Mortgage News

Sunday, September 27, 2009

New Mortgage APR Calculator

We often get many clients asking about how to calculate a mortgage APR and exactly what it means. Due to the inquiries we have created a new mortgage APR calculator to help individuals understand the annual percentage rate. Our APR calculator provides a detailed explanation based on just a few user inputs along with a full amortization schedule and truth in lending type disclosure displaying actual APR of the mortgage. Take a look and provide us your feedback and we will try to improve it.

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Monday, March 03, 2008

Pay-Option Loans - Big Trouble with Small Payments

Today, CNN had an article regarding pay-option arm loans and the risk they are presenting to Countrywide. The article had some very telling statistics that should forewarn many that we are not out of the woods yet regarding this housing downturn.

Here are some quotes and personal observations...

"81 percent of the loans were made out to borrowers who provided little or no documentation on their income"

This is scary especially since majority of the loans where 100% financing. There is only one reason why borrowers elect to use a loan where they don't verify income, starts with an L and it's not Lazy. This simple fact is the beginning of a big problem.

Now...

"71 percent of borrowers with pay-option loans were electing to make less than full interest payments."

Keep in mind that many of these loans had mortgage payments and rates at around 2% - 3%. If they are making just the minimum payment, there is alot of negative amortization being added onto those loan balances. When these loans are fully indexed you are talking about rates near 8%, so the balance are climbing at around 5% per year.

As you can see...

"end of December, Countrywide had nearly $29 billion in pay-option loans, with about $26 billion of the total having grown beyond their original loan amount"

Wow, most with higher balances in a depreciating market. It would appear that the borrowers are not even trying to pay down the balances and many are having difficulty making mortgage payments that are exceptionally low...

"5.71 percent of the loans based on unpaid principal balance were at least 90 days late as of Dec. 31,"

The majority that are 90 days late will end up in foreclosure and go back to Countrywide, like this current inventory of REO properties in San Bernardino CA.

Now the scary part. 89% of the loans have higher balances than they started with, adding an average of 3-5% a year.

When the balance gets too high, these loans have a security measure called a "Recast" which usually kicks in at 110% - 125% of the original loan balances. When this happens the loans become fully amortized based on the remaining term and balance at the fully indexed mortgage rate.

When the recast happens the monthly payments jump up dramatically which only add to the number of problem loans. Here is a pay-option ARM loan calculator that estimates the time and adjustments in payments.

So as you can see from the CNN article, the small minimum payments allowed on these loans are now a big problem with lenders like Countrywide and many others.

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Thursday, February 21, 2008

Foreclosure Crisis... What if?

The following two months bring the highest number of adjustable rate mortgages reaching the first and most shocking payment adjustment. Something over 100 billion a month vs. the 30 to 50 of the last 3-4 months.

Inevitably many will end up in foreclosure.

Nouriel Roubini was on CNBC discussing the new plan to freeze foreclosures for 30 days and follow that up with this post which gave some reasons why it won't help and a possible scenario...


...banks will have to eventually recognize that even a plan that freezes the reset of most mortgages will not be enough. To stop foreclosures
they will have to a accept a reduction of the face value of the mortgage to the lower current value of the home
. While this may be costly to the banks
the alternative of foreclosure and selling such homes in a illiquid market is
worse for creditors. Thus, much more radical policy options should be considered
to avoid the biggest foreclosure crisis in US history.



Do you think this could happen and if it did would it actually
help?

What would be the fair way to select who gets a reduction?

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Tuesday, February 12, 2008

How FICO Credit Scores Get Gamed

Today there was a very interesting article regarding FICO scores on Businessweek that talks about the dark side of the FICO credit score and mortgage lending.

The article is surprisingly clear on the techniques used to raise credit scores.

Generally, the thing that hurts the score the most is having too much debt vs. your outstanding limits. Anything you can do to get your available balances below 50% of the available limit will increase your scores.

Here is the calculation to figure out your balance to limit ratios.

Total Outstanding Balance / Total Available Limits = %

Instead of paying a so called credit doctor, you can often just call your existing card companies and request an increase in available limits and thats free.

If you have legitimate errors on your credit report you can also make use of the Fair Credit Reporting Act yourself by contacting each credit bureaus and following the credit dispute instructions.

- TransUnion
- Equifax
- Experian

The article is worth the read if your curious about how the FICO score system works.

If your not sure whats on your credit report you can request your free annual credit report from each credit bureau from the official public website

Remember that the most important thing is to just make your payments on time. After all when you borrowered the money thats what you agreed to do.

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Thursday, January 31, 2008

Real Estate Lenders Declining Market Value Guidelines Affecting Thousands

Back on December 5, 2007 Fannie Mae quietly released mortgage-underwriting guidelines that would affect thousands of homebuyers and owners and further test the current real estate market. Now the full impact of this change will be felt almost immediately.

The guidelines updates the maximum loan to values (LTV - here is a LTV calculator) that Fannie Mae will purchase from mortgage lenders whom are selling loans to the GSE (which is just about everyone currently since the Wall Street MBS fiasco)

In summary, all maximum loan amounts are cut by 5% across the board if your property is in a “Declining Property Value Area” as deemed by the following:

A) Automated underwriting systems from Fannie Mae and Freddie Mace return a declining property value notice

B) Property falls into MSA, CBSA or Zip code considered a declining according to the written guidelines from PMI companies.

C) Real estate appraiser notes property as located in a declining market.

Some individuals where already affected via the Fannie Mae automated underwriting system which had its own set of areas built in but now, many more will be since the major PMI companies are enforcing their own guidelines.

Following are some of the notices and start dates from the major PMI companies:

AIG United Guarantee – 5% per automated underwriting system – Jan. 5

MGIC – all properties in California & Florida – Jan. 14

Radian – Download the attached 200 page PDF for areas – Feb. 1

RMIC – as per Automated Underwriting - Jan. 28

So a buyer who saved up his $15,000 to equal the 5% down payment requirement of $300,000 will now need $30,000 to purchase if he wants the same mortgage financing to purchase the home.

Additionally the cost of PMI coverage itself is going up in most of the areas further pushing up the total monthly payments for buyers.

Since the business has been slow and many real estate agents and mortgage lenders have not had any transactions they are going to be caught off guard by this update, leading to many recent pending transactions being cancelled.

So what is a homebuyer supposed to do?

The current options for home buyers is to now use government loan programs such the FHA home loans which requires down payments as little as 3% or for veterans the VA home loan program which allows for 100% financing.

There are other available options but all are more expensive. For example buyers may qualify for the conforming 100% financing options which carry a significantly higher interest rate and PMI rate and be required to put down only 5%.

As a result of these changes, I believe that property value declines maybe further accelerated in these areas and you will see the NAR’s Pending Home Sales Index drop dramatically over the next few months directly due to these changes.

Those homeowners who have been thinking about refinancing should seriously consider doing so now as not only will are they affected by actual property value dropping but now also the decrease in maximum loan to value amounts.

Have any of you reading this had this experience yet? What do you think the impact will be in these areas?

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Monday, January 14, 2008

NAR's HousingMarketFacts.com and Equity Estimator Calculator Fall Short

The NAR released a new website called Housingmarketfacts.com which contained some already well quoted figures and a "Equity Estimator Calculator" to help buyers see the ROI of their real estate investment.

First get ready for the talking website... always a crowd favorite, right?

The facts the NAR highlights are very well known and basically revolve around the idea of homes increasing an average of 6%, yet the most recent report indicates an anticipated growth next year of only 3.1%.

The NAR could have created a really nice tool to highlight market conditions along the tools like Trulia's heat maps, Zillows price charts or Altos Research to really educate the customer but instead took the easy route and came up way short.

Especially interesting to me is their Equity Estimator Calculator. It has a basic calculation but you don't see how they came up with the results. You simply enter your down payment amount it and tells you how much return on your down payment. The percentages are always the same regardless of what amounts are entered?

I created a similar home equity growth calculator last year that displays all the calculations on a month to month basis but also factors in a mortgage amortization schedule and equity growth.

Do you think the NAR should spend millions in TV commercials and advertising to promote the market with a website that is thin in useful information? Lastly does the NAR equity calculator seem accurate to you or does our equity estimator seem more useful?

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Tuesday, December 11, 2007

Example of Why Reading the Fine Print of Websites is Important

You may have heard this... "Big print giveth... little print taketh".

This is important both online and offline and especially for anything you sign.

I took screen shots in case things change on the site after the post. Pictures speak a thousand words, so here you go. I'm sure plenty of you will have something to say about this advertising from Bank of America.

Bank of America launched the No Fee Mortgage program which has been a huge success for them. Here is a screen shot of the site.



Seems welcoming like a great deal.

The Big Print.

No Mortgage Fee's, No Private Mortgage Insurance, Best Value... etc.

Almost too good to be true? I'm sure many people jumped on the opportunity. In fact, from Oct. 18 press release B of A stated... "First mortgage originations rose 27 percent helped by success of No Fee Mortgage Plus, which accounted for 21% of first mortgage productions in the third quarter."

See those tiny blue links or the small text at the bottom... terms of service, clicking link that will get you this.



Little Print Taketh.

Read carefully where I've underlined and you be the judge of if the little print matches the offer of the big print.



Now I'm sure this is simply to protect B of A and I'm sure B of A delivers these loans as you can see from the various Inman news post and history of this loan starting here, then this, and most recently with this.

Additionally, well respected Mr. Guttentag - aka (mortgage professor) did a comparison of this loan to see if there was real savings with the program.

Here were his results...

The results were mixed. In the 11 comparisons I did, Bank of America's prices were lower in five and higher in six.


The loan does exist but not necessarily as expected for the average consumer who simply looks at the big print.

What is also interesting is that the advertising a "no fee loan" was based on a loan that actually had fees associated with it?

Any thoughts or personal experiences regarding big print / little print?

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Wednesday, November 28, 2007

The First Mortgage Lending 2.0 Mashup?


There is lots of talk about Zillow entering the mortgage lending space and creating Mortgage Lending 2.0.

Currently the issue is most mortgage web sites don't actually help consumers do anything, they are simply lead companies who resell the data. Current consumers will check current rates on a site like Bankrate, if rates are lower than what what they currently have they will go to LendingTree to complete a form to have lenders call back and calculate the actual savings of refinancing. At that moment the consumers credit is ran which increases the chance of dropping their FICO scores, even if the consumer decides not to refinance because the savings don't make sense.

If the savings are not large enough, the lenders will usually try and sell a "creative" financing option to save the deal. That's where trouble sometimes happens as evidenced by the current mortgage crisis and the millions of borrowers who got "sold" a creative loan.

Not a very efficient process.

We believe we have taken the first step into mortgage lending 2.0 with a dock-able mortgage widget.

We mashed up a mortgage calculator, mortgage rate feed, monthly / annual / life savings calculation into a single widget that they users can access anytime without providing any personal information, no running of credit and no pressure.

This mortgage widget installs directly onto your IGoogle.

Install the refinance calculator gadget onto your igoogle now and give us your feedback.

Are tools like this the future of mortgage lending and is this the first mortgage lending 2.0 mashup?

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Wednesday, September 12, 2007

HUD's FHASecure Loan Conference Call Highlights

Today, HUD had a FHASecure conference call to clear up questions on the FHASecure program. Here are some new highlights and take-aways from the call.

First and foremost, the FHASecure program is simply an extension of the traditional FHA home loans with accomodations for home owners who have become delinquent to due mortgage payment resets of adjustable rate mortgages.

Here are some important items discussed.

- If property was recently listed on the MLS for sale you can still refinance as long as the MLS listing is cancelled before closing.

- You can add a non-occupant co-borrower to qualify as per traditional FHA qualifying guidelines.

- Borrowers who owe more than existing FHA loan limits may still be able to refinance if existing lender or a new lender is willing to do a subordinated second mortgage for the difference even if exceeding 100% of the loan to value.

- FHASecure program can be used to consolidate both a first mortgage and a second mortgage that was not a "purchase-money" second (which Fannie Mae / Freddie Mac consider a cash-out refinance) up to the 97% LTV but no more than current FHA loan limit.

- Borrowers who are delinquent can do FHASecure refinace to bring their loan current and finance all late fee's and payments.

- No 12 months seasoning requirements to complete a mortgage refinance.

- The upfront MIP and monthly MIP will remain the same for most likely the next three months. Next week HUD may release some new guideance for future adjustments.

- FHASecure refinance interest rates will be at current FHA market rates.

Other important upcoming items.

- If FHA loan limits are raised, the FHASecure program will also follow those limit increases.

FHA will be posting some Q & A's from the meeting today on their websites in the next few days. Remember that HUD simply insures FHA loans and FHA home loans and the new FHASecure refinance loan are originated and funded by FHA mortgage lenders.

If you are behind on your mortgage the FHASecure program maybe able to help you. You can inquire into the FHASecure program here.

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Thursday, September 06, 2007

Updated FHASecure Refinance Loan Program Details

Yesterday, we received detailed information from HUD regarding the new FHASecure loan. In case you haven’t heard, FHASecure is a new program that allows for some borrowers to complete a mortgage refinance out of an adjustable mortgage into a fixed rate loan even if they are behind on mortgage payments and have multiple lates or even facing foreclosure.

The initial release indicated the main FHA loan qualifying guidelines of the FHASecure program which are as follows:

- Homeowner must have a history of on-time mortgage payments before their adjustable rate mortgages teaser rate adjusted and reset.

- The adjustable rate mortgage must have adjusted after June 2005 up to December 2009.

- Must have three percent cash or home equity in the home.

- Must have a verifiable and continuous history of employment, and

- Sufficient income to make the mortgage payment as per debt to income guidelines.

According the HUD this new FHA loan program will help an estimated 240,000 families avoid foreclosure by refinancing to fixed rates.

Here are some more detailed guidelines of what is possible under the FHASecure refinance loan program:

- The mortgage that is being refinance must be a non-FHA adjustable rate mortgage.

- If the borrower is currently behind on mortgage payments, the loan underwriter must be able to determine that the mortgage rate and payment adjustment of the non-FHA adjustable rate mortgage i9s what caused the homeowner to become behind on mortgage payment.

- The borrower must show that they were making timely mortgage payments for the previous 6 months of the ARM loan adjusting.

- If there is enough equity in the home (up to 97%) and the loan amount is below the maximum FHA loan limit, the FHASecure refinance will allow for missed mortgage payments to be added into the new FHASecure loan amount.

- Maximum FHA loan to value (aka: LTV) ratios 97.15% total. Under certain circumstances with loans below $50,000 maybe as high as 98.75% -

- FHASecure refinance program will allow financing of the first non-FHA adjustable, any original purchase second mortgages (i.e. piggyback loans), mortgage closing costs, mortgage prepayment penalties and late charges. FHA loans will also allow the financing of missed payments as noted above. The main requirement of this is that the maximum FHASecure loan amount cannot exceed the maximum geographical FHA loan limits or the loan to value guideline of 97.15% noted above.

- Borrowers must have the capacity to make the new FHASecure loan payments. This is determined by debt to income ratios that FHA home loans will follow. The new FHA loan payment cannot exceed 31% of the borrowers income and the total monthly obligations including the mortgage payment cannot exceed 43% of the income.

This maybe the most important part of these new FHASecure loan guidelines.

- If the new FHASecure loan amount is not enough to pay off the existing first adjustable rate mortgage, loan closing costs and arrearages, the lender may execute a second mortgage at the time of closing to pay the difference. The combined FHASecure first and subordinate non-FHA second mortgage MAY exceed both the geographical FHA loan limits and maximum FHA loan to value guidelines.

What is not clear currently is if the original mortgage lender can carry this second mortgage or only the new mortgage lender. If it is a new mortgage lender, we will need to wait to see which lenders will offer these second mortgages and what their maximum loan to values and income to debt guidelines will be.

The FHASecure program provides an excellent opportunity for distressed homeowners to refinance their mortgages. Especially those who already have mortgage lates or worse facing foreclosure. The FHA loan allows for extremely competitive mortgages rates that would be otherwise unavailable.

We will be keeping an eye on the availability of the FHASecure program for our clients and shortly will be providing some tools to help borrowers and lenders determine if they qualify for the FHASecure refinance program.

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Tuesday, September 04, 2007

FHA to the Rescue with FHASecure Refinance Program

On Friday, President Bush and HUD made an announcement that will help an estimated 240K people avoid losing their home to foreclosure. The new FHA program allows individuals who are currently behind on their mortgages to refinance but only under certain circumstances. Below are the basic guidelines for the FHASecure loan program.

1 - You must have had good payment history prior to your interest rate adjusting.
2 - The mortgage rate "reset" or adjustment must have happened after June 2005 and up to December 2009.
3 - There must be at least 3% equity in the home. (here is a real estate equity calculator)
4 - You must have a history continuous employment.
5 - You must have sufficient income to afford the new mortgage payment.

Some additional notes regarding qualifying for this FHA program.

- Your new mortgage amount cannot exceed the maximum FHA loan limit in the area.
- Stated income loans are not allowed.
- You do not need to be behind on the mortgage currently in order to qualify for the FHASecure program.

This is an excellent opportunity for those caught by rising rates of their subprime mortgages adjusting. Here are some mortgage calculators to help you determine an estimated adjustment of your 2/28 mortgage or 3/27 mortgage.

View a copy of the original release from HUD.

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Saturday, July 21, 2007

Facebook API App Explosion... 8 Mortgage Calculators

As everyone knows, Facebook has exploded with the release of the API. In their developer group there is currently 86,925 members already signed up. Facebook had a competition for apps and the winning programmer and his application has had over 130,000 applications installed in less than a month. This explains why there is talk of it being worth for around 6 billion.

We noticed that there was not any mortgage calculators so we programmed a few a for you to install in your facebook account.

Mortgage Calculator - calculates 10-50 yr mortgages both fully amortized and interest only loans.

Side by Side Mortgage Comparison - calculate payments of up to 4 loans side by side at the same time.

Pay Option ARM Loan Calculator - Displays worst case scenario adjustments

Loan Amortization Schedule Calculator - Creates a monthly amortization schedule.

Adjustable Rate Mortgage Calculator - Displays worst case scenario of adjustments for ARM loans.

Blended Rate Mortgage Calculator - Got two loans? Calculate the "blended mortgage rate" of a first and second mortgage to help you determine if you should have a single mortgage.

Home Buying Monthly Budget Calculator - Thinking of buying a home? This calculator helps you calculate your net income monthly income after cost of living bills and mortgage payments.

Real Estate Investment Calculator - Calculates the monthly equity growth of your real estate investment through price appreciation and mortgage amortization pay-down.

Please try them out and provide us some feedback as to the usefulness of these facebook apps. You can access all of these calculators on or site at mortgage-info.com.

We will be keeping on eye on the growth of these types of apps and the impact of it on the mortgage landscape.

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Tuesday, May 08, 2007

BofA Skews Truth About New Smoke and Mirrors No Fee Mortgage Loan

You may have recently seen news and press releases regarding Bank of America's new "No Fee Mortgage PLUS" program that touts the following..

No Closing Costs and No PMI for loans over 80% LTV at competitive rates.

Yet, Bank of America's website loan disclosures state differently... don't fall for this corporate "bait" as I will prove below.

BofA made some pretty bold claims in it's press release like this...

-- No Private Mortgage Insurance: No Fee Mortgage PLUS eliminates the need
for PMI, which is usually required for a loan-to-value greater than 80
percent. Bank of America enables borrowers to get into their home
without the need to bring 20 percent to the closing table in order to
eliminate PMI, which not only reduces cost but also eliminates anxiety
and uncertainty in the homebuying experience.

News agencies then give millions of dollars in trusted advertising by reporting it like this...

CNN.. " It also won't charge for private mortgage insurance - often required for borrowers who put less than 20 percent down."

Inman News... "but lets them make a down payment as small as 5 percent without having to purchase private mortgage insurance."

Milwaukee Biz Journals... "No Fee Mortgage Plus eliminates application fees, lender fees and the need for private mortgage insurance."

San Diego Source... " It also will not require private mortgage insurance on loans with less than a 20 percent down payment."

Does this sound too good to be true? That's because it is!

The way the loan really works, is that they charge you a "higher then normal" interest rate to pay / subsidize these closing costs that are "not being charged" by BofA. Instead of paying for the fee's out of pocket, you are simply financing them via a higher mortgage interest rate for the entire life of the loan.

Matt from Inman was the closest to getting the truth from BofA as reported in his Inman news piece..

In a conference call with reporters, BofA officials avoided the question of whether they would be recouping those expenses by charging a higher interest rate or points for the loan.

"It's not about interest rates, it's about value," said Floyd Robinson, BofA's president of consumer real estate, when asked whether the loan would carry a higher interest rate. When the loan's elimination of fees, private mortgage insurance and other features are factored in, he said, "We're confident the customer will feel (BofA's no-fee loan is) the best value."


This makes sense if you are keeping the loan for a short amount of time but if you anticipate to keep it for 30 years, it may cost you thousands more. Also, this is nothing new or exclusive... any and all lenders can offer this same mortgage program.

The smoke and mirrors part of this is Bank of America is stating to everyone that it will not charge for PMI but yet... directly on their website mortgage disclosures you will find this:

No Private Mortgage Insurance

There may be an incremental cost for the No Private Mortgage Insurance (PMI) option.


Read the entire BofA disclosure here.

Hmm... there may be a cost? I thought you (Bank of America) said that I won't be charged PMI?

How can companies get away with this smoke and mirrors tactic?

Remember... big print giveth... little print taketh.

Always, start with the fine print.

When shopping for a mortgage the numbers don't lie. Here are some mortgage calculators to help you with your mortgage decision. What does PMI actually cost... here is a PMI calculator.

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Friday, March 02, 2007

Time to Get Rid of the "Pig" from Your Mortgages Back?


As you know, thousands of home buyers over the last few years have used a piggyback mortgage such as a 80/20 or 80/15.

Many of the second mortgages were based on an adjustable rate mortgage indexed on the ever increasing Prime rate.

Over the last 24 months, the prime rate has increased from 5.5% in Feb. of 05 to 8.25% currently. Many of the second mortgages are now fully-indexed at rates well over 10.00% with the first mortgages of 6.5% or higher.

Fully-Indexed?

If you have an adjustable rate mortgage you really need to understand what this means. Here is the calculation for fully-indexing a mortgage:

Index + Margin = Mortgage Rate
Index = Prime rate, Treasury Bill, LIBOR, etc
Margin = Arbitrage spread of the mortgage lender. Typically 2.5% - 7.5%.
Index (prime rate - 8.25%) + Margin (say 3.00%) = 11.25% Mortgage Rate.

For some, this may be an excellent opportunity to refinance considering that the effective "blended rate" of their first and second mortgages may be higher than the current mortgage rates of a single loan.

Blended rate is the actual monthly payment costs of both mortgage loans.

Here is an example assuming a $550,000 purchase using a 80/20 piggy back mortgage. View piggyback mortgage calculator.

First Loan: $440,000 at 6.5% = $2,781
Second Loan: $110,000 at 10.0% = $965

So assuming the current jumbo mortgage rate is 6.75% most people would not think of refinancing since the mortgage rate is .25% higher than they are currently paying. But here is why it's important to review your mortgage.

Using this blended rate mortgage calculator, you can see that combined (or blended) mortgage rate is actually: 7.20%

So if you can refinance your existing two mortgages which are 2 years old into a new single loan at say 6.7%, you would actually save .5% a year in mortgage interest on $550,000, which is $2,750 a year or $229 a month.

You would have a few options with this money.

A) You can deposit $229 a month into a savings account like hsbcdirect which is currently paying 6%. $229 a month will compound to a savings account of $16,286 in just 5 years, $37,945 over 10 years and $231,413 over 30 years.

B) You could get a 25 year loan at 6.75% and have monthly payments of $ 3,800 which is only $54 a month more but could save you a 36 months of $3,800 or $136,000 in future mortgage payments.

C) You could use the savings to pay down high rate credit cards.

D) You could support your Starbucks habit of two venti lattes a day.

E) Fund your kids piggy bank.

If you are currently in the above scenario, use the mortgage calculators indicated to determine if you should get rid of the pig and save some bacon.

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Thursday, March 01, 2007

Freddie Mac - Dropping the Bomb on Sub-Prime Loans and Possibly Real Estate Prices

Couple days ago, Freddie Mac announced changes to it guidelines which will take effect on Sept. 1, 2007. This is due to the demands of OFHEO the Interagency Guidance on NonTraditional Mortgage Products release from October last year. Freddie reponded, Fannie as yet to do so?

So regrading the Freddie Mac response, which may be a very good indicator of things to come from all other lenders and it's impact will be felt everywhere. Here is one of the two main highlights:

Freddie Mac’s new requirements cover what are commonly referred to as 2/28 and 3/27 hybrid ARMs, which currently comprise roughly three-quarters of the subprime market. Specifically, the company is requiring that borrowers applying for these products be underwritten at the fully- indexed and amortizing rate, as opposed to the initial "teaser" rate.

What's important.

A) Borrowers must qualify for loans that are underwritten at the fully-indexed and fully amortized rate... not the "Teaser" rate.

How big is this. Here is where I commented on this in the past but we will review it again because the new guideline is saying "fully amortized" AND "fully indexed" on 2/28 & 3/27 which previously qualified at the "start rate", within the last month at the fully amortized rate but now at the fully indexed.

So, using a scenario: 2/28 Interest Only, 600 FICO score can go 50% income to debt ratio, 80% LTV.

Current start rate would be: 7.750% interest only. The LIBOR index as of today is 5.032 and a margin of 5.5%.

So let's see the impact of this for borrowers who have $500 in revolving debt and makes $60,000 a year. Note that I'm not including property taxes and insurance as this varies around the country and this example is to simply show the impact.

Qualifying at start rate as done for the last three years:

50% income to debt means they qualify for payments of $2,500. From this we deduct the $500 in revolving.

$2000 is the interest only P.I. payment the borrower qualifies for a maximum loan of: $309,000 at 7.75% interest-only.

Now, under new Freddie Mac Guidelines at the fully-amortized and fully indexed rate.
First let's calculate the fully indexed rate. We must perform this calculation:

Index + Margin = fully indexed rate.

6 month LIBOR - 5.032% + Margin - 5.50% = 10.32% fully amortized and fully indexed rate vs. 7.75% interest only.

So assuming the same $2,000 monthly payment the borrower now qualifies for a maximum loan of: $221,980

A max of $221,980 vs. $309,000... ouch.

As you can see from this, it drops the borrowers qualifying by 28%, less loan... less house.

So again, buyers will qualify for loans that are 28% less... that's a huge number.

So now onto the second main point from the release:

The company also will limit the use of low-documentation products in combination with these loans. For example, the company will no longer purchase "No Income, No Asset" documentation loans and will limit "Stated Income, Stated Assets" products to borrowers whose incomes derive from hard-to-verify sources, such as the self-employed and those in the "cash economy." There will be a reasonableness standard for stated incomes.

Many buyers over the last three years of used the "stated income" loans, especially borrowers whom are actually employed with a company and receive w-2's. Many of this borrowers who technically have verifiable income used these "stated income" loans in order to be able to qualify for a large loan amount by falsely stating an inflated income.

Hence the reason why these types of mortgages are often called "liar loans".

My personal feeling is that this was the fuel to the dramatic increase in real estate prices over the last three - four years.

So recent homes buyers who really made $45,000 a year used a "stated income loan" and stated that they made $60,000 in order to be able to qualify for the required larger loan amount.

If we apply this to the above scenario that same borrower would now have to state an income of over $78,000 to qualify within the 50% income to debt ratios.

That is an increase of over $18,000 or a 30% increase in the income actually necessary to qualify... not going to be very believable or smart.

This causes another problem, where all the salaried people that have used this type of loan to purchase a property above their means, may no longer qualify for any type of refinancing, as they technically no longer qualify for a mortgage if they must go full doc. and verify their income. This makes them stuck with fully-indexed at 10% or higher.

From the sub-prime wholesale loan representatives in California and data I've seen, the stated income 2/28 loan made up as much as 60% of all subprimes loans funded in California.

This is especially true in high-cost areas where home prices are so high, these programs where the only way for people to buy a home... unforetunately a home they cannot afford.

So what is the impact?

Real estate prices are driven by basic supply and demand principals.

From 2001-2004 there was low inventory (supply) of homes for sale and high demand (due to low mortgage rates and relaxed guidelines) - prices go up.

Today, supply is high and demand is low - prices should go down.

Supply of homes for sale is skyrocketing across the nation. You still have the builder supply of approximately 1 million "must sell" homes and the massive inventory of existing homes for sale.

Soon you will have additional "must sell" inventory of bank REO properties to add to the equation.

With the tightening of mortgage credit such as the Freddie Mac guidelines you will also see the drop in demand from borrowers because they can no longer qualify for homes at the current prices based on the new mortgage financing guidelines.

This means that home prices will drop.

How far? Who really knows but in order for home sellers to reach the 20-30% of the buyers market represented by the sub-prime loans, they will need to drop 25% or more.

This is not out of the question considering Sarasota-Bradenton Florida has already dropped 18.2% in one year.

Additionally, keep in mind that in the last three years millions of borrowers have purchased homes using these "stated income" loans... take away the stated-income loan and how are these people going to refinance to avoid the increase payments of the adjusting 2/28 mortgages?

How are home buyers going to react when they have to use traditional mortgage qualifying guidelines and they realize they cannot afford a home?

Share your thoughts on this situation.

View the entire Freddie Mac Response

Here is a video from PBS commenting on the issue.

Use these mortgage calculators to help you calculate your payments.

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Tuesday, December 19, 2006

Possible End of Stated Income Mortgages... Drop In Home Prices Coming?



Stated Income Mortgages (sometimes called "Liar loans") for Salaried Borrowers may be going away soon, if you read this from pages 10 - 11 of the Interagency Guidance on Nontraditional Mortgage Product Risks...

questioned whether stated income loans are appropriate
under any circumstances, when used with nontraditional mortgage products, or when
used for wage earners who can readily provide standard documentation of their wages.

The final guidance also cautions that institutions generally should be able to readily document income for wage earners through means such as W-2 statements, pay stubs, or tax returns.


There is typically only one reason why a borrower who works at a job and has paystubs and w-2's uses a "stated income" loan. That reason is because they cannot qualify for the mortgage loan because their income to debt ratios calculations are too high... (or according to current guidelines, they don't make enough money to qualify for a loan that size).

These types of mortgage loans have allowed people to drive up the prices of homes in California to a point where the home affordability index stands at the low teens assuming a 20% down payment...

If the mortgage lenders start eliminating the stated income loan to comply... real estate prices across the nation will drop... Possibly significantly as those who currently have these types of loans most likely will not be able to refinance in the future.

What is your observation of borrowers who use this type of loan... are they trying to buy more house than they can afford or do they really not want the hassle of finding their paperwork so they can save .250 - .500% on the mortgage rates?

Sunday, December 17, 2006

Fannie Mae & Freddie Mac Told to Immediately Adhere to New Mortgage Underwriting Guidelines


In October 2006, new mortgage underwriting guidance was proposed to help mitigate risky alternative mortgages, such as interest-only and pay option arms.

There appears to have been a lack of action taken by the mortgage companies and the OFHEO is not happy about it.

They have issued a demand directly to Fannie Mae and Freddie Mac now to also follow the suggested Interagency Guidance on Nontraditional Mortgage Product immediately with a final compliance deadline of Feb. 28, 2007.

The impact of this will be far reaching since Fannie Mae and Freddie Mac are GSE's and every mortgage lender will be required to follow these guidelines in order to be able to sell to Fannie Mae and Freddie Mac or they will no longer purchase these types of mortgages.

I commented on what the potential impact would be on home prices with these new mortgage guidelines and it was not pretty.

As an example of what (or should I say WILL now?) can happen based on just one of the mortgage guidelines found at the bottom of page 8 and top of page 9, which states...

... the proposed general guideline of qualifying borrower at the fully indexed rate, assuming a fully amortizing payment including potential negative amortization amounts, remains in the final guidance.

... final guidance does not exclude interest-only loans with extended interest-only periods.


So what does that mean?

Borrowers will now qualify for significantly smaller mortgage loan amounts... and smaller mortgage loan amounts equal lower home selling prices.

This is no different than if household incomes dropped and borrowers could only afford smaller mortgage payments.

Use this mortgage qualifying calculator to see just how big the impact is to you, people you know or it's impacts to averages in your area.

Here is a small calculation performed to determine maximum mortgage amounts:

- Assuming mortgage rate of 6.00%,
- a gross monthly income of $6,000 a month or $72,000 a year
- total monthly revolving bills of $500

Maximum Mortgage Amounts excluding down payments:

Interest Only Mortgage: $296,000 - current guidelines
- vs. -
Fully Amortized: $246,852 - as required by new interagency mortgage guidance.

As you can see from this example there is a $49,148 difference in loan amount.

Put another way... the borrower qualifies for a loan amount that is almost 17% less using the new guidance.

This would lead me to assume he / she will buy a home that costs 17% less.

If use supply and demand... supply is up, demand is still o.k. but if the demand is stifled by the maximum amount one can afford due to mortgage guidelines , prices must come down.

Again, keep in mind if national household incomes dropped then home prices would also drop... same thing with stricter guidelines.

Can this be the final nail in the coffin to cause national real estate prices to drop 17% or more in 2007?

What do you think the impact of these mortgage guidelines will be on real estate prices?

Wednesday, December 13, 2006

13.22% of All Subprime ARM Mortgages Currently Delinquent

Here is a report from the Mortgage Bankers Association that points to a very scary statistics.

The SA delinquency rate for the subprime FRM loans increased 35 basis points (9.23 percent to 9.56 percent), whereas the rate for subprime ARMs increased 98 basis points (12.24 percent to 13.22 percent).


Why is this scary?

Subprime loans make up about 30% of all mortgage issued over the last 3 years and were the fastest growing sector of mortgage lending.

Let's put this into perspective. Last year we had about 7 million home sales. 30% of these homes were purchase used a Subprime mortgage. This means 2.1 million homes will subprime loans. If we use a blended average of the deliquency rate of fixed rate mortgage and adjustable rate mortgages we get a 11.39% average deliquency rate.

Possibly as many as 239,190 homes are currently deliquent on their mortgage assuming just those owners who purchased just last year.

I use this figure because most of these people have no equity to start-off with and the likelihood of being able to save themselves is very low. Can't sell - slow market, can't refinance - don't qualify and no equity. Only option - go to foreclosure.

Historically, if the homeowners get more than 45 days behind, there is a 50% chance that the home will go to foreclosure.

That is alot of households in trouble.

Now this may just be the beginning as many of these types of loans are based on a 2/28 adjustable rate mortgage and many of those 2.1 million loans will adjust next year. The jump in mortgage payments can be as high as 55%, as you can see from running examples on this 2/28 adjustable rate mortgage calculator.

If will be interesting to see what happens over the next year but my guess is that things will go south pretty quick.

What's your take? Do you know of anyone who has a subprime loan who is currently in trouble, if so, share the story of why it happened (obiviously no names needed) so we have a better understand of what can be done to help people from this situation.

Friday, September 29, 2006

Real Estate Market Impact of New Lending Guidelines for Exotic Mortgages... Real Estate Prices to Suffer?


Federal Banking Regulators are tightening the belt on the loan qualifying guidelines for exotic mortgages for various mortgage providers under the FDIC, NCUA and OTS. This impacts major banks like Washington Mutual, World Savings and Bank of America.

Many mortgage insiders and economist believe the explosive housing prices over the last four years has been due to these types of exotic mortgages and relaxed qualifying guidelines.

The new guidelines are designed to make consumers more aware of the loans they are applying for via disclosures but more importantly is that they make it more difficult to qualify. We already attempted to do this in the past on our own with this pay-option ARM / Pick-a-payment mortgage calculator.

The item that has the most impact in the new guidelines is that mortgage lenders most now qualify buyers at the fully indexed mortgage rate for interest-only and payment-option loans.

What does this mean to borrowers and real estate prices?

Instead of qualifying for a mortgage at the popular 1.00% start rate banks will now qualify the buyer at the fully indexed rate. What is a fully indexed rate?

Index + Margin = Fully Indexed Rate

Many creative mortgages are based on the 11th. District Cost of Funds Index or COFI. This index is currently at: 4.177 %

The "margin" is what the bank makes, it's usually between 2.25% up to 6.75% but for our example we will use: 3.5%.

So, take the index 4.177% + margin 3.5% = fully indexed rate: 7.677%

As you can see this is a pretty significant difference in mortgage rates and there is a dramatic effect on mortgage qualifying. Here is an example of the impact on qualifying based on our mortgage qualification calculator

We will use this example: Qualifying at 2.00% start rate or fully indexed 7.625% based on $8,000 gross monthly income and $800 in revolving debt.

Mortgage Qualifying Differences:

at 2% Maximum Mortgage: $432,878
at 7.625% Maximum Mtg: $226,055

Assuming normal qualifying guidelines regarding income to debt ratios of 30/40.

That is over $206,000 difference in qualifying. If a large percentage of home buyers over that last three years used these types of mortgages to qualify and their new loan adjusts to the higher rate.... they can no longer refinance. This will create some significant issues in the near future.

Some of this properties will go to foreclosure or the owners will need to do a real estate short sale. Either way these properties become comparable sales as far as appraisals are concerned and this will apply downward pressure on home prices.

Additionally, these changes in mortgage qualifying will affect current home buyers who can no longer for a mortgage large enough to purchase a home, which will force property values down.

What do you feel will be the impact if current home buyers can no longer qualify for mortgage loans? Are lot's of people going to lose their shirt?

Tuesday, September 26, 2006

Looks like Risky Lending is Not Just a US Problem


Here is an article from Australia that states that risky loans are also causing problems in the land down under.

Monday, September 25, 2006

Great Explanation of Home Sales Data

You may have already read the existing home sale data which indicated a national drop of 1.7% vs. August of 05. There will be lots of talk about this but I found this article from the Montley Fool which helps to explain the interpretation of the data.

It's a great read and well worth the few minutes.

Wednesday, September 13, 2006

Foreclosures up 53% over Last Year... Partly Due to Adjusting Mortgages


Cnn released a story titled, "Foreclosures Spike in August" which quotes a 53% increase in national foreclosures with some (not surprisingly) hot spots like California, up 160% since last year. According to the report, Rick Sharga of RealtyTrac's states the rising foreclosures are in part due to adjustable rate mortgages.

They quote a 5/1 Adjustable rate mortgage that would be resetting and the first adjustment would tack on 2% to the interest rate. The article indicated a $200,000 loan would cause a jump of $250 in monthly payments but that does not assume an interest only first mortgage.

Here is the actual numbers making an assumption of a $200,000 originally at 5% that was fully amortized. Original payment would be $1,074, the new payment $1,410. That's a $340 increase (31.657%) of the borrowers "net" income. Pay raise or not, this people are in trouble.

Now here is an even more common scenario ran through our 5/1 adjustable rate mortgage calculator which would be fairly common in California.

$300,000 loan amount originally at 5% "interest-only".

Original mortgage payment: $1,250 a month
New mortgage payment: $2,120

An increase of $870 a month or 69.6% increase. Ouch.

We would like to take a little survey... you can stay anonymous, please indicate the terms of your current loan and what state you are in, so we can get an approximate idea of what types of loans most people have.

For example: $200,0000 30 year fixed rate, texas

Also, if you currently have an interest only loan as indicated in the story, we you aware by how much your mortgage payments could increase?

Tuesday, September 12, 2006

Prediction of a Real Estate Recession



Here is a sobering article from the NY Sun predicting a real estate led recession where property values in some cities could drop by 40% or more. In part the story talks about the effect of the previously popular pay option adjustable rate mortgages would take on some households to assist the downturn.

Only time will tell but what are you thoughts? Can a decrease in real estate prices cause a recession? An interesting theory that may indicate we are already headed there points to auto sales originally from an article in the Ny Times.

Adjustable Rate Mortgages Causing Increases in North Texas Foreclosures

This report coming from NBC5 indicates that nearly 4,000 homes in North Texas are facing foreclosure this month alone. The article seems to indicate that adjustable rate mortgages may be a large cause of this run up.

It's important for customers to really understand their current mortgages and take appropriate actions before trouble comes, as once someone is late on their mortgage payments it's nearly impossible to refinance.

Do you know of anyone who is currently facing trouble because of an adjustable rate mortgage?

Adjustable Rate Mortgage Getting More Bad Press... For Good Reason?



The Greater Baton Rouge Business Report reported that "People who finance their homes with ARMs may not realize the risks involved and often find themselves in serious financial situations as a result."

The article cites a few cases with relatively small loan amounts of $85,000 and the customer getting a 30% jump in mortgage payments which forced her to get a second job just to make ends meet. My concern is that in places like California, New York and Florida many more people have these loans and they are even less prepared for significant 50% - 75% increases in monthly payments.

We have created a few different mortgage calculators where you can get an idea of what to expect at your first adjustment based on the type of loan you have.

Many of these article point out that the consumer was unaware that such a big jump was coming... if you are one of these consumers, please share you story with us.

Tuesday, September 05, 2006

Option ARM / Neg Am Loans Grilled by BusinessWeek





Option ARM / Neg Am Loans Grilled by BusinessWeek

In case you haven't heard the buzz yet about this BusinessWeek article regarding the popular "Pay Option ARM Loans" with artificially low rates, it may be worth it for you to read it now. Especially if you think you may have one of these types of adjustable rate mortgages. If you do have this type of mortgage check this pay option arm / pick a payment mortgage calculator to review the real numbers.

The pay-option ARMS will not cause the most pain in the short term because the recast period is fairly long and the payment adjustments are minor (although the accumulated negative amortization is not) as indicated by this pay-option arm mortgage calculator.

The one to fear is the 100% 2/28 interest only loans (often done as a piggy back loan 80/20). When these adjust for the first time, they have the largest monthly payment adjustment. Here is a 2/28 adjustable rate mortgage calculator. Running a scenario of: 300,000 that started at 5.5% interest only (rate about two years ago), the very first payment adjustment would jump the payment from $1,375 to $2,139, a $764 adjustment that represents and increase of 55% in the payment. Combine this with the fact that most people who obtained this type of mortgage probably did a "stated income" loan which is also falling out of favor with the mortgage lenders and these people will not be able to refinance due to their income to debt ratios and possibly not be able to sell, leaving no option but foreclosure or short sale.

Do you have one of these two types of mortgages? If so what are your thoughts as an actual borrower? Afraid? Already refinanced? Not Sure?