Archive for the 'Financing' Category
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.
With HUD properties, title seasoning, FHA loans, and short sales, real estate investors have had some confusion regarding the rules. This article will clarify all of these issues for you.
HUD is the United States Department of Housing and Urban Development, a government agency whose goal is to increase homeownership and support community development . The Federal Housing Administration (FHA), which is part of HUD, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States.
HUD and FHA come into play in three different scenarios in the investor/foreclosure arena.
HUD Foreclosed Properties
When a person gets an FHA loan, it is funded through a private lender and the loan is insured or backed by the Federal Housing Administration. When the loan is in default, FHA pays out the lender and take an assignment of the loan. When the property is foreclosed, it is owned by HUD. HUD then offers these properties for sale to both owner-occupants and investors. The properties are offered on the local MLS computer database, but you have to submit an offer through a HUD-approved real estate broker. The offer is made under a bid process, under which the HUD will either accept or reject your offer depending on what other offers are submitted. An investor can buy, hold, or flip these properties if their offer is accepted.
FHA Loans and Title Seasoning
The Fair Isaac Company have announced that they will be releasing three new credit scores based on their new FICO 08 model.
1. The FICO Mortgage Score
The FICO Mortgage Industry Score is designed to help mortgage lenders improve credit decisions for both current and future homeowners. Introduced by FICO and Equifax, the score delivers significantly greater assessment of mortgage repayment risk — up to 25% or more for key population segments, compared to the base BEACON score. The score aids servicers in earlier identification of borrowers at risk, mitigating the incidence and high cost of foreclosure.
2. The FICO Auto Score
FICO have also introduced another industry-specific credit score for the auto industry. According to Tom Quinn, vice-president of scoring at FICO, the new scoring model "will identify 5 to 15 percent more potential delinquencies… For the overwhelming majority of consumers, the auto industry score will be relatively close to the [generalized] FICO score," says Quinn. "There is a percentage of the population that will be different. And that’s why lenders have opted to use the other [auto industry] score."
TransUnion has already made this score available immediately to lenders, while Experian and Equifax are planning to follow suit later in the summer.
3. The FICO Bankcard Score
The third scoring model is specifically for the credit card industry, officially named the FICO Bankcard Industry Option. This does the same kind of things are the Mortgage and Auto industry versions, by taking your credit file and first scoring it by the "broad-based" risk scorecard system, and then by one of two industry-specific overlay scorecards — one for files with derogatory information on any type of account, one for files without. This overlay adjusts the credit bureau scores up or down. The resulting score is scaled to match the same "good versus bad" odds as the broad-based risk scores.
These three options are generally greeted with positive comments from consumer experts. The tweaking of the current "classic" FICO score can only help lenders make more informed decisions when underwriting loans.
According to the National Association of Realtors, the number of sales of previously owned homes in the U.S. rose by 2.9% in April to an annualized pace of 4.68 million. The gain, the second in three months, was spurred by foreclosure auctions and cheaper prices which attracted bargain hunters. Distressed properties accounted for 45% of all existing home sales and the median price of a home fell 15% from a year earlier. The number of houses on the market climbed 8.8% to 3.97 million in April, and at the current rate of sales, it would take 10.2 months to sell all those homes, Bloomberg reports.
At the same time, the Mortgage Bankers Association’s index of mortgage applications decreased 14.2% in the week ended May 22. The share of applicants seeking to refinance existing loans fell to 69.3%, from 73.6% in the prior week, as the average rate on a 30-year fixed-rate loan rose by 12 basis points (bps) to 4.81%, the highest level in more than two months. The average rate on 15-year fixed-rate and one-year adjustable mortgages rose by one basis point to 4.44% and 17 bps to 6.55%, respectively, Bloomberg reports.
Yesterday, I suggested that the idea of the "Stress Test" for banks was really just a marketing ploy by the Treasury to boost confidence that the United States financial system is stable. After all the back-bending, and billions in bailout funds to avoid bank failures, do we really think the Treasury is suddenly going to declare any banks insolvent?
Highly unlikely, in my opinion.
So if the Treasury is unwilling to nail any banks, what does that mean for the Public-Private Investment Program that’s supposed to buy banks’ toxic assets? What will be the motivation for selling if there are no consequences for keeping these assets and waiting for value to return?
Well, it would appear that the Treasury is playing the "opportunity cost" card. Offer the banks a premium for these assets now that might otherwise take years to achieve.
The banks win, as they free up their balance sheets and can theoretically increase lending. The "Toxic Investors" win, as they buy potentially valuable assets with very little of their own money while the Fed and Treasury subsidize the rest. And the taxpayer wins as Fed and Treasury loans are paid back.
I don’t know about you, but that all sounds a little too perfect. Something’s bound to go wrong with this neat little win-win-win scenario. And I know who isn’t going to get shafted – the investors who partner with the Treasury to buy these assets.
That’s because they simply won’t be taking on much risk at all, and they potentially make a lot of money.
With the large number of foreclosures to hit this country over the last few years, con artists have come out of the woodwork to prey on those in trouble — including real estate investors.
The number of schemes, and those being caught and charged, can be found in the news and on many internet website like Mortgage Fraud Blog (www.mortgagefraudblog.com).
This short 2-minute video by Freddie Mac teaches you how to spot a foreclosure scam and find out how to avoid becoming victim to home foreclosure fraud.
Do you know someone who’s been victimized? Do you think this problem is getting worse?
There’s a lot going on today. The unemployment rate "surprisingly" hit 8.5%. President Obama knocked ‘em dead at the G-20 meetings.
But the headline that caught my eye was "Bailed-out banks may buy toxic assets."
Believe it or not, Citigroup, Goldman Sachs, Morgan Stanley and JP Morgan, are considering using the Public-Private Investment Program to buy toxic assets from other banks, according to the Financial Times.
The Public-Private Investment Program is designed to encourage private investors to put money to work buying toxic assets from distressed banks. The Treasury and the Fed have offered loans to make the purchases less risky for the buyer. In essence, all a buyer has to do is put up a token amount of cash and the government will fund the rest.
Yes, the plan reduces risk to the point that it’s kind of like a free money giveaway – the taxpayer takes the risk, the subsidized investor makes the profit, assuming there is one.
Personally, I’m not happy about the plan. But something has to be done to get the market for these toxic assets moving. Right now, there’s a huge spread between the banks asking price and investors’ bid. And nobody’s budging. Throw in some free money via the Public-Private Investment Program, and the bid can rise to be more in line with the ask price. It’s a sweetheart deal.
Before you apply for a mortgage loan modification, it’s important for you to understand the lender guidelines and whether or not you qualify one.
A mortgage loan modification is an adjustment to your mortgage by your lender with the intention of co-operating with you in situations where you are having financial difficulties. The objective is to make your loan more reasonable, taking into account your present financial condition so that it becomes manageable for you.
Before you make a decision to pursue a mortgage loan modification, you must determine whether you are eligible and fall under the guidelines of a mortgage loan modification.
The U.S. and world economies are about to suffer through some of the worst recessions in the postwar period. Most measures of economic and financial activity look like they fell off a cliff in September and October, and have been deteriorating at an alarming rate ever since. The United States is now officially in a recession that started in December 2007. Japan and many European countries are in the same boat. At the same time, growth in most emerging markets is faltering. IHS Global Insight now believes that global growth will be in the 0.0 – 0.5% range during 2009, compared with 2.7% in 2008.
- THE U.S. RECESSION WILL BE ONE OF THE DEEPEST — IF NOT THE DEEPEST — IN THE POSTWAR PERIOD.
The current downturn is well on its way to becoming the longest in the past six decades. Based on the December IHS Global Insight baseline forecast for the U.S. economy, it will be the fourth deepest in the postwar period (the 1957 recession was the deepest, followed by the contractions of 1973 – 75 and 1981– 82). Nevertheless, given the very negative tone of the incoming data (including the 533,000 drop in November payrolls), the recession could well be the worst in the postwar period. At the same time, the large back-to-back declines in real GDP predicted for the fourth quarter of 2008 and the first quarter of 2009 (down 5.0% and 3.8%, respectively) are the worst since the 1982 recession, and may easily be the worst in more than six decades. Overall, we expect the U.S. economy to shrink at least 1.8% in 2009. - THE FEDERAL RESERVE AND OTHER CENTRAL BANKS WILL KEEP CUTTING RATES.
The race to zero is on! The Fed has already cut the federal funds rate to 1% and is likely to take it all the way to zero by the end of January. Once the overnight rate is at zero, the Fed may have to engage in “quantitative easing” (direct purchases of long-term Treasuries). It is already engaging (massively) in unorthodox measures such as buying commercial paper, mortgage-backed securities, credit card debt, and loans to small businesses, students, and car buyers. On December 4, the European Central bank joined the fray by cutting the overnight rate by 75 basis points (to 2.5%), while the Bank of England cut by 100 basis points (to 2.0%). IHS Global Insight now believes that the ECB and BoE will push rates all the way to 1.0% and 0.5%, respectively—and could cut all the way to zero. Most central banks around the world have followed suit. Notably, on November 26, the People’s Bank of China lowered rates by 108 basis points, the largest cut in 11 years and the fourth cut since mid-September.
In an effort to revive the economy the Federal Reserve cut the federal funds rate today but a half-point (0.5%). This lowers the rate to 1 percent – the lowest rate since 2003-2004. The last time the federal funds rate was lower than 1 percent was during the Eisenhower administration in 1958.
Today’s interest rate cut was the second half-point cut this month. The last one on October 8, 2008 was in a coordinated move with foreign central banks.
This year’s economic weakness has created huge declines in the price of oil and other commodities. While many economists believe the country is in a recession, they also believe the recent rate cuts and other aggressive actions by the Fed will help prevent a prolonged downturn and help unfreeze the credit markets.
If these aggressive moves by the federal government are successful in thawing the credit markets, it will be great news for real estate investors who are having difficulty financing their real estate investments.
In some of the worst housing markets in the country, deflation has reached double-digit proportions. While housing woes have spread around the country, California appears to be poised to rank among the worse. One of the primary reasons for this is the fact that in the last few quarters California has experienced the largest rate of deflating home prices. In fact, home prices in California have fallen to levels that have been unprecedented.
Miami, Florida has also proven to be a difficult market at the moment. The weak mortgage market and record high rates of foreclosures have led to declining home values as well. In fact, Miami has been among the worst home markets in the country for two years running. The condo boom in Miami just a few years ago has further fueled the problems that have now spiraled into a massive real estate bust.
