

PS:  I’ve received over a dozen e-mails this week asking my advice on your loan-in-process.   If you are working with another mortgage adviser, you should speak with her first.  If your rate isn’t locked and you’re not getting daily updates from your loan adviser, you need to consider one of these professionals.

What a week, huh?  The mortgage rates meltdown scared a lot of people this week, me included.  I was mostly worried that foreign investors believed American homeowners were a all sub-prime borrowers.  I knew if that false sterotype were allowed to proliferate, mortgage rates would skyrocket. I was worried but…

…I didn’t panic.

I didn’t panic because I remembered two rules of investing, learned early in my career:

1- Buy the rumor and sell the news. I expect the Fed to massively intervene next week;  perhaps expand its commitment even higher.  If Ben’s talking on the TV, I’m locking a day or two later.

2- Don’t fight the Fed. People do it all of the time and often end up on the wrong side of the trade.  Why would you fight an institution that just creates money when it needs it?

I said we’ll see rates under 5% by the end of next week.  It looks like I was wrong.  Check out how I screwed this one up

Update: June, 2009 Mortgage Rates Thoughts (added at midnight)

We’re in the “Era Of Finger Pointing” so I”ll just pile on; mortgage rates have skyrocketed in the past week and it’s all the Chinese, Tom McClintock, and Bill Gross’ fault.

Tom McClintock is a  California Congressman (and former gubernatorial candidate).  Congressman McClintock wrote an opinion piece, in the Washington Times this past weekend, that suggested that the budget crisis in California foreshadows the inevitable national crisis:

What can California do? Its credit is stretched to the breaking point, and increasing tax rates now produces decreasing tax revenues. Its deficit vastly exceeds resolution by conventional budget reductions. There is no line item labeled “waste,” and the state’s deficit vastly exceeds the truly obsolete and overlapping programs strewn throughout its budget.

McClintock’s summary and warning:

The decline and fall of the California Republic is a morality play in the form of Greek tragedy. Before dismissing California’s agony as the just price for its hubris and folly, though, heed this warning: Congress is well under way toward imposing the same policies on the rest of the nation. California is just a little further down that road.

Bill Gross is perhaps the most prescient fixed-income money manager in the world.  He’s often known for being early but correct.  Mr. Gross suggested that America’s soverign debt might lose it’s rock-solid AAA rating and that we’re headed for the junk bond heap:

Bill Gross, manager of the world’s biggest bond fund, warned on Thursday the United States will eventually lose its top AAA credit rating, a fear that had already spooked financial markets on Thursday and could keep the dollar, stocks and bonds under heavy selling pressure.

Throw in the unsolicited money management advice from our largest creditor, the Maoists, and you have a recipe for a panic run on mortgage bonds.

Mortgage rates responded appropriately; the mortgage-backed securities market sold off about 3% in the last five days.  This means that a 4.5% mortgage rate, that cost 1 point a week ago, costs 4 points today.  This is a short-term overreaction.   Moody’s rating service, mostly owned by Friend of Obama (FOO), Warren Buffett, reaffirmed the US Treasury’s Aaa (highest) rating today:

And today, Warren Buffett’s Moody’s (MCO) went ahead and decided to kick sand in Bill Gross’s face yet again. How so? Moody’s affirmed the U.S.’s Aaa rating, arguing that “the U.S. economy’s long-term resilience and key role in global affairs should bolster its ability to resume a strong performance following the current recession.”

In addition to the Gross-slap Warren Buffett administered today, the Fed still has $600-700 billion earmarked to support mortgage-backed securities.  This means that they can buy a bunch of mortgage bonds, to bid up the lost 3% and drive rates back down into the 4′s.

Is this crazy? Why are we borrowing from Mao to subsidize Joe’s mortgage?  The answer lies in the depression recession war; we gotta subsidize housing by any means available if we want to pull out of the economic nose dive- even if it means we have to bribe “Big Daddy Buffett” to git ‘er done.

What’s this mean to you? Locking in your mortgage rate is probably a hasty decision right now.  Expect Ben Bernanke to speak by Friday in his gentle, reassuring tone.  Tim Geithner should be front and center, calming down those impetuous bond traders tomorrow.  Mortgage rates should drift down by the end of next week.

The Chinese, Tom McClintock, and Bill Gross are all correct; the US government’s actions are inflationary and destructive.  They are all correct but early.  The time to panic will be this fall; hopefully you’ll do what you need to get done by then.

Originally posted on Millionaire Real Estate Lender

Brian Brady Zillow

Brian Brady, enjoying his new Zillow hat, while he checks comps with the cool Zillow iPhoneApp

The recent FHA ruling (HUD Mortgagee Letter 2009-15),  designed to allow a subordinate lien, cross-collateralized by the anticipated First-Time Homebuyer Tax Credit, has been stalled.  Less than one hour after the ruling was posted on the HUD website, the provision was rescinded.  From Boston.com:

According to contacts with both FHA and HUD, Mortgagee Letter 2009-15, which stated that first-time homebuyers would be allowed to use the tax credit for their downpayment, has been rescinded. On a phone call with FHA, Kim Kahl was told, “The mortgagee letter has been rescinded for the time being.” NAEBA President John Sullivan was told something similar when contacting HUD. Neither FHA nor HUD gave further details.

This is not to say that the policy won’t be reintroduced soon.  Government relations’ executives at mortgage banks believe that HUD wanted to avoid the implementation problems the temporary agency-jumbo loan limits increase order created when the agencies and lenders weren’t prepared.

Can a home buyer borrow money for his/her down payment today? Of course they can provided the loan is documented and the repayment terms are figured into the debt-to-income ratios.  Current sources for downpayment loans, which are acceptable to HUD, are not limited to but include:

• personal loan from a family member
• unsecured line of credit (credit card)
• 401-k retirement plan loan

For example, if a home buyer wanted to purchase a $300,000 home, which required a $10,500 down payment, they could take a cash advance against a credit card.  Underwriters would most likely require that a 4% per month minimum payment ($420) be used to calculate the debt-to-income ratios (regardless of the actual minimum payment).  Is this a prudent use of credit?

Perhaps. In our example, the home buyer might pay nine months interest on that credit card loan, at 24%, until the tax credit could be realized.  That interest (in our example) would be about $1,900.  if the home buyer were reasonably certain that the home they were buying was offered at such a compelling price that the $1,900 cost was minor, then I’d suggest it might be a prudent use of credit.

Perhaps not. I’m not convinced that the compelling deals won’t be here in 8-9 months.  In short, it would seem a bit impetuous to me to use that credit card loan.