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Your Interest Rate Update

November 11, 2008

Round and round we go...

This could be a long letter, but...there's a lot of good information, I think. I hope you agree. Please let me know.

As I think is clear, this economic recession began with a deflating (or bursting) housing bubble. It's morphed WAY beyond that, but, it began with housing and the end most likely will come from housing. As a result, we have a new buzz word (or words) in our vocabulary, "Loan Modifications."

Loan modifications... Help for homeowners (borrowers, that is), or a shell game? That's the Billion Dollar Question. Many billions, really.

Whatever the answer, please hear this. If you're in need of a loan modification, YOU CAN DO IT YOURSELF. Unlike shopping for a loan, you have one source. Your current lender, is the only one who can modify your loan. You do not need to pay someone to do it for you. You'll talk to the same people at your lender's Loan Modification Department that a third party will. Yes, it may be frustrating, and take you longer than someone who knows the process, but you can do it yourself.

If you decide the "grief to dollar" ratio for you is worth it to pay someone, make sure you're working with a reputable company. Make sure you're getting a money back guarantee for delivering as promised. And, make sure you're not paying more than about $1250 for the service.

It disgusts me to see so many of the same people who abused the Pay Option/Negam, stated income and other "creative" loan programs - that really had an application before they were bastardized and misused - jump into the Loan Modification Business to make a quick buck, preying on the same folks they duped before. Often I hear of people charging $3000-$4000 - with no guarantees of success - to try to modify your loan. They're all over radio and TV pushing their ads. And, the direct mail is starting to come in force too. But, being duped is a two-way street...buyer beware.

All that, with no comment from regulators, nor the industry to help guide you in this hectic time. It's a shame, really, that they're letting you, their customers get duped again. Meanwhile the same folks that bilked so many into this mess are profiting again. Don't get me wrong. I like profits. I'm as capitalistic and opportunistic as it gets, but...I like to think I have a moral compass, too.

So, let's look at what you can do, if you need a loan modification. Loan modification is not designed to help investors, and people who made bad choices or over extended, or over leveraged, or had bad timing, but...I'm sure some will try - and succeed - in gaming the system. Loan modifications are designed to help those THAT NEED to stay in their homes do so. In so doing, the hope is that a bottom to the house price correction will form.

On the bright side, today, Fannie Mae and Freddie Mac (who hold roughly 50% of outstanding mortgages) announced a plan they hope will help borrowers who really are in trouble to stay in their homes.

Here's how James Lockhart, Director of the Federal Housing and Finance Agency (the newly created agency to oversee Fannie and Freddie) described it in an interview with Susie Gharab of Nightly Business Report (www.nbr.com): "Well, I think it's more than a start. I think it's really a comprehensive program that will really help very many people that are delinquent in their mortgages stay in their homes. They will get affordable mortgages. It will be funded by the people that provided the mortgages, Fannie and Freddie, the banks that did the lending and I really think that private label security holders, those investors that had their securities sliced and diced, should also join this program. It will save them a lot of money versus foreclosures. "

It goes into effect Dec. 15. To qualify, borrowers will need:

To be at least three months behind on their home loans - I'm not sure that's a good thing, and I'll get to that below
Will need to owe more than 90% of their home's value, based on current market valuation
Will not pay more than 38% of their gross income on housing expenses (mortgage, taxes, insurance, and mortgage insurance, if applicable)

To accomplish these modifications and meet the 38% debt to income ratio guideline, Fannie and Freddie can use any or all of the following:

A temporary reduction of the interest rate to as low as 3%, lasting for 5 years. From that point, the interest rate will rise by 1%/yr up to either prevailing rates, or Fannie Mae 30yr fixed rate at that time. Whether that reduction is interest only or principal and interest hasn't been mentioned, to my knowledge.
Extension of the loan term and amortization, up to 40 years.
Temporary deferment of a portion of the principal. NO PRINCIPAL WILL BE FORGIVEN. It will either be repaid by lengthening the amortization period, or by adding in a balloon payment.

Additionally, there is the Hope For Homeowners program. Unlike the Fannie/Freddie plan, they want you current with your mortgage prior to receiving assistance. This is a voluntary program by which lenders can agree to finance your home to 90% of its current market value with an FHA insured loan. The balance may be forgiven. You may waive your right to benefit exclusively from any appreciation from that point forward. It's my understanding that you'll agree to grant a 50/50 split of future appreciation with your lender/FHA. You can find more information at http://www.hud.gov/fha/home080730.cfm, but again, I encourage you to contact your lender directly, too.

Bank of America/Countrywide, Citi, JP Morgan Chase/WAMU and Wells Fargo have all announced various plans to modify more loans, and stem the tide of foreclosures. Again, if one of those companies is your lender and you need help. Call them. They've put a moratorium on new foreclosures and have staffed up to handle the volume of calls. With Fannie/Freddie's new initiative, the landscape continues to evolve. These lenders' policies may or may not mirror the new Fannie/Freddie initiative.

Will this all work? Maybe. I'm a little skeptical, though.

We could now find a wave of people who are current, who can possibly afford their mortgage as-is, start missing payments to qualify for the Fannie/Freddie "deal." Sure, they'll tank their credit, but...if it saves them tens of thousands of dollars in the next 5 years, who cares? Their credit will be repaired in that time frame, and they can walk then, when their rate begins to rise, but their home will most likely be worth about the same as it is today.

Moreover, who's to say that someone who's upside down by $150,000 (and tens of thousands of people here in Sacramento are) will get their loan modified, but decide to blow it off anyway, rather than waiting for 10 years for them to recoup their equity? Whether that money was borrowed, or put down, what's the incentive to stay in that home and keep paying? In many cases, you can go rent a nicer home, for less money. I'd like to think the incentive is holding up your end of the bargain, following through with your commitments and paying your bills as agreed, but...unfortunately, I think that's overly optimistic.

So, we could argue that all this "help" is only delaying the inevitable correction to the historic, mean (average) level of real estate appreciation over time. On that note, we can argue that a slow bleed is better than a blood letting, but...

As I've said before, someone's pain and nightmare is someone else's dream opportunity. Blood letting could be the way to go.

Now I know, that sounds harsh, and a lot of people got jacked up for a variety of reasons not necessarily of their own doing. That doesn't mean they won't make a "business decision" either before or after a loan modification, and walk from their obligation.

So, what can we do to help?

Despite how it appears on your news channel, there are plenty of people out there with tons of cash, great income and the long-term horizon to seize opportunities and build greater long-term wealth.

Here are my ideas that I think can help stem the tide and shore up our housing market:

Fannie and Freddie should revise their guidelines for investors. Right now, they won't allow for an individual to finance more than four properties, cut down from 10 as the markets began to sour last year. 10 was only excessive because they allowed people to borrow without verifying income, with minimal down payments, and marginal credit histories. By establishing firm, yet manageable guidelines (25%-30% down, fully documented income/assets, 720+ ficos, properties that cash flow, etc.) they can open the door of opportunity to many people who will gladly soak up the excess inventory of homes en masse. Right now, only a select few local lenders who don't sell their loans, but rather keep them on their books, will consider this type of scenario. In Sacramento, you can now very easily get a 5% cash-on-cash return. Is your stock portfolio delivering that? Plus, over the next 10+ years you'll probably benefit from some appreciation, too.
They need to keep interest rates around today's levels. Yes, I'd love to see them get lower. But, as I've said, they have little incentive to lower them as they try to return to profitability and bring their balance sheets, well...back into balance. And, 6.5% is still a great 30yr fixed interest rate! It's also a great rate of return to the investor, as long as the default rates are low.
Underwriting guidelines can't be excessively loosened. Unfortunately, unless default rates drop back to historic norms, investors will either shy away from parking their money in mortgages or...they'll charge more. Again, despite what you hear in the mass media, there are plenty of strong borrowers who are great buyers out there.
Tax credits should be offered to all home-buyers, whether it's first time buyers, move-up buyers, or investors. Small credits can mean a lot to an individual. And, right now localities (cities, towns and states) are seeing massive revenue shortfalls, largely due to empty homes. Empty homes pay no property taxes. The Fed and/or state can grant a small break, that might be offset as buyers pay their local real estate taxes. That in turn will ease the burden of those localities who are now turning to the State and Fed to get "bridge" financing to cover their basic expenses. California is a great example. Revenues are so short, and lenders so few, that Governor Schwarzenegger asked for $7 billion to cover normal operating expenses. I'm not smart enough to know whether this math would pencil out, but...my gut says it could help fill part of the gap.
We need to move forward diligently but patiently, and not rush into policies that are meant with the best intentions but spin off unforseen consequences. After all, that's exactly how we got into this mess in the first place. Good ideas gone bad. Although I could be wrong, it feels to me like the Sacramento housing market is finding a bottom, and we have not seen massive amounts of loan modifications here. Sure, we could see another dip of 10% or so (maybe more, although I'll put money that it won't go much lower than that), but...either way, that's not necessarily the end of the world, if you can afford what you bought, and have a long-term horizon on owning that property.

I don't know how much those ideas will help, if at all. I don't think they'd work in isolation. Clearly, some loan modifications (ok tons of loan modifications) are a good thing. But, they're not the end-all-be-all solution either. Nor is the ever growing corporate bail-out sinkhole we're throwing our money into. Like solving any problem, we need a multi-pronged approach. Fed Chairman Bernanke has certainly pulled out all the stops he can, but...his powers and influence only go so far.

Capitalism, for better or for worse, breeds winners and losers. The strong will survive.

I know a woman, a good friend of mine's Mom, who made her fortune buying real estate in California (Santa Cruz, mostly) buying all the properties she could in the late 70's and early 80's when property values were dropping and interest rates were in the double digits. Everyone thought she was crazy. She retired twice by the time she was 45, when I moved to California in 1994. She bought on cash flow. As long as the properties covered their own expenses, she bought. Then, as rates dropped, and values rose, she was laughing. She's now a masters skiing champion and living the good life in the mountains of Utah, where...yep, real estate is relatively cheap.

My grandfather did well, too. Real estate was a big part of his success. He always used to say "I couldn't do what I did today." That's one of the few things I disagreed with him about.

Opportunities exist today, and they always will, even in the worst of times. Some say, especially in the worst of times. The shapes, sizes and colors may have changed a bit, but they're out there for those who are ready and looking for them. We're in an unprecedented time right now.

Just like every other up and down, boom and bust cycle, we will get through it. We're already reading stories about the amazing resiliency of the American economy - at least in foreign press who are now realizing the extent of their problems (see google Iceland economy if you're curious). It truly is remarkable. We'll emerge from this stronger, smarter, and for some, much wealthier. I hope you're able to capitalize, while keeping your moral compass aligned.

As always, call or email if you or anyone you know has questions about financing residential or commercial real estate. Here are your rates for the week. Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
40 yr fixed mortgage	n/a	1	#VALUE!	$300,000.00	#VALUE!
30 yr fixed mortgage	6.000%	1	6.240%	$300,000.00	$ 1,799
15 yr fixed mortgage	5.625%	1	5.825%	$300,000.00	$ 2,471
3/1 ARM	5.625%	1	5.815%	$300,000.00	$ 1,727
5/1 ARM	5.750%	1	5.960%	$300,000.00	$ 1,751
5/1 ARM Int Only	5.875%	1	6.135%	$300,000.00	$ 1,469
Jumbo (ask me about the new limit, per your zip code)
40yr fixed mortgage	n/a	1	#VALUE!	$550,000.00	#VALUE!
30 yr fixed mortgage	8.750%	1	9.010%	$550,000.00	$ 4,327
15 yr fixed mortgage	8.500%	1	8.755%	$550,000.00	$ 5,416
3/1 ARM	6.375%	1	6.555%	$550,000.00	$ 3,431
5/1 ARM	7.000%	1	7.220%	$550,000.00	$ 3,659
5/1 ARM Int Only	7.250%	1	7.500%	$550,000.00	$ 3,323
Rates subject to change without notice.
These rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.