FHA Cash Out Refinance LTV Limits Will Be Reduced

Waterstone Mortgage has recently learned that HUD will be reducing the loan to value limits on an FHA Cash Out Refinance from 95% to 85%. The decision has not been finalized, but due to their recent pattern of decision making I am confident this guideline will be enforced by the end of the first quarter of 2009 if not by the end of this year! Why is this important? Most people looking to refinance their homes are just looking to get a better interest rate or extend and renew the terms of the loan. However, with an FHA refinance a “cash out” refinance is treated a little differently. If you have multiple mortgages on your home, meaning you have a 1st mortgage and a 2nd mortgage or home equity loan/line of credit, and you want to consolidate them into one mortgage this must be treated as a “cash out” refinance through FHA guidelines.

HUD claims with the current state of the housing market the 95% cash out threshold is not sustainable. Typically when HUD makes a new rule it is enforced immediately without much notice in advance. Please consider this your notice and a call to attention for any people you know who need to refinance their homes. If you know of someone with an adjustable rate mortgage or a high interest rate on their mortgage, please have them give me a call so we can discuss their refinance options. Especially if you know of anyone with multiple mortgages on their property where one mortgage might have a high interest rate or is set to adjust in the near future. There is still time to act and complete a refinance in order to help everyone stay in their homes with a comfortable monthly payment.

If you have any questions or would like to discuss available loan programs please do not hesitate to give me a call. Realtors, if you have any clients or listings who find themselves in this position where consolidating multiple mortgages is in their best interest please give them my name and contact information. As always, I guarantee to provide excellent service as well as detailed and accurate information. There is still time to take advantage of great interest rates and loan programs through an FHA refinance, but you must act quickly!

So... What Happens Next?

As we have seen over the past few weeks it is getting harder every day to forecast what will happen next in today’s economy. The government continues to put together and implement different ideas and plans in order to shore up confidence in Wall Street; however we haven’t seen many positive effects from these efforts yet. The DOW feels more and more like a bad roller coaster ride and the bond market has been reacting in ways not typical of a traditional market.

I wish I had a crystal ball and the ability to forecast exactly what will happen next. Since I do not have a crystal ball I will try my best to share with you my own opinion of what we are seeing and how this will all play out…

We all need to be patient! This is the greatest financial crisis we have dealt with since the Great Depression and it is not going to be fixed overnight. If the government pumps money into the banks on Tuesday, we cannot expect to see the credit markets open up and return to normalcy on Wednesday! Additionally I’m getting a little tired of the stock market reacting unexplainably to different earnings projections, projected index’s and statistics, and other weekly reports the stockbrokers salivate over. If the analysts making these projections are supposed to be experts in their individual fields, why are they always wrong? Just one time I would like to see a report saying; “the consumer pricing index numbers were issued earlier today, and the analysts were 100% correct with their forecast and the market reacted according to these expectations”. Too much of the trading in the market
today is being based off of emotion; we need to get back to the fundamentals.

Another reason the market is constantly dipping is due to the fact we are in the middle of a deflationary period. Yes, there are liquidity problems for short term credit and inflation is absolutely a risk with all the money the Federal Reserve continues to print. However, we cannot expect the cash injections of the government or private investing to really make a difference until we begin to feel confident in the values of our assets. Housing values are obviously dropping, but over the past few weeks we have seen many different commodities (oil, copper, wheat, corn) fall in value as well. Many investors are waiting for the marker to hit absolute bottom before they jump back in and inject their own contribution. Keep in mind we will not have a real good idea of asset values until we elect a new President. Whether it is McCain or Obama, both of them have very different ideas on ways to shore up asset values. Until we have a better understanding of who will be in office and which direction they wish to proceed there will be uncertainty and instability in
the markets and on Wall Street.

It is also important to remember the United States has created three trillion dollar financial crises over the past three decades. We had the Savings & Loan crisis in the late 80’s, the Tech Boom and Bust in the late 90’s, and now the Housing Crisis in 2008. Each time we were warned this one is a little different and gloom and doom trickled down throughout the nation. The financial market is cyclical and it will figure itself out, this one just might take a little more time due to the addition of complexity throughout the global marketplace. Again, be patient!

I understand being patient might not be an option for some people. Maybe you are already retired or closing in on retirement and are gravely concerned about your life savings. Instead of being patient, my advice is to be educated! That doesn’t mean stay glued to the financial news on the television, this might be the worst place to stay in touch with what is happening. Instead, who do you trust who can answer questions regarding your specific situation to your satisfaction? Is it your financial advisor, banker, mortgage banker, accountant, or a friend or family member? Speak with someone you trust who can help you by understanding what you are going through specifically, not an analyst on television firing off vague answers that will encompass a number of different scenarios. Knowledge is power and in today’s Information era we all need to take accountability for the information we use to help us with difficult decisions.

Real estate agents, we need to calm our clients down and help them understand there are loan programs out there to help them purchase a home or refinance their current mortgage. Right now long term credit is easily accessible in the market and acquiring a 30 year fixed rate loan is absolutely possible! What is the best way to keep our clients calm and help them make wise decisions? Stay educated! Take advantage of all the tools available to you in order to effectively communicate with your clients what is taking place in the market and how it affects them individually.

For me at Waterstone Mortgage, it is business as usual. Yeah, interest rates are a bit volatile and they have increased in the last week. Don’t worry; they will come back down in a bit. Once a little more certainty is back in the economy more investors will pull their money out of cash and put it back into stocks and bonds. Waterstone did not participate in the subprime market, due to this we are very attractive to our correspondent lending partners and we are not having any problems closing and funding loans for qualified borrowers. I have heard some absolute horror stories from real estate agents over the last couple of weeks regarding their client’s deals falling apart at the last minute. Always know you are welcome to call me if you have questions about loans you have in progress, or clients who need help obtaining financing. After all, taking care of our clients is the number one priority for all of us. The best way to succeed in today’s market is to stay educated and surround yourself with professionals who are capable of helping your clients in an erratic market.

Image courtesy of Getty Images

Another Day in the Market

Sometimes you have to wonder who is pressing the buttons behind the curtain...

From The Economist, 1987

SLOW DOWN!!!

Why is everyone in such a hurry all the time? Is it there is too much to get done and the day is not long enough? Or is it more a reflection of how we prioritize our daily activities with poor organization? Or possibly, we are unrealistic when evaluating our individual limits and how far we can push ourselves? I have a suggestion; SLOW DOWN!!!

I remember a piece of advice my college baseball coach would consistently repeat on a daily basis, “slow down”. You see, by slowing down you are actually making yourself increasingly quicker and more efficient. Instead of trying to complete a set of actions as quickly as possible and rushing through them, his advice was to simply control the process by slowing the action down and focusing on each part until its completion. Think about that… by breaking down the action you can focus on each individual part instead of trying to complete the entire process all at once. By slowing down the action you are actually focusing on each part in order to complete the routine as efficiently as possible.

Take this simple advice and transfer it to our own individual daily activities. If we can slow down and place a great deal of focus and intensity to each aspect of our lives while we are completing them, how much more efficient will you be? If you are reading and responding to E-mails, only read and respond to E-mails and only do it one at a time! Don’t get distracted by different links embedded in an E-mail and end up surfing the web for the next twenty minutes. You can’t get those twenty minutes of lost productivity back! If you are giving a presentation or attending a meeting, only focus on the task at hand and what contributions you can give in order to make the meeting/presentation as effective as possible. There is a reason you are in the meeting or giving the presentation so make this time work for you. Don’t use this time to concentrate on what is going on the rest of the day or what the evening’s dinner plans will be!

Break down each task you need to complete on a daily basis and figure out how you can complete it more efficiently and with discipline. Try creating an outline of your next day’s responsibilities the night before, by having a plan set in your mind you should wake up with goals and objectives clearly outlined and ready for 100% of your participation. While attacking these responsibilities keep your discipline and do not move on until you have completed the task and are satisfied with the result. When you move on to the next task you will have a clear mind ready to focus on the next challenge.

Of course there will always be days where everything goes haywire and your planned schedule doesn’t mean a whole lot after 9 am. When you feel as though you are juggling your schedule and rushing through your day… slow down! Take a deep breath and analyze what responsibilities have top priority and which ones can be passed off to the following day. Take five minutes to breathe and collect your thoughts. These five minutes could be the most valuable five minutes of your day if they afford you time to get back on track with a clear mindset!

We can only complete one task at a time, however the level of efficiency we have completing each task will allow us to do much more, or much less throughout the day. By slowing down you might actually create more time!

700 Billion Dollar Rescue Plan, Not Bailout

700 billion dollars… yes, 700 billion dollars! Wow, say that out loud and it makes the impact of this number even more difficult to swallow. Tonight Washington is scheduled to vote on a rescue plan for the second time this week. It is widely assumed this vote will be successful and by the beginning of next week we will have a rescue plan passed into law. Why is it so important that government acts so swiftly to remedy this situation? I am going to try and briefly analyze a few of the reasons an everyday person, with not much education about the economy, needs to understand about this government intervention. I could write a book on all the reasons why we find ourselves in this situation, but that is not the goal of this posting. If anyone has specific questions or would like to discuss what happened to put us in this position feel free to call me and I would be happy to discuss!

The main reason why the bill failed to pass the first time it was introduced is purely because of politics. Most House Republicans are from the old school of Chicago Economics where the belief is a free market with little to no government intervention will always correct itself. These representatives wanted to make a point with their vote. By showing their constituents they will not vote for a bill basically introducing socialism into our economy, this will allow them to run numerous advertisements for their campaign next time they are up for election showing how they stayed true to their free market American principles. It makes me sick that these politicians put politics before the best interest of their country. Nobody is excited about this bill, nobody wants to saddle taxpayers with a possible 700 billion dollar debt, nobody wants to inject socialist principles into the economy, but if we don’t do something the consequences could be catastrophic. What is the price we would pay by allowing the economy to correct itself on its own? Bank after bank would fail, credit limits would be slashed and taken away, the value of the dollar would plummet at racing speeds, and the costs of everyday living would increase significantly. Let’s explore what is currently happening in the market right now.

• Credit Markets are Frozen – The cost for a bank to borrow money from another bank is the highest it has ever been. Last time I checked it would cost a bank just below 7% to borrow money at an overnight rate. Banks need to be able to borrow money from one another in order to inject credit (loans) into the market place. We have created a society dependent on credit because individuals, families, and businesses live and operate beyond our means. If a business cannot use their line(s) of credit to purchase inventory, pay bills, pay their employees, and otherwise operate on a daily basis they will shut down within a couple of months. With credit being unavailable it will also lead to competitive businesses not being able to expand and grow their business, expansion would promote and create new jobs for the growing amount of unemployed Americans. The reason banks cannot borrow money and lend money is because there is currently too much bad debt on their books from all the bad loans they have written over the past 8 to 10 years. The rescue plan is designed to purchase all the bad debt from these banks and free up their balance sheets and allow them to function on a normal basis once again.

• Credit Limits Get Slashed – Credit has been far too accessible in the United States for a long time now. With the accessibility of credit it has led to irresponsibility with credit. Since the credit markets are frozen and short term lending is at a standstill, we can probably expect many consumers lines of credit will be decreased in an attempt to try and control the availability of credit in the economy. Think of how this might affect a business or a family juggling their bills from month to month. The rescue plan does not specifically focus on buying bad debt from credit card companies, but hopefully the passing of this bill will help free up credit availability in this sector of the market. However, I can guarantee we will see a dramatic change for the next 10 years regarding the requirements of being approved for a credit card, home equity line of credit, auto loan, college loan, or any other form of short term financing.

• Foreign Confidence in America – America has been the promise land for longer than any of us have been here, right now foreign investors are seriously doubting the strength of our economy. Like it or not, we live in a global economy and the strength of our economic system and currency is directly responsible for the amount of capital other countries are willing to invest in our system. Due to all the irresponsible loans we sold foreign investors we are in a position where America is perceived as we have lied to them. We lied about the value of properties, we lied about standards used to approve a borrower, we lied about the integrity of the insurance agencies grading the lenders approving the loans, and in turn these foreign (and national) investors lost a lot of money. Economists know that if the banking system fails their investment strategy in our country will shift dramatically. For the past countless years’ foreign investors have been investing money in our country to help our economy grow and expand. If a rescue bill does not go through their investment strategy changes to one of a fire sale. Either they will unload as much debt as they can, or they will come in and buy as much as they can at ridiculously low prices. The only “company” that has the time and patience to hold these bad assets is the American government. The government, through taxpayer dollars, will be able to hold bad debt, help homeowners stay in their homes, and most importantly restore confidence into the economy. Let’s look at how the rescue plan will work as it is currently drawn.

Of the 700 billion dollars only 250 billion will be used immediately to purchase bad debt from banks. This bad debt is placed in a fund they are calling a TARP (Troubled Asset Relief Program). This is basically a big fund where different assets within the TARP can be traded in the market. From what I have heard over the past few weeks, analysts are estimating only 100 to 200 billion dollars of these assets are currently at risk of defaulting or have already defaulted. The most important part of this bill is the fact there will be tremendous oversight of the people instituting these policies, and there will be accountability for anyone who is found not acting in the best interest of taxpayers. Executives of companies who have bad debt purchased by the government will be capped on the amount of compensation limits received if and when their institution fails. Finally, if any portion of the TARP is profitable and sold within the market, taxpayers will receive a portion of the profits through warrants. Warrants are like stock options without having any voting authority.

Getting the bad debt off the bank’s balance sheets is crucial for the economy to be able to breathe. Right now the economy is being squeezed from every side imaginable and times are a bit scary. Once this bill passes it will allow us to collectively take a deep breath, but don’t get too excited because there is still much work ahead of us. We need to change the way we think about money, the last 8 to 16 years have been sponsored by unregulated economic policies and the party is over! In the end we all need to learn from this crisis, coming this close to utter disaster will hopefully allow us time to correct our mistakes and move forward with proper economic fundamentals and responsibility.

Why FHA and Why Now!!!

As conventional loans are getting tougher to approve with less credit available in the market and stricter lending guidelines it is important you are aware of FHA lending and its capabilities. In order to get the best interest rate available for a conventional loan a borrower will need to put down 20%. With a 20% down payment any borrower will be avoiding adding an additional second mortgage at a higher interest rate as well as increasing the interest rate on their first mortgage by increasing their loan to value (purchase price). On the other hand, FHA financing requires only a 3% down payment and currently government loans are offering better interest rates than a conventional loan with a 20% down payment! This does not mean an FHA borrower is limited to a 3% down payment; they can put down a greater amount as long as they do not exceed 20% of the purchase price.

There are additional conventional loan programs which will allow one loan up to 95% of the purchase price. These loan programs are also inferior to FHA lending due to the greater cost of mortgage insurance, sometimes 2/3 greater, or if mortgage insurance is not included in the loan you can guarantee a greater interest rate will make up for the lack of mortgage insurance.

If you are not currently marketing to or working with FHA buyers you need to be aware of the following statistics:

• Mortgage Bankers Association says applications for government-insured loans were up 133.9 percent in July from a year ago.

• Applications for conventional loans like those purchased and guaranteed by Fannie Mae and Freddie Mac fell 50.2 percent in July from one year ago.

This means you could be possibly be missing out on a great amount of buyers currently seeking to purchase a home. So, what are some good ideas on ways to market to FHA buyers?

Marketing Ideas

• Bankruptcy & Foreclosures: FHA will approve a purchase of a home for any buyer with a bankruptcy discharged more than 2 years old. If a buyer went through a foreclosure they will need to be 3 years removed from the foreclosure in order to be approved through FHA. Conventional lending will require both bankruptcy and foreclosure clients to wait 5 years to purchase a home. Market to these clients by informing them of the availability of FHA and share with them these useful underwriting guidelines. Call your local Title Company Rep and ask them to send you a list of clients with a bankruptcy older than 2 years and a foreclosure older than 3 years. By sharing the option of purchasing a home with only a 3% down payment being less than 5 years removed from this event should give you a heads up on your competition.

• Bank Owned Properties that Need Repair: Here is a chance for you to show your buyer’s what lending options are available to them through an FHA 203k loan. The 203k loan will allow for repair costs to be built into the purchase of the home in order for your clients to make significant improvements to the property. This is also a great marketing piece if you are listing distressed properties that need repairs in order to bring them up to living standards. If you would like more information about the 203k loan program please give me a call and I would be happy to explain them in greater detail. Waterstone Mortgage is one of only a few lenders in the state of Colorado who is approved and has the experience to provide this loan program.

• First-Time Home Buyers: Right now is a great time for first-time homebuyers to enter the market. Property values have decreased which increases the probability they can find a great home well within their price range. With FHA only requiring a 3% down payment this affords them a great opportunity to be approved for a loan with a minimal down payment while the rest of the lending market requires a greater down payment and tougher lending guidelines. Apartments are a great idea for marketing material. Most apartment complexes already require a credit approval as well as an income (debt to income ratio) approval.

If you would like to discuss these ideas and try to come up with some other ideas please give me a call!

Why are Major Investment Banks Defaulting and How Does it Affect You?

This past couple weeks in the market have been highly volatile and have placed our economy in a very unstable condition. Fannie Mae and Freddie Mac have been bailed out by the government, Lehman Brothers was forced to declare bankruptcy, Merrill Lynch was acquired by Bank of America at a fire sale rate, AIG was bailed out by the government at a tune of 85 billion, and previously the government backed the acquisition of Bear Stearns by JP Morgan. Why is this happening? We all are aware the current state of the housing market is a direct reflection of the relaxed lending guidelines over the previous eight years in the subprime market. In order to fully understand how we reached this point it is important to understand the decisions made which placed us in this current state of affairs.

Back in 2000 Texas Senator Phil Gramm introduced the Commodity Futures Modernization Act into the budget bill. Originally, commodities were typically agricultural products and raw materials. Things like pork bellies, corn, wheat, and oil are common commodities. Once the Commodity Futures Modernization Act was passed into law, the shape and feel of ordinary commodities was able to become very different. Before this piece of legislation, a commodity was a tangible good which could be produced and traded in the market place. This bill allowed stocks and other securities traded on Wall Street to be treated as commodities. This greatly affected the real estate industry by allowing bundled up subprime mortgages to be sold as securities which were then treated as a commodity. The hidden truth behind this legislation is the fact neither the SEC nor the Commodities Futures Trading Commission (CFTC) were allowed to examine financial institutions to guarantee they had the assets necessary to cover the losses they were guaranteeing. By not allowing financial institutions like hedge funds and investment banks to be thoroughly examined in an effort to ensure they had reserves needed to support all the subprime mortgages they were guaranteeing, basically allowed major financial institutions to gamble the idea these mortgages would not default and homeowners would be able to continually make their monthly payment. As we have seen over the last handful of years, a great amount of subprime mortgages have defaulted causing the foreclosure crisis in America which led to plummeting values of homes throughout the country. Since the investment banks guaranteeing these mortgages did not originally have the assets required to cover these losses, we now have our current liquidity crisis where it is more difficult to insure and guarantee loans for qualified homebuyers.

The current events taking place in the market have led investors to look for safer and more secure investments, which are typically found in the bond market. The greater amount of investment in the bond market generally leads to better interest rates for mortgage backed securities. This means, qualified homebuyers will currently be able to purchase homes at lower interest rates. We are in no way shape or form out of the woods yet. As the next months unfold it will be important to see what other financial institutions are close to becoming insolvent. Follow the Implode-O-Meter website to see how many lending institutions have been forced to close their doors since 2006, and which lenders are on the watch list of possibly closing their doors as well.

As I write this on Friday morning, Treasury Secretary Henry Paulson just announced he will be working with Congress over the weekend to create a program that will cost “hundreds of billions” of dollars in an effort to shore up the housing market and stabilize the economy. Unfortunately the biggest loser in this debacle will be the taxpayers. All relief granted by the government will be paid for by taxpayers over the following countless years. Immediate action is needed and it appears the government is attempting to take all necessary steps to fix the problems created by relaxed lending guidelines for the past eight years. It is hard to forecast what will happen in the coming months as America takes action to repair the damaged economy. Stay tuned as further information presents itself…

$7,500 First-Time Homebuyer Income Tax Credit

Due to the recently enacted legislation, H.R. 3221, I am sure we have all been fielding questions on what this means and how it will affect our clients. I wanted to use this post as an opportunity to review some of the highlights and ramifications of the $7,500 first-time home buyer tax credit. What does it mean to recent and future homebuyers? How can any real estate agent use this information to increase their business? By knowing the facts about this piece of legislation recent homebuyers will know what to expect on their 2009 taxes and Realtors will be able to steer their past and future clients in the right direction.

Highlights

• Any first-time homebuyers who purchase(d) a home, as their primary residence, between 4/9/2008 and 7/1/2009 will qualify for this tax credit.
• The maximum credit is $7,500 or 10% of the purchase price if lower than a $75,000 sales price.
• If you purchase a home in 2009, you can amend your 2008 tax returns and claim a tax credit.
• This tax credit is really an interest free loan from the government and will be paid back over a 15 year period. The $7,500 tax credit will be repaid at $500 per year; however the homebuyer will skip the first years payment (more on this in a bit).
• A first-time homebuyer is considered as a person not having an ownership interest in a property in the past three years. This time period starts from the settlement date of the previous property to the settlement date of the new property; the date of the sales contract is irrelevant.

There seems to be quite a bit of confusion regarding how the tax credit will be paid back. Simply put, the homebuyer will need to pay back the $7,500 with a $500 annual payment over 15 years. If you sell your home before the tax credit is repaid, any profits will first go to paying off the remaining balance of the credit. If you sell the home at a loss, any unpaid amount of the tax credit will be forgiven. However, any loan forgiven agreement will require you to record the loss as income on your taxes. If the homebuyer decides to move out of the home and keep it for a rental, the tax credit is required to be paid back at the time the house is no longer occupied as a primary residence.

Realtors, use this as an opportunity to follow up with any past clients who purchased after April 9th this year. Make sure they understand how this legislation affects them and what they can expect for their upcoming taxes. Also, with down payment assistance going away in the near future this could be an opportunity to present this tax credit as a way to secure a temporary loan from their immediate family for down payment purposes! By receiving a tax credit from the government the homebuyer can use up to $7,500 to pay back their immediate family the following year.

For further information regarding this tax credit please visit the following link; Government Affairs Update. Make sure you consult a tax advisor to ensure this tax incentive works in your favor!

Eat That Frog!

Mark Twain once said that if the first thing you do each morning is to eat a live frog, you can go through the day with the satisfaction that that is probably the worst thing that is going to happen to you all day long.

This is a terrific metaphor for business professionals to get out of their own way and stop procrastinating. Your “frog” is often the biggest or most important task that you are most likely to procrastinate on throughout the day. Most often this task can have the greatest positive impact on your success or obtaining the current results/information you desire. By “eating your frog” you will complete your most important daily action first thing in the morning and have a clear mind with a fresh perspective throughout the rest of your day.

This habit requires the discipline necessary to be successful in today’s competitive market. I challenge you to begin making a list of the most important tasks you need to complete on a daily basis and force yourself to finish them before you move on to secondary tasks or projects. Just like any other habit, this will be challenging at first, but as this becomes part of a daily routine you will become a much more efficient professional.

So… make that list and “eat that frog”! Try this for one month and discover for yourself how much your productivity increases. If you would like further tips regarding implementing this habit, please review the free online book written by Brian Tracy; Eat That Frog!

How Much Time is Left for DPA?

Do you still have any current buyer’s in need of FHA seller credited down payment assistance? There has been much confusion lately regarding the timeline of when these future homeowners need to have their down payment assistance in place and registered. Here is the current timeline I am using for all seller credited down payment assistance.

Items Needed by September 30, 2008

• Executed Purchase Contract
• Executed Nehemiah Participating Home Agreement
• Completed Loan Application and Pre-Approval
• Loan Registered with the Investor/Underwriter
• Final Loan Approval Received from Underwriter

In order for any seller credited down payment assistance loans to fund they need to close on or before October 20, 2008.