Category Archives: Investing

Might "Lease Purchase" be this market's "il Salvatore"?

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Lease Purchase DONE WELL could be the “Saving Grace” for a portion of what ails the current real estate market. 

If the lowest price range cannot move out, then the owners of them cannot move UP!  That creates a slowdown in all market price segments by domino effect.

Let’s look at an example of how Lease Purchase can work, and potentially help this market.  There will not be one “cure all” answer to what ails us.  Likely a dozen or more answers will equal a total solution.

WARNING:  Lease Purchase NOT “done well” could end up being just Another Brick in the Wall  in the long run, so don’t try this at home without expert guidance including an attorney drafting the governing documents.  Don’t confuse what most other people call “Lease Purchase” today, with the version I am detailing below.  This is the right way.  What most people call Lease Purchase combines “an up front option fee” to buy, and is wrong.

I will be using my condo listing in Klahanie, for the purpose of providing a break down of the sequence of events and estimated numbers.

The buyer/tenant would be purchasing the property via FHA Financing.  For the “Lease” portion of this Lease Purchase, the buyer/tenant will need only what is needed for the lease portion as to monies.  That being:

Fair Market Value Rent: $1,200

First Month, Last Month and Security Deposit: $3,000

That is all that is needed for the Lease portion of the equation.  Now let’s move to the “Purchase” side of the Lease Purchase.

To Purchase the condo the buyer would have an FHA Loan at 6.125% with 1 point.  Loan Amount of $247,350.  Monthly Payment of $1,502.92 Principal and Interest plus $200 a month for real estate taxes plus $285 a month for condo fees to Sundance HOA and Klahanie on a combined basis.  That means before entering into a lease purchase, the buyer/tenant should qualify for a total payment of $1,990 a month.  $1990 a month times 12 months divided by 30% is $80,000. 

To enter into the Lease Purchase the Tenant Buyer should be making $80,000 or so.  Of course other debt is also a consideration, but I am simplifying for purposes of this example post.

Here comes the tricky part.  Let’s say the buyer has NO MONEY as in ZERO DOWN. You can use a Lease Purchase to effect an eventual purchase if the buyer qualifies EXCEPT for the cash part.  So let’s say they have a credit score of 660, which I think is enough for FHA and makes $80,000 a year and not too much “other debt”.  If they qualify for an FHA loan except for the cash issues, then they can buy it via Lease Purchase by doing the following.

1) They pay the owner $3,000 up front for first, last and security deposit on the $1,200 a month lease. (normal lease stuff)

2) They pay the owner $1,990 a month, which is what they will be paying to the lender and HOA after the property closes.

3) The owner keeps $1,200 (the fair market rent portion) and puts the difference of $770 into a “savings account” for the buyer/tentant to accumlate the cash needed to close.

That’s it…that simple. Easy as renting.  When the $770 per month fund equals the cash needed to close, then it can close.  Let’s call that 3% of $255,000 or $7,650.  Then you would do a lease purchase to close in 10 months as $770 times 10 equals $7,650.  The Closing Costs were built into the price, and the downpayment was accumulated without the buyer paying any more than if they had bought it on day one.  The owner covered the bulk of his costs for 10 months by being able to keep the fair market rent portion.  If the buyer doesn’t close, then the $7,650 gets treated in whole on in part as Earnest Money forfeited to the seller based on the original agreement.  The $3,000 paid up front on the lease can also be used, in part, to close in less than 10 months.

That my friends IS a Lease Purchase…DONE WELL, (not the flim-flam version taught in $8,000 seminars in Vegas).  Using that method can likely solve at least 10% of the problem with today’s real estate market, and in Domino Effect create a move up benefit to the market as a whole.

WSJ Reporting Deal Near to put Fannie and Freddie into Conservatorship

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The Wall Street Journal is reporting tonight that the time is almost up for Fannie and Freddie. That didn’t take long. No wonder the bill was rushed to President Bush to be signed at the end of July.

The plan is expected to involve putting the two companies into the conservatorship of their regulator, the Federal Housing Finance Agency, said several people familiar with the matter. That would mean the government would take the reins of the companies, at least temporarily.

Plans include the government gradually injecting capital into the two companies and a “top level management shakeup.”

Freddie and Fannie own or guarantee more than $5 trillion of mortgages. They have suffered combined losses of about $14 billion over the past four quarters as they make provisions for a wave of defaults. Investors worried that a government bailout would wipe out the value of existing stock, and those fears have sent the shares down about 90% from a year ago. Many U.S. banks as well as foreign governments own stock or debt in the two giants, meaning their financial woes could cause broad problems beyond the housing market.

Emphasis mine.

This breaking story has already been updated. Read more here at the Washington Post and NYTimes.

Fannie Mae and Freddie Mac to be put under control, sources say

U.S. rescue seen at hand for mortgage giants

Update:

Here’s Bloomberg; Paulson plans to bring Fannie, Freddie under government control

Reuters: Fannie Freddie shares fall after report of bailout

I’m sure there will be more stories posted all throughout the weekend.  This Fannie and Freddie takeover is something I could have never imagined when I started my career in mortgage lending 25 years ago.  When they raised the conforming loan limit several months ago and allowed F&F take on Jumbos, there were many who said F&F wouldn’t be able to survive if loan defaults continued to rise.  Firstam Core Logic says defaults will to continue to rise for at least the next 18 months.  We should now begin thinking about the FHA mortgage insurance program and their 3.5% down requirement.  That equity goes away fast during a down market.

I am heading out to the Edmonds Woodway High School Football game. I will post a link to that CoreLogic report and any updates when I return.  Link to CoreLogic PDF posted above. 

Update 2: Sunday morning press release from Paulson:

Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers

Washington, DC–

Good morning. I’m joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA. In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.
Continue reading here.

 

Readers, what effect do you believe a F&F conservatorship will have on the local and national real estate market?

Reviewing Your Adjustable Rate Mortgage

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RCG’s Jillayne Schlicke was interviewed on King 5 last night…I wish her spot would have been longer.  Check her out here!  The piece is about resetting subprime adjustable rate mortgages.   King 5’s, Chris Daniels reports that locally, we’ll see around 12,000 subprime mortgages reset over the next 6 months.  Combined with lower home values and tougher underwriting guidelines, if home owners are not able to swing their new payment or refinance, may be in a tough situation. 

I thought this would be a good opportunity to go over how to determine what your new mortgage payment may be in the event you have an adjustable rate mortgage.  This does not only apply to borrowers with subprime mortgages–this is for anyone with an adjustable rate.  

First, drag out your Note for your mortgage.  

In your Note, you will find the following information that you will need in order to determine what your payment may be once your mortgage adjusts:

  • Index/Indice — this is what your rate is based on.  Most common are LIBOR, Treasury, MTA, etc.   It can vary so you need to determine this.  The index is a variable and not a fixed figure.
  • Margin — the margin is added to the index to determine what your new rate will be.
  • CAPS — caps limit how much your rate can adjust at the first adjustment, every adjustment following and provides a lifetime limit on how high or low the rate can adjust.
  • Start Date — when you started paying your mortgage.
  • Fixed period term — is your ARM fixed for 2, 3, 5… years (etc).
  • Amortization — Does your mortgage offer an interest only feature?  Do you have negative amortization? 

If your mortgage is set to adjust within the next 6 months, I especially recommend that you go through the following exercise.   I’ve been sending letters to my clients with adjustables that are set to adjust with this information:

Start Date:  May 1, 2003

Start Interest Rate:  4.125%

CAPS (first/after first/lifetime):  5/2/5 (Lifetime CAP: 9.125%)

Margin/Index:  2.75%/1 Year LIBOR – 3.16 as of June 1, 2008 (currently 3.22)

Start loan amount:  $131,500

Fixed Period:  60 Months

First Adjustment Date:  June 1, 2008 and adjusting annually on June 1 for the remaining life of the loan.

This is not a subprime loan.  Many subprime loans have much higher CAPS and margins.   This is a classic 5/1 LIBOR ARM.   This home owner has not refinanced nor do they need to.  Their rate is attractive compared to current market. 

Based on their estimated balance (assuming they did not pay additional towards principal over the last 5 years) of approx. $118,500; their rate for the next 12 months will be 6.00%.  (Index from when the mortgage reset: 3.16 plus the margin of 2.75 = 5.91.  This is rounded up to the nearest 0.125%).   6.00% is a pretty good rate for not having to pay closing costs to refinance as long as you can tolerate the annual adjustments (which may work in your favor or not).   Their pricipal and interest payment will be approx. $763.50. (balance at adjustment/projected interest rate/remaining term of 25 years).

On June 2009, the highest this rate can be is 8% since there is a 2% annual cap.  The lowest the rate can be is 4%.  The most the rate can change on the anniversary of the change date is up or down 2% from the current rate.  It can never go beyond the lifetime cap of 5% plus the Note rate (9.125%) and it can never be lower than the margin of 2.75%.

How will your ARM treat you?  It all depends on the term of your Note and what the Index is when it adjusts.   This reset I’ve reviewed here is prettier than most–especially compared to subprime.   With FHA and Conforming Jumbo loan limits being reduced at the end of this year, I would consider meeting with your Mortgage Professional sooner rather than later if your ARM has you feeling itchy.

Predatory Upfront Loan Modification Fees

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I’m troubled by a trend that I’m seeing.  Recently I’ve noticed that mortgage brokers/loan originators have become interested in learning about loss mitigation techniques. When I ask why, they say that they’re hearing there’s good money to be made doing loan modifications.  What? Wait a second. I thought loan modifications were done by the lender for free.

More and more spam is popping up in my spam bin advertising loan modification services, offered by loan originators so I decided to call one of these LOs today after sending an email late last night asking for more information and receiving no reply. 

This particular person goes by the title of “mortgage planner.”  On her website, she advertises a wide variety of mortgage products including the pay option ARM and the hybrid ARM (are those even available anymore?) but there’s nothing on her website about loan modifications. None of the staff bios show any experience in doing loan modifications. Here’s what I found out.  The upfront fee charged to the homeowner is $3500.  But the LO assures me that all the work is handled by attorneys, she says.  The borrower’s up front fee is placed into escrow.  If a request for loan modification is accepted by the lender for loss mitigation (statistics were offered that 93% of loans are being modified) the full fee is due.  If the loan does not get modified, $2,000 is refunded and the remaining $1500 is not.  I asked the LO why a homeowner wouldn’t just work directly with an attorney.  She said that she works with a network of attorneys with a high loan mod approval rate and homeowners are always free to hire their own attorney and not work with her.

I asked her how much of the $3500 goes to the attorney and how much of it she gets to keep.  Her response was, “why are you asking me that?” To which I replied, “because if the attorney is doing all the work, then I’m wondering how much of that fee is going to you.”  She said “Well I work with the clients. I put a package together and follow up with the lender.” I said, “but a few minutes ago you mentioned that everything is handled by attorneys.”  Of course at this point the conversation has turned a tad bit adversarial and she starts to probe deeper into my true intentions. My intentions are only to get closer to what’s really going on here. I need to know if this sort of gig is something that is a viable alternative for Realtors to know about when counseling homeowners in financial distress.  My intentions are to be able to help other loan originators evaluate whether receiving a referral fee on a loan modification is going to get them into trouble.  If I were to guess, I’d say that the LO earned $2,000 for a successful loan mod and the remaining $1500 went to the attorney. There are forums out there confirming my guess.

In some states, including Washington State, Mortgage Brokers and their LOs now owe fiduciary duties to consumers.  Fiduciary comes from the Latin word fiducia, meaning “trust.

Twitter is AMAZING

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Over this past week, I’ve had the misfortune dealing with cable (Comcast) being down and just today, my email being out (an issue with Network Solutions).   Both times, I vented with 140 characters (or less) on Twitter.  Of course, I had to use my Treo to whine about Comcast.  But what happened in both cases really surprises me.   Apparently these big corporations have their own “David G’s” out there with their own Twitter profiles and alerts set up to address issues brought up on the internet.

Here’s my Tweet:

pulling out my hair…network solutions email seems to be down…argh! No emails for me.

And the response I received minutes later.

netsolcares @mortgageporter Hi this is Gerry from Network Solutions. I’m sorry your having issues. If you’d like to contact me I’ll see what we can do

I just got off the phone (after holding for over 11 minutes) with Gerry @ Network Solutions and they narrowed down what my issue was (too technical for me to explain) and the good news is, everything is back up and working.   And it’s the weekend.  I’m amazed.

The Comcast response and issue was very similar.   A “tweet” from me saying Comcast is out…no email or internet and this reply from “Comcast Scott” within moments

comcastscott @mortgageporter how often has this been happening? Can we help

Along with this one

comcastcares@mortgageporter Keep us updated

and

comcastscott @mortgageporter glad to help! Keep those tweets coming

By the way, if you have Twitter and you find your Comcast or Network Solutions services not working, you can always tweet these fella’s…they react quickly.  I am impressed and would have never pictured large corporations utilizing social networking this way.

So for all of you who are not utilizing Twitter because you think it’s a fad, I encourage you to check it out.  It is what ever you make it.  I’ve found it to be real useful for communicating what I doing during the day, like providing live rate quotes, in a consultation, writing a blog post, etc.  And I’ll post something “non-business” every once in a while like what I’m cooking up for dinner.

If you do sign up (it’s free and easy to do) please “follow me” or at very least, send me a tweet!

Deceptive Advertising Update: Linden Home Loans, Paramount Equity and Assurity Financial

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Linden Home Loans received a “Statement of Charges” back in Dec of 2007  for a deceptive television and radio ad.  The Department of Financial Institutions discovered that Linden promised consumers residential mortgage loans at “1% interest, with no points and no fees,

And the FED…does nothing.

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The markets anticipated the FOMC to leave the Fed Funds rate alone at 2% and that’s just what they did.   The markets are reacting accordingly by not swinging drastically either way.   The DOW is enjoying triple digit gains while oil has been under $120.   What does this mean to mortgage interest rates?

As you know, the FOMC does not directly control mortgage interest rates as mortgage interest rates are based on bonds–mortgage backed securities (MBS).  Traders will react to what the FOMC does and does not do and THIS will impact mortgage interest rates.

The FOMC press release states:

“Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports”.   I’m wondering how much of the growth in consumer spending is from the economic stimulus checks?

This statement is quickly followed with: “…labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters”.

Bonds react negatively to inflation, I’m anticipating that we will see mortgage rates continue to trend higher.   Here’s a bit from the FOMC regarding the “i-word”:  

“Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.”

You can read today’s FOMC statement here.

PS:  As the Prime Rate is tied to the Fed Funds Rate, your HELOC is unchanged for now.

Why do banks take so long to approve a short sale?

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This question comes up over and over again from Realtors, homeowners and homebuyers everywhere I go. A one sentence answer doesn’t exist for this question. If you truly want to know the answer to the question, “why” continue reading.  This means you will have to take a step back from your particular emotional situation enough to really listen to what’s being said because everyone wants their deal approved NOW. 

Banks are under no obligation to approve your short sale.  I know what you’re thinking, reader. You’re thinking, “Well if the G.D. bank would just approve my short sale faster, they wouldn’t be losing so much money!”

Let’s start at the beginning. A homeowner is said to be in a short sale situation when he or she owes more than what the home is currently worth, is in default and must sell.  Traditionally, homeowners agreed to pay back the difference between what was owed and the sales price. The short sale seller signed a new, unsecured note at closing and promised to pay back the difference in regular monthly installments.  The only cases where the debt was “forgiven” was for true financial hardship cases where there was absolutely no way the homeowner could ever repay the difference. An example would be the untimely death of one of the breadwinners. But that was then.

In today’s politically charged, loan modifications for all, HoHo, let’s-dump-everything-into-FHA environment, homeowners in a short sale situation today are receiving debt forgivness and even temporary tax exemptions on top of that.  Don’t worry, the rest of us tax payers will pick that up for you.

The first step in figuring out why your short sale is taking so long to be approved is to inquire about whether the homeowner is asking the bank to forgive the difference or if the homeowner is gainfully employed and able to pay back the difference.  This all must be proven and documented to the lender’s satisfaction.  If the homeowner is asking for debt forgiveness, the short sale will take longer to approve if the bank does not have all the required documentation.

Thought question: Why would any lender approve a short sale, especially one that requires debt forgiveness, unless there is proof that foreclosure is imminent? Answer: They won’t.  Lenders have to weigh the costs associated with the short sale proposal against the cost of foreclosure.  If a homeowner has not yet defaulted on their loan, the bank has little motivation to approve the short sale. Why not wait for a better offer to come along?  (Note, homeowners reading this article should always consult with an attorney if you are selling short, in default, or will be in default on your mortgage loan(s).)

All loan servicing departments have processes in place for dealing with short sale approvals.  They may not have fancy computer systems so that everything is automated but maybe that’s a good thing. Look where automated underwriting got us.

Next step: Homeowners must prove that they do not have the money to make up the shortfall. This means sending in copies of all bank statements, tax returns, w-2s, and other supporting documents to verify that the homeowners is financially insolvent. Short sales are reserved for people with NO MONEY. 

Gentle reminder: The new sale must be an arms-length transaction.   Another common problem that lenders must watch for is when the real estate agent on the transaction happens to be the “assigned” buyer on the purchase and sales agreement.  The lender is not going to be thrilled in paying a real estate commission on that kind of transaction. Further, there are plenty of foreclosure rescue scams happening nationwide. Lenders scrutinize short sale offers to look for signs of fraud.  Tanta reminds us:

Is it the job of the Loss Mitigation Department to care about clearing your local RE market? No. Is it their job to care about keeping your buyer wiggling on the hook long enough to get papers signed? No. Is a short sale supposed to be a painless alternative to foreclosure for anyone involved? No. There are no painless alternatives. There shouldn’t be. There cannot be.

Next, everyone who is patiently waiting for the bank to approve the short sale must now realize that once the bank says “okay” to the short sale, there very may be a long list of investors who own pieces of this mortgage loan. Each and every investor will have to give their approval for the short sale.  We enjoyed many years of growth in the real estate industry and the overall economy thanks to the invention of Residential Mortgage Backed Securities.  RMBS made millions of dollars for many people.  The downside to securitizing mortgage loans and then selling off slices of each mortgage to different investors is that when it comes time to tell the investor “you’re going to have to take a haircut” that investor gets to have a say in the matter.

Calling loan servicing and yelling at them over the phone will get you nowhere.

I would like to be first to predict that the next meltdown will be loan servicing.  But perhaps my prediction is so obvious as to not be much of a prediction at all.  How much longer can they sustain this level of stress and pressure, with their current staffing levels, while the banks are facing enormous losses?  Of course when that meltdown happens, I predict our government will step in and mandate harsher regulations on servicers, which will be passed on to the consumer in the form of higher interest rates.

Loan servicing use to offer what it said: “service.”  It was treated as a cost center on a bank’s balance sheet.  Over the past 15 years, servicing became a “profit center” and the highest expense, namely labor, was cut to achieve profit goals.  This is one more lesson in underpricing. The cost of “good” loan servicing in which phones are answered and files processed smoothly, would have cost us all way, way, way more on the retail end, than what we paid. 

Let’s say we could create instant loss mitigation nirvana today.  All phones are answered on the first ring, all short sales are approved with no questions asked, no documentation required, no proof of hardship necessary, no proof of financial insolvency needed, and all Realtors receive their full 6% commission. 

The consequences of not performing due diligence at the loss mit stage are disaster for all of us. Compare this to the current nirvana we just left behind: A world where anyone could get a mortgage loan with no verification of ability to repay, with massive fraud still being uncovered.  We need to do it right this time, and it takes TIME to do proper short sale loss mitigation.

Housing Market Predictions from RE Connect

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To follow up from last week’s Inman Connect, here are the answers from panelists to the question, “When will the housing market recover?”

Noah Rosenblatt, Founder of Urbandigs
Severe and deep recession, housing may bottom at the end of 2009 with recovery in 2011.

Dottie Herman, President, Prudential Douglas Elliman
We’ll hit bottom in the first quarter of 2009, after the election and stay flat for a few years.

Avram Goldman, President and CEO of Pacific Union GMAC Real Estate
We’re in a recession now. Some markets will do fine and go up, some markets will be down a long time.

Yves Smith, NakedCapitalism
I wish I could say 2010.  The Alt-A ARM resets bother me because they will peak in 2011.  Market will bottom in 2010 and stay flat for a long time.

John Williams, Economist; Shadowstats.com
We’ll have an L shaped decline, hyperinflation, and a great depression.

CR, CalculatedRisk
Foreclosures are moving upstream. Notice of defaults will rise in the mid and higher price ranges. They’ll never reach the foreclosure levels of the subprime loans, but foreclosures in the mid and higher price ranges will rise.  Wonders if our government is out of tricks; the new housing bill doesn’t do much, but we have to have confidence in our GSEs.  Different areas will bottom out at different times: 2010 to 2012.

Same question, two days later, different panel. Here are their answers:

Alex Perriello, CEO Realogy
We’ll have a sloppy, rocky, bumpy bottom. It’s not pretty where we are today. Inventory is key.  We can support 4.6 to 4.8 million sales nationwide. The last time inventory was this high (nationwide it is 11 months) was in 1986.  Inventory drives price.  Realtors should datamine their clients who bought 2002 and prior: Sell them a new home! Market to renters! Alex says it’s too early to call the bottom.

Joel Singer, EVP, California Assoc of Realtors
Prices are exploding downward in CA. Worried that if anything happens to the GSEs all bets are off. There’s a lot of wild cards in the financial sector. Cali seems to have hit a bottom but this may be a false bottom.

Patrick Stone, Chairman, The Stone Group
What hasn’t been fully communicated is that price stability has been achieved in a third of the country.  In the next six months, we’ll see another third achieve it.  The last third will achieve price stability in “probably one year” unless we have a cataclysmic event where the impact on our economy could be severe. The stability of our financial system is paramount to finding the bottom.

Jonathan Miller, Co-Founder, Miller Samuel, inc.
It’s very challenging for appraisers to come up with a value when there’s a lower pace of sales. Until progress is made with the credit markets, it is too soon to talk about the bottom.  To call a bottom is not professional. We can’t do it.

More Fannie Changes for Investment Properties and Second Homes

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Effective tomorrow (August 1, 2008) borrowers who convert their existing residence to an investment property or second home will be treated to tougher standards if they’re using a Fannie Mae loan.    Here are the new requirements:

Converting existing residence to a “second home”.

  • Borrower must qualify for both payments (this is not new).
  • Unless the borrower has at least 30% equity in the existing property, they will need 6 months PITI for both properties in reserves. 

Converting existing residence to “investment property”

  • The borrower may only use rental income (75% credit) of their existing property if they have at least 30% equity in the property.   Otherwise, they must qualify with both full payments (no credit for rent).
  • Rental income must be documented with a fully executed lease agreement and a receipt showing the security deposit from the tenant has been deposited into the borrowers account.
  • If the borrower does not have 30% equity in the proposed investment property (former residence) then they will need 6 months PITI for reserves for both properties.

Either an appraisal, AVM or Broker Price Opinion is used to determine if there is 30% equity in the existing home that is being converted to a second home or investment property (this may be determined by underwriting).  

Last, be careful when reading guideline changes, such as this.  Underwriting guidelines and loan programs are changing constantly, post like this are quickly “dated material” and no longer applicable–do verify information you find on the internet with your Mortgage Professional to make sure the information is still valid.