"Credit Crunch" - the new hit financial drama

Home equity loan delinquencies reach new record levels

2009-07-08T05:52:00.000-07:00

The American Bankers Association reported yesterday that job losses contributed to new record levels of home equity loan delinquencies. With more than 6 million jobs lost since the current recession began, people are falling behind in paying their bills.

The ABA considers a home equity loan payment to be late if it is made more than 30 days after its due date.

This is one of the contributing factors which make it very difficult to obtain or refinance home equity loans or home equity lines of credit in today's market. If you have a HELOC or a 2nd mortgage in place and you're not "upside down" in your financing (that is, if your home is worth more than the sum of your mortgage balances), your best bet may be to refinance both loans into a single new FHA mortgage. FHA rates less than 6.000% are still easy to get, and that rate will cover not just your first mortgage, but also the portion of your financing which has been covered by your second.

FHA loans do come with FHA mortgage insurance, but FHA monthly premiums are lower than private mortgage insurance, and chances are you'll be saving money on the portion of your financing currently held in your second mortgage.

Denver real estate losses are relatively good

2009-06-05T14:58:00.001-07:00

Hard to put a headline to this data; on Wednesday, May 27th, the Denver Post said "Metro home slide not off cliff".

Here's the essence of what they're saying -- the latest real estate market data released (for March) shows a 5.5% decline in the Case-Shiller home price index, the least bad result for 20 major cities.

We beat out Dallas, which had a 5.6% decline. Not too shabby, compared to Phoenix (36.0%) or Detroit (25.7%). And although their Lakers seem on their way to another NBA championship after beating our noble Denver Nuggets, our decline was less bad than theirs (22.3%).

Maybe we should all move to Phoenix, where it's cheap.

A realtor might tell you that this shows that Denver is the most stable market among the top 20.

Call me if you want to buy a home (go to http://www.jordangraham.com/).

Sub-5% mortgage rates are going...going...gone?

2009-05-29T07:11:00.000-07:00

Here's the picture worth a thousand words, and more than a thousand dollars for the typical mortgage borrower -- it's a graph of the yield for the 10-year US Treasury note (from Yahoo), which is the foundation on which fixed rate mortgages are built. When the yield on the 10-year goes down, so do fixed mortgage rates for new loans.

That dip you see toward the left of the graph took place on March 17th - a couple of days after China's premier Hu Jintao voiced his concern at how much the United States is borrowing in order to stimulate our economy. The US Federal Reserve responded by announcing a plan to buy $1 trillion worth of government debt and mortgage-backed securities -- prices for Treasuries shot up (which means that yields plummeted), and I spent all day the next day on the phone locking refinances for people I knew who were waiting for the right time to lock.

That day I locked 30 year fixed rate refinance loans at 4.375% with no origination or discount points. That's a "novelty" interest rate -- unbelieveable from a historical perspective.

But a look at the 10-year yield graph since then shows movement steadily upward, and the past week and a half have seen particularly steep climbing. All good things must come to an end, as I'm learning in my personal life right now, and it seems as though reality is catching up with the US mortgage market.

Fundamentally, US government bonds are trading at unsustainably high prices. China cannot afford to continue buying our bonds (read: lending us money) as much as they have in the recent past; they desperately need their cash for domestic spending projects to stimulate their own economy. We've seen interest rates at historic low levels for a long, long time.

My take is that rates will be back in the 6.000% range for 30 year fixed rate loans before too long. That's a great interest rate, by the way, if you look at historic averages. The days of novelty sub-5% interest rates look like they're going. . . going. . . gone.

How long are sub-5.000% interest rates going to last?

2009-04-27T14:06:00.000-07:00

I read a piece today by my well-published friend Vitaliy Katsenelson about the pickle in which China finds itself these days. What struck me as the understated punch line is that mortgage interest rates are as low as they are right now (I quoted someone 4.375% for a 30 year fixed rate loan this morning with 1.500% in discount points) largely because China is continuing to buy US Treasuries at unsustainable levels.

In the old days it worked like this: China bought US Treasuries, driving down their yields -- and since fixed rate mortgages are built on the yields of US Treasuries, this drove down our mortgage interest rates. Americans refinanced their homes and spent money, fueling demand for China's exports. This gave China more money to buy US Treasuries. . . and so the circle went.

In this financial crisis, though, Americans have pulled way back on spending. China is responding with a stimulus of its own, forcing banks to lend and going on its own spending spree, hoping that the global financial crisis will ease before it runs out of money to spend propping up its own economy. For this it needs cash, and it's eyeballing its huge portfolio of US Treasuries, wishing it could use some of those funds.

To quote Vitaliy, here's the pickle China's in:

Now China needs to stimulate its economy. It’s facing a very delicate situation indeed - which is a nice way of saying that China’s screwed. China needs the money internally to finance its continued growth. However, if it were to sell dollar-denominated treasuries, several bad things would happen. Two come immediately to mind:

1. Its currency would skyrocket - not good for China, because it would lose its (relatively) competitive low-cost producer edge.

2. US interest rates would go up dramatically - not good for the US (its biggest customer), and therefore, not good for China.

This is why China is desperately trying to figure out how to withdraw its funds from the US dollar without driving the dollar down. Good luck with that.

And the US government isn’t helping: It’s printing money and/or issuing Treasuries at a fast clip, and needs somebody to keep buying them. If China reduces or halts its buying, we may be looking at high interest rates, with or without inflation.

The latter scenario worries me most.

Me too. On Saturday, March 14th, China's premier Wen Jiabao expressed concern about China's investment in the United States, saying "We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

Three days later, the Fed announced that it would begin buying US Treasuries (to reassure global financial markets?); the next day, long term mortgage interest rates hit the lowest I've ever seen them. I spent all day on the telephone, only calling people who were ready to lock interest rates on refinances -- I got 4.375% 30 year fixed rate loans with no points at all that day (the best I've ever seen; I doubt rates will be that low again).

Of course, the market reaction was brief, and by the late afternoon rates were rising again.

I've been harping on sustainability for years. China is buying Treasuries at unsustainable levels. The Fed cannot step in and take China's place. Soon -- and I don't know when -- demand on Treasuries will begin to drop, and long term mortgage interest rates will return to 6.000% and higher.

Shared equity down payment assistance

2009-01-22T17:25:00.000-08:00

Douglas County (Colorado) has a new down payment assistance program called the Shared Equity program. They provide up to 20% for qualified first time home buyers to use as the down payment on their new home -- but unlike traditional down payment assistance, no interest ever accrues on their piece, and no payments are ever required.

Instead, the home buyers pay the county back when they sell or refinance their home, paying the same percentage of the home's then-present value as the percentage given as down payment assistance.

For more details, click here: Shared equity down payment assistance program

3.99% 30-year fixed rate mortgage

2009-01-22T08:15:00.000-08:00

The Wall Street Journal reported yesterday that home builder Toll Brothers (based in Horsham, Pennsylvania) is offering 30-year fixed rate financing at 3.99% for buyers of their homes.

The rate requires no "points" (origination or discount fees), and is for loans:

Under the conforming loan limit ($417,000 or less)
Made to borrowers with credit scores of 720 or higher
For purchases in which buyers have 20% or more for down payment

This following last week's record-setting low mortgage interest rates.

Rates rose Friday and Monday of this week, and although they are higher than last week's best, borrowers can still get 30 year fixed rate loans in the 5.000% range.

For more information or to find out what interest rate you can get, contact me.

Treasury Department considering 4.5% mortgage loans

2008-12-05T05:42:00.000-08:00

The US Treasury Department is thinking about making 4.5% fixed rate mortgage loans available to home buyers through Fannie Mae and Freddie Mac in its latest effort to stabilize the real estate market. Rates this low haven't been around since the early 1960's; the theory is that home buyers who have been waiting on the sidelines would flock to the closing table, buying homes, reducing home inventories and stabilizing the real estate market.

As recently as September, Fannie Mae and Freddie Mac fixed-rate mortgages had interest rates as high as 6.375%. With that interest rate, a home buyer's monthly payment of $1,350 could buy a home worth only $179,000. With a 4.500% interest rate, that same monthly payment could buy a home worth $214,000.

Sounds pretty good so far. The New York Times' headline reads "Washington’s New Tack: Helping Homeowners" - but far from helping homeowners, the new plan would rescue banks by placing the risk of falling real estate values squarely on the shoulders of American families. Inventories would be reduced (that's the piece that helps banks; the country is littered with foreclosed properties which banks have had to repossess - they sit empty, costing the banks more money every day) - but what effect would this have on real estate values?

In the short term, buyers would quickly pick up on the logic of being able to afford more home. Americans love MORE MORE MORE; a few years ago we rushed to take out subprime mortgage loans because we could buy bigger homes. We save almost no money for our future; we open financing accounts with Best Buy so that we can bring home larger televisions with flatter screens; we buy bigger homes.

But what are homes really worth? These below-market mortgage interest rates would only artificially prop up home values. If you bought that $214,000 home today and went to sell it years from now when the 4.5% mortgage plan was no longer being offered, who would pay you $214,000 for it? The home which cost you $1,350 a month to live in would cost someone wanting to buy your home $1,552 a month. The "hangover" after this plan tanks will depress real estate values years from now.

The subprime market collapsed largely because the assets in the mortgage-backed securities involved weren't worth what the financial whizzes thought they were worth. Sure, if a buyer is willing to pay you $214,000 for your home, in one sense your home is worth $214,000 -- but economists point out that the ratio of home prices to household incomes is still very high.

As long as Americans sign up for living that life - paying more and saving less because we're buying the illusion that that will make us happier - this house of cards that is our economy will sputter along as it has for the last couple of decades. Our parents and grandparents probably shake their heads in disbelief, and I think they're right to do so.

1.0% Fed Rate; GDP shrinks by 0.3%

2008-10-30T09:36:00.000-07:00

The good news is that the Government is still spending money, and that America is exporting for the moment -- the New York Times reports today that consumer spending is down for the first time since 1991, when President George Bush Sr. went to war in Iraq.

Even after 9/11, American consumers were spending. It was the patriotic thing to do, after all.

Now we're having the economic hangover from all of that spending -- and the borrowing that fueled it.

The Federal Reserve Board met yesterday and did what was expected of them -- they dropped the key benchmark Federal Funds Rate to 1.0%, the lowest rate since our emergency response to the attacks of 9/11.

Bloomberg reported this morning that the Fed may not stop there:

Bernanke is drawing on an academic career studying the failed efforts to prevent the Great Depression, and yesterday's shift indicates he's prepared to revisit his 2003 commitment as a governor to lower rates to zero percent if necessary. Should lending fail to revive by December, the central bank will probably cut by another half point, said former Fed Governor Lyle Gramley.

The Fed most recently lowered the Fed Rate three weeks earlier, on October 7th, 2008; long-term mortgage interest rates responded by climbing steadily higher. With its many rate cuts over the last couple of years, that's what has happened -- long term mortgage interest rates rose after the Fed lowered its rate. Sometimes rates were higher only for a few days; other times they were higher for several weeks.

Interest rates on mortgages opened higher today.

Banks should eat their vegetables

2008-10-24T10:13:00.000-07:00

I read this article in the New York Times last night about a member of the Senate Banking Committee wanting the banks that we as taxpayers have propped up to do more, quickly, to help homeowners in danger of foreclosure.

My favorite part:

Senator Charles E. Schumer, Democrat of New York, told the officials that they seemed to be giving the banks “a little too much dessert and not making them eat their vegetables.

Most loan modifications have been made on a "voluntary" basis with banks. Loan modification is expensive to banks -- both in absolute dollar amounts and in time -- and banks haven't been very proactive about making them.

After John McCain suggested that we as taxpayers pay full price for distressed loans (rewarding the banks who made bad loans), I thought of an alternate plan in which the US Government could buy servicing rights to distressed loans, modify the monthly payment terms and create negative equity accounts for loans in which the new payments are less than the cost of providing the modified financing; those negative equity accounts could be attached to the homes through a lien which would look a lot like a second mortgage. In time, if the borrowers' financial standing improved or property values increased, this negative equity account could be brought to zero through a refinancing or selling of the home.

The cost to Americans would be minimal; basically interest on the negative equity accounts, which would start small and grow over time.

Sorry to say that neither Presidential candidate has approached me so far to ask me more about this idea.

Down Payment Assistance is dead -- long live Down Payment Assistance!

2008-10-13T20:45:00.001-07:00

Back at the end of July, when this credit crunch was just a bad dream to only a handful of people like Paul Krugman (the winner of this year's Nobel Prize for Economics) and Barry Ritholtz, President George W. Bush signed the Housing and Economic Recovery Act of 2008 into law. With it came the October 1st sunset of one of the last good scams in the real estate business -- the seller-funded "Down Payment Assistance" scheme.

Here's how the shell game worked: Suppose I'm trying to buy your house and I don't have any money for a down payment. These days, when making an offer to buy your home I'd be likely to make an offer for less than your list price -- maybe 3% - 5% lower. But the days of "no money down" mortgage financing are over; the best deal around (since I'm not a veteran) is an FHA loan, which until recently required that I bring a down payment of 3%.

How much is your house worth? Say, $285,000? That 3% works out to $8,550. My closing costs will likely be another 2 1/2 %, or $7,125 -- add that to the down payment assistance and I need to bring at least $15,675 to closing in order to buy your house.

But I don't have any money for a down payment, remember? So I'm stuck. Can't buy your house. My real estate agent can't get a deal out of me, and her mortgage broker can't either.

Enter the "Down Payment Assitance" scheme. Instead of negotiating a lower purchase price, I make a full-price offer to you. . . but, being a charitably-minded guy, I require as part of my offer that you donate 3% of my purchase price to my new favorite not-for-profit organization over here on the side. Aw shucks, while we're at it let's make that requirement 3% plus 2 1/2% (that's what my closing costs will be, after all).

What happens next? Surprise, surprise; this not-for-profit organization makes a gift to me of 5 1/2% of the purchase price (less a $500 administrative fee). I never need to pay it back. I'm certainly willing to pay $500 to the not-for-profit for them to launder the money for me, since now I have gift funds from a not-for-profit which I can use not only for my down payment, but also to pay the closing costs on my loan to buy your house. I "give you" the money back as part of my offer to buy your house.

You get the same amount of money you would have gotten had I negotiated a lower purchase price for your house. I get to buy your house, even though I had no money to use as a down payment (and therefore couldn't honestly qualify for an FHA loan to buy your house). And my newly-favorite not-for-profit organization gets $500 for managing a handful of documents and passing your money back to you through this circuitous route. My real estate agent gets her commission (usually 2.6% of the purchase price, or $7,410 -- how psyched is she if she gets 10 Down Payment Assistance deals a year, huh?) and of course her mortgage broker gets about 1%, or $2,850, so he's happy too.

It's a win-win-win-win-win, right? Everybody happy?

So why did Down Payment Assitance (referred to, in this anacronym-happy culture, as "DPA") get shot down?

It turns out that you and I, as American tax payers, are on the hook for the losses that FHA experiences when no-money-down borrowers masquerade as 3%- down borrowers and end up getting foreclosed on.

The Wall Street Journal reported this summer that FHA was posting a $4.6 billion loss -- its largest in years -- based to a large extent on seller-funded Down Payment Assistance. Although that amount seems quaint in light of our $700 billion bailout and tonight's announcement that the US Government is forcibly buying ownership interests in major US banks to the tune of $250 billion, that $4.6 billion loss was based on the effects of a lie. That lie is that I am a 3% down borrower when I use a seller-funded Down Payment Assistance program, not a no-money-down borrower.

FHA charges a mortgage insurance premium as a part of every loan -- in an up-front mortgage insurance premium payment, as well as a monthly payment that's part of my mortgage payment. FHA charges 1.75% for the up-front MIP fee, and 0.55% per year for the ongoing piece -- and these amounts are based on FHA loan underwriting guidelines, which require a minimum down payment of 3%.

My belief is that FHA should charge a progressive MIP (mortgage insurance premium), costing me less money if I bring a larger down payment than they would charge for a lower down payment. They don't do it that way; they charge me the same percentage if I bring 19% down payment ($54,150) as they would if I brought my 3% statutory investment of $8,550. (To be sure, 0.55% of my lower loan amount -- in the first scenario -- is only $1,269.68 a year, lower than the $1,520 a year I'd pay if I only brought 3% -- but the risk premium is the same.)

I believe that a no-money-down loan is a riskier proposition than a 3%-down loan, and should cost more.

In any case, seller-paid Down Payment Assistance programs died because that's true -- no-money-down loans are riskier, and you and I (as American tax payers, on the hook for FHA's losses) ended up footing the bill for way more foreclosures than we would have had if we'd had a pool of true 3% down buyers.

I can hear the real estate agents screaming; this has been a cash cow for them for years. And yes, there are good, solid buyers who would have maintained integrity with their financial commitments under DPA purchases who can't buy a home using that scheme any more, and that's bad -- not just for the family itself, but for America. We need those good, solid, responsible people in ownership of homes, reducing bank-owned property inventories which depress the real estate market, in turn creating new waves of foreclosures.

I've seen legislation being pushed by the incredibly effective DPA lobby, asking for seller-funded down payment assistance to be reinstated, with new risk premiums. Sadly, the legislation is still too risky and you and I would end up bailing out the FHA down the road, as well.

With seller-funded down payment assistance in the morgue, there's only one option available to ultra-low-money-down buyers: The $100 HUD home program.

Since November of last year, HUD has had a program in which you can use a down payment of only $100 if you buy a HUD home, and:

make a full price offer
live in the property as your primary residence, and
use an FHA-insured loan for your purchase

Interesting, isn't it? HUD is perfectly OK taking on a no-money-down buyer -- making an exception to the new 3.5% statutory minimum buyer investment -- on its own properties, while it's not OK for that same buyer to use the same financing structure to buy a bank-owned (or family-owned) home through a DPA program.

That's irony.

But in the meantime, the HUD $100 down program is the only game in town.

$50 million in new housing counseling grants

2008-10-08T07:36:00.000-07:00

The Secretary of HUD -- the U.S. Department of Housing and Urban Development -- announced yesterday a grant of $50 million to housing counseling agencies around the country to work with Americans on getting them into homes they can afford or keeping them in the homes they have now.

Since 2001, HUD has increased funding to 2,300 approved housing counseling agencies by 150 percent. More than $47 million will support 21 national and regional organizations and 376 state and local housing counseling agencies. In addition, HUD is awarding $3 million to two national organizations to train approximately 2,600 counselors who will receive the instruction and certification necessary to effectively assist families with their housing needs.

Of the $50 million grant announced yesterday, $4 million will go toward helping elderly people understand reverse mortgages (also known as Home Equity Conversion Mortgages, or HECM's). In a reverse mortgage, a homeowner can stay in her home and receive a monthly check from the lender to help cover medical and other costs of living.

Here's a list of the HUD approved housing counseling agencies in Colorado:

Aurora: City Of Aurora Community Development Division
Boulder: Boulder County Housing Authority
Colorado Springs: Partners In Housing, Inc.
Commerce City: Adams County Housing Authority
Denver: Brothers Redevelopment, Inc.
Denver: Colorado Housing Assistance Corporation
Denver: Denver Housing Authority
Denver: Northeast Denver Housing Center
Denver: Southwest Improvement Council
Durango: Housing Solutions For The Southwest
Fort Collins: Neighbor To Neighbor

Fed Rate lowered again by half a point

2008-10-08T07:28:00.000-07:00

I drove my wife to the airport this morning at 4:45 am Mountain time (that's love, isn't it?) and on the way back -- at 5:15 -- I heard the news that the Federal Reserve had lowered its key rate, the Federal Funds Rate, by an additional 0.500% (it now stands at 1.500% -- the lowest it's been since 2004).

The first thought I had when I heard the news was that those lads at the Federal Reserve sure get up early -- it was only 7:15 Eastern time, and they were already busy lowering rates.

In the past 18 months, nearly every time the Fed Rate has been lowered, long-term fixed mortgage rates have risen -- at least temporarily -- for anything from a few days to several weeks.

This morning's interest rates are actually lower than yesterday afternoon's, by about an eighth of a point (0.125%).

Announcing Hope for Homeowners ("H4H") program

2008-10-03T12:10:00.000-07:00

One of the critical goals we have in bolstering our financial system is stopping the slide in real estate values. Some argue that real estate values are still too high; nevertheless, if values continue to slide, more and more homeowners will go "upside down" in their mortgages, owing more than their homes are worth -- a condition that leads in many cases to more foreclosures.

Through the Housing and Economic Recovery Act of 2008, Congress created the Hope for Homeowners ("H4H") program to help reduce foreclosures.

The Hope for Homeowners program allows borrowers who are struggling in their current mortgages to refinance into fixed rate FHA loans they can afford. For qualified borrowers, lenders will have to "write down" the size of the mortgage to 90% of the borrowers' new appraised value (meaning that even if a homeowner is upside down in her loan -- owing $200,000 on a $175,000 home, for example, she could refinance into the H4H program with a loan amount of only $157,500.

Additional requirements of the Hope for Homeowners program are:

Their mortgage must have originated on or before January 1, 2008
They cannot afford their current loan
They must have made a minimum of six full payments on their existing first mortgage and must not have intentionally missed mortgage payments
They do not own a second home
Their mortgage ("front end") debt-to-income ratio must be at most 31 percent
They did not knowingly or willfully provide false information to obtain the existing mortgage, and they have not been convicted of fraud in the last 10 years
They must follow FHA’s long-standing and strict policy of fully documented income and employment
Homeowners must agree to share both the equity created at the beginning of their new HOPE for Homeowners mortgage and any future appreciation in the value of their home
To participate, existing subordinate lenders must agree to release their outstanding mortgage liens

The new HOPE for Homeowners mortgage payment must be at or below 31 percent of the borrower’s income, unless there is ‘trial modification’ period prior to loan application. A trial modification would give borrowers the opportunity to demonstrate their capacity and willingness to make a mortgage payment that does not exceed 38 percent of their monthly income.

The program is effective from October 1, 2008 to September 30, 2011.

As many as 400,000 homeowners could avoid foreclosure through this program over the next three years. If you or anyone you know are having trouble making your mortgage payments, contact me to see if we can help you through the HOPE for Homeowners program -- by refinancing your loan into a new 30-year fixed rate loan with lower payments.

Change to FHA guidelines

2008-09-26T16:26:00.000-07:00

One healthy aspect of our recent real estate market has been the opportunity to buy a new personal residence and keep one's old residence as a rental property. It's healthy because it takes two homes out of the real estate for sale inventory (high inventories push down home values) and the credit worthy home owner is, in effect, guaranteeing both mortgages, but his or her rental income provides a significant offset to the cost of the two combined.

Safety. Credit worthy borrower. Housing for the renter, who may not be able to qualify for a loan on his own.

FHA just changed their guidelines, however:

Homeowners vacating an existing primary residence and purchasing a new residence, will not be allowed to use rental income from the property being vacated for qualifying purposes. The borrower must qualify with both full PITI payments. The only 2 exceptions to this policy are as follows:
Relocation with a new employer or being transferred with the current employer to an area not within reasonable commuting distance.
If the current principal residence being vacated has a 75% or less LTV based on an appraisal dated within the previous 6 months or based on the original Sales Price of the property.
Additional details on the new guidelines are spelled out in Mortgagee Letter 2008-05.

If you're really interested in more info, call or email me.

Quote of the day on the bail out

2008-09-25T08:28:00.000-07:00

This is one of the best pieces I've read about the proposed bail out of Wall Street and American consumers who bought homes they never could afford -- from Jim Welsh of Welsh Asset Management:

"We will be told that the Federal Reserve and the Treasury have finally gotten it right. The scope and size of the proposed program will arrest the decline in home prices, restore stability to the financial markets, enable banks to get back to the business of lending, and restore the confidence of the American consumer.

While the program certainly has each of these points as a goal, the amount of time to achieve each goal is unknowable, but an important factor. Moses was told he would lead the Jews to the Promised Land. He didn’t know it would take 40 years. And, in all due respect to Bernanke and Paulsen, Moses was working with God. They are working with Congress."

HUD's $100 down payment program

2008-09-10T22:44:00.000-07:00

With all of the foreclosures FHA has been experiencing, HUD has initiated a program in which buyers can buy a HUD home for owner occupancy using only $100 as a downpayment.

Click here for more information on the HUD $100 down payment program.

Housing and Economic Recovery Act of 2008

2008-07-30T19:00:00.000-07:00

This was a huge piece of legislation, signed into law by President George W. Bush on July 30, 2008. Among other things, the Housing and Economic Recovery Act of 2008 established the Federal Housing Finance Agency, put an end to seller-paid down payment assistance ("DPA") programs such as Nehemiah and Neighborhood Gold and created the Hope for Homeowners program.

If you google the Housing and Economic Recovery Act of 2008 you'll find a lot of garbage information -- here are links to two good documents with good information on it:

Here's the full text of the legislation

Here's a summary of the law

Of course, if you want to know how any or all of this affects you personally, please contact me!

The dollar and foreign exchange

2008-07-23T15:46:00.000-07:00

Actually, the dollar is off of its recent lows -- but this is just too good to pass up.

Thanks to Barry Ritholtz.

Cinema: Batman and "The Dark Knight"

2008-07-21T15:07:00.000-07:00

I saw The Dark Knight last night and really loved it. Glad to see Batman movies being done with this much budget; Christian Bale is the best Bruce Wayne / Batman I've ever seen and I love Michael Caine.

Before I go any further: Do not bring the kids. There is a strong "your parents cannot make you safe" element to the movie. I make no apology if this tells you too much about the movie; just don't bring the little kids. Twelve, thirteen -- maybe.

I've never seen Heath Ledger before; what an incredible performance. I found myself happy to see him enter the scenes; he absolutely stole every scene he was in. In the personal work I've done I've come to know my own rebel personality -- that part of me that rejects rules. In his portrayal of The Joker, Heath Ledger brings a dark brilliance to the rule breaker. I could hear a young man (teenager?) behind me loudly enjoying The Joker's darkness -- perhaps this young man recognized in the character his own internal rebel.

As I've said, I loved the movie -- but as I left I realized that something was bothering me. There's a theme in this movie that it's OK to go against what is right and proper, as long as you're doing so in the service of "the greater good." One of my college degrees is in philosophy, and I remember studying this notion -- we called it "utilitarianism." I believe that it cedes moral responsibility to whoever is deciding what is "the greater good" -- and I see it at work in our country.

I see Abu Graib prison, Guantanamo and water boarding all being done in the name of "the greater good," and I see my fellow Americans allowing others to decide what "the greater good" is.

I once read that our horror movies show what we're afraid of. In a way, it's Batman I'm afraid of, not The Joker -- because Batman symbolizes this notion of abdicating my own moral responsibility, letting others do things in my name which I cannot support in good conscience.

Jordan Graham for President?

2008-07-14T06:35:00.000-07:00

A good friend emailed me this link this morning, asking if I was really running for President.

At first I thought that the article would have been about this Jordan Graham, running for President -- but the new video doesn't actually show the "candidate" at all. (My younger brother clued me in to this particular Jordan Graham -- there was a time when I was spending a couple of hours a day in the gym, lifting weights -- but I never got to looking quite like this particular Jordan.

Just a couple of years ago, I was at a coffee shop ordering my usual four-shot mocha (with just half the usual chocolate) and I discovered to our mutual amusement that the young woman behind the counter was also named Jordan Graham. Perhaps she's the one who's running for President now.

Just for the record: I am not running for President.

Love the publicity, though!

What's the difference between getting pre-qualified and pre-approved?

2008-07-09T03:43:00.001-07:00

When you submit an offer to buy a home, the listing agent (that's the real estate agent representing the sellers) will ask for a "lender letter" -- and what they mean is either a "pre-qualification letter" or a "pre-approval letter." Either one works for the sellers; they just want to know that you've spent some time talking to a mortgage company.

There's a huge difference between the two, and sometimes you can lose a property you want to buy by having the wrong one.

Getting pre-qualified is easy -- you can call a mortgage company and give some basic information to them, such as your monthly income and bills and rough estimates of your bank account balances, and they'll write a letter saying that you're pre-qualified to buy the home.

But they haven't pulled your credit, so they don't know what your scores are, and they're taking your word for everything. You could call me and say "Hi Jordan, I'm Donald Trump. I make $50 million a month and I have no personal debt," and I'd be able to dutifully write a letter for your purchase offer which says that you are pre-qualified to buy the place.

Getting pre-approved, on the other hand, takes a few more minutes but dramatically increases the confidence on all sides that you can in fact buy the home. To pre-approve you, I would indeed pull your credit report and ask you for a lot of information (where have you lived and worked for the past two years, what's your compensation structure, etc.) I'd upload all of your information to Fannie Mae's secure automated underwriting system, which would then not only give us an "approve-eligible" finding, but tell us exactly what paperwork they'll require for your loan file. For example, they might say that they only need to see bank account statements showing a certain amount of money (a recent one I did asked only to show $1500 in assets), or they might not require paycheck stubs or tax returns at all.

When I write a pre-approval letter for you, the listing agent knows that I've done a lot more homework on your loan -- I know a lot more about you and I know what it will take to get us all to the closing table. That's why, if they receive two offers at the same price, they might accept the offer with a pre-approval letter instead of the one with just a pre-qualification letter.

Here's a link to my site to get your pre-approval process started.

Buying foreclosures and pre-foreclosures

2008-07-09T02:48:00.000-07:00

It's 3:56 am, and for some reason my mind has just been racing all night. If I weren't working, I could be downstairs in front of the TV watching infomercials on how to make a killing buying foreclosed properties (with no money down, I'm sure!) -- but instead, I'm going to set out the basics on buying foreclosures and pre-foreclosures.

First, to dampen your enthusiasm: There are very few killer foreclosure deals in the Denver metro area. The vast majority of today's foreclosures were originally bought with little or no money down, so if a home cost $250,000, chances are the bank that owns it today is in to it for about that much. What's worse, much of the Denver metro area has seen declining property values -- meaning that the bank may have a $248,000 loan against the property, but recent comparable sales might average $235,000 -- so the chances of you getting that $250,000 home for $75,000 are pretty low, with rare exceptions.

If you're still reading, I'll go back a few steps and start with pre-foreclosures. You'll find pre-foreclosure homes for sale, for the most part, by searching the MLS. (That's the realtors-only database of homes -- click here to send me a note if you want help with the MLS.) These homes are listed because the owners are behind in their payments and are trying to sell the house to get out from under their mortgage payments.

If their loan amount exceeds the market value for their property (as in our example above), the owners are said to be "upside down" in their loans, and they'll either have to bring money to the closing table to make up the difference or negotiate a "short sale" with the bank, in which the bank agrees to accept less than the full amount owed on the mortgage.

So when you find a property on the MLS which looks like it might be a good buy, the listing agent will tell you if it's a short sale. That's good information to know, because buying a short sale property is a process unto itself.

The listing agent will be looking for a lowball offer -- anything credible (meaning it's from a qualified buyer) which he can take to the bank which has the mortgage against the property. In our example above, the bank has $248,000 against the property, which is worth only $235,000 -- so you might offer $220,000, just to get things going. The listing agent will take your offer to the bank, which will then begin its incredibly slow process of evaluating what it should do with the property.

It can take weeks to hear back; banks have loss mitigation departments which review thousands of troubled properties each month. You'll almost certainly not have your offer accepted; quite likely yours will not be the only offer they're looking at (that's part of why they take so long) -- they may counter, or they may reject your offer outright -- but they'll communicate to the listing agent what they think they'll end up selling it for.

Quite likely they'll ask all of the parties who have made offers on the home to give their "best and final" offer -- what's the maximum you'd be willing to pay for the property. You can write your offer to beat any other offer on the table by $500, up to your maximum -- so if your high end is $230,000, you can write it for $225,000 with this clause and only end up spending $228,000 if the highest other bid is $227,500 (for example).

So that's a short sale. You'll do yourself a favor by being pre-approved for your financing before you make your offer; banks usually have many offers on the table and they'll take the one that is most certain to close, all else being equal.

If the home doesn't sell in time, the bank may foreclose on the property. Often owners will remove all of the appliances as they leave (including the dishwasher and the stove); people are in a tough spot in their lives when they're losing their home.

The home will be re-listed on the MLS, most often with a new listing agent whom they use to handle their foreclosure portfolio. The process is the same as a short sale, in that the bank has to sign off on your offer. Real estate agents who specialize in foreclosures can set you up to receive emails of all new foreclosure properties listed on the MLS meeting your basic criteria -- again, click here to email me if you'd like to be set up to receive this kind of emails.

There are two other strategies I'll mention, and both of them involve auctions. There are auctions held by the counties themselves, and then there are auctions held by private companies which take a bunch of foreclosure properties which banks have not been able to sell and move them at whatever price they'll go for.

Buying at the county auction, you need to have your money with you in certified funds on the day of the auction. Imagine that -- in our example above, you'd need a cashier's check or a money order for around $220,000 with you the day you go to bid on the home. This dramatically restricts the number of people who bid at county auctions; it's possible to get financing in advance, but it takes non-refundable research fees of $2,500 or more and interest rates of around 14% -- obviously designed to get you on title and have you refinance immediately.

Private auctions are less frequently held, but I have some clients who have actually done pretty well. Check out REDC's website to see what they're about -- they'll hold an auction for a particular geographic market, publicizing the list of homes they'll be offering and minimum bids. You'll need to go see the home according to their posted schedule of when they'll have it open for your examination; you need to know what improvements or repairs it'll need, and base your bidding accordingly.

In private auctions you have a reasonable amount of time to get your full financing. You'll need to show up with a cashier's check for $5,000, plus either cash or a check so that you can put a total of 5% down as earnest money. They'll hound you to try to get you to use their lender, but if you're pre-approved before the auction you won't need to buy into their fear tactics around financing.

Those are the elements of buying foreclosures and pre-foreclosures. If you've read this far, here's an action plan for you:

Get pre-approved for your purchase with an honest mortgage broker
Ask an experienced realtor to email you newly listed bank-owned and other properties meeting your search criteria
Be prepared to move quickly if you find a good property -- the good ones are snapped up before you know it!

Remember those 1.95% loans?

2008-07-09T01:16:00.000-07:00

I read a very interesting article the other day about a class action lawsuit filed by a couple from Wisconsin who discovered that the loan they'd thought had a 1.95% interest rate fixed for five years was not fixed at all.

The district court found that the lender (Chevy Chase Bank) had violated the Truth in Lending Act, but the real kicker was that

The judge transformed the case from a run-of-the-mill class action to a potential nightmare for the U.S. banking industry by also finding that the borrowers could force the bank to cancel, or rescind, their loans. That decision was stayed pending an appeal to the 7th U.S. Circuit Court of Appeals, which is expected to rule any day.

Rescinding a loan means returning the borrowers to where they were before the loan began -- returning to them all closing costs and interest paid on the loan, for example.

Where do I even begin on this one? First of all, what on earth was the couple thinking -- did anyone really believe those junk mail pieces that promised 1.95% or 1.25% interest rates? Those are "option ARMs" -- named so because every month, the borrower had four options to choose from for his or her monthly payment -- and internal interest rates were never fixed. Your minimum monthly payment was fixed, but your outstanding loan amount could increase every month.

I remember when World Savings came to my office to pitch this idea to me and I repeatedly said that I didn't understand the product; it transferred all of the interest rate risk to the borrower. "It's about the cash flow," they said.

Turns out I did understand the product.

As a loan officer, I can tell you that it would be really easy to run afoul of the Truth in Lending Act with an option ARM. The Truth in Lending Act requires that you disclose and categorize all of the fees and payments on a loan such that your APR is within 1/8 of a percent of the note rate. I remember wanting to know how to set up the Truth in Lending Statement (one of the required disclosures for a mortgage loan) and not finding anyone who knew how to do it -- the good people at World Savings were more concerned with selling their product than ensuring proper disclosure.

But option ARMs became really popular. The logic was that "as long as your home value increases, you don't have to worry about your outstanding loan balance growing every month." If the courts rule that option ARM borrowers can rescind their loans, the losses that banks have been showing due to foreclosures will be overshadowed by all of the interest they'll need to repay to borrowers who rescind.

More to come on this one -- I for one am watching for the appellate court decision.

Senate housing bill has it backward

2008-04-10T21:45:00.000-07:00

From today's New York Times:

The Senate on Thursday moved to stabilize the battered housing market by approving a bill to provide tax breaks for home builders and other businesses, a $7,000 tax credit for buyers of foreclosed homes, $150 million for counseling borrowers and $4 billion for local governments to buy foreclosed properties.

Sounds good, doesn't it? We're really doing something now! Tax credits, counseling for borrowers (does that mean I can go see my shrink again? I have a mortgage) and support for local governments.

I was all set to send out an email piece on this legislation, until I realized that it's almost completely backwards.

Home sellers these days are competing with banks with foreclosed properties on their books. The few qualified buyers who haven't been scared out of the market are looking for the best deals -- so if I'm trying to sell my home, and the buyer can get a $7,000 tax credit by buying the foreclosed property around the block from me, I'll have to lower my price to be competitive.

Whom does this help? Certainly not me, as the seller of a house. The buyer gets a free ride, courtesy of you and me, for $7,000 (consider for a moment that according to the IRS, the average American individual paid $9,231.53 in Federal income taxes in 2006) and the banks get this darned foreclosed property off of their books.

I'd be more supportive of offering a $10,000 first time home buyer's tax credit. They might buy a bank-owned property, and they might not. If they bought my house, I wouldn't have to drop my price precipitously just to compete, and I'd be able to move on and buy a new home of my own -- which would enable the sellers of my new home to do the same. The economic benefit of that $10,000 tax credit could go on for dozens of cycles.

I joke about how the whole country is waiting for just one qualified first time home buyer to start it all off. But they're the ones we need to support, not the banks themselves.

Generate your own meaningless Fed rate announcement

2007-12-25T10:07:00.000-08:00

I love this one.

Seems as though most people still cling to the notion that when the Fed lowers the Fed Rate, long-term mortgage interest rates go down as well.

Here's a handy site where you can auto-generate your own meaningless, fake Fed rate announcement:

http://www.kedrosky.com/cgi/spew2.cgi

Here's an excerpt from the announcement I just got:

The Committee is somewhat convinced that a restrictive stance of monetary policy, coupled with irritating underlying growth in the price of Nebraska real estate, is providing ticklish support to economic activity. However, the increase of Web 2.0 conferences has lowered, generally speaking, ethanol prices, reduced Robert Shiller's book sales, and reduced debt markets. These developments, along with the neutral stance of monetary policy and ongoing vertiginous increase in high-beta stocks, should foster increased economic stability over time.

Have fun!