Rob's Rant

I promised to provide more info on the $8000 Tax Credit Extension.

Please watch my brief overview:

$8000 Tax Credit Extension Explained

Here are the Links I promise in the Video:

IRS Tax Credit Explained at irs.gov

Download Form 5405

More questions? Email Rob

So the Tax Credit Extension was passed by the House yesterday and signed by the President today.

I will pull the info and give a final take on details next week, but promised to update you when it passed.

"He signed you, Bill.  Now you're a Law."

Stay tuned for more details...

Today the US Senate passed an Extension to the Tax Credit.  Here's what we know so far (source: www.washingtonpost.com):

• The new Expiration Date would make more sense: Contract must be written by 4/30/10 and Escrow must be Closed by 6/30/10.
• Household Income to qualify would rise to $125,000 for single people and $225,000 for married couples.
• In addition to the $8000 credit for First Time Home Buyers, there would also be a credit for Move-Up Buyers.
• $800,000 maximum purchase price.

In case you don't recall how bills become laws (or just need a little nostalgia--trust me you'll enjoy this), take a look at the following video clip:

How a Bill Becomes a Law

This passed 98 - 0 in the Senate & is on its way to the House.  It is attached to a Bill extending Unemployment benefits.  It does seem likely to pass and I can't imagine the President vetoing it.  However if there are changes when it comes out of the House, I will certainly keep you posted.

SO--a reprieve for anyone who thought s/he was going to miss the party!

So I have this client whom I helped purchase his retirement home in Arizona earlier this year.  My client is a Viet Nam Veteran, and a recipient of both the Purple Heart and the Silver Star.  (He doesn't like to brag about these things so I do it for him.  I'm proud to know him.)

This particular client sent me an email Friday asking about obtaining a copy of his Deed.  He mentioned that he received a letter from a "National Deed Service" who would obtain a copy for him and provide it to him--for a $49.50 fee.

YIKES!  After spending about 5 minutes on the County Website, I was able to download and forward a copy of the gentleman's Deed to him, at no charge.  That's right--no charge.

In Arizona, the Deed is a matter of public record.  (In fact, our County sells the names on Deeds as an additional revenue source--which is my guess as to where this phony company obtained my Client's info).

You already have a copy of your Deed that was mailed to you by your County Recorder when you purchased your home.  If you need another copy, you can easily obtain one by going online to your County Recorder website.  Depending on the County, there may or may not be a charge for that.  HOWEVER THERE IS NO REASON TO PAY THESE THIEVES TO DO IT FOR YOU.  It is very easy to find.

If you live in Maricopa County, here is the website to find all public records:

http://recorder.maricopa.gov/recdocdata/

If you live elsewhere, just Google "[County name] County Recorder".  It seems like they are almost all online nowadays.  Follow the links, they are generally pretty user-friendly.

You can enter your own name and get copies of any document that has been Recorded there.

If you can't tell, this experience makes me VERY ANGRY.  I HATE it when people take advantage of others because they are perceived to be easy targets, for example Veterans and Retired people.  GRRR.  I think I will encourage my Client to contact the Arizona Attorney General.

If you haven't done so already, please click SUBSCRIBE below.  I always try to talk about topics that are timely and informative.

There has been a lot of activity this week.  Here is my perspective on some of it.

The $8,000 First Time Home Buyer tax credit has been subject to rampant fraud. (Source: http://www.marketwatch.com/story/fraud-found-in-home-buyer-tax-credit-claims-2009-10-22 ).  DUH.  Throw a bunch of money at something and con men will come out.

Home Sales up 9.5% for September.  (Source: http://www.realtor.org/press_room/news_releases/2009/10/rebound_shows?lid=ronav0021 ).  Throw a bunch of money at something and everyone (not just con men) will respond.  This is an effect of the $8,000 credit, and an effect of Fed buying Mortgage-Backed Securities to drive down yields (aka interest rates) on mortgages.  What remains to be seen is if this will be a short-term or long-term effect.  It is possible the Consumer will be reassured by the halt in price declines and look to buy again in 2010.  It is also possible that people will stop buying in 2010 because those who would have purchased in 2010 moved their purchase forward to 2009 to take advantage of the FTHB tax credit.  Auto sales fell off a cliff after Cash for Clunkers expired: watch for for home sales to do the same early 2010 before underlying market forces bolster the price.  Long-term, Real Estate makes sense as an investment (see previous posts about inflation, etc.).  Short-term is less certain.

TARP program has 1-year anniversary.  How much Toxic Assets did the TARP actually buy?  $0.  Ah well, I'm sure that money went somewhere.  In unrelated news, because Goldman Sachs paid back its TARP money, its Executives will not have their income capped like GM, Chrysler, B of A, etc.  Whew!  Those boys dodged a bullet there!

I read that $3 out of every $10 on deposit in the United States is at B of A, Chase, and Wells Fargo.  Small banks being pushed out and big ones benefiting.  I'm sure that's just a coincidence.

Congress today is working on creating another Federal Agency to oversee the banking industry to prevent future economic crises.  I'm sure that'll work.  Remember how the FBI prevented 9/11, the SEC prevented the Bernard Madoff ponzi scheme, and the Department of Energy was able to eliminate US dependence on foreign oil?

There's a Microsoft Store that opened yesterday right here in Scottsdale.  People waited outside the mall for 20 hours just to be the first to get inside.  It said on the radio it was opened to directly compete with Apple Stores.  Apple has stores?

FHA will now be suing FHA Underwriters directly in cases of losses.  This odd turn of events will make Underwriters more cautious then they have been already.  Times like these are when "the men get separated from the boys".  Sounds like fun to me!  Never before in my mortgage career has it been more critical to have experience, contacts, and a good reputation.  The harder things become, the easier it is for me to differentiate myself from the pack.

Thanks for playing.  Be good to each other and enjoy your weekend!

The world of Finance can be a confusing and scary place.  For this reason many people avoid the topic altogether, until the time comes to make a move: at which time they are often unable or unwilling (or both) to wade through the information available to make sense of it.

Once of the most confusing and contentious terms out there is "Yield Spread Premium" (YSP).  YSP is also one of the most misunderstood terms.  There is even a current proposal at the Federal Reserve to eliminate the practice altogether.

So what is YSP and how does it affect you?

In a nutshell, YSP is how Banks are able to pay Brokers for mortgage loans. 

Here is a simplified example:

1) Let's assume the current market rate for a 30-year fixed loan is 5.5% + 1% Origination and 0% Discount.  You call Bank "A", Bank "C", and Bank "W" and they all are approximately this rate.  Then you call a Broker & s/he quotes you 5.5% + 1% Origination and 0% Discount.  (On a $100,000 loan, 1% = $1,000.)

2) You later learn that the Broker's quote of 5.5% + 1% Origination and 0% Discount includes a 1% YSP.  So to deliver the loan to one of the Banks you called, or possibly to another Bank you didn't, the Broker will be paid 1% by you (Origination), and another 1% by the Bank (YSP).  Your price, however, is the same: 5.5% + 1% Origination. 

So are you being overcharged?  Not because the Bank is paying YSP, you're not.  After all, you're getting the same price (rate and fees) as the fellow who walked into the Bank directly.  Remember, your payment, closing costs, etc. are the same.  So where does the YSP money go in his case?  The Bank just keeps it, & it goes to the Bank's bottom line.

Can borrowers be overcharged?  Yes, they can.  Understand this is a function of rate and fees, not YSP.  Borrowers can be overcharged by both Brokers and Banks (ever heard of Washington Mutual or Countrywide? they were Banks not Brokers).  This is where doing your homework and being educated comes in.

Understand what you are signing.  Ask questions.  Find someone you trust.  Get a Second Opinion on what you are considering, whether it is a Purchase or Refinance.  If you count on the fact that a company is big to protect you, remind yourself of the horror stories of the Bailout.  Investors at Merrill weren't protected, but the Executives were.  The same holds true for AIG and all the rest.

So the net effect of YSP is: more competition in the marketplace.  Brokers can compete with Banks on price, service, or a combination of the two.  Remember, more competition = lower prices.  (Remember your Monopoly game from when you were a kid?  You only can really make the BIG BUCKS when you control a market, represented in the game by a color group.)  This idea is also expressed by the Laws of Supply and Demand.

Remember it is the little guy who can protect you from the "Too Big to Fail" companies.  If they're "Too Big to Fail" what the heck do they care if you get shafted?  I live in the neighborhood in which I work.  Think I care if my neighbors hate me?  You better believe I do!  Think some suit in NYC cares if you're unhappy?  Not likely.  It is the mechanism of YSP that allows me to compete with him for your business.

With whom would you rather work?

(PS--If you would like further explanation, or would like other terms explained, please "comment" or shoot me a private email.  Thanks!)

Foreclosures continue to rise.  The US Government is in obvious panic-mode about housing. People are selling at any price just to get out from under their properties, or are walking away from them.

Is this a good time to purchase real estate?  It seems like if you believe Baron Rothschild (who nobody would really call a "nice fellow" but who was immensely wealthy) you should consider this option for your investments.

There are 2 factors I believe are important to consider right now: people are dumping properties (dropping prices) and ultra-low interest rates (further dropping payments).  Even if prices go down further, rates can't drop and will certainly go up, if only because nothing stays at historic highs or lows forever.

Consider: a $200,000 loan at 5% has a Principal and Interest (PI) payment of $1073.  At 6%, that same $1073 results in a loan of $179,000.

So if rates rise only 1%, home prices would need to drop 10.5% to keep pace, over and above the drop that has already taken place.

On the flipside, when home prices do rebound, you have locked into this lower price and lower rate.  When Rents rise, your PI payment remains the same, and the overage is your profit.  Should values go up 10%, even if rates remain flat (which is highly unlikely), the loan at $220,000 at 5% interest is $1181.  This is $108 that another landlord would have to charge just to break even, putting you at a competitive advantage.

And if the home prices go up 10% and rates go to 6% the loan at $220,000 at 6% would be $1319 per month.  This is a $246 competitive advantage to you.

There is always risk of loss.  You MUST educate yourself about any investment before buying.  Enlist experts to advise and assist you.  But if you sit on the sidelines and just WAIT, you'll miss what seems to me like a party.

Remember the examples I give apply to Primary Residences as well.  If you know someone who is still Renting, this may be the ideal time to change that.  Fixed-Rate mortgages are better than Rent Control!

Open up any official history of our country and you will find reference to the fact that the Federal Reserve, under the wise tutelage of Chairman Paul Volcker, raised interest rates to record levels and broke the back of Inflation.  Since that time, we are told, we have experienced moderate to low levels of Inflation, and the horrors of the 1970s have been averted.

How true is this version of events?

Here is a chart, published by the Federal Reserve, showing the Consumer Price Index, seasonally adjusted:

Take close notice of the period from 1970 - 1980, when we experienced "high" Inflation, vs. the period from 1982 - present, when we have been experiencing "moderate to low" Inflation.  Notice any difference?  Neither do I.

This tells us Inflation is here to stay, until/unless the United States gets serious about its currency and backs it with something.  That could happen soon, or it may be many years from now.  Either way, you need to consider protecting yourself and your family from this loss of purchasing power in the meantime.

Traditional Inflation hedges include: commodities (oil, natural gas, food, precious metals) and real estate.  We are currently watching the unwinding of some folks' heavy bets into real estate.  It will be a long time before people who purchased real property during the "boom" will come out ahead. 

There are some factors going on in the current housing market that tell me it may be time to take another look at diving into real estate as an investment:

(1) It now costs more to build a home (at least here in Metro Phoenix) than it does to buy one.  So buying now will get you the thing below what Adam Smith called the "natural price".

(2) There has been a wave of Foreclosures, and more are to come.  While that could further depress the sales prices, there is a point where we cannot go much lower.  See #1.  All these people who used to own homes will have to live somewhere.  I can tell you they will not be getting another mortgage for a minimum of 3 years.  Therefore they will have to rent.  Watch for Demand for rentals go up, therefore driving rents up (when Demand rises, so do prices).

(3) The Federal Reserve is currently doing all it can to keep mortgage rates low and incent people to buy.  Eventually those rates will have to go up--possibly very significantly.  (In 1981, 30-Year Fixed rate was 18.45%.  Source: http://research.stlouisfed.org/fred2/data/MORTG.txt).  If you own real estate at 5% or 6%, and your neighbors are at 12% or 13%, you can either (a) charge lower rents or (b) make bigger profits.

Should you sink all your money into real estate?  Of course not.  But it may be time to consider adding rental real estate to your mix of investments.  And the lesson from the crash?  If it doesn't cashflow, don't buy it.  The mistake the majority of rookie landlords was buying properties on which they were taking a monthly LOSS, and speculating on being able to "flip" the property later.  Like anything else, in real estate, "bears get fed, bulls get fed, pigs get slaughtered".  This may very well be an excellent time to get into this market, so long as you avoid the temptation to be greedy.

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.