FHA seems to be the new subprime loan because it requires the least amount of money down. The Wall Street Journal wrote in the article below that “Hundreds of private lenders, using the latest technology and paying high salaries, failed to adequately manage mortgage credit risk during the housing boom. Now, the Federal Housing Administration, using 24-year-old computer programs and civil servants who still handle some loan documents by hand, is trying to do better.
At an FHA processing center in Philadelphia’s Center City — one of four such centers across the country — the number of loans approved for insurance has soared to an average of about 40,000 a month from 12,250 a year ago. Each day couriers drop off about 700 mortgage loan applications in paper form, typically 150 to 200 pages each, to the Philadelphia office. The FHA recently began testing the use of scanners to convert those documents into digital form. For now, though, employees still thumb through them manually to make sure the forms are complete.
As President-elect Barack Obama and his transition team consider how much risk the government should take as one of the nation’s largest insurers of home mortgages, a more immediate question is this: Can the agency handle the responsibility it has already been given?”
Are they taking on too much risk? The bulk of most mortgage brokers and banks loans are FHA mortgages. They may be taking on too much but they do collect an upfront mortgage insurance premium of 1.75% of the loan amount on every loan. This fee goes to the government and can help them cover some of the losses if a borrower is to default on a loan. I think you will see more changes coming from FHA with regards to credit scores and maximum debt to income ratios. This isn’t necessarily a bad thing seeing as a loan can be approved with a debt to income ratio of as high as 55% of your gross income and it doesn’t take into account groceries, insurance, etc. In my opinion you should never let that figure go above 40%, preferably 36%.
http://online.wsj.com/article/SB123025405605234543.html?mod=todays_us_page_one
Archive for December, 2008
Are There FHA Changes on the Horizon?
Why Aren’t Banks Lending with the Taxpayers Money?
Well, when it comes to residential mortgages they are lending and you can get a loan but they aren’t lending as much as they should be. In The Wall Street Journal article below they said that publicly, officials are pushing banks to make loans, tweaking them for taking government money while they tighten lending standards and turn away borrowers with less than perfect credit records. Privately though, some bankers say regulators are urging them to build capital cushions that are considerably thicker than what is officially required to be classified as a healthy institution.
So where does it go from here? I don’t know the answer to that but I know they have to be careful to not horde all of the money and at the same time keep their balance sheets solid. Only time will tell.
http://online.wsj.com/article/SB123024352610834057.html?mod=todays_us_money_and_investing
Should I refinance?
That is a good question and the answer is that it depends. I have had many clients call me and say they heard that if your rate doesn’t decrease by at least 1% it’s not worth it. That is not true. In order to find out if it is worth it we would have to compare what the rate reduction will save you per month, how much it will cost you in closing costs, and how long you plan to stay in the home or keep the loan. I always calculate how many months it takes to recover your money from closing costs and if you plan on staying in your home longer than that, it would make sense. There is a good article below that talks about whether to refinance or not. The only part I don’t agree with 100% is the new rate being 1% lower than your current rate as I discussed above.
http://money.cnn.com/2008/12/24/real_estate/when_to_refi/index.htm?postversion=2008122608
Should I buy a property in 2009?
That is a great question and there is probably no correct answer. Well, maybe once everything turns around all the experts will come out of nowhere and state that you should’ve bought. They are great with hindsight.
I have commented on Warren Buffett’s quote numerous times “Be greedy when people are fearful and be fearful when people are greedy. He learned this from his mentor Benjamin Graham who wrote the book “The Intelligent Investor” which is an incredible book and I recommend reading it.
My point is to do the opposite of everyone else and don’t run with the herd. This is very hard to do especially when emotion and the media takeover our rational thinking. It is very rare that a buyer is in the driver’s seat like they are today.
The Census Bureau said the average amount of time someone stays in there home is about 14 years. I bet if you bought during the recession in 1991 when I am sure no one thought was a good time to you ended up doing pretty well.
The average increase on real estate is 6% over time. So let’s do the math on say 3% appreciation. If you bought a home for $100,000, put 10% down ($10,000), 3% is $3,000, so your return would be 30%. This is because you use leverage to buy a home. Not only do you get that type of return you also get a tax break and get to live in the home.
Here is another good example on why to buy now. Rates are at a 37 year low and currently at about 4.875% on a 30 year fixed mortgage. If you bought a home today for $100,000, putting 20%, at a rate of 4.875% your principle and interest payment would be $423.37. If you waited 6 months and home prices dropped by 7% on that same house the purchase price would be $93,000 but say rates went up 1% to 5.875%. Your principle and interest payment would be $440.10 which is more per month. The bottom line is that interest rates will not stay this low forever and once the market does turn around interest rates will go up. Notice I didn’t say interest rates will skyrocket which is something that can happen. Even 5.875% is an incredible rate. A drop in value of 7% is very large and you also need to keep in mind that you are most likely buying a property today that is worth more than you are paying. This means you have some equity to work with already if values drop more than 7%.
CNBC was talking about what we can expect in 2009 yesterday and one of their comments was that we will see increased sales in Florida and California due to the amount of foreclosures. This is because everything is on sale down here.
What the mortgage Bailout Means for You.
Below is a great article that talks about this. Not everyone can receive help. The 2nd link talks about how some loan modifications are better than others. I could not have said it better myself.
http://biz.yahoo.com/bizwk/081218/dec2007db2007126633122.html?.&.pf=loans
Renting vs. Buying
That is a good question. There are many “Rent vs Buying Calculators” that can be found online but I can also do the analysis for you which I suggest because you never know how accurate the information is online. The basic principles behind determining this would be to estimate the time you will stay in the home, the amount of appreciation in the home, annual rent increases, your tax bracket, amount of taxes and insurance, and your interest rate. The software I use will then give you a break down of your tax adjusted mortgage payment along with home much equity you accumulate due to appreciation and monthly principle reduction over that time period, usually 5 years. You can call or email me and I am more than happy to send you a free analysis.
I just received my property tax bill and it is more than I had expected?
If you feel that the assessed value of your property is too high there is something you can do. You can petition your tax bill. How do you go about doing that? You will need to contact your County’s Property Appraiser’s office. In Broward County Florida you just log onto http://www.bcpa.net/ and click on “Appeals & Petitions,” pay the $15 filing fee, and follow the rest of the instructions. It’s that easy. The article below talks about how more homeowners are doing just that. What’s the worst that can happen, they say no?
http://biz.yahoo.com/ap/081212/property_tax_relief.html?.v=2&.pf=real-estate
Is There A Second Mortgage Disaster on the Horizon?
On CBS’s 60 minutes from this past weekend, Whitney Tilson who is an investment fund manager said we have a second mortgage disaster on the horizon due to the PayOption Arm (Negative Am loans where you have 4 payment choices and if you make the minimum payment your principle balance owed will increase) and Alt-A loans that are about to reset. Just b/c a loan resets doesn’t mean that everyone who has one won’t be able to afford their mortgage. I understand Whitney is viewed as an “expert” but it seems there are so many people coming out of the wood work now that we are in this mess with all types of predictions. Where were you prior to this and why didn’t you make more noise? No one knows what is going to happen but what I do know is that the government is trying to step in and stop some of this. Only time will tell.
They were talking about this on FoxNews last night and one of the contributors mentioned that Alt-A meant bad credit. Little does she know that it was also for good credit score borrowers.
What got us into this mess? It was borrowers unable to afford their payments and going into foreclosure but everyone thinks lower rates are the solution. Its not, stopping foreclosures is. Believe me, I’m happy that rates are low b/c I can do refinances but that is all it has done. It hasn’t spurred purchases. I am sure most have heard of short sales. Well there is also something called a short refinance. A short refinance is basically finding out what the property is worth, making sure the borrower qualifies for a new loan at that value, and gives the borrower a new loan. This saves the bank from the high costs associated with a foreclosure, prevents low ball offers, and prevents values in and around that neighborhood from dropping more. So how is that fair to those who pay their bills on time and made the right decisions? Its not and life isn’t fair but if they don’t do this your value will come down even more. Everyone complains about this but you never hear complaints about people who don’t pay their taxes and settle for pennies on the dollar. A Wall Street Journal Opinion Article this morning disagrees with me which is fine b/c this is just “my opinion article” and I have been wrong before.
http://www.cbsnews.com/stories/2008/12/12/60minutes/main4666112.shtml
Mortgage rates fall to a 37 year low
The USA Today commented that “This is an historic opportunity,” Gumbinger says. “This is the program for borrowers not in trouble.” Homeowners should act now because rates aren’t likely to go much lower and they tend to rise faster than they fall, Savitt and Gumbinger say.
This is so true. On Wednesday rates on a 30 year fixed hit 4.625% for about an hour and then increased back up to 4.875%. The media talks about lower rates which is great that they are making the public aware but what they don’t talk about is the volatility and how it can change very quickly. Just as you cannot time a housing bottom and a stock price, the same is true for interest rates. My advice is always that if you are happy with your payment at a certain rate you should lock it in and never look back.
I just received my property tax bill and it is more than I had expected?
If you feel that the assessed value of your property is too high there is something you can do. You can petition your tax bill. How do you go about doing that? You will need to contact your County’s Property Appraiser’s office. In Broward County Florida you just log onto http://www.bcpa.net/ and click on “Appeals & Petitions,” pay the $15 filing fee, and follow the rest of the instructions. It’s that easy. The article below talks about how more homeowners are doing just that. What’s the worst that can happen, they say no?
http://biz.yahoo.com/ap/081212/property_tax_relief.html?.v=2&.pf=real-estate
Located in South Florida, Justin Miller has established himself as a leader in the mortgage community for his expert advice and understanding of the current real estate climate. 
Jonathon Becker (Coastal Credit Clinic): Justin- GREAT blog post! This is a HUGE questions many of my clients h...
Sean: Justin- Great article...would be great to understand the differences i...
Phil Himes: You are so correct! Many of my clients are currently looking at purch...
Stock quote: Good blog post, nice efforts. It couldn’t appear to have been penned a...
Upside Down Guy: This sounds like a great program for someone like me but my lending in...