Rob's Rant

For those of us who did not have high school Latin, "caveat emptor" in English is "buyer beware".  This attitude can be the silver lining to the cloud of our current Recession.

I was listening to NPR in my car on the way to work this morning, and the discussion was about Loan Modification.  The reporter was interviewing a fellow named Richard and discussing his mortgage, and his attempts to modify said mortgage.

Richard's mortgage had a low, low start rate ("teaser" rate) and then reset to 11%+.  OUCH.  For the past 1 1/2 years, according to the report, Richard has been attempting to modify this rate to be lower, even to the current market rate (+/- 5.5%) and thereby drop his payments back to affordability.

He had had no success, until he took his paperwork to a local non-profit for assistance.  They showed him his paperwork, which included a loan application attesting to $16,250 monthly income ($195k annually).  He stated in the report on the radio that his actual income at the time was only $37k per year ($3,083 monthly).  He also stated in the report that his Mortgage Broker lied so he could qualify for this larger loan and that he had never seen this income information before, nor were the terms of the loan explained to him. 

Let me be clear on this point before I continue: I am not hard of heart, I feel for Richard and his family.  Read on for a better idea of what to do.

My knowledge of some mortgage procedures may shed a new light on some of these circumstances, however: 

(1) Final loan papers are not signed at the Mortgage Broker or Mortgage Lender's office.  They are signed in the presence of a disinterested third party.  In Arizona the third party is an Escrow Officer; in many other states that person is an Attorney.  When someone hands you a fat stack of papers you may not understand, why would you not ask the Escrow Officer or Attorney sitting there to show you the relevant portions and ensure you understand them?  YOU ARE PAYING THAT PERSON.  S/he will likely not give you an opinion, however s/he can explain the relevant terms and conditions including interest rate, prepayment penalty, etc.  Make him/her earn his/her fee.

(2) Recall that Richard stated he had "never seen" the application showing $16,250.  This is most unlikely, as part of the documentation sent to the Escrow Officer/Attorney is a "Final Loan Application" requiring initials on every page and a Signature on page 4.  He may not have reviewed the document in sufficient detail, but he almost certainly saw it.  This application is included in the final loan package (along with Note, Mortgage/Deed of Trust, etc.) for the express purpose of ensuring the borrower sees the information at least once.

How can there possibly be a silver lining to all this?  Because I am pretty sure going forward that Richard will READ everything before he signs it, rather than simply trusting what someone else verbally tells him.  Another silver lining: YOU can learn from his difficulties.  When it comes down to brass tacks, who has more interest in the well-being of you and your family?  NOBODY.  Educate yourself so that you understand what you are getting into.  If you don't understand something.  ASK.  If you still don't understand, ASK AGAIN.  Still don't get it?  ASK SOMEONE ELSE.  Be sure you know what you are signing before you affix your signature.  Your signature attests that you fully understand what you are signing.  If this is not the case, you are signing falsely.

Ask anyone who has sat with me in a loan application.  I explain every form, and I encourage my Clients to read them.  When we are finished I give them copies of every page, and encourage them to look at them at their leisure, and call or email me with questions.  And that is just the Application, which isn't even a legally-binding document.  If you are working with a mortgage person, whether a Broker or a Bank (yes, Banks were at least as bad as Brokers in all this mess), UNDERSTAND what you are signing.

This is why I have always offered to review people's mortgage applications, good faith estimates, etc.  I offer the service for free with no obligations because even by re-originating only the people who are getting screwed by their current Bank or Broker, I can benefit myself sufficiently to always tell the truth and show potential clients their true costs.

CAVEAT EMPTOR!  Be aware of what you are signing!  DO NOT sign something you don't understand!

(FYI: the other silver lining for Richard is he got his rate dropped to 3% and can make his payment now.  So after all is said and done, this experience was truly a win-win for him, in spite of all the drama he had to go through to get there.)

SO WHAT??  You may ask.  This blog is about Mortgages, right?

Everything is related.  A weakening dollar is the result of an expansion of the money supply (more dollars mean each one purchases a little less stuff).  Some Economists consider the weakening of the dollar to be Inflation, others (notably Austrian Economists) point out that Inflation is the monetary expansion itself and the weaker dollar is the result.

Also, traditionally, in times of rampant Inflation, gold has been one of the best stores of value available. 

So a weakened dollar and a run-up in gold prices mean that the Market is pricing in future Inflation. 

In times of Inflation, other investments that do well (besides gold) are commodities and Real Estate.  Interest rates also skyrocket during Inflationary periods, no matter what the Government would like them to do.  This is because the person or bank or whoever is lending the money must factor in the fact that the dollars s/he gets back have less value than the ones s/he lent out.  Therefore s/he must get more of those dollars as a return--meaning a higher rate on interest you must pay.

Real Estate is a little more complex in today's environment.  With our Government's meddling in this market (which started way back in the 1930s and has gotten progressively worse ever since) it seems no end is in sight.  Now many people are (finally!) looking at the Option ARM loans which should kick into high gear for resets over the next 12 months--this should begin another wave of foreclosures.

Should you buy now or should you wait?  My answer (as to everything) is: it depends.  You have to factor in a few variables: how long will you keep the house?  Will you live there or rent it? Take a look at these two examples:

1) Buy a house today at $150,000 at today's rate of 5.25% 30-year fixed (5.571 APR).  Your PI payment (that is, the payment for just your loan aka Principal + Interest) with 20% down is $663 and your loan amount is $120,000.

2) IF rates go to 10%, the same $663 per month gets you a loan of only $75,508 (10.617 APR).  That home value had better drop an additional $45,000 over and above however far it has already dropped, or else YOU CAN'T AFFORD THIS HOME ANYMORE.

Scenario 2 assumes prices continue to drop (which could happen).  It seems equally likely that we are currently near the bottom in this one area and will stay here a while.  Eventually people should begin investing in real estate again as they see the Inflation hit.

Could rates go to 10%?  For anyone over 30, you may remember when mortgage rates hit 22%!!  This was a DIRECT RESULT of the Inflationary 1960s and 1970s.

The money supply of our nation is larger than ever before.  The Deficit is $1.38 Trillion so far this year--an the year isn't over.  The dollar has resumed its long decline against the other currencies of the world.  The Federal Reserve has been spending Billions by directly buying Mortgage-Backed Securities in order to jam interest down to below-market levels.

All this tells me that the question should not be "if" rates will go above 10%, but "when" and "how high"?

I think locking in current interest rates is a boon, especially for anyone who is currently renting.  Investors may also wish to diversify back into real estate: current rates are favorable for them too.

Greetings, all!

Here is a brief description of the $8000 IRS Tax Credit for you.  Bear in mind I am not a Tax Advisor nor an Attorney.  Please Consult your Tax Advisor or your Attorney to see how these rules apply to your specific circumstance.

Here are the rules:

1) First-Time Buyers only.  NOTE: the mortgage industry (and for this program, IRS) defines "First-Time Buyer" differently than you do.  Anyone who has not owned a Primary Residence in at least 36 months falls into this category.  (Case in point: I had Clients this year who checked with IRS and found out they were able to receive the $8000 even though the wife still owned a home in another state that she had not lived in for over 3 years).

2) Home must be purchased between 1/1/09 and 11/30/09.  If you already bought a home this year, you may qualify.  If you haven't yet, and want to take advantage of the program, I suggest you GET STARTED TODAY.  Closings now are taking 45 days or more--watch for a crazy 2nd 1/2 of November as people try to beat this deadline (if you are a day late and record on 12/1/09, it will cost you the $8000).  Add Thanksgiving into the mix and, bottom line, you may not be too late but you are close.

3) You have a choice to take the $8000 in your 2009 Tax Return, or to file an Amended Return for 2008.  I have been told by my clients it seems to take about 60 days to get your money.  Not bad.  Consult your Tax Advisor to discuss which option is better for you.

That's pretty much it! 

Here are Links for you:

First the form itself:

http://www.irs.gov/pub/irs-pdf/f5405.pdf

And now the Guideline:

http://www.irs.gov/newsroom/article/0,,id=204672,00.html

Please post any questions and/or comments about this popular program.  I'd love to hear from you!  Or call or email me directly.