Jay's Mortgage and Investors Blog

I came across this site that Mark Evans DM put together. For a limited time, he is giving away a Real Estate Investing course for absolutely FREE. Here is the link:

Sub2magic

This is an awesome course and covers more than I’ve seen with any other on this type of investing. Get it before he starts charging - I did.

James

You listed your house for sale. It sat on the market for two years. You cannot stand it anymore and decide to stay and do a little work.  You go to a local lender and apply to refinance your loan.  You will consolidate your first mortgage, your line of credit and pull out 50,000 to redo the kitchen.  This will make you feel better and forget that you cannot sell your house and you are compromising. 

You, are perfectly “clean” borrower and post a credit score of 695, make a decent salary and have a few hundred thousand in your 401k.  Bravo! 

After the appraisal is completed and the bank reviews it, you get a call from the loan officer, that the lender has REJECTED your loan!  Why? Why? WHY?  You said I was perfect – a slam-dunk.   

What happened is, that you did not tell your loan officer that your house was recently listed for sale.  We could not sell it! We had it on the market for two years. The banks do not care.  The philosophy is that if your house is listed or has recently been taken off the market, you are still trying to sell it.  Therefore, the work and loan will be a bad investment for the lender, because they will be paid off as soon as you can sell it.  

In light of the fact that the real estate market sucks and people cannot sell, the lenders have loosened up on the rules. FNMA now says, if your house was listed within the last 6 months, you can refinance but the listing had to have expired or been removed for 30 days.  

Previously, the house had to be off the market for 6 to 12 months depending on the lender. For Jumbo loans (over 417,000), the listing has to be over 90 old. Banks will no longer do home equity loans on properties that were previously listed.  

Of course, this is case by case as the lenders put it. The thing is tell someone that your house was listed before you bother. Do not think that pulling the sign out of the front lawn is going to fool anybody either.  They have ways……. 

When the Federal Reserve lowered the Fed Funds Rate by 0.75% yesterday, it was in response to economic weakness that mounted since its last meeting December 11, 2007. By contrast, the mortgage markets meet every day. Because of this, mortgage rates had already "priced in" the weakness to which the Fed was reacting. This is why mortgage rates did not fall by the same 0.75% yesterday -- they only fell slightly.

Two important rates that did fall, though, were the 6-month LIBOR and the 1-year constant maturity treasury (CMT). These are two popular interest rates used in adjustable-rate mortgages. When an ARM adjusts, it adjusts according to a simple math formula: (New Interest Rate) = (Index) + (Margin)
Where: Index: A variable, usually 6-month LIBOR or the 1-year CMT. ?Margin: A constant, usually ranging from 1.500% to 6.999%

So, if the indices move lower -- as we saw yesterday -- the adjusted interest rate on a mortgage is going be lower, too. As an example, LIBOR fell  percentage point over the last month from 4.83% to 3.83%.  This means that mortgage rates tied to LIBOR will adjust 1 percent lower than they would have in December 2007. For every $100,000 in a principal + interest loan, this yields $65 per month in savings.

Of course, each mortgage has unique index, margin and rate characteristics so give me a call and ask about how your ARM operates.

With the real estate market so slow these days, many Realtors are suggesting that the sellers offer incentives to the buyers who purchase their home. This can be a great way to separate your home from the many other homes on the market.

There are right and wrong ways to give seller concessions. The way it is structured can make all the difference in the world.

Limits to seller concessions

Most mortgage programs set limits to the amount of concessions a seller can make to the buyer before it begins to affect the sales price of the home. For instance, with a conventional 30 year fixed rate mortgage, if you have a down payment of 10%, the seller can give you up to 6% of the sales price as a concession. If the concessions are greater than 10%, the sales price will be reduced by that amount when the lender calculates the down payment and loan-to-value ratios (LTV).

Types of acceptable seller concessions

Typically, sellers can pay for non-recurring closing costs up to the maximum allowed by the lender for the specific mortgage program. Also, sellers can pay points to help the buyer lower their interest rate or pay for a temporary buydown. Also, if the buyer and seller agree to a payment abatement program the seller can pay for the payments that the buyer will skip.

Types of unacceptable seller concessions

Sellers can never give the down payment for the purchase to the buyer nor can they give them allowances for decorating, carpeting, repairs, etc. Many real estate professionals do not understand this and write them into the sales contract. If you are going to do repairs or replace carpeting for the buyers, it will have to be done before closing, put into escrow for the buyers to do later, or paid directly to the contractor who is going to do the work. If not, it will affect the sales price used by the lender to calculate down payment and LTV.

Concessions are a great way to entice buyers to take a closer look at your property and make an offer. But, it must be done correctly for the buyer to get the full benefit of the conecssion.

Portable mortgages are an idea that makes sense...maybe.  The concept is simple.  You get a home loan at a 30-year fixed rate.  If you lock-in when rates are low, you keep that rate for the life of the loan and transfer the loan to a new property.

Borrowers would love it because it makes them feel that the loan they "earned" stays with them forever.  Secondary markets (the ultimate purchaser of most loans) and banks, won't love this idea.   

Portable mortgages are available in Canada.  E-Trade Financial experimented with this loan product in 2003.  They charged borrowers a rate premium of .375% to guarantee that portability.  That means that if the "market rate" was 5.5% in 2003, the borrowers who optioned to take the portable mortgage, received a rate of 5.875%. 

The rate premium was charged to appease the secondary markets by providing them the extra money to hedge the interest rate risk.  The interest-rate risk for the investors could be hedged through mortgage derivatives or a collared options strategy.  I'm not exactly certain how that strategy will work so Pat Kitano was asked to comment; he was a capital markets guy on Wall Street so he might have an interesting take for us money geeks.

What are some of the problems ?

WACC is the most obvious problem for the consumer. if you have a $200,000 mortgage at 5.875%, and you want to transfer $200,000 in equity to a $500,000 home, you'd have to obtain a $100,000 second mortgage at 8.5%.   This would give you a WACC of 6.75%.  That's about .375% higher than the current market for a 30 year fixed rate, conforming loan.

Downsizing movers would probably not benefit. I have to think that a 20% equity position will need to be maintained. reducing the loan amount would severely hamper the secondary market's ability to hedge that interest rate risk so they would most likely disallow such a transaction.

Not all county recording offices are automated. The County of Philadelphia is still recording deeds like they did in 1963 while Maricopa County has been automated since the early 90s. This makes it difficult for a lender to perfect a proper lien on the new home.  Moving from Philly to Phoenix shouldn't be a problem but the reverse could be catastrophic for the lender.

Mortgage originators will HATE this idea. Over 70% of the home loans in the country are originated by mortgage brokers.  Brokers make no money on the servicing of the loan and would most likely resist the adaptation of this new product.   I suppose brokers could charge a slight premium in origination fees to recapture that lost future income.

Conclusion:

I'm predicting that a portable mortgage, while a unique marketing tool, would ultimately not be of benefit to most consumers.  In today's new real estate paradigm, equity harvesting offers more benefits to the consumer than the old "stay and pay" approach of the Depression Economic and Boomer Economic paradigms.  Its a fun topic to bounce around but the practical applications just don't make sense.