NELA Live

Los Angeles Mortgage Rates Report- October 25, 2007

We're still cautiously floating the rate in anticipation of mortgage rates below 6%.  The economic data being released suggests that we are in a recession; that would imply that the Fed will be lowering the Fed Fund rate again.  There really is no market moving data due out until the last day of the month.

If your loan in Los Angeles is due to close in the next 10 days, go ahead and lock the mortgage rate. Otherwise, continue to cautiously float that rate.

We had quite a scare, in Southern California,  earlier this week and we're not out of the woods yet.  My family was literally "on the move" as this wildfire threatened to move into our town. Laurie Manny and Jeff Brown kept most of youup to date about my family's evacuation; I'm grateful to both of them for that.

Today, it's back to the markets and the markets say float.  Keep checking in for updates.

We're still cautiously floating the rate in anticipation of mortgage rates below 6%.  The economic data being released suggests that we are in a recession; that would imply that the Fed will be lowering the Fed Fund rate again.  There really is no market moving data due out until the last day of the month.

If your loan in Los Angeles is due to close in the next 10 days, go ahead and lock the mortgage rate. Otherwise, continue to cautiously float that rate.

We had quite a scare, in Southern California,  earlier this week and we're not out of the woods yet.  My family was literally "on the move" as this wildfire threatened to move into our town. Laurie Manny and Jeff Brown kept most of youup to date about my family's evacuation; I'm grateful to both of them for that.

Today, it's back to the markets and the markets say float.  Keep checking in for updates.

Los Angeles Mortgage Rates Report: October 19, 2007

Today is the 20th anniversary of "Black Monday", the close to 23% single-day decline in the stock market.

Mortgage bonds have increased tremendously since my recommendation to float on Wednesday. If you have to close a loan in less than 10 days, and you are floating the rate, now is as good as any time to lock it.  If you have more than 10 days to close the loan or have just made application on a mortgage in Los Angeles, I still think you can hold out and float the mortgage rate.

I now want you to "cautiously float". This means that you pay more attention.  Call your loan adviser every day, right before lunch.  If your loan adviser doesn't have access to live mortgage bond quotes, he/she is wasting your money.  I took a loan application on Wednesday, advised them to "float" the rate instead of locking-in, and it has saved them close to $3,000 as of today.

I think we'll see the strong bond market have an effect on Monday's mortgage rates.  I expect the 30 year fixed rate, full documentation, loan under $417,000, to drop below 6%, early next week.

Today is the 20th anniversary of "Black Monday", the close to 23% single-day decline in the stock market.

Mortgage bonds have increased tremendously since my recommendation to float on Wednesday. If you have to close a loan in less than 10 days, and you are floating the rate, now is as good as any time to lock it.  If you have more than 10 days to close the loan or have just made application on a mortgage in Los Angeles, I still think you can hold out and float the mortgage rate.

I now want you to "cautiously float". This means that you pay more attention.  Call your loan adviser every day, right before lunch.  If your loan adviser doesn't have access to live mortgage bond quotes, he/she is wasting your money.  I took a loan application on Wednesday, advised them to "float" the rate instead of locking-in, and it has saved them close to $3,000 as of today.

I think we'll see the strong bond market have an effect on Monday's mortgage rates.  I expect the 30 year fixed rate, full documentation, loan under $417,000, to drop below 6%, early next week.

Los Angeles Mortgage Rates Report: October 17, 2007

Recommendation Change: It's time to start floating those loans! We should be watching mortgage rates in Los Angeles drop lower these next 3-7 days.  Do not lock in your mortgage rate at application; lower rates may be here next week.

Two big numbers came out today:

Inflation (CPI) was a bit higher than expected; thank higher oil and food prices for that.

Core CPI- That's the inflation number without the oil and food prices figured in, was lower than expected.  This means that prices of goods and services are feeling the pinch of higher oil and food prices.  That doesn't make you feel any better if you drive a car and eat; prices are still higher.  It does mean that the higher prices of staple goods could throw us into an economic slowdown.

Housing starts were the lowest they have been in 14 years.   This means that builders ain't building. While this is bad news for the housing market TODAY, it will mean that there will be less homes available for sale tomorrow.  Ugly figures sometimes precede rebounds; it just won't feel good while we're going through it.

Those figures signal more Fed rate cuts and mortgage bonds love that.  Expect to lock into rates below 6% next week for conforming, full-doc loans. Stay nimble!  In this economy, news travels like lightning.  While I'm reasonably certain that lower rates are on the near-term horizon, that could change quickly.

Keep checking back for more information.

Recommendation Change: It's time to start floating those loans! We should be watching mortgage rates in Los Angeles drop lower these next 3-7 days.  Do not lock in your mortgage rate at application; lower rates may be here next week.

Two big numbers came out today:

Inflation (CPI) was a bit higher than expected; thank higher oil and food prices for that.

Core CPI- That's the inflation number without the oil and food prices figured in, was lower than expected.  This means that prices of goods and services are feeling the pinch of higher oil and food prices.  That doesn't make you feel any better if you drive a car and eat; prices are still higher.  It does mean that the higher prices of staple goods could throw us into an economic slowdown.

Housing starts were the lowest they have been in 14 years.   This means that builders ain't building. While this is bad news for the housing market TODAY, it will mean that there will be less homes available for sale tomorrow.  Ugly figures sometimes precede rebounds; it just won't feel good while we're going through it.

Those figures signal more Fed rate cuts and mortgage bonds love that.  Expect to lock into rates below 6% next week for conforming, full-doc loans. Stay nimble!  In this economy, news travels like lightning.  While I'm reasonably certain that lower rates are on the near-term horizon, that could change quickly.

Keep checking back for more information.

Be VERY Careful When You Refinance

California real estate has been a great ride this decade.  Property values have almost tripled in some areas over the past 6-7 years.  May homeowners have use their new found wealth to pay off high-interest debt, improve their property, or even leverage into more properties; all sound ideas.

There is an old sheriff in town enforcing some oft-overlooked laws next year and it just may affect YOU!

A few things you should know about the deductibility of mortgage interest:

1- It is limited to $1.1 million.
2- You must itemize (Schedule A) to receive that deduction.
3- A fully-amortizing loan reduces your Acquisition Indebtedness each month.
4- An interest-only loan does not reduce your Acquisition Indebtedness; it remains level.
5- You are entitled to a $100,000 over the Acquisition Indebtedness as a home equity exclusion for tax deductibility.

Now, here's the catch.  The IRS monitors your interest paid on mortgages through a Form 1098. The IRS has no formal system to monitor the segregation of debt (how much was the Acquisition Indebtedness, how much is covered under the home equity exclusion, and how much is not deductible)...UNTIL NOW.

In 2007, lenders are required to report cash-out refinance transactions. That includes any and all refinanced loans that exceed the original Acquisition Indebtedness.  This means that if you bought a home in 2000 with a $250,000 loan against it and have subsequently increased that debt to $400,000, your qualifying debt for interest will be capped at $350,000, more if you paid down the loan through an amortized loan.  In California, that applies to MANY refinance transactions for homes owned more than three years.

Why is the IRS doing this?  Well, follow the money. The IRS has overlooked this common ignorance of the tax code because it really didn't affect the average Joe...until NOW.  The real estate boom gave homeowners a chance to use their home like an ATM and withdraw cash.  Now, the IRS wants it's pound of flesh.  If you've refinanced and pulled out cash over and above $100,00 above your Acquisition Indebtedness, you had better start paying attention to your deductibility of mortgage interest ...because Uncle Sam is...next year.

Everyone's a Dodger Fan Today

Today is April 15, deadline day for Americans still trying to file their income taxes (Relax...in 2007 we have until the 16th)

Baseball fans, however, know that today marks the sixtieth anniversary of the game where Jackie Robinson did the unthinkable; he broke the color barrier in Major League Baseball.

Los Angelenos should be very proud of this native son because he led a remarkable life.  University of Southern California graduate, commissioned officer in the United States Army, and then his remarkable achievements on the diamond.  Notwithstanding the historical significance of his career, Jackie Robinson was  the 1949 MVP and held a .311 lifetime batting average, truly Hall of Fame statistics. 

This picture shows Jackie stealing home in the 1955 World Series against the Dodgers.  Stealing home is an amazing feat and hardly ever attempted in the modern game.

My father, a lifelong baseball fan, described the love/hate relationship Phillies fans had with Robinson in the '50s.  "They would call him ugly names so he stole second base.  Pitchers would throw at him and Jackie would score the winning run. They hated that a black man could do something  their hometown boys could not; win baseball games for his team".  I asked him one time if the hype about Robinson was really  justified.  I queried whether his hero status was just  a function of being the first black man in the game.  My father just shook his head and lamented, "Nope.  He was really THAT good."

I asked my dad if he hated Jackie Robinson as a kid in Philly.  He said, "Of course.  He was a Dodger."

I think Jackie would have respected that sort of "hatred".

Click the link to hear the Count Basie song, "Did You See Jackie Robinson Hit That Ball?"

Please...don't ask me to lie to you

I have had a number of would be borrowers call me up with "scenarios" demanding a good-faith-estimate for loan terms.  "Internet shoppers", cruising online for a mortgage loan, are bewildered when I decline to "compete for their business". 

THEY ARE ASKING ME TO LIE TO THEM and I won't do that.

Morgan Brown, a partner in the Orange County based New Day Mortgage, is a co-contributor to Bloodhound Blog.  He penned a great article called "The New Bait and Switch" which details the most recent shenanigans in mortgage marketing. Originators now offer loan terms based on unrealistic values which preys upon your ego.  Borrowers find out that the independent appraisal process doesn't agree with the originator who feigns surprise at the lower value.  The result?  Changed loan terms.

Don't ask me to lie to you.  I'll gladly prepare  a good faith estimate for you without pulling your credit if you can furnish me with:

1- A tri-merged credit report, dated within 30 days, showing the three credit scores reported by the major credit bureaus. 

2- Income documentation ( your past two years tax returns (fist two pages are fine for the quote)

3- The past two statements showing some liquidity (six payments worth)

My next post will show you how to prepare a "bid package" so you can legitimately shop for mortgage terms.

Is Your Neighbor Moving Inland?

Orange County, CA may be in trouble. The OC is home to the subprime lenders of America. The subprime mortgage market is collapsing like a bluff on a beach in a tsunami. Bubble bloggers dance on the graves of the fallen. What I find amusing is that nobody feels bad for a collapsed lender.  I mean, come on, everyone knows that it's just a bunch of rich people playing with the Wall Street's money, right?

Now Main Street's whitewashed windows and vacant stores
Seems like there ain't nobody wants to come down here no more
They're closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain't coming back to your
hometown
Your hometown
Your hometown
Your hometown

Lyrics from My Hometown by Bruce Springsteen

Well, let me tell you a story of the real estate industrial complex of Orange County.  It may not have a happy ending.  Most lending employees are not highly-paid.  Sure, I've mentioned that the subprime wholesale account executives were paid like starting pitchers for the Angels but the bulk of the folks who crank out the loans are the rank and file, clock-punching, lunch-box carrying, worker bees. These are folks who were tossed into an industry some five years ago, learned their jobs by their wits and excelled during booms.  They stayed late, worked on weekends, and sacrificed vacations, to get the job done.

Now they won't have jobs. "The Boss" opined in the mid '80s about industries leaving small towns and the effect on the local economy.  You have to wonder about the effect on the subprime mortgage capital of the country, Irvine in tony Orange County.  Most of the employees came from the Southern California counties of San Diego, Orange, and Los Angeles.  The subprime mortgages were not only originated there, they provided affordability for the starter homes in those counties.

Let's look at the ripple effect:

(1)- lending guidelines tighten so residential mortgage capital is becoming more scarce.

(2)- loans default in record proportions in a lighting-quick time frame

(3)- lenders announce massive layoffs or simply close the doors

(4)- home building starts drop

(5)- construction jobs become less plentiful

I think it's quite possible that we could see an exodus of young, non-college educated people from the coastal Southern California counties to areas like San Bernandino, Riverside, And Kern counties. The average family needs an income of close to $100,000 to afford a starter home in the coastal counties.  The inland counties provide housing options for a family with a $65,000 income.

I know most people won't shed a tear for the "worker bees" that worked for lenders.  I, however, thank you all for your hard work, dedication, and professionalism during a trying decade of lending.  I wish you the best of luck no matter what you pursue.

Orange County, CA may be in trouble. The OC is home to the subprime lenders of America. The subprime mortgage market is collapsing like a bluff on a beach in a tsunami. Bubble bloggers dance on the graves of the fallen. What I find amusing is that nobody feels bad for a collapsed lender.  I mean, come on, everyone knows that it's just a bunch of rich people playing with the Wall Street's money, right?

Now Main Street's whitewashed windows and vacant stores
Seems like there ain't nobody wants to come down here no more
They're closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain't coming back to your
hometown
Your hometown
Your hometown
Your hometown

Lyrics from My Hometown by Bruce Springsteen

Well, let me tell you a story of the real estate industrial complex of Orange County.  It may not have a happy ending.  Most lending employees are not highly-paid.  Sure, I've mentioned that the subprime wholesale account executives were paid like starting pitchers for the Angels but the bulk of the folks who crank out the loans are the rank and file, clock-punching, lunch-box carrying, worker bees. These are folks who were tossed into an industry some five years ago, learned their jobs by their wits and excelled during booms.  They stayed late, worked on weekends, and sacrificed vacations, to get the job done.

Now they won't have jobs. "The Boss" opined in the mid '80s about industries leaving small towns and the effect on the local economy.  You have to wonder about the effect on the subprime mortgage capital of the country, Irvine in tony Orange County.  Most of the employees came from the Southern California counties of San Diego, Orange, and Los Angeles.  The subprime mortgages were not only originated there, they provided affordability for the starter homes in those counties.

Let's look at the ripple effect:

(1)- lending guidelines tighten so residential mortgage capital is becoming more scarce.

(2)- loans default in record proportions in a lighting-quick time frame

(3)- lenders announce massive layoffs or simply close the doors

(4)- home building starts drop

(5)- construction jobs become less plentiful

I think it's quite possible that we could see an exodus of young, non-college educated people from the coastal Southern California counties to areas like San Bernandino, Riverside, And Kern counties. The average family needs an income of close to $100,000 to afford a starter home in the coastal counties.  The inland counties provide housing options for a family with a $65,000 income.

I know most people won't shed a tear for the "worker bees" that worked for lenders.  I, however, thank you all for your hard work, dedication, and professionalism during a trying decade of lending.  I wish you the best of luck no matter what you pursue.

In season at the Old LA (Highland Park) Farmers Market

By Seth Budick - http://www.friends4oldlafarmersmarket.org -Cross-posted from NelaList: 

Citrus, including delicious Satsuma and Paige tangerines, continues to dominate the farmers  market. Do your part to battle scurvy by enjoying pomelos, grapefruits, oranges, cara-caras, blood oranges, Meyer lemons, kumquats and tangelos. Fresh herbs, apples, asian pears, cherimoyas and other winter fruits are also all available at the market, consult http://www.friends4oldlafarmersmarket.org for a full list.

In addition to the excellent avocados and citrus that Spencer Farms brings to the market each week, Pancho was also selling the unusual chilacayote squash this past week. Native to Central and South America, chilacayotes, also known as Malabar gourds or shark-fin melons, come somewhere between a cucumber and watermelon in flavor and have the texture of spaghetti squash as the pulp separates into its component strands when cooked. I've been experimenting with chilacayotes, which are often used in soups, candied, or made into jams, and I would love to hear from anyone with a secret family recipe. Comment here and share your chilacoyote delicacies with the world! And while you're at the market, pick up fresh nuts, cheese and fruit preserves and enjoy fresh tamales and honey  pineapple chicken for dinner.

Please stop by the market for fresh, field-ripened, high quality produce from local farmers and spend time with your friends, neighbors and other community members.

The Highland Park Certified Farmers Market is located adjacent to the Highland Park Gold Line station at Marmion Way between Ave. 57 & 58 and operates Tuesdays from 3-7PM.

- Seth Budick

Should English Be The Language of Business in America?

I attend various industry group meetings to learn about trends in lending.  One of the big hot buttons in California is the "suitability" of the newer loan programs.  Many borrowers obtained financing with terms that are difficult to understand.  The "teaser rates" of the early part of the decade are starting to adjust and borrowers are getting "trapped" with a higher payment.

Those borrowers are crying foul; they say that they didn't understand the loan disclosures.

Libertarian-leaning man that I am, I questioned whether those borrowers shouldn't have hired an attorney, CPA, financial advisor, etc, to explain the risks and rewards independently of the loan originator. 

"Caveat Emptor !" and all that libertarian-leaning mantra, right?

Well, it turns out that there is a sub-group of the financially clueless who actually may have a case; they didn't understand the loan paperwork because English is not their first language.  Their first language is Chinese, or Vietnamese, or Spanish, or Tagalog, or Russian.  In California, it can be a number of different languages because we are a land of immigrants.  It's one of our strengths in The Golden State.

Good loan originators have solutions to that.  We have an arsenal of already translated loan disclosures for all of the aforementioned languages except Russian.  The borrowers still need to execute their loan disclosures and loan documents in English but we'll give them a good translation if they want it.  I think that makes good business sense and offer it on every loan application now regardless of what their first language appears to be.

I don't want that practice legislated, though.  I'm against that kind of legislation; not for the reasons you might think.  I don't have an "ENGLISH ONLY" bumper sticker on my pick-up truck.  I don't even have a truck.  I'm against a legislative mandate because of we need to have uniformity in business dealings in this country.  It inspires confidence in our markets for investors. 

I've owned property in Puerto Penasco, Mexico.  The closing documents were in Spanish and the developer was wise enough to offer an English translation to them.  I  spent an extra $800 and had the closing documents translated by an independent source.  The translations were slightly different, different enough to cause me pause and clarify a few issues about  my loan.  That turned out to be a VERY good practice because I negotiated  some more favorable terms.

I'm not a xenophobe.  I find the "speak English only" movement in America laughable.  In Europe, people speak 2-3 languages and I think it's wise for Americans to do the same.  I'm moving in that direction at age 41 and pushing my five year old daughter to do so.  Our European cousins have it correct; American's should pursue more than one language in the spoken form.

Business, however, is moving to English as the official language world wide.   California should do the same.

HARD MONEY: What is THAT?

Hard Money Lending is exactly what it sounds like; loans that are hard to do.  Many borrower's needs fall out of the mainstream loan guidelines and they often need a "short-term" fix. 

A private mortgage loan is essentially someone with a lot of money lending to someone who needs it and can't get it from banks or mortgage companies.  Most of my investors are older, retired, well-heeled, and smart.  Investors are sharp and know how to mitigate loss.  They are also quirky and their quirks tend to match up with their life experiences.

Let me give you some examples where hard money loans are appropriate and the type of investors I match up with the loan:

1- Multi-family: Most banks or commercial lenders will not lend over 55-60% on multi-family in Southern California.  The rents don't cover the monthly debt service and expenses.  I have three investors who made a living owning and managing apartment complexes.  They know the "secrets' to undervalued properties that are being leased at below-market rates. They'll lend up to 75% on those properties if they have a decent borrower. 

2- Investor Seconds:  Many investment properties have low fixed-rate loans on them and the owner does NOT want to refinance a 5.25% first just to get money out of the property.  Oftentimes, the investors are "stated-income" borrowers that couldn't get a second mortgage on the investment property.  Maybe they just need $50K for some repairs.  They'll pay 12-15% for that money.  I have seasoned investors that understand that challenge.

3- Small Builders: Small builders are taking it on the nose this year! Their materials costs skyrocketed. They have "runout of money" on their traditional construction loans and are 80-90% completed.  They need maybe $100K to get the over the hump, finish the property and get it sold.  I have retired builders that will look at the property, analyze the costs overrun and lend him the money for a year at 15% with no payments (interest accrues).

4- Small Business Owners: Many times the small business owner can't get a quick loan on his property because his credit scores have dropped (he's maxed out on credit) and he just needs the money for short-term. 

5- Recent Bankruptcy:  We loaned 70% to a physician who was 6 months out of BK.  The seller carried the 30% balance and the doctor got the house.  We knew the worst was behind him (with the BK) and thought he could refinance in a year.  The investor made 10% on his money, the seller got his price, and my borrower refinanced out of the loans in 18 months. The investor, a retired physician, understood how managed care wreaked havoc on general practitioners in San Diego.

Hard Money Lending is exactly what it sounds like; loans that are hard to do.  Many borrower's needs fall out of the mainstream loan guidelines and they often need a "short-term" fix. 

A private mortgage loan is essentially someone with a lot of money lending to someone who needs it and can't get it from banks or mortgage companies.  Most of my investors are older, retired, well-heeled, and smart.  Investors are sharp and know how to mitigate loss.  They are also quirky and their quirks tend to match up with their life experiences.

Let me give you some examples where hard money loans are appropriate and the type of investors I match up with the loan:

1- Multi-family: Most banks or commercial lenders will not lend over 55-60% on multi-family in Southern California.  The rents don't cover the monthly debt service and expenses.  I have three investors who made a living owning and managing apartment complexes.  They know the "secrets' to undervalued properties that are being leased at below-market rates. They'll lend up to 75% on those properties if they have a decent borrower. 

2- Investor Seconds:  Many investment properties have low fixed-rate loans on them and the owner does NOT want to refinance a 5.25% first just to get money out of the property.  Oftentimes, the investors are "stated-income" borrowers that couldn't get a second mortgage on the investment property.  Maybe they just need $50K for some repairs.  They'll pay 12-15% for that money.  I have seasoned investors that understand that challenge.

3- Small Builders: Small builders are taking it on the nose this year! Their materials costs skyrocketed. They have "runout of money" on their traditional construction loans and are 80-90% completed.  They need maybe $100K to get the over the hump, finish the property and get it sold.  I have retired builders that will look at the property, analyze the costs overrun and lend him the money for a year at 15% with no payments (interest accrues).

4- Small Business Owners: Many times the small business owner can't get a quick loan on his property because his credit scores have dropped (he's maxed out on credit) and he just needs the money for short-term. 

5- Recent Bankruptcy:  We loaned 70% to a physician who was 6 months out of BK.  The seller carried the 30% balance and the doctor got the house.  We knew the worst was behind him (with the BK) and thought he could refinance in a year.  The investor made 10% on his money, the seller got his price, and my borrower refinanced out of the loans in 18 months. The investor, a retired physician, understood how managed care wreaked havoc on general practitioners in San Diego.

Ozomatli to Release New Album

I haven't posted in nearly two weeks here on NELA.  Let me assure you Angelenos, it is not because of the swift retribution enacted upon me by Cheryl Johnson for my hate speech against an LA institution.  The hard fact is that I'm bored lately with all of this mortgage stuff.  I imagine you are also.  I'll still throw up the mortgage stuff for you but I'm going to pepper it with some issues that might not lull you to sleep.

Ozomatli is a twelve year old band out of Los Angeles that rocks San Diego when they visit us.  They're a mash-up of musical genres I dig:  Hip Hop, Latin, Funk, and a little bit of Middle Eastern.  If you can imagine the Black Eyed Peas with more street cred, you get Ozomatli.   They've played at the Coors Ampitheatre, The Del Mar Fair (right near my home), and will be at the Belly-Up Tavern in Solana Beach (my hometown) on March 9-10.   The Belly-Up is my all-time favorite concert venue and where I met OZO some 4-5 years ago.

Ozomatli releases it's newest album, Don't Mess With the Dragon,  in April, 2007 on the Concord label.  OZO is known for their political activism and the group promises that Don't Mess With the Dragon won't hold back.  The new album features Latin track, La Gallina and their driving anthem to their hometown, City of Angels.   Here is a link to a 2-3 minute video about the new album.

Anybody who's been to an OZO show knows how hard working this band is.  The end of the concert is marked by the band mixing with the crowd in an impromptu sing-a-long of mindless diddies.  OZO fans love this band and for good reason.  One look at trombonist, Shef, shaking his thing when not playing gives middle-aged, suspender wearing, mortgage brokers hope that, we, as goofy as we are, still got it goin' on.

The Dreaded Dodgers

Make no mistake about it Northeast Los Angeles...I hate the Dodgers.  I was born in Philadelphia, lived in Phoenix and now live in San Diego.  As a kid in Philly, I watched the Dodgers teams of the 70's beat up on the Phillies.  We were finally redeemed in 1980.  As a young adult in Phoenix, I took perverse pleasure in the Dodgers decade-long decline.  Now, as a Friar faithful, I have grown to appreciate the Interstate 5 rivalry.

I hate the Dodgers and you probably love them in Northeast Los Angeles. 

I love Dodgers' fans, though.  You're passionate, knowledgeable, and lots of fun to run smack on.  I intend to do that all season. 

So...Dodger fan!  Can you believe it all starts in less than 30 days?

Dodgers Spring Training Schedule

Leave Lender Guidelines Alone!

Predatory lending laws get proposed by ambitious Attorneys General (like Lori Swanson of Minnesota)and I come off sounding like one of two things:  an industry apologist or a libertarian whacko.  I suppose  I’m much more of the latter than the former but I’d ask you to see past  both my industry and political afflictions and read why legislated loan guidelines just don’t make sense.

Predatory lending legislation, while well-meaning, ends up penalizing the very people whom it was meant to protect.  Banks and lenders simply refuse to lend in areas where the government legislates loan guidelines.  Ask a Cleveland Realtor about the exodus of sub-prime lenders from their fair city some 3-4 years ago.  Georgians will tell you that some lenders simply stopped lending in Georgia until the state addressed their predatory lending legislation.  North Carolina celebrates it’s sixth year of “success” of its benchmark predatory lending bill with a rising foreclosure rate and few lenders prepared to give borrowers a second chance.

I posted Predatory Lending Legislation Can Prey Upon the Responsible over on  Bloodhound Blog .  Here I suggest that proposed predatory lending legislation penalizes the 96% of the consumers who borrow money and are not in in trouble.  If you outlaw negative amortization loans  (as North Carolina did for high-cost borrowers) or prepayment penalties (as many states have done),  lenders just won’t lend in your state.  That is patently unfair to the consumer who does know how to manage her affairs.

Dan Green, fellow former Philadelphian, (like me) and author The Mortgage Reports  points out how the IL HB 4050 failed the consumer. A down-on-his-luck borrower may lose over $100,000 in equity, equity he spent a long time building, because the government decided that he needed protection from those big, bad banks.  Sad, indeed.

Should state governments take the stance that if lender’s won’t play by their rules they should just get the hell out of their state?  They will, which reduces a consumer’s options, lowers liquidity in an already illiquid market, and ultimately drives home values lower.  That, hurts responsible homeowners.

I applaud new Minnestoa Attorney General, Lori Swanson for her zeal to flush out the despicable practice of predatory lending.  I implore her commission members to focus on penalization of the rogue originators rather than legislated loan guidelines.  Minnesotans can’t afford the latter.

Gina with the Gams and Gunny Pop

It stared out with a post today about a gal named Gina who started a program called Pinups for Vets.  Gina published a calendar  featuring here as a pinup gal in the style of the 1940's pinup gals.  I found it cute and amusing and posted on America's Most Opinionated Mortgage Broker.  I sent Gina an e-mail inviting her to comment to lend some authenticity to the project.

Gina commented and I was pretty happy that I did a bit of due diligence.   She's the real deal:

Brian,
Hello again! It's Gina from the above calendar project. First of all, I wanted to thank you so much for posting information about the fundraiser and getting it out there. And thank you to everyone who is supporting this project by purchasing a calendar either for themself or for a vet or deployed military.
I am going to be visiting a Medical Hold Platoon in a few weeks with many wounded Marines from Iraq and Afghanistan. I would love to be able to bring 55 calendars to all of them. So, if you can donate even one calendar, that will help me reach my goal.
Thank you so much for your support and if you have any questions/comments...please feel free to email me at PinUpsForVets@aol.com
Also, be sure to send on the website link to anyone who might be interested in supporting the project.
Gina
www.PinUpsForVets.com

What I didn't expect was the comment from "Viper", a Captain in the United States Marine Corps.

All, this is Captain Grose again and I can vouch for the authenticity of this project. I contacted Gina TODAY for the first time and she has answered a half dozen emails from me within minutes of sending them. She also spent almost an hour with me on the phone where we hatched a plan to get her to see the wounded Marines at Balboa. She is as friendly and dedicated to this project as she is beautiful so please help her and those deployed who will undoubtedly cherish one of these calendars.

Captain Grose has a website:

It has some light-hearted posts that Generation X-er's will enjoy, most notably Capt. Grose's dedication to The Electric Company TV show.  Those of you under 45 will definitely remember that one.  It proves that Jarheads have a nostalgic side.

And it has sad stories.  Stories you don't want to hear but must. It has a story about a Marine Non-Com called "The Cigar Marine".  His name is Gunnery Sergeant Nick Popaditch aka "Gunny Pop".  Gunny Pop is a wounded war hero who's going to college here in San Diego to become a school teacher.  Gunny Pop really wants to go back to lead his Marines but has lost an eye from an Rocket Propelled Grenade (RPG) attack.  Captain Grose dedicates a page filled with links about Gunny Pop.  I implore you, regardless of your feelings about the War Against Terrorism to read this account.

Please consider buying a calendar for a service member overseas.

Hard Money: Apartment Loans

One arena where hard money can be helpful is to get a quick loan, in second lien position,  against a multi-family property. There is a tremendous need in California for that right now because so many multi-family property owners have low-rate first mortgages at 50-60% loan-to-value (LTV) that were made some years ago. There are two major reasons why the multi-family property owner is reluctant to refinance the first lien to a larger amount:

1- They have a great rate on the first mortgage.  Rates for buildings purchased in 2003 or 2004 were term loans with a note rate below 5.5%; today those rates are 6.5% or higher.

2- They have a very restrictive prepayment penalty on the first mortgage.  The more common prepayment penalty is offered as a declining penalty over 3-5 years.  Commercial Mortgage Backed Securities (CMBS) have a much more restrictive prepayment penalty referred to as yield maintenance or defeasance. Simply put, the borrower must guarantee the lender (who in turn guarantees the investor) a yield for a specific term; this can be much more costly than the declining penalty.  Why would someone borrow money with yield maintenance as a prepayment penalty?  They received a much lower rate. 

We recognize two things in the multi-family market in Southern California:

1- Multi-family properties are undervalued when analyzed on a per-unit basis.   High land costs and rising construction costs make existing properties that have utility as a potential conversion to condominiums valuable.  Condominiums can fetch as and average of $300,000 in San Diego County.  Many times we'll try to loan up to 60% of the future value of a conversion.

2- Multi-family properties have rising yield potential.  There still is a housing shortage in the lower end of the market in Southern California.  Vacancy rates are falling and average rents are rising. We'll try to extrapolate how an existing owner might "reset" the rents to reflect the market if the property is improved and deferred maintenance is performed.  We'll analyze the debt-service coverage ratio (DSCR) and lend on a 1.0 coverage using "market" rents or future value of rents.

READ: Multi-Family Lenders Are Liars ( or are they?)

Why would a borrower with good credit and equity borrow money at 13-14% ?

The answer is that nobody else funds second mortgages on multi-family properties; we will.  Many of our private lenders owned multi-family properties in their more aggressive investing years so they understand the property type. 

Sometimes, a multi-family property owner is looking for some quick money for 1-2 years.  The amount they need is not much in relation to the first lien and value.  Borrowers with a CMBS mortgage often find that the high costs and rates associated with our loans are actually quite a bargain when compared to a full refinance of the first lien.

READ:  "Hard Money" makes sense for good credit borrowers

One arena where hard money can be helpful is to get a quick loan, in second lien position,  against a multi-family property. There is a tremendous need in California for that right now because so many multi-family property owners have low-rate first mortgages at 50-60% loan-to-value (LTV) that were made some years ago. There are two major reasons why the multi-family property owner is reluctant to refinance the first lien to a larger amount:

1- They have a great rate on the first mortgage.  Rates for buildings purchased in 2003 or 2004 were term loans with a note rate below 5.5%; today those rates are 6.5% or higher.

2- They have a very restrictive prepayment penalty on the first mortgage.  The more common prepayment penalty is offered as a declining penalty over 3-5 years.  Commercial Mortgage Backed Securities (CMBS) have a much more restrictive prepayment penalty referred to as yield maintenance or defeasance. Simply put, the borrower must guarantee the lender (who in turn guarantees the investor) a yield for a specific term; this can be much more costly than the declining penalty.  Why would someone borrow money with yield maintenance as a prepayment penalty?  They received a much lower rate. 

We recognize two things in the multi-family market in Southern California:

1- Multi-family properties are undervalued when analyzed on a per-unit basis.   High land costs and rising construction costs make existing properties that have utility as a potential conversion to condominiums valuable.  Condominiums can fetch as and average of $300,000 in San Diego County.  Many times we'll try to loan up to 60% of the future value of a conversion.

2- Multi-family properties have rising yield potential.  There still is a housing shortage in the lower end of the market in Southern California.  Vacancy rates are falling and average rents are rising. We'll try to extrapolate how an existing owner might "reset" the rents to reflect the market if the property is improved and deferred maintenance is performed.  We'll analyze the debt-service coverage ratio (DSCR) and lend on a 1.0 coverage using "market" rents or future value of rents.

READ: Multi-Family Lenders Are Liars ( or are they?)

Why would a borrower with good credit and equity borrow money at 13-14% ?

The answer is that nobody else funds second mortgages on multi-family properties; we will.  Many of our private lenders owned multi-family properties in their more aggressive investing years so they understand the property type. 

Sometimes, a multi-family property owner is looking for some quick money for 1-2 years.  The amount they need is not much in relation to the first lien and value.  Borrowers with a CMBS mortgage often find that the high costs and rates associated with our loans are actually quite a bargain when compared to a full refinance of the first lien.

READ:  "Hard Money" makes sense for good credit borrowers

Borrow Money Like You Would Buy A Cell Phone

How is borrowing money like  buying a cell phone?

I'm going to share a funny personal story with you.  I just bought a cell phone the other day. Now,  read on because it has a LOT to do with how to get good mortgage terms.

This was a big thing for me because I bought a real bad-ass cell phone. It's the LG CU500, the first HSDPA compatible UMTS handset for the US, and probably the first to be offered by Cingular.

Now I have no idea what I just cut and pasted about my cell phone but I know the thing cooks.  The interesting part is I am a long-time cell phone user.  I go back to the days when you threatened to leave your carrier and they gave you a free phone.  PAYING for the handset was a never an option for me.  I've been a ATT Wireless (now Cingular) customer for years so I logged on to the website and started my search.  I found 2-3 phones I like,and marched into the Cingular store , prepared to do battle.  Guess what?  It costs about 50-$100 dollars more to buy the phone in the store than online.  And that's perfectly fine with me because it is definitely worth it.

The moral of the story is this: We don't buy products, We buy solutions.  Solutions are best provided by people and not a URL.

So how does this relate to the online versus in-person mortgage origination ?  It's actually quite simple.  You'll never get the rate/terms you think you will get online.  In fact, you might even get a better rate/terms.  I paid more for my cell phone but I am convinced that the VALUE I received far exceeds the dumb choice I made for myself. 

The mortgage industry, even when practiced with complete transparency, is not a simple choice anymore.  There are tons of mortgage programs available with various ways to get approved.  A seasoned mortgage professional is always going to deliver the better loan solution for you than an online purveyor of products will.  So why would you go online to shop for mortgage terms?

Online mortgage shopping gives you a reference point.  It gives you an education about what mortgage lenders look for when approving loans.  A seasoned mortgage professional loves educated consumers because they take up less of her valuable time.  If time equals money (it does) and you can save an originator time, you'll get a fair shake and pricing that is real similar to the "deals" being quoted. 

The "shenanigans" we hear so much about often come from unrealistic expectations and a lack of cooperation from borrowers.  When a borrower starts playing a cat and mouse game with originators, it results in a declined loan application.  We had this experience this past week.  The borrower didn't get us his rental payment check copies until 4 days before the closing date on his new home.  Why?  He was habitually late these past 12 months with his rent although he claimed to have a perfect rental history..  His loan was declined.  Can we approve him on another program for a higher rate?  Of course but the originator doesn't want to start all over again.  The Realtor requested that our originator charge the borrower more money to compensate him for his time. Presented with that option, our originator gladly started the SECOND loan package for the deceitful borrower.

Go to www.bankrate.com and be brutally honest with yourself as you enter the "compare local mortgage rates" function. Enter information that is similar to your financial status, the property type you are financing, and the type of loan product  you think you want.  Print it out and go to a local mortgage originator's office with the expected documentation.  Ask the broker about her compensation, and whether she can offer similar terms.  I think you'll find you get good advice, fair terms, and a better understanding of how the mortgage market works.

It worked for me and my new cell phone.

MARKET STATS 12/4-12/10

Market activity in zip codes 90031, 90032, 90041, 90042 and 90065 for December 3, 2006 through December 10, 2006, as reported in I-Tech MLS

New listings entered

Price reductions

Reported pending

Reported sold and closed

The Power of an Annual ARM

       Why should you ALWAYS get a one year ARM rather than "locking" into a 30 year fixed rate loan?  The easiest answer is that you will NEVER be able to accurately predict interest rates.  Did you know that Wall Street gurus are wrong over 60% of the time with their interest rate projections over a 3-5 year timeframe?  What makes you think you know better than them ?

Did you know that over a five year period of time, the one year ARM has always outperformed a 30-year fixed rate loan?   That statistic has held true for over 40 years. What that means is that your average interest cost for a five year period was less with a one year ARM, than with a traditional 30 year fixed-rate loan..  Let's look at the last five years and compare a LIBOR plus a 2.25% margin ARM to a 30 year fixed rate loan:

Let's assume a customer secured a 30 year fixed rate loan in October, 2001.  They would have gotten a rate of 6.75% for a $200,000 loan.  Now let's assume they refinanced in the summer of 2003 to a 5.5% rate and paid out $3,000 in closing costs.  How much interest (and costs) would they have paid until today? $1125/month times 20 months PLUS $3000 closing costs PLUS $916/month times 40 months.  A total of  $62140 in interest and costs.  Good thing they refinanced because if they hadn't that figure would be closer to $67,500.

Now, let's look at the one year ARM:  They would have had a rate for the first year at 5.0% or paid $10,000 in interest.  The second year, their interest rate would have jumped to 5.75% costing them $11,500.  The third year would have been nice, they would have been at 4.5% costing them $9,000 in interest.  The fourth year at 5.50% costing them $11,000.  Finally, this year, their rate would have climbed to 6.75% costing them $13,500 (the inverted yield curve, while temporary, was brutal this past year).  Total costs...$55,000.

Will this trend continue?  Absolutely.  Their rate will be set around 7% this year and that will be difficult.  Inverted yield curves don't last forever, in fact, they usually precede a period of rapidly declining interest rates of 2% or more in a 6-12 month period. This means we start the cycle all over again at a sub 5% rate next year.

How about for jumbo loans?  Here's where it gets even more advantageous to have a one year ARM. You see, ARMs favor big borrowers.  It is possible to get a LIBOR plus 1.75% margin loan for a jumbo where the 30 year fixed has a "jumbo premium" of .25% higher  to the rate.

Why don't people borrow with annual ARMs then?  People always compare the annual ARM rate to their last one year period; that context is unfair.  It makes sense to analyze a loan for the average holding period (3-7 years) rather than compare over a one year timeframe. Check with a local mortgage professional. He or she can show you the 40 year charts, explain how ARMs are priced, and give you some great advice.

Another lie from mortgage companies

I am continually amazed at the misrepresentations mortgage companies use when advertising.
It  is absolutely impossible to advertise best or lowest rates, truthfully.

Let me give you an example:

1- Go to google and enter in quotes:  "lowest mortgage rates"- 519,000 hits
2- Now enter in quotes: "lowest mortgage rates"+california- only 243,000 hits...that's better.
3- Finally, enter in quotes: "lowest mortgage rates"+san diego down to 109,000 hits..wunderbar!

Now let's shop for the lowest rate and call every one of the 109,000 entries and verify the terms of the "lowest mortgage rate".  It will take me 545 days to get through all of the entries for "lowest mortgage rate"+san diego. 

Do you think that the lowest rate might have changed in a year and a half?

So...advertising that claims the "best" or "lowest" rates has a 1 in 109,000 chance of being correct; the other 108,999 entries are published liars. Next week, I'll tell you how to "shop" for a mortgage.

I am continually amazed at the misrepresentations mortgage companies use when advertising.
It  is absolutely impossible to advertise best or lowest rates, truthfully.

Let me give you an example:

1- Go to google and enter in quotes:  "lowest mortgage rates"- 519,000 hits
2- Now enter in quotes: "lowest mortgage rates"+california- only 243,000 hits...that's better.
3- Finally, enter in quotes: "lowest mortgage rates"+san diego down to 109,000 hits..wunderbar!

Now let's shop for the lowest rate and call every one of the 109,000 entries and verify the terms of the "lowest mortgage rate".  It will take me 545 days to get through all of the entries for "lowest mortgage rate"+san diego. 

Do you think that the lowest rate might have changed in a year and a half?

So...advertising that claims the "best" or "lowest" rates has a 1 in 109,000 chance of being correct; the other 108,999 entries are published liars. Next week, I'll tell you how to "shop" for a mortgage.

I love Dingbats

I must admit that my heart finds for some strange affections.  I love dingbats!   Now..I better explain myself.  I'm not referring to an "intellectually disinclined" woman.  I'm talking about the multi-family building so prevalent to Southern California.

FROM WIKIPEDIA:

A dingbat (also called a stucco box or a shoebox), is a type of architecturally undistinguished apartment building that flourished in the Sun Belt region of the United States in the 1950s and 1960s. Dingbats are boxy, two- or three-story apartment houses with overhangs sheltering street-front parking. 

Particularly popular in southern California, but also found in Arizona, Florida, Hawaii and Nevada, they are known for their downmarket status and inexpensive rents. They are currently experiencing a minor sentimental renaissance thanks to the mid-century modern design return to vogue. In spite of their serviceability as functional, affordable housing, and the niche appeal of their trappings and trim, dingbats are widely reviled as socially alienating visual blights; California historian Leonard Pitt said of them, "The dingbat typifies Los Angeles apartment architecture at its worst".

Why do I love dingbats? These apartment buildings offer one of the greatest challenges to a real estate financier.  They don't qualify for residential financing because they are usually greater than 4 units.  They are "small commercial" deals that banks pick apart with a fine tooth comb.  They generallly don't cash flow greater than 60% LTV in Southern California so it is hard for investors to leverage themselves.   They do, however, provide a great opportunity to make money because they have been generally mismanaged and aren't receiving market rents.

Let me give you an example of a property I just financed.  It is less than 500 feet from the sands of the beach in Imperial Beach, CA and was built in 1954.  It is mostly studios and one bedrooms with monthly rents of $6600.  The investor bought the property for $1.1 million.  Banks wanted to finance him at a maximum of $500,000 with no subordinate financing; they were going off of his market rents.  Now come on!  $660/month for a beach apartment in Southern California..unheard of!

This investor plans to sink $100K-$150K into the building to upgrade the facade and interiors.  Updated, an apartment this close to the beach can command upwards of $1,000/month.  It is extremely close to Coronado Naval Base, home to over 5000 sailors.  These sailors receive over $1,200 allowance for off base housing.  He has a natural market less than five miles from his property.  Now, what do you think the effect of future rents will have on the ability to service the loan?  If you're thinking that it is positive, you are correct.  We recognized that and made a hard money loan to purchase this building, allowing for seller-carryback financing of 30%.

One of my favorite things about dingbats is the kitschy names for them.  The complex name is usually emblazoned across the facade in aqua or salmon and has names like "Palm Gardens" or "Beverly Palms".  Dingbats are so retro cool, it makes you want to don a bowling shirt and fedora and have your picture taken in front of the property.

Yep...I love dingbats. I love the fact that they offer affordable rents to the masses and a great return for investors.  Banks hate them, I love them.

A Realtor's Guide to YSP (Yield Spread Premium)

There is a lot of good information about a pricing mechanism in the mortgage market called "rebate" or "yield spread premium".  Mortgage brokers will often refer to this term as YSP.  Bill Archambault, a former mortgage broker and Realtor from Nevada, has written a whole bunch of books aimed at consumer real estate education.  He runs The Real Estate Investment Institute and teaches people how to buy homes for profit.  Bill wrote an article entitled, A Consumer's Guide To Mortgage Brokers and The Evil Yield Spread Premium. Bill summarizes that the consumer should focus on rate and fees as a shopping mechanism.  I suggest it to borrowers now before they commit to a loan application with me.

Another good source for understanding how to understanding the concept of yield spread premium is from Jack Guttentag, a retired professor from the Wharton School of Business at the University of Pennsylvania (in my hometown of Philadelphia) .  Jack has a website called The Mortgage Professor.

I'm going to use Jack's example of points and negative points with you, the Realtor, acting as a fiduciary for your client.  I have heard many Realtors explain that they don't really understand the whole "YSP thingy".  I hope to make it easy to explain and simple for you, the Realtor, to check  your customer's loan application disclosure documents and the estimated and final HUD-1 Settlement Statement.

Discount Points are upfront interest to the borrower .  Along those lines, so are closing costs from third-party providers.  This means that we figure in those costs as the true COST of credit to the consumer and measure it as an annual percentage rate (APR). There are 2-3 good arguments about why APR is an antiquated measure but I'll leave them for another article.  Borrowers pay points to lower the rate.  A common term is to "buy down the rate".

Did you know that mortgage brokers get money at a wholesale cost?  It's how we make profit. Just like your local Nordstrom's, we buy at wholesale and sell at retail.  The only difference is that we, acting as a mortgage broker have to tell the customer three times what we expect to profit on their mortgage transaction:  First, within three days of an application on a good-faith estimate, at the bottom of the itemization (bottom of page 1 of the California MLDS), second, within three days of drawing loan documents (same disclosures), and finally, on the HUD-1 Settlement Statement as a paid outside of closing (POC) item. 

That profit, paid by the lender to the broker is called yield spread premium or YSP. You can understand it as "negative points".  if a consumer "pays points to lower the rate", why can't they "receive points to accept a higher rate".  Instead of paying upfront interest in the form of a discount point, they receive upfront interest in the form of a "YSP".  That receipt of upfront interest defers the mortgage broker's fee!

Let me give you a raw example.  If I wish to earn a mortgage brokerage fee of 1% of the loan amount plus $495 processing fee on a $400,000 loan, here are 3 ways I can do it for a customer who wants to take advantage of YSP (or negative points).  Let's assume that the third party (or HARD) costs of this loan are $4,000:

1-  The customer gets a rate of 5.875% with no YSP.  The customer-paid fees will be my $4,495 PLUS the $4,000 third party fees for a total of $8,495.

2- The customer gets a rate of 6.25% with 1% YSP.  The customer-paid fees will be my $495 PLUS the third party $4,000 for a total of $4,495.  The lender will pay me (the mortgage broker) the other $4,000 of my fee. the borrower really pays it in the form of a higher interest rate.

3- The customer gets a rate of 6.625% with a 2% YSP.  The customer-paid fees are only $495!  The lender pays me (the mortgage broker) my $4,495 and I credit the remaining $3505 from the YSP to the borrower for all of the third party fees.  That's enough to include the title premium, "lender junk fees", appraisal, etc .

Why would a customer want to pay a higher rate if he qualifies for a lower one? The answer is in paragraph six; they actually receive negative points! Hey!  What about their payment?  Isn't it going to be higher?  Of course it is!  In the difference between option one and three , it is $250/month in extra interest or $3,000 year.  They receive $8,000 upfront in negative points for that $250/month.  Then, it's a matter of simple math.  I ask the customer if they intend to keep this mortgage for more than 32 months (the breakeven point).  If they say, "No, we'll probably refinance to remodel", then they should take the negative points and higher rate.  If they say. "Yep.  We expect to be in this loan until we pay it off", then I advise them to pay the third party fees and my mortgage brokerage fee upfront and take the lower rate! Jeff Belonger does a nice job of explaining in this post about the Myth of Zero Point Mortgages.

If you are used to dealing with a direct lender, correspondent lender or bank, they do not have to disclose yield spread premium to the customer because they are making the credit decision, funding the loan, and reselling it on the secondary market (Wall Street).  if you want to be certain that your customer is getting a fair deal from a direct or correspondent lender (or bank) , ask a mortgage broker to furnish you with a good-faith estimate at identical rates and fees from the direct lender so you can see the "profit" the lender is making.

I hope this article better explains the whole "YSP thingy" and assists you as you help your client make the right loan decision!

MySpace to Market Real Estate?

I read a funny article about a few of my colleagues here in San Diego and the success they've had marketing to the MySpace generation. It was in the Voice of San Diego and this article featured an agent named Seth O'Byrne.  I have communicated with Seth a few times and can tell you that this is a young man that has his pulse on the 20-something market.

Business Week writes about how the MySpace Generation is used to receiving information instantaneously.  It's obvious that technology and speed will be important to capture these teens and twenty-somethings when they start buying homes in 3-10 years.

Finally, although this site requires registration, this article called "Marketing to the MySpace Generation" discusses the phenomenon of social networking, the growth of myspace to over 120 milion users.  I logged onto Myspace in early 2005 and I was pretty much the oldest person there. 

My Group on MySpace, MLS on MySpace, has close to 900 real estate professionals as members.  It is a place for professional Realtors to publish their listings. Please check it out and see how the MySpace Generation of Realtors is communicating with each other.  While you're there, check out my home page and request me as a friend. 

My summary of these articles is:

MySpace is not a flash in the pan nor is it a "haven for sexual predators".  With over 120 million users, the bulk of whom will be first-time homebuyers in five years, it is silly not to incorporate this site into your long-term online marketing strategy.  10 years ago, the buzz was "are you on the world wide web?" 

Today, it's "what's your myspace?"

How Mortgage Originators Lie

Mortgage originators constantly advertise that they will find "the perfect loan for you" and that they will "work hard to find you the absolute best terms".  You may find, after reading the compensation agreement, ....that is bunk.

It has been said that the "devil is in the details" and in mortgage origination disclosure documents, nothing could be more true. Contractual relationships mortgage originators have borrowers sign, hidden carefully in a stack of disclosures, clearly state that there is not a fiduciary relationship but an independent contractor relationship between the borrower and the mortgage originator. The National Association of Mortgage Brokers (NAMB) defines that relationship as one of an independent contractor in its widely used loan origination agreement.   Read the text in Section One of the Model Disclosure Agreement.

It kind of makes you realize that the relationship your originator has with you (the borrower) is akin to a Vegas taxi driver dropping a group of horny conventioneers off at a strip club; he charges a fare while collecting a "steering commission" from the strip club.

Let me explain by lumping origination companies into three categories:

1- Direct lenders originate loans for their own portfolio and/or securitization.  These companies are not limited to but include Wells Fargo Home Mortgage, Countrywide, IndyMac, Flagstar Bank, National City, Ameriquest Mortgage, Bank of America Mortgage, Chase Manhattan Mortgage, and Washington Mutual.  They do not guarantee a borrower that they will work to find them the best terms, only the terms they offer. In fact, these originators severly penalize (or prohibit) employees who "broker" a loan to another direct lender because the terms are better for the borrower. 

2- Correspondent Lenders are "Mortgage Brokers" on steroids.  They look and act like brokers inasmuch as they submit your loan package to various direct lenders but have the ability to hide the "steering fee" as profit from selling the loan. Correspondent lenders prepare the loan documents, fund the loan from a warehouse line (or giant credit card that the direct lenders provide for the correspondent), and sell the loan to the direct lender.  They generally use the NAMB disclosure form but can be persuaded to offer you a fee for services agreement.

3- Mortgage Brokers agree to arrange a loan for the borrower with direct lenders.  They offer the absolute best chance a borrower has to get a true fiduciary relationship. The way to establish that fiduciary relationship is through a carefully worded fee agreement that clearly defines the duties of the originator and the amount and form of compensation.  A sample of a contract defines how lender paid compensation can replace the borrower paid compensation or augment it to pay the mortgage brokerage fee.  The service offering agreement defines the contractual relationship between the originator and borrower.

Here is the truth about mortgage originators. We get paid by you (the borrower) AND the lender with whom we place the loan.  There is nothing evil or illegal about that; it just hampers our ability to get you the best terms and get paid for our services.  Yield Spread Premium or Lender Rebate is a form of compensation to your originator.  If you, the borrower, negotiate a fee for services with the originator at application, that acknowledges that the yield spread premium or rebate is applied to that fee, you're getting an originator that is clearly working to get you the best terms; she's going to make her fee no matter which loan program you choose. 

If you're a Vegas conventioneer, you will probably have a great time at the strip club the taxi driver recommended.  Just be sure to negotiate his "steering fee" as a credit to the fare before you get in the cab.

$1 Trillion in ARMs resetting in the next 18 months

Many people chose to finance their purchases in 2003-2005 with an adjustable rate, interest only mortgage.  These not quite subprime loans and not quite A paper loans were marketed by lenders and Realtors as the "way to get in the game" in rapidly increasing markets like Southern California, the Northeast, Florida, and the Southwest.

What does "resetting" the ARM really mean?  Well, the rate charged by a lender for an ARM is based on two things:  the index plus the margin. Common indeces include the London Interbank Offering Rate (LIBOR), the Managed Treasury Average (MTA) and the Cost of Funds Index (COFI). The index is usually pretty close to what the bank's cost of money is. The margin is the bank's profit.  That is how you determine the TRUE rate on an ARM.

Borrowers elected to take two and three year "fixed rate periods" when they bought their homes to give them a bit of "payment safety".  That payment safety is about to turn into payment SHOCK!  Let me explain with a real life example:

I have a customer who bought a home and secured a $400,000 2 year ARM, interest-only, in 2004.  The loan was due to reset in September to LIBOR (around 5.4%) plus a 3% margin.  This means that his rate was due to go to 8.4%.  It would still be interest-only (for another 8 years) but his "start rate" was fixed at 4.875% for two years.  You can do the math.  His start payment was at $1,625 and it was about to adjust to 8.4% for the next year bringing his new payment to $2,800.  That's an increase of some 72%.  Now I don't care how high your income is, a 72% increase in ANY expense is traumatic.  I mean, at least it took three years for a gallon of gas to increase that much.

His refinance was REALLY hard because his home increased about 8% during that period.  We were able to get him into a 5 year ARM at 6% so his payment only rose $325.

Anyway, I digress.  Here's the really scary (or opportunistic) statistic.  There are $330 million in ARMs resetting in 2006 and ONE TRILLION DOLLARS in ARMs resetting in 2007.  Now, fellow lenders, don't lick your chops just yet.  These loans were made back when stated income was truly a "liars loan" and banks have really tightened up on those loans since then.  Prices have risen since then but most of these loans were backed up with HELOCs for 100% financing. 

I estimate that there is some $20 million per day resetting in Southern California for the next 15 months.  WOW!

Ten Rules to Buying Property in Mexico

I've made loans to Americans buying resort properties in Mexico since 1998 and I still do it today. Now, you may have heard lots of stories about the horrors of buying property south of the border and I'll admit, there are a few of them. Guess what?  It's because the buyers didn't listen!

Here are 10 rules to buying property in Mexico:

1- Get title insurance from an American Company.  Stewart Title's been insuring property in Mexico since 1994.  First American and Land America insure down there also.   Mexican sellers (and their agents) will tell you you don't need it but do NOT listen.  You need title insurance or NO deal.

2- Check to see how you have to hold title.  The "restricted zone' for foreigners is 100km from a border and 50km from the coast.  Baja California peninsula is, in effect, mostly in the restricted zone.  You can hold property fee-simple in outide of the restricted zone but need to use a bank trust or fideicomiso

3- Get a referral from someone who owns property about a reputable Realtor down there.  There are no licensing requirements for Realtors but many belong to AMPI which is an organization similar to NAR. In fact, NAR announced an association with AMPI and is having a joint conference with AMPI.

4- Understand the role of a notario publico as a title search agent, closing agent, and county recorder.

5- Get all contracts, promises, representations, and warrants in English (or have them translated).  Any reputable firm will have them available.

6- Use an American escrow company.  The title company can offer their "in-house" escrow company; use them.

7- Examine the document called the condominum regime (regimen de condominio) to see owners' right, obligations, and restrictions.  These are similar to our CCRs.

8- There is no requirement for sellers-disclosure in Mexico.  Caveat Emptor!

9- Mexican Corporations have restrictions against foreign ownership now. Using a Mexican Corporation to buy property isn't as advantageous in the past.  Don't be awed by the Mexican corporation that comes with the property; it may be useless to you.

10- Pay your taxes !  The IRS is called Hacienda in Mexico and they will lien and foreclose on your property if you do not file or underpay your tax bill.

Say NO to Predatory Lenders

Jack Guttentag, "The Mortgage Doctor" and founder of the Upfront Mortgage Brokers Community (UMB), wrote an article that identifies the 4 characteristics of victims of predatory lenders. I'll list them and provide my commentary about how you can avoid being one of the victims.  He cites a case study done by ACORN, a consumer advocacy.

1- Passivity: Borrowers who tend to react to events rather than be proactive are typical prey.  They will drone on and on about how life dealt them a bad card.  They never take personal responsibility and seem are absolute targets.  The key thing is that they are selected very carefully by predatory lenders.  Predatory lenders buy lists of people whom have mountains of credit card debt and whose credit scores are JUST LOW ENOUGH to make them feel inferior as borrowers.  Do not be the passive! When contacted by a predatory lender with a value proposition that seems to meet your needs, explain that you'll be checking with a family friend, a local broker, and one recommended by your attorney. This will set the tone with the predatory lender that you have choices and an attorney is one of them.

2- Confusion: There is absolutely no confusion in a real estate loan.  Predatory lenders must play by the rules or they lose their license.  They disclose properly but bank on the fact that the prey won't read the disclosures.  The terms of the proposed loan are spelled out presicely in the diclosure documents that are mailed to your home.  If you didn't receive them within a week of having your credit pulled (or made application); the predatory lender is out of compliance.  Have them e-mailed.  READ THE DISCLOSURES!  If you don't understand them hire an attorney to read them and interpret them  An attorney costs about $300 for document review (about the cost of an appraisal).

3- Cash Hungry: Most borrowers are focused on the big lump sum the predatory lender promises.  Guess what?  The money ain't free.  If the predatory lender senses that you are panting at the prospect of a big lump sum, she'll add points and unnecessary fees.  There is absolutely no reason to think that your world will get worse if you don't back out of a loan because of confusion.  Predators will drag out the process until they sense you are desperate for the money and then offer a much more expensive loan.  You should politely decline and tell them that you appreciate the offer but you'd like your appraisal (that you paid for) to shop on your own.  At this point, the predator gets nothing for all of the work in the loan.  Surpisingly, the terms will go back to what was disclosed at application.

4-  Payment Focus: if the borower is focused on payment so much that the predator can sense this, they are cooked.  This is when the negative amortization loan (sometimes these are called option ARMs or payment options ARMs )comes out. Sometimes, predators hold the neg-am loan out for the final delivery. In other words, they have the borrower focused on getting $50,000 cash out for $2,000/month. The borrower is sweating out the loan underwriting until the final  days.  The borrower is declined but offered another option.  They can receive $70,000 cash-out and the payments are only $1400/month.  The borrower is ecstatic!  The predatory lender discloses but never explains that your interest rate is actually LIBOR plus 3.9% (or 8.2% in todays market).  The worst part is that the borrower's mortgage balance rises some 5% a year for five years and then the loan amortizes.  The payment jumps to $3200/month!

Anybody can be a victim.  The only way to deal with predatory lenders is to say no:

1- When called with a good loan proposition, explain that you'll run it by your attorney.  A reputable lender will ask for the opportunity to speak to your attorney to clarify a few points, a predator will go away.

2- Read the disclosures.  I know they're confusing but so many people read the details of a vacation trip more than they do the details of the biggest loan they will ever take in their life.

3-  If the deal changes at the end, back off.  The predatory lender did a lot of work to get you approved.  When you back away from the deal, she'll want to "just get something".  You have shifted the desperation to the other foot.

4- Finally, consider dealing with a Fiduciary Mortgage Broker (sometimes called Upfront Mortgage broker).  This is where you hire a mortgage broker and negotiate a brokerage fee at the time of application.  The Fiduciary Mortgage Broker agrees to offer complete transparency to the transaction and is not influenced by "lender specials".  The Fiduciary Mortgage Broker receives the same fee no matter what loan you choose.  His interests are completely aligned with yours.

New contributor: Brian Brady

You may have noticed a new voice on NELaLive.  Our new contributor, Brian Brady, is a professional loan originator and managing director with World Wide Credit Corporation in San Diego.  He has a talent for doing hard and "goofy" deals. He's financed properties in Mexico for Americans who bought vacation homes there.  Brian also put in six years on Wall Street as a Consumer Markets Account Executive with Merrill Lynch.

My long term goal for NELaLive is to maintain an interesting, albeit unpredictable, mix of community, real estate, and financial information.  And to stimulate discussion in all these areas.  In this quest, I have invited Brian to contribute his insight on real estate and financial issues. 

Brian's web site

Brian's blog

What do Lenders Want?

Lenders basically weigh three items in order to make a decision on your loan. These three items are CREDIT, CAPACITY, and COLLATERAL, commonly referred to as THE THREE C’S. When all three C’s are strong, the risk on the loan is low. A borrower would then qualify for the best terms. If any one of the three C’s is weak, a borrower would still be likely to qualify for a mortgage, but the risk to the lender is higher, which means the rate may be higher as well. If all three C’s are weak, it can get difficult to obtain a mortgage. Underwriting is a layering of the risk or a blended analysis of these three factors:

The better your credit is, the less the risk to the lender. A good credit rating is the most important of the three C’s but it is not necessary that your credit be perfect.

The easier it is for you to afford the monthly mortgage payment, the less risk to the lender. Capacity is the ratio of your montly income as it relates to your monthly obligations (bills).   Capacity is measured by debt-to-income ratios.

Collateral is a combination of your down payment and the property. The larger your down payment is, the less the risk to the lender.  The property is the second part of the collateral equation. Your down payment is your part of the collateral invested into the property. The property itself covers the other part of the collateral for the lender. Lenders look closely at the property you are buying because it is usually the biggest portion of the collateral that is used to secure the mortgage. There are different requirements for various types of properties because each presents a certain level of risk to the lender.

You Ran Out of Money?

You decided to renovate a home rather than buy a brand spanking new one.  You had your plans drawn up, created a budget, and started work.  Maybe you got a construction loan, maybe you figured that you'd finance it from your savings.  You started renovating your dream house but, 2006 came along with its higher labor and materials costs and...

YOU RAN OUT OF MONEY !

Well, my first comment is don't feel so bad; you are not alone.  I know that you're worried right now because you may have studs exposed to the elements but a solution can be found.   The good news is that your land value probably increased from when you bought it so there is some value to your property.  The challenge is that no bank wants to lend you money now that you "botched" the project; they think that you don't know how to manage your costs.

Private mortgage investors disagree with those lenders.  They understand that many owner-builders and small professional builders were not able to hedge labor and materials costs because of those added costs.  They understand that you just got caught in a bad situation.  The good news is that there are private investors that will lend you the money to complete the project.  It is expensive money.  It is sometimes referred to as hard money.  Annual percentage rates of 12-15% for this money are not uncommon.

Here is what a private mortgage lender will do if the property is in NELA.  They will ask you to pay an independent construction inspector to visit the site to determine (with you) a realistic budget to complete the project.  If that budget determines that the loan will be equal to a value that is 65% or less than the final appraised value (of the completed home), you probably have