Top 10

Ugh... Still in the top 10.

Good news is we aren't #1.

1. Detroit 4.9%
2. Stockton, Cal 4.86%
3. Vegas 4.2%
4. Riverside 3.8%
5. Sacramento 3.2%

9. Denver 2.6%

These of course are 2007 foreclosure statistice provided courtesy of Realty Trac. The US Average is a 1% foreclosure rate.

There is no doubt its a buyers market. Plan on living in to your place for 5 years or keeping it as a rental property.

What To Do?

"Matt, we're buying our first home in June. How do we get the whole process started?"

Congratulations!
Buying a home (especially your first) is an extremely exciting time. Many times, it is a roller coaster process as you find the perfect home, make an offer and obtain financing.

1. Establish a Budget & Get Preapproved. I would run numbers based upon a 6.5% interest rate. Rates are lower than that right now, but we're still 6 months out. Establishing and remaining within your budget is vital! When you are preapproved, find out when your rate will be locked.
2. Find a Realtor. Typically, references are the best resources. Know anyone who has purchased a home recently and had a great experience? Make sure that your Realtor treats this purchase as an investment.
3. Start shopping. Take notes to remember each property. As you narrow down your choices, have your Realtor pull some comparable sales in the neighborhood to make sure that you're getting into a sound investment.

“Should we put money down? If so, how much?”
I'm not a financial investor and won't pretend to be one. However, some basic financial principles need to be applied.

I would start with 3% down in order to qualify for FHA financing. You'll obtain great rates & will lower your mortgage insurance premiums. The more money you put down, the lower your mortgage insurance payments. However, mortgage insurance is only required on homes whose financing exceeds 80% of the value. For that reason, I would not recommend putting more than 20% down as it will not improve your financing. Conservative investments offer returns that exceed the 6 – 7 % mortgage rates so reducing your principle may not always be the wisest investment.

There is one big problem when you pay down your mortgage. Liquidity. Once additional payments have been made, your monthly payments do not change. Should you run short on cash, the bank will not float your payments for 30, 60, or 90 days, they will begin foreclosure proceedings. Ugh.

Always have a plan for a worst case scenario. If you do decide to put additional money towards principle, obtain a HELOC first. This line of credit will provide the necessary liquidity while allowing you to accelerate the pay off. This is a win, win. You have access to your equity & you will reduce the amount of time you are exposed to the interest rate, thereby reducing your effective interest rate!

Hope this helps! Happy home buying!

Merry Christmas Adjustable Rate Mortgage Holders!

United States Treasury Secretary Henry Paulson is extremely optimistic that many of the big players in the mortgage industry are going to go to work for thousands of homeowners.

A deal is in the works to extend the lower introductory rate on fixed rate mortgages for 1 - 7 years. My bet is that when it is all said and done, we'll be looking at 3 years.

This is phenomenal news! If it goes through, it will be the government's greatest achievement in alleviating the mortgage meltdown!

http://hosted.ap.org/dynamic/stories/M/MORTGAGE_CRISIS?SITE=CODER&SECTION=BUSINESS&TEMPLATE=DEFAULT#

Sunny Skies Ahead?

Probably not. However, here is a little hope that Colorado will be one of the first states to recover from the mortgage crisis.

http://www.rockymountainnews.com/news/2007/dec/01/states-foreclosure-rate-drops-to-no-7-in-nation/

Problems...

The real estate industry is going nuts. We all see the news, read the horror stories and witness giants such as CITI and Countrywide scramble while their stock prices tumble and tumble and tumble...
Rust Belt city mayors recently met to discuss the mortgage mess. With all of the media hype, government officials are calling for changes. They are calling for help. The question is... will help arrive?
I hope not. Here is why. The mortgage mess is due to a few factors.

1. Lack of Consumer Education. Borrowers were told two things:
-Your credit will improve. This is true IF you embrace responsible spending.
-Your home will appreciate. Long term, this is always true. Short term, there are no guarantees. This is especially true for borrowers who didn't treat their home as an investment.

2. Greed.
-Wall Street was getting rich. Can you imagine 1% of hundreds of billions of dollars? -Brokers. While Wall Street was getting fatter than fat, individual mortgage brokers seized the opportunity to gouge clients on their loans.
-While 1% of hundreds of billions is hard to imagine, a $10,000 profit on a single closing hits a little closer to home.

3. Government -A president who wants to increase home ownership (Great principle, but the means to this end has proven errant).
-Greenspan. The jury is still out, BUT interest rate cuts made unaffordable homes, very affordable (for the time being).

Looking for solutions? Check out the next post.

Why Not?

I was chatting with a friend from home a few weeks ago. Soon, we started talking about mortgages. Here is his scenario.

30 year fixed loan

90% financing

Low interest rate

This young lad has made some pretty wise decisions! After all, he is planning on living in this home for a long time. He is in the right loan product and he is locked in at a competitive interest rate which will save him thousands of dollars over the life of his loan.

Problem: He is putting every spare dollar towards paying off his mortgage as soon as possible.

Question: Why is this a problem? Won't this save him even more money in interest paid?

Answer! Before paying down your mortgage, take some time to evaluate your overall financial situation.

1 - Do you have any other debt that carries a higher interest rate? (i.e. auto, personal loans, credit card debt)

2 - Do you have at least enough money in the bank to cover 6 months of expenses?

3 - Are you on pace to retire at the income level you desire?

For those who are not carrying extra debt, have substantial savings and are investing for retirement.... go ahead and pay that mortgage down.

For the rest of us.... don't do it!

When you pay towards a fixed rate mortgage, you lose liquidity. In other words, that money is no longer yours and you can no longer access those funds.

What will happen if you lose an income or encounter unforeseen expenses and find yourself unable to make your mortgage payment? Will the bank give you a credit for the extra payments that you have made?

Nope. The bank will begin the foreclosure process. Not only would you lose your home, but you'd lose all of those extra payments as well. Yikes!

Don't fear! With a little education and a little bit of discipline, you can build some reserves, save for your retirement and pay down your mortgage early!

Time for a Recession?

“Detroit, Cleveland and some smaller Rust Belt cities are experiencing a traditional bust, in which economic woes spread to housing. In San Diego, the housing decline seems to be a self-generated phenomenon, the product of too-high prices and too-crazy lending practices.”
Basically, there are a lot of reasons that the housing industry is struggling. Economic woes obviously go hand in hand with housing woes. People without jobs are going to struggle to make their payments. No shocking revelations here….
The big question is “Will housing woes result in an economic recession?”
Housing prices have dropped 3.2% nationally during the past 12 months. Over 36,000 in the mortgage industry have dissipated over the course of the past year. “46% of new jobs between 2001 and 2006 in the US were credited to real estate, residential construction and other housing related Labor Department jobs.”
Managing director of the Economic Cycle Research Institute, Lakshman Achuthan, says, “Having a jobs report come in negative does not mean that a recession has started.” The risk, however, is there.
Time for some personal insight… I don’t believe a full blown recession is at hand. Inflation looks to be stable which could me a rate cut in the very near future. The federal government is becoming actively involved as government backed programs are loosening up a bit and providing relief for some distressed homeowners.
Bottom line: There are a lot of bad loans out there that are going to keep a large inventory on the market BUT builders are pulling out, government backed programs are expanding and Wall Street seems to be settling down a little bit. Not all subprime loans are destined for foreclosure. Most subprime borrowers do pay their mortgage and do know the terms of this mortgage. I’m proud to be one of them.
**Statistics and other information drawn from Time Magazine 9/24/07.
http://www.time.com/time/magazine/article/0,9171,1661682,00.html

Accountability

I'm working on some loans right now for an investor who owns over 15 properties and has been working within the real estate/ development industry for over 20 years. He has never missed a payment. He has over a million dollars in the bank.

His loans were just canned because of the Colorado legislature.

Why??

Foreclosures have been blowing up. The government has to step in to protect its constituents right?

I disagree.

The loans that the lender canned were sophisticated loans that required no income disclosure.
(If you want to know exactly why the no income loan fits borrowers who retain many properties, please contact me. Basically, those who own & rent real estate have an extremely high overhead because the mortgage payments are so high.)

Anyway.... back to the task at hand.

1.) Should mortgage broker's be licensed?
-Absolutely. You, as a consumer, have a right to know that the person handling your mortgage is not a criminal.

2.) Should consumers enter mortgage agreements with caution?
-Yes! If your mortgage broker isn't willing to tell you how much money they are making or let you know that your loan terms are changing minutes before closing, get out! Work with someone who can provide references. Work with someone who deserves your trust and has your prosperity in mind.

3.) Should the legislature determine which loans are acceptible for consumers?
- No! Borrowers need to take responsibility and understand the exact terms of their loan. When I speak with borrowers, the most important question I ask is, "What is your worst case scenario?" I work with investors, first time home buyers and everyone in between. Their needs are different. The loans that fit these needs are different.

The bottom line:
Don't trust anyone with your financial future. Ask the hard questions, understand your worst case scenario. Make wise investments that will build wealth! There will always be scum looking to kill it off of some poor sucker. Work with people who are honest and deserve your trust. Am I the richest loan officer you'll meet? Absolutely not. Will I do everything in my power to help my customers achieve wealth? Yes!

Own Your Future!

Check out this article.

http://www.denverpost.com/specialreports/ci_4421584

So basically, an elderly couple on fixed income with escalating medical bills was encouraged to obtain an option arm loan.

What is an option arm?
-Basically, an option arm is an adjustable rate mortgage with payment options. You can pay interest, amortization or the minimum payment which is actually less than your interest rate. In other words, every month you make the minimum payment, you owe more on your house then you did before. When you owe 110 - 115% of your homes value.... hasta luego minimum payment and hello amortizing loan.

Is the option arm evil?
-Yes and no. It's definitely not for everyone.

Who is it for and why?
-Frankly, right now I wouldn't encourage anyone to take on an option arm. If short term interest rates were very low (i.e. 3%), the market was seeing strong appreciation (i.e. 5%) and the borrower is financially capable of making drastically larger payments should the negative amortization cap hit.
In other words, I only recommend this loan under certain circumstances for savvy knowledgeable investors who understand exactly what the loan entails.

Whose is to blame in the case of this article?
-No one likes to blame consumers (especially senior citizens on fixed income) for trusting a mortgage broker and not asking enough questions. That being said, consumers absolutely must understand the intricacies of their mortgage and always know their worst case scenario! If you are in a loan and don't know your worst case scenario, you need to find out and fast.
-Mortgage brokers looking out for their checkbook are also to blame. Few consumers understand loans. Brokers need to understand this and take on the responsibility to educate their customers. Broker - client relationships must be a win -win. The broker pays his bills and the consumer has the loan that best fits their needs.
-Regulation basically doesn't exist. The government could eliminate more exotic loans.

My two cents....
1. Consumers, take responsibility for your financial future. Be an informed client. Ask for references. No matter what kind of government regulation exists, there will always be brokers looking for maximum commissions with minimal regard for their clients.
2. Brokers, put yourselves in the shoes of the consumer. Make sure they are informed. Ask questions to make sure that this loan best meets their needs.
3. Regulation needs to exist. I believe broker licensing is the most important step. More disclosures that borrowers don't read won't help. Eliminating option arms will not fix the problem.

The Bottom Line:
Work to become an educated and informed client with a reputable broker whose priority is your prosperity!

Ouch....

I'm not referring to my back after 8 hours of laying tile yesterday... I wish I was.

"Colorado came in second with one foreclosure filing for every 290 households, which was 2.3 times the national average. Colorado's foreclosure activity, at 6,231 foreclosure filings in May, rose 9 percent from the previous month and was an increase of more than 50 percent from May 2006" (Source: CNBC http://www.cnbc.com/id/19193611)

OUCH!

What does this mean for homebuyers, homewners and investors?

• Homeowners - Foreclosures drive market prices down, making it more difficult to sell & move up or to refinance.
• Homebuyers - Lenders have cut back first time buyer programs, but if you can qualify there are a ton of good deals out there.
• Investors - Get off of this foreclosure mindset. Will your investments probably be foreclosures? Yes. 1 of every 290 houses is in foreclosure! Does this automatically mean you're getting a great deal? No way! Look for great deals. Who cares if the property is owned by a bank or private seller?