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Greg Swann and I write on the well-known industry site,  Bloodhound Blog.  I talked about why investors should “Go Local” when analyzing investment real estate, here on Mortgages Unzipped.  Here’s a peek into a conversation Greg and I had about real estate investing in Phoenix:

Back so soon? Yes, I am. 

I felt like playing my own ‘Devil’s advocate’ in regards to my latest blog. See, I tried to play it off like I don’t know why anyone would want to hold out for the lowest possible rate, even if it may never happen. 

I am a consumer, just like all of you who are reading this. At our most basic level, we all want the same thing. The best deal, at the best time. Sometimes, that works out. Sometimes, we get burned. But I wanted to share a funny story about consumerism at it’s finest. 

I spend most of my time in Connecticut, New York and New Jersey. Gas prices, like everywhere else, were absolutely OBSCENE up here. At the height, let’s say they averaged $4.50 a gallon. In recent months, they steadily dropped. In CT, they hung out around $3.50 for a bit, then $2.50. Then, magically, $2. In NJ, they are consistently 50 cents less. On my most recent journey to New Jersey, prices in CT and NY were around $2/gallon. Naturally, I wanted to fill up in NJ, so I drove to find the ‘best deal’. I SHOULD have been absolutely happy with anything BELOW $2, right? That is what I was used to, and what I had paid most recently. But the fierce consumer in me won out, and I drove to the area with the best prices, I think $1.57/gallon or so. 

I get it. I totally understand the forces that drive us to ‘wait’ or drive an extra five miles. Truth be told, I saved 60 cents. Was it worth it? Of course not, I was totally irrational. But in my mind, for some strange reason, I wanted gas for $1.57, not $1.63. But anything beat the $2 I’d be paying just over the border! Silly, but true stories often are just that. 

What would have happened if I drove ten miles out of the way, and gas prices actually started going up? Let’s say I was waiting for $1.57, but had to take $1.71 instead, or risk running out of gas? Was I going to beat myself up over it? Probably! But I would then be beating myself up for not taking the $1.63 when I had the chance

But that’s just the way things are as an American consumer. Let’s try to not beat ourselves up anymore. New Year’s resolution?

Jennifer Monastero

Citizens Community Bank

Low rates are here, and have been here for a solid month now. People can obtain rates anywhere from 4.5% to 5.125% when just a short time ago we were closing loans at 6.125%+. By all accounts, these are excellent interest rates and they should actually be stimulating the real estate market NOW. 

A very strange thing has happened though, and I am not sure it’s entirely healthy. People seem to be fixated on ‘waiting’ for ultra-low rates that may never appear, and in the meantime they continue to pay their 6.5% or 7% loan payment. Might 4.5% with NO points happen? Maybe. Maybe not. Tchaka Owen, who commented on another blog and writes on Active Rain brought up a very good point. He mentioned that no matter what the government does, it’s the LENDERS who control where rates go. So, while all signs are pointing to 4.25% RIGHT NOW, we are not seeing those rates on the street. Lenders don’t want to do it. Why? Because they are trying to make money, and because they are so understaffed they know they’ll get killed if they open the floodgates. If those rates aren’t there NOW, when they should be, how do we know they will be at some point this spring (or next week)? 

Let’s take a look at what ‘waiting’ for the magical rate does in two examples. One, a loan amount of $150,000 and the second a much larger loan amount of $450,000- both paying 6.5% currently.

At $150,000, the payment is: $948

At $450,000, the payment is: $2844

They can both obtain 5% with no points currently- and those payments are:

On the $150,000 loan: $805 (savings- $143)

On the $450,000 loan: $2415 (savings- $429)

Let’s say they are holding out for 4.5%, what would their payments be?

The $150,000 loan would carry a payment of: $760. This would mean an additional savings of $45/month.

The $450,000 loan would carry a payment of: $2280, or an additional savings of $135.

Based on these numbers, one could argue strongly for holding out for the lowest rate on the higher mortgage amounts, but not so much on the smaller mortgages. The difference in payment, in my opinion, is not ‘earth-shattering’ enough on the $150k loan to get worked up over. And honestly, even on the $450k loan, is missing out on 4.5% reason to cry? I doubt it. Both scenarios are saving so much at 5% that holding out for a little extra may end up costing them. And how do we know where rates will bottom out? We don’t!

What happens if someone closes at 4.875%, and rates continue to fall? Are they going to beat themselves up for ‘not holding out’ long enough?

My suggestion would be to not get all wrapped up in the rate, it will drive you crazy. While I understand the want behind getting the best rate, I can’t get behind the current obsession. If you want to close, and it will save you money, the sooner you do it, the better. End of story. Rates may continue to fall, and if they do, remind yourself that you had 6.5%+/-, and you were one of the lucky ones that could refinance and get out of it. People can beat themselves up over many things, getting the lowest interest rate should not be one of those things!

2009, here we come! Hold on to your hats!

Jennifer Monastero

Citizens Community Bank

I wrote this article about 15 months ago.  Since then, lenders have suspended the negative-amortization loan product, under the guise of “consumer protection”.  In reality, it was “lender protection”.  The Option-ARM time bomb, that is exploding today, is due to three factors:

1- Greedy borrowers, looking for something for nothing.

2- Greedy lenders, looking to lay off a poorly underwritten loan on an unsuspecting Wall Street investor.

3- Horrible disclosure and execution of this financial instrument.

Negative amortization loans will be back when the real estate market stabilizes and starts its upward climb.  EXACTLY when THAT will be is a prediction that, as our newly elected President says, “is far above my pay-grade”.  When that time comes, you’ll be better educated if you spend a few moments reading this article:

Remember the “sleazy Option ARM advertisements“?

They’re back but with a whole new twist:

This is why I never did option arms.  This is part of the reason why we are in the housing mess we are in.  Yes, borrowers have to claim responsibility, but every Bank that pushed neg am as a financing alternative deserves the billions in write downs and losses in stock options that they are mired in.  I have no sympathy for them…only contempt!

Oh, brother! If I see one more loan hack Monday morning quarterbacking this mess I’m gonna puke.  There is nothing wrong with negative amortization loans; there was something drastically wrong with the way they were prescribed. The “new neg-am” advertisements are “posited indignation” and they’re just as sleazy as the original advertisements.  They prey upon the opposite of the greed motivation; fear.

Let me try to break down the negative amortization loan for you:

• There is an interest rate charged; it may be adjustable monthly, annually, or for a specified period.
• There are payment options.  One option is LESS than the interest assessed for the month.  Borrowers have the “option” to pay the minimum amount or a higher payment.
• The difference between the lower amount paid and the higher amount assessed is added to the loan balance.  The loan balance rises or amortizes “negatively”.
• If that balance rises to a pre-determined amount (usually 110% to 125% of the original balance), all bets are off; the loan becomes a fully-amortizing loan and the payment goes up…a lot.

Neither the neg-am loans nor the banks caused the housing mess; a supply and demand imbalance, combined with an adolescent nature towards understanding complicated loan products did.  I’m gonna help you out with this.  Neg-am loans are neither good nor evil; they’re just financial instruments.  When prescribed properly, they can be a super-charged problem solver or liquidity builder BUT…you gotta do your homework, first.

When does a negative amortization loan make sense for you?

How about when you’re looking to buy in a soon to recover market?  NAR Chief Economist, Lawrence Yun believes that a V-shaped spike is due in three markets:

Middle-America cities that performed evenly over the past few years – like Cincinnati, Milwaukee and the Kansas City, Mo., area – are likely to experience home price gains in the 20 to 30 percent range over the next five years, while markets like Miami, Las Vegas and Phoenix could see prices go up as much as 50 percent during that time period, Yun said.

If you’re looking to buy a $300,000 home, with $150,000 down payment, in Las Vegas, you might consider buying a rental property in Phoenix, for $150,000, as well (geographically diversify). Spread the $150,000 over both homes and use a negative amortization loan to keep your payments affordable, for the recovery period.  You might sell the Phoenix rental for $225,000, in 2013, and use the extra $50,000 to pay down the Vegas loan under $100,000, in 2013.  That’s what wealthy people do.  They buy low and sell high with other people’s money.

If you’re saddled with debt and no lender is going to let you refinance with “cash-out”, you might need a negative amortization loan.  Let’s assume you’re paying $2,200/month on your $300,000 fixed rate loan and $800/month in $40,000 in consumer debt (credit cards).  In 3 years, your mortgage balance will drop to $290,000 and your credit card balance will drop to $27,000.  If you took out a neg-am loan, with a $1,400 payment, and applied the $800 cash-flow savings to your credit cards, you’ll pay OFF your credit card debt in 3 years.  You will have INCREASED your mortgage balance some $15,000 but you’ll be swapping 14% debt for 6.5% debt.

In the existing scenario, you’ll owe an aggregate of $317,000 in 2011. With the neg-am loan, you’ll owe an aggregate of $315,000 (on your mortgage) but your high-interest consumer debt will have been retired. Your credit score will most likely have risen, making your eligible for a MUCH better loan program.  Oh, you’ll save a bunch of money on taxes, as well.

Finally, maybe you have no liquidity .  That’s VERY dangerous !  Investing that $800 monthly difference can grow to a $35,000 nest-egg (assuming a 7% return). While the difference in mortgage balances will be $25,000 higher, with the neg-am loan, the investment account will have grown to $35,000; you’ll be ahead some $10,000 and have what we call in financial planning circles, liquidity.

Oh…by the way…liquidity=safety. When the dung hits the blades, cash in the bank is king !

Here’s the advice for today; don’t be swayed by the fear mongers of today; you weren’t swayed by the greed merchants of yesteryear.  Do your homework, perform your due diligence, and call a mortgage adviser who has financial planning background.  He’ll analyze ALL of your assets and liabilities, and tailor a loan solution specifically for your situation.

After all, aren’t you special enough to warrant personal attention?

Questions?  Want to ask me about my loan solutions?  Contact me here.

You asked for it?  You finally got it.  Shout it from the mountaintop, scream it in the valleys-

The Bailout is here.  The Bailout is here !

The Federal Reserve announced that the WILL buy mortgage-backed securities, in the open market, in an attempt to lower mortgage rates to 4.5% or lower:

The Federal Reserve on Tuesday announced that it expects to begin operations in early January under the previously announced program to purchase mortgage-backed securities (MBS) and that it has selected private investment managers to act as its agents in implementing the program.

Under the MBS purchase program, the Federal Reserve will purchase MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae; the program is being established to support the mortgage and housing markets and to foster improved conditions in financial markets more generally.

Mortgage markets are responsding with EXUBERANCE…joy…unbridled passion!  In post-market trading, the 4% coupons are trading at a premium, suggesting that  mortgage rates should open below 4.5% tomorrow.

Here’s my strategy, outlined with “mi compadre”, Sean Purcell, on Radio Mortgage

Come and get your money…if you qualify for it.

That question was the rallying cry for the recent Presidential Election.  In the following article, I examine the “new” lending guidelines and find that they’re similar to the way we funded loans back at the turn of the millennium.  This is one of the reasons I suggest that borrowers look for a loan originator with a little bit of grey hair.

The article starts off with an answer I made to another “old school real estate professional”, Lenn Harley, back in 2006.  That answer led me to write my market predictions.

READ:  Real Estate Market Outlook For 2009

Enjoy this little trip down memory lane:

Mortgage bankers have become extremely stingy about the yield spread premium they offer, to mortgage brokers or directly to consumers, for accepting a higher rate.  Essentially, yield spread premium is a way for consumers to lower the upfront costs associated with obtaining a mortgage.  Generally speaking, each .25% higher in rate afforded a 1% “rebate” to the consumer.  The formula isn’t linear and it varies with economic conditions but we used to rely on that .25% rate/1% rebate formula, in the past.

Today, that scale looked like this:

RATE                             REBATE

4.750%                           PAR

4.875%                          .375%

5.000%                          .500%

5.125%                          .625%

5.250%                          .875%

5.500%                           1.0

You follow?  In years past, a “par” rate (one that offered no rebate and required a 1% origination fee) was about .25% lower than a “no point” loan (one that paid the originator her fee from the lender).  Today, that spread was three times as much.,,,and I bitched about it on Twitter.  Enter Seattle real estate agent, Ardell Della Loggia.  She said, on Twitter:

ARDELLd @mortgagereport - Bigger news 4 buyers and agents…”break even in 21 months vs. WAS just over 5 years A point is looking like a bargain!”

Ardell was a bit off but she’s a REALTOR not a mortgage lender.  It normally took four years to “recover” the upfront point, the consumer paid.  Today it only takes about 18 months.  Ardell looked at the POSITIVE benefit of this disjointed market rather than the negative implications.  In other words, she recognized that the sub-5% mortgage rates are artificially low and that the 5.5% rate is more in line with the market.

Should you pay that “point”? Of course you should IF…you plan on staying in the home for a year and a half.

Sometimes, it’s all in the way you view things.  Thanks, Ardell.  I should have seen that.

Release Date: December 16, 2008

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

What’s up with the “range” of rates?   Well, they’d look pretty foolish if they said they wanted the rate to be at .25% and the market was already trading fed funds futures at .14% as of this morning.   Calling the rate at .25% would be sort of like predicting yesterday’s weather.

Since the Committee’s last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. No arguments there. Financial markets remain quite strained and credit conditions tight. I’m not sure that a lot of people are as aware of the strain on the financial markets as they should be. Overall, the outlook for economic activity has weakened further. Enough said there….

Meanwhile, inflationary pressures have diminished appreciably. Saying that inflationary pressures have diminished is being modest.   Inflation is dead for now. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters. For inflation to moderate any further, deflation will become a huge issue. Let me rephrase that, in light of the Consumer Price Index report this morning, it’s pretty apparent that deflation is an issue.

The Federal Reserve will employ all available tools (available tools - oh and since we’re running out of ammo in our normal tools, we’re going to come up with some new ones.   We hope that they work and we hope that they persuade people to start spending and borrowing money again) to promote the resumption of sustainable economic growth and to preserve price stability. Price stability - yeah, we are kind of concerned about that deflation thing and we’re afraid that all of the money we are printing is going to have a very negative effect on the value of the dollar and the value of our stock market investments, but we’ll worry about that some other time. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.  You know the era of cheap credit?  That period that Fed Chairman Bernanke presided over that created the credit bubble that is in the process of bursting?   The one that has inflicted so much pain over the last year or so?   We want that back and we’re going to keep rates low for as LONG as we have to in order to get people to start getting back into debt and engaging in “retail therapy.”

The focus of the Committee’s policy going forward will be to support the functioning of financial markets we need to make sure the banks not only stay solvent, but also start writing more loans and stimulate the economy through open market operations Open market operations - I think we can translate that into - we’re going to buy mortgages, buy treasuries and buy lots of other things (virtually anything) in order to keep the markets moving to keep the borrowers borrowing and keep the spenders spending and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level. High level - they’ll print as much money as they have to in order to get the economy going. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. We already said that we’re going to buy $500,000,000,000 and if conditions warrant (meaning if we need to and if it makes a difference) we’ll buy more. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities We can’t really figure out what good that would do, but it sounds good to say that we’re evaluating it.   There are a lot of other things we’re evaluating too. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses translated - to buy credit card balances and car loans off of banks so they can go make more loans..  The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity. We’ve got a printing press and we’re not afraid to use it.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Christine M. Cumming; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

Tom here - as I’m sure you could figure out, my comments are in bold and the italics are the actual written text.   A couple of thoughts about it further:

1. We truly are in historic times and I’m not sure it’s a positive thing.    The fact that our government is lowering rates that far due to economic stress is quite something.
2. There are several “lengths” of Treasuries are currently yielding less than .25%.   As of yesterday, 3 month Treasuries were paying a negative .3%.   Essentially that means that when someone buys a 3 month Treasury bond, they are saying, I’ll give you my money for 3 months and I’ll pay you for the privilege of knowing that I’ll be able to get 99.7% of the principal back.   That shows that all isn’t well in the economy.
3. When the Japanese lowered their rates to zero in the 1990s, it really didn’t work out very well for them.
4. Like I’ve written previously, the fact that short term rates are plummeting doesn’t necessarily mean that long term rates will follow.   We’re talking apples and oranges and the oranges are impacted by things that the apples aren’t.   One of the big differences is that the long term rates can’t be manipulated by the Fed the way short term rates can.   The Fed can say, “We’re going to .25% for short term rates.”   However, for long term rates to drop, the market has to be inclined to push rates in that direction.   How can it do that?   The direction of short term rates does have an impact.   However, so do things like inflation, deflation, the value of the dollar, investor appetite for mortgage backed securities and the overall direction of the economy.   So, don’t hold your breath waiting for 4.5% or any other particular rate because who knows whether it’s going to happen.
5. The stated goal behind this effort to lower rates is to get the housing market going again.   According to information I read, assuming the average price of a home in the nation (a little over $220,000) and a 20% downpayment, a 1% drop in rates would make approximately a $90 a month difference.   Is that enough to get the housing market going?
6. The long term effects of the type of market intervention that the Fed is doing are not known yet and I really think we’re going to find that unintended consequences are not going to be fun.

So, do I expect mortgage rates to drop a little bit?   Yes I do.   Do I expect the “euphoria” in the stock market to last?  Not for very long - maybe until after the New Year.   Do I expect that these attempts to help the economy will be successful?   No I don’t.   And why not?   Because they don’t deal with the number one problem right now and that is consumer confidence.

So what is the answer?  It can be described in 1 word (four letters):

JOBS

Stay tuned.

Tom Vanderwell

Amid the doom and gloom of the tanking economy, bleeding stock market, and declining home values is a bit of news that could be the best holiday present for homeowners (and mortgage pros, too!). Mortgage rates have fallen dramatically over the past month, now down to 5.00% for 30-year fixed loans.

In addition to making new homes even more affordable for home buyers, these incredibly low rates are a boon for homeowners who need or want to refinance their existing mortgage.

For example, on a $200,000 loan with a 30-year fixed rate, the monthly principal and interest payments at today’s rate of 5.00% is $1,073.64, whereas it was $1,206.83 one month ago when the rate was 6.06%.  That equates to a savings of $133.09 per month, or $1,598.28 per year.

Borrowers are taking advantage of these low rates.  Loan request activity on Zillow Mortgage Marketplace is more than 70% higher so far this month versus last month.  And it seems that homeowners have decided that the rates are low enough to refinance their existing mortgages.  Refi loan requests on Zillow Mortgage Marketplace have shot through the roof!  They now account for 54% of all loan requests, whereas last month they only accounted for 33%.

If you are thinking about refinancing your mortgage, now may be a great time to take advantage of these historically low rates.  An easy and anonymous way to do this is to submit a loan request on Zillow Mortgage Marketplace.  Lenders provide custom quotes to you, and then you decide who you want to call—they don’t call you.

And then go out and buy yourself a holiday gift with the money you will save!