Archive for the 'Financing' Category
By the time you read this, the new 2,300 page financial reform bill is likely to be making the headlines. The Senate has already approved the new bill and President Obama is expected to sign it into law this week – despite the fact that many of the provisions related to specific regulations have yet to even be written. If that sounds faintly disturbing, don’t worry, your concern is noted and shared by many experts throughout the nation. However, there are sweeping changes that are already apparent despite the lack of specific details.
Although broad in scope, home buyers and sellers are likely to be among the first impacted by the new provisions. They represent one of the most comprehensive – top to bottom changes to the finance, valuation, types of mortgage products offered and how lenders are compensated to take place in decades. In fact, there are even new rules for real estate investors that provide capital for the purchase of mortgages.
The US Federal Reserve is expected to keep US interest rates at historic lows when it meets later Wednesday, as it tries to keep a languishing recovery on track. The Fed’s top rate-setting body is widely expected to keep its main rate of borrowing at between zero and 0.25 percent to help spur economic growth.
Faced with reams of data showing the recovery is still fragile, the debate over whether the Fed should quickly raise rates to stave off inflation has all but disappeared in recent months. The Fed’s announcement will still be keenly watched as investors look for any hint that a double-dip recession is on the way, or that the worst of the danger has passed.
Jobs growth remains anemic with employers still reluctant to add permanent positions during the fragile recovery. The unemployment rate is expected to hover near 10 percent for quite some time as the economy regroups after the worst downturn since the Great Depression of the 1930s Consumers have been cautious about spending, which normally drives about two-thirds of the activity in the world’s largest economy.
Using self-directed IRA funds to purchase income-generating real estate is a profitable strategy an ever-growing number of investors are employing. These accounts (a.k.a. real estate IRAs) can buy rental property as an investment, just as they would buy stock market securities. This means real estate IRA holders can use their retirement funds to purchase real estate without incurring early distribution taxes or penalties and they can realize the rental payments as tax-deferred income within their IRA.
The challenge, however, is this: How do you purchase real estate that costs more than the money you’ve accumulated in your retirement account? Because the Internal Revenue Code prohibits account holders from extending credit (a personal guarantee) to their own accounts, personal loans can’t be mixed with IRA funds. So unless you have an IRA flush with funds, it would seem that your purchase options are slim to none.
Leveraging borrowed funds
There is a way out of this dilemma. Real estate IRA accounts can make use of borrowed money as long as the credit history, income and/or assets of the account holder are not used to acquire or guarantee repayment of the loan.
There is only one leverage option that meets these criteria: non-recourse loans.
FICO Scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined in the chart. The percentages in the chart reflect how important each of the categories are in determining your FICO score.
These percentages are based on the importance of the five categories for the general population. The importance of these categories may be somewhat different for particular groups. For example, people with new credit or those who have not been using credit for very long.
Payment History
- Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.).
- Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items).
- Severity of delinquency (how long past due).
- Amount past due on delinquent accounts or collection items.
- Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any).
- Number of accounts paid as agreed.
- Number of past due items on file.
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Nationwide, one in every 200 residential loans funded last year, totaling $14 billion, involved fraud, according to First American CoreLogic. Despite what looks like an unsettling amount of shadiness lurking within the mortgage market, the company says the fraud rate has been steadily declining for the past three years and is now about 25 percent lower than when it peaked in the third quarter of 2007.
Since then, First American notes, lenders have been more aggressive in curtailing mortgage fraud – a prudent reaction considering banks have been forced to buy back billions of dollars in fraudulent loans sold to investors during the boom, when standards were lower and many loans were made without verifying the applicant’s information. "In 2010, 2011, and 2012 you won’t see nearly the amount of [fraud] reports that you’re seeing today," said Tim Grace, SVP of fraud analytics at First American CoreLogic.
First American CoreLogic says 25 percent of foreclosures show fraud in the initial application, and as much as 70 percent of early payment defaults show indications of fraudulent activity in the application process. The company’s conclusions are based on its analysis of 80 million loans passing through its proprietary national fraud data repository.
The FHA has gone crazy, making sweeping new changes in several policies. You’ve got to keep these in mind when clients consider FHA loans. Here are some of the most extreme changes:
- Raised up-front costs for insurance
- TRIPLE down-payment requirements
- Cut seller concessions by HALF!
The government hopes the new policies will help the organization better handle risk. And they’ve got every reason to be nervous. 9% of all loans that the FHA insures are past due. FHA claims have been skyrocketing with the organization paying out of its capital reserves.
30% of all new loans (and 20% of refinances) are backed by the FHA. This is a 1,000 percent
increase over 2006. This seems like shaky ground for the company. The FHA is hoping to scale back to pre-crisis times and minimize their exposure.
Owner financing is the most common way to buy a property with "no money down". Instead of getting cash at closing, the seller agrees to finance all or some part of the purchase price. What this means is the owner of the property will act as a bank and lend the buyer all or part of the money needed to purchase the property.
It is estimated that nearly 35% of all the properties in the United States are owned free and clear (no mortgage financing). A surprising number of those owners would be willing to finance all or part of the purchase price as a mortgage and take payments over an agreed upon period of time.
Generally, you will be getting a second mortgage from the seller. That means you will get the majority of your financing (the first mortgage) from a primary financing source like a bank. The seller would provide most or all of the balance in the form of a second mortgage.
There are four types of owner financing to that you could ask for:
Improving your FICO® credit score may take time and often there is no quick fix. FICO scores reflect credit payment patterns over time with more of an emphasis on recently reported information than older information. Below are some general tips to follow that may increase your FICO credit score:
- Focus on the negative factors provided with your FICO score. These represent the main areas where your score could be higher.
- Don’t open new accounts for the purpose of providing a better credit picture – it probably won’t raise your FICO score and, in some instances, may even lower your score. Apply for and open new credit accounts only as needed.
- Keep balances low on credit cards and other “revolving credit”. High outstanding credit card debt can negatively impact your FICO score.
- Pay off debt rather than move it around from one credit card to another. The most effective way to increase your FICO score in this area is by paying down your total revolving (credit card) debt.
- Pay your bills on time. Delinquent payments, even if only a few days late, and collections can have a major negative impact on your FICO score.
Mortgage rates have been steadily climbing, from a low of 4.5% around November 27, 2009 to above 5% on December 22, 2009. For the past two months I’ve been warning that this will eventually happen. It’s not because the economy is recovering; it isn’t recovering. The reason mortgage rates will rise to 6% or above, sooner rather than later is because that is the "natural" market.
About a year ago, the Federal Reserve announced a $1.25 Trillion mortgage rates subsidy, by purchasing mortgage-backed securities in the open market, through March, 2010. Right before the subsidy was announced, mortgage rates were at or above 6%. The subsidy was referred to as Bernanke’s "nuclear option" meaning he was using an extraordinary monetary stimulus to keep mortgage rates artificially low.
One year and 12 months into the 15-month game, we’re at $1.07 Trillion spent on this open market MBS purchase program. This means that the Fed still has about $150 Billion to spend in three months, so mortgage rates should stay around 5%, right? After all, the Fed only spent $80 billion/month and they have at least 2 months of money left.
Markets are discounting mechanisms meaning that traders anticipate how potent the Fed can be. The Fed is just about out of bullets and MBS traders know it. Let me try to give you an example of what the Fed did by recanting the explanation I gave, to a Del Mar Realtor, on the beach this summer.
Leave it to the government to take a crippled housing market (which they helped destroy) and make it worse by prolonging its recovery.
Regulators have taken a loose and passive role watching the housing bubble inflate. Now, true to their nature, regulators are making the problem worse with their slow response and lack of real-world solutions.
Real estate investors, in my opinion, have been unfairly squeezed by the ever tightening underwriting guidelines. We are dealing with larger down payments, higher credit scores, larger cash reserves, and lower debt-to-income ratios.
As a real estate investor, Fannie Mae and Freddie Mac require you to have a bullet proof credit profile to even be considered for financing. When you consider that investors put up a larger down payment than most home buyers, require better credit, and typically research and buy investment property with a cash-on-cash return, lenders and regulators should be more willing to finance these solid transactions. They would also help solve the housing crisis by reducing the excess foreclosure inventory sought by rehabbers and wholesalers.
The mortgage loan limits and policies established in 2008 and 2009 will continue through 2010.
There are several types of mortgage loan limits. Generally, most borrowers need to look at conventional, FHA and VA loan limits to see how much can be financed with the most-widely originated loans.
If you borrow at or below the conventional loan limit for non-government mortgages, you would have what is generally known as a “conforming” loan. If the amount borrowed is above the conventional loan limit, you would have a “jumbo” loan and face a higher rate because larger loans imply more risk to real estate investors, the folks who buy mortgages.
Conventional Loans
For 2010 the conventional loan limits depend on the county where you’re located. Instead of one national mortgage limit, we now have one for each county – and there are more than 3,200 counties.
In general terms, 2010 loan limits for a single-family home range from $417,000 to $729,750. Once you know the loan limit for a single-family home in a specific area you can then see the limits for owner-occupied homes with two to four units.
On November 19, 2009 Freddie Mac recorded an average 30 year mortgage rate at 4.83%, down from 4.91% the previous week. Just over one year ago, the 30 year mortgage rate averaged 6.04%. So long as you have solid credit and a 20% down payment, whether real estate investor or homeowner, this time in history is certain to mark historic lows for home buying. In addition, those who still have equity in their property can take advantage of an incredible refinance opportunity.
Mortgage companies have seen steady rises in applications for refinance, but certainly not at the volumes seen just two years ago. Why isn’t everyone flocking to refinance? The answer is quite simple, homeowner appraisals are often below the requirements needed to refinance and many homeowners are dealing with loss of income due to unemployment or wage cutbacks. The only solution is for the economy to pick up and create more jobs along with more competition for increased wages. Unfortunately such a task, although eventually likely, is not in the near future. Economists across the nation are predicting additional declines in jobs during the first quarter of 2010. Job creation is likely to remain slow during most of 2010.
Yet there is still a silver lining to the doom and gloom. It is likely that the federal government will do all they can to keep interest rates low up until actual job creation becomes more robust. Interest rate hikes over the next 6 to 9 months will only occur if outside-international influences force the hand of our financial markets to increase rates. Although a remote chance of this exists, I for one believe we have another year of healthy-low interest rates within the real estate market. Once rates do inch up it is likely to be welcome, so long as inflation remains tame and not hyper.
Credit has its fair share of myths, legends and misinformation. Pile on top the proprietary nature of credit scores, the formulas for which are closely guarded secrets, and navigating the credit waters becomes even more confusing.
It’s time to dispel some common myths about credit reports, credit scores and credit cards:
1. Pulling your credit will hurt your credit score.
When you pull your credit report for your own educational purposes, it’s considered a “soft inquiry” and will NOT affect your credit score. On the other hand, when a creditor or lender pulls your credit report for the purpose of extending you credit or a loan, it’s a “hard inquiry” and may negatively impact your credit score.
2. Your income is factored into your credit score.
Your salary has nothing to do with your credit report and credit score. You may earn a solid income, but that doesn’t necessarily mean you have good credit. They are separate.
3. Closing a credit card account will help your credit score.
When you close a credit card account, you may be affecting your “credit utilization.” Credit utilization is simply how much credit you use (total of all balances) compared to how much credit is available to you (total of all credit limits). When you close an account, you’re lowering the amount of credit that’s available to you, which may increase your credit utilization percentage. A higher credit utilization may negatively impact your credit score, as it suggests to a creditor or lender that you’re a higher risk.
I’m sure you know by now that it was the first wave of defaults in “subprime” mortgages that helped spark today’s economic meltdown. What you might NOT know is that there’s a whole second wave of mortgages in the pipeline that are just as toxic and just as large as the first. This second wave may be just as far reaching.
You can see that the first peak in subprime loan “resets” arrived smack dab in the middle of 2008. And many billions in bank write-downs, along with trillions of dollars in market losses, immediately followed.
This second wave of toxic property loans, made up of so-called “option ARM” or “Alt-A” loans, won’t hit peak resets until 2011.
What are these toxic loans? They are the fancy mortgages snapped up by middle Americans to buy homes nobody imagined would be worth only a fraction of their selling price just two years later.
And just like in the subprime wave, these loan contracts also carry a “reset” risk in the fine print, when already high monthly mortgage payments could as much as double — right at the height of the second biggest market meltdown since the Great Depression.
Millions of additional consumers will freeze up as their finances go over a cliff. More bank losses will drag down even more so-called “blue chip” retirement portfolios, and the impact of the consumer bust will get “multiplied” yet again. Millions of additional Americans could lose everything.
Will this present us with new real estate investment opportunities? Very likely. In addition to the large number of foreclosures and bank REOs, most real estate markets around the country will continue to offer investors with low-priced real estate due to an ongoing buyer’s market sustained by excess inventory.
What do you think the upcoming second wave of mortgage “resets” will bring us?
The FHA is a big reason that home prices haven’t fallen even further. The FHA’s aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. The FHA is an even larger percentage of the new home mortgage industry – nearly 25% according to HUD.
The FHA insurance fund, however, is likely running dry. According to a report from mortgage finance experts, the FHA will not meet its minimum requirement as of its fiscal year-end, which is only 26 days from now. For months, we have been investigating this and reporting our findings to our clients.
While almost all of the experts believe that Congress would support the FHA if necessary (it’s currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. Already, FHA has contracted its own standards to require a 10% down payment for those with credit scores below 500.
Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent.
Given the FHA’s September 30 fiscal year-end, this financial reality will come to light about the same time that other market forces run out of steam:
- Just as the $8,000 tax credit expires.
- Just as more of the stalled REO currently held on banks’ balance sheets will be coming to market.
The culmination of all these factors means housing could see another leg down by early next year.
