Home Loan Focus

Archive for the ‘mortgage system pitfalls’ Category

For many people their home is their largest investment.  Second to that investment many people often times have life insurance.  These days most people that have life insurance have it in the form of Term insurance.  This means they pay a monthly, quarterly or yearly rate for life insurance.  If they pass away, a sum will be paid to their heirs.  However, there is no cash value to this policy.  If they stop paying the coverage stops and they are out all the money they paid in over the years.

There are several other forms of life insurance such as whole life insurance that essentially builds up a cash value to the policy.  These policies can be borrowed against.  As many Americans are facing foreclosure, some people are turning to life insurance like IRAs and 401ks as a source of money to pay their mortgage.  This can serve to protect their largest investment (their home) in the short run, but if there is no end in sight then it could be a bad move.  Depending on your state, your life insurance, even your retirement could be protected under bankruptcy laws (consider OJ protected his retirement from his former in-laws through Florida’s protective bankruptcy legislation).  However, if you borrow on your life insurance to pay your mortgage payments and still go bankrupt then you could end up with out a house and without life insurance too!

The same thing goes for IRA’s or 401ks.  It can also apply to people considering the possibility of tapping their savings or life insurance to come up with a down payment.  This is just as risky, but these people are presumably not so close to bankruptcy and buying into a market at current levels could make a good return on their money . . . IF the market has bottomed out!

This week we can expect yet another ‘Super Tuesday’.  The only people these Super Tuesdays are helping is the 24 hour news channels.  For Americans and the economy however, they are stretching out the political cycle and increasing the amount of angst and risk for investors.  That is not all of the problem, but definitely a component in keeping prices at the pump high and keeping investors on their toes as they try and determine whether or not Barack Obama would really bomb Pakistan or whether or not both Obama and Clinton were paying lip service to the notion of canning NAFTA with Canada, our closest supplier of oil, or Mexico, our cheapest supplier of labor.

I would not suggest that there is a lot of room for improvement in politics today, but purely looking at this from the investors perspective, a long drawn out political battle with risk is a bad thing for them and they pass that down hill to borrowers in the form of higher interest rates, tighter credit, lower savings rates and more.  The economy has a long way to go to heal itself, but if the parties do not get a move on in selecting their candidates we are all going to be looking at a factory job packaging dog supplies for minimum wage with a worthless dollar as a step in the right direction.

The Federal Reserve has moved interest rates down 1.25 percent or 125 basis points within 2 moves of .75 and .50.  Many people now feel that the Federal Reserve is likely to move yet another .50 percent the next time they convene maybe even sooner if some bad news comes our way first.

Planning to Refinance – Target July

Now for rate cuts to work their way through the banking and mortgage system, it usually takes about 6 months.  The banks have the technology to make decisions and actions faster.  They often times choose not to do so and only move under competitive pressure from their rivals.  In the mean time they will benefit themselves from arbitrage (getting their own better interest rate deal via the Fed and NOT passing that on to consumers).  Essentially for a few months, as long as they can hold out, they will pocket all the profits from the rate cut. 

Banks will not move their own interest rates down until their greedier volume hunting rivals start trying to take some of their business away with lower rates and offerings.  So the race to the bottom probably won’t kick off for another month or two and then it historically takes about 6 months to work its way through the system.  So if you are in a hurry to refinance, but you can hold out safely until summer, you could end up getting a better rate.

You will need to compare the potential savings then versus the savings that you forego in refinancing now. If you are financially strapped you should also consider whether or not you can keep paying your bills as is.  If waiting 5 months might put you in the danger zone, then consider refinancing now and maybe again in a year.  This might enable you to stair step your way down to the lowest rate possible.

In a future article we are going to talk about the importance of performing a Phase I Environmental assessment on certain types of properties before you buy.

Well, this was a pretty dramatic week for the mortgage market. There are banks taking more multi-billion dollar losses and the federal government preparing to increase loan limits for FHA loans and other loans that can be secured by Freddie Mac and Fannie Mae.  Oh and then there was the interest rate reduction by the Federal Reserve.

All of this is opening up things for the banks to reach out to people and refinance them secured with government money.  The banks have lost a huge amount of money and getting you to refinance could just be the thing they need to make some money and get closer to profitability.

Now before you go and get all patriotic sacrificing your hard earned wages and savings to refinance your house and bail out the banking industry, please, please take your time and review the deal very very closely.  Read every document, shop every offer and rate around.  If the deal goes south and they attempt to flip you into something that is less than desirable bail out.

DO NOT GO THE PAPERLESS ROUTE!

That is probably the most important lesson that mortgage borrowers have learned.  Demand to have your income verified.  Make sure they go over your tax paperwork even.  Do not let them push you into a more expensive loan that gives you a higher interest rate just so that you do not have to do as much paperwork.  This is one of the things that tricked many a borrower, yours truly included, over the last few years.  I was fooled once, but many people were fooled several times.  That promise of less work and an ‘easy refinance’ comes with a real financial cost.

We have all learned to ignore the freebies, the toasters, the camping gear, the karaoke machines and coffee grinders.  Now we have to learn to ignore the easy refinance and choose the road that is more difficult.

Oh and one other tip, don’t refinance before the end of the month.  Many people expect the fed to drop rates one more time!

As a financial writer, I know that there are times when it makes sense to consider a reverse mortgage as an option to help solve an issue or a problem in your finances.  If you are cash poor and house rich, meaning you have very little money in the bank or available, yet you have a great deal of equity in your house, a reverse mortgage may be something that you might want to consider.

A reverse mortgage is a tool, and as a tool it can be used to good or to bad purposes.  There are a few mortgage providers out there that probably provides safe reverse mortgage offerings.  I do not know who they are, but I’m sure there’s an honest one out there somewhere.

Do not necessarily blindly trust the latest commercial you see on TV. Anyone can put a commercial on TV, and hire a semi-retired actor, Like Robert Wagner or James Garner(one of my favorite actors) that do not want to take out a reverse mortgage themselves to cover their snappy retirement expenses. Not all actors (that you might like) take work for ‘good’ or ‘nice’ companies. Plus, some companies that are possibly ‘good’ or ‘nice’ may have a few bad apples working for them that are working very hard in a particular month to make more in commissions and they may cut a corner right through your house on the way to their new swimming pool.

There are many more companies out there offering reverse mortgages that are dangerous and could hurt your finances significantly.

About seven years ago there was a fad and car sales, all of the major car companies started offering up their own financing to people that would buy cars.  The financing that very creative and eventually people were buying cars with major balloon payments at the end of the car, they were not buying cars when they thought they were buying cars as the financing was structured as a lease and not a loan which enabled them to get the payment they wanted, but at the end of the lease term they didn’t have the car that they wanted and the car wasn’t worth half as much as they owed!

The car cubbies were providing a service that the customers seem to want, but the financing that so creative and so complex that ultimately consumers got ripped off.  The car companies made at great deal of profits off of this, but ultimately it was like a paramedic scheme and most of the car companies suffered losses at the end of the program.  They had to shut the programs down typically taking that loss in a particular quarter.  For example they might take a loss for a half billion dollars, Mitsubishi, when they had received a great deal more profits in the years before they took that loss.  Don’t feel too sorry for the car companies.

Mortgage companies offering reverse mortgages are doing some of the same tricks that the car companies did a few years ago, and they are doing some of the same tricks that they did was sub prime loans over the last few years.  They are working the numbers behind the scenes to make them a great deal of money in fees and commissions and a number of other items that don’t necessarily help the consumer actually taking out the loan.  You mortgage broker is not your Buddy, they’re not that your friend, they’re not your business partner or your financial advisor.  A mortgage broker is a salesperson trying to sell you a house loan, treat them as a salesperson and protect yourself.  You will need to work with them whether it’s on the phone or in person, but that doesn’t mean you shouldn’t check up on their work and make sure all their numbers make sense and that goes double if not triple for reverse mortgages.

With a reverse mortgage if you have $100,000 in equity in your house, you could essentially take out a $100,000 loan on your house.  This is a home equity loan in essence and you have to pay closing costs and a number of other fees for this particular loan.  Those fees could easily and legitimately add up to anywhere from $1000-$10000 depending on who you go with.  If you go with an unscrupulous mortgage advisor, these fees could add up to $50,000 or $80,000 and at the end of the day you’ll end up with $50,000 or $20,000 in cash and the bank will own your house in a few years.

So make sure you shop around for a good deal on a reverse mortgage if this turns out to be its tool that you really need.  If you do not shop around, then you are engaging in a very dangerous behavior that could cost you your home, your finances and maybe your health.  The thing about a reverse mortgage is, it can impact your income.  This can play a role in whether or not you qualify for Medicaid or Medicare if you’re retired.  So don’t just go take out a reverse mortgage to get some cash to make your retirement easier, take a look year or entire financial situation and make sure that you’re not harming something else that could be more important than having an extra bit of cash to take a cruise or buy a car.

If you are looking to buy a house this year, think about buying a house that you can afford.  Here’s a simple will rule to follow when considering just how much you can afford.

Do not go by what the bank tells you that you can afford — the bank makes more money if you buy a bigger house, so you simply can’t trust them.  Be your own advocate.

If the bank tells you that you can buy a $300,000 house, buy a $200,000 house.  As a general rule of thumb, shoot for a value that’s about 65% to 80% of what the bank tells you that you can afford.  Alternatively, if the bank tells you that you can afford a house over $400,000 in value, consider spending less just so that you don’t have to spend money on something you do not really need.  Warren Buffett, one of the richest men in the world, lived in the plain House in the suburbs driving a 20-year-old car for many years without having to go out and purchase a house that he could “afford”.

It is definitely tempting to go out and purchase as big of a house as you can afford, and who wouldn’t want to live in a mansion or at least a Mc-mansion.  But remember, you have to pay the bill, the entire bill and not just a single monthly payment from time to time, so consider what you are really getting into here. 

• Do you really need to spend a half million dollars on a house? 
• Duty to spend $300,000 on a house? 
• Could you be perfectly happy living in a house that cost $200,000, $100,000, or $80,000?
• Would you be happier living in an apartment, not a condominium but an apartment at someone else owns?

The great American dream is to own a home.  The great American dream is not to purchase a home.  Purchasing a home is not owning a home there is a distinct difference.  When you finance a home and purchase it, you do not yet own that home.  Making the purchase of a massive McMansion, is not achieving the American dream, and it might just lead you into the American nightmare of foreclosure.

So be careful with your money and your finances and don’t just go purchase a home because you can, because a bank allows you to make that purchase, like a dealer in Vegas would allow you to place a bet.  Because that’s what you’re doing when you purchase a house, you were betting on the value of that house and you are betting on the ability of your self and your wife to pay for that house every month until you finally do Own that house.

Car donations

as a side note I like to mention a charitable organization that accepts a car donation, so that they can use the money and the proceeds from selling those cars to make videos for kids.  The organization has some admirable goals, and for some people it’s just too difficult to get rid of that old clunker in the front yard.  This could be one way that you could do it and you could be helping some other kids when you get that eyesore out of your front yard and make your home a little more appealing for sale.  If you have the time, I recommend that you sell the car yourself and just donate cash if you feel like donating the cash.  However, the donation of a car could save you some time and effort and might be a little less hassle when you have other things to take care of. 

There is some irony in a recent editorial by the Chicago Tribune.  The article talks about how Democrats are looking to fleece borrowers as a solution to the melt down in the mortgage industry, partially fueled by sub prime loan foreclosures, even though the editorial notes that sub prime is only a small part of the problem.

From listening to the critics, you’d never guess that. Sen. Barack Obama (D-Ill.) denounces “predatory lenders” for “driving low-income families into financial ruin.” Barney Frank (D-Mass.), who chairs the House Financial Services Committee, blames everything on an epidemic of “abusive lending.”
But lenders who made bad decisions are already paying the price. Many mortgage firms have gone bankrupt. And if these loans are so unconscionable, the question is not why the foreclosure rate is so high but why it’s so low.  Democrats may commit the real mortgage fraud — chicagotribune.com

While the State of Illinois begins to investigate the largest mortgage lender in the country, ironically named Countrywide, the Chicago Tribune would pretend that lenders are not guilty of the melt down in the markets.

Maybe the Tribune did not pay attention when banks stood up in 2005 to lobby Congress for bankruptcy laws that would elevate credit card debt over mortgage debt, forcing borrowers into foreclosure 2 years later, while they continue to pay 28% interest on the credit cards.

Maybe the Tribune did not notice the predatory lending practices that the mortgage industry engaged in as they suddenly flipped a switch and over night stopped engaging in red lining one day, and started offering up billions of dollars in credit to the people they had formerly blacklisted.

Maybe the Chicago Tribune did not notice that when the people that finally received this credit, had to honor their contracts there were thousands of examples where the mortgage brokers lied about the paper work, the loan documents, even the terms of the mortgage itself all so that they could earn a higher commission from people that were lumped into the sub prime bucket.

Maybe the Chicago tribune also did not notice that mortgage lenders were shifting people that had good credit into mortgage agreements that were sub prime days before the home closing, just so that the broker could again receive a higher commission.

So I find it a little shallow that the Chicago Tribune would snipe at Democratic politicians for wanting to do something about all of these predatory lending practices.  Even Republican politicians recognize that there is a problem.  Even if you want to look at this from the perspective of the very wealthy, these mortgage houses at best are guilty of mis-managing the funds of their clients by utilizing unsavory business practices that induced a high level of risk into the US financial system so that the managers could benefit in the short term. 

Maybe the Tribune needs to go back to commenting on local news and selling advertising hand outs for the latest sales on electronics and maternity clothing, they obviously seem to be disconnected from the reality of finance and national politics.

Politicians are hoping to help some of those people that took out loans that they could not afford.  Many people took on mortgages with teaser interest rates.  Essentially the mortgages started with interest only payments, or teaser payment rates with escalating payment levels as the loan advanced.

Many of these same loans were also Adjustable Rate Mortgages (ARMs).  As the loans start to include principle payments later on in the life of the loan, the interest rates sometimes start to increase as well.  This serves to hit homeowners with a much higher payment that too many cant afford.

Lawmakers are considering legislation that would lock these payment amounts at their current level, so that people could stay in their home.

How to lock these rates though is problematic.  If banks do not receive a principle payment, the homeowners will never take control of their home and finances.  Some legislators are considering options that would make renters out of homeowners.  Essentially looking at those interest payments as a rental contract and updating the mortgage to reflect this reality with out pushing a homeowner into bankruptcy, foreclosure and a canvas tent.  Its unfortunate that these same lawmakers could not have protected homeowners and borrowers from the predatory lending practices of recent years and even more tragic that lawmakers could not protect US citizens from their own actions when they instituted tougher bankruptcy laws in 2005 that essentially made credit card debt more important than a mortgage in the eyes of the courts and as an indirect result in the eyes of debt holders.

One of the questions that seems to be coming up over and over again as we advance through the mortgage crisis, is the concept that the industry is leading consumers into and possibly out of the crisis.  Similar arguments were made in regards to the credit card mini crisis a few years ago when bankruptcy legislation was the popular topic on the hill.

Its a question of personal responsibility vs the power of marketing.  Can home owners and buyers stop themselves from paying attention to the marketing campaigns that come out of Madison avenue and other marketing hubs around the world?  Can we say no to the latest 0% interest credit car offer?  Can we say no to an interest only mortgage offer?  Can we say no to the deal that puts us into a McMansion for a monthly price equivalent to the rent that we paid in college on a run down hovel?

I can not answer those questions.  At a personal level there have been times when I personally have been able to say no and there are many times when I was unable to say no and took those deals knowing that they were too good to be true.  As a consumer educated in finance and home buying if I can’t say no then how can someone without the benefits of my education, understanding and experience say no to these fantastic mortgage deals?

One company through better information has some of the means to guide the industry through its current self destructive run.  The company is Red Clay Media.  They provide essentially marketing intelligence driven products from unsexy things like direct marketing mailing lists to products that provide mortgage brokers with mortgage leads.

The Mortgage Marketing Rub

Here’s the issue, their tools are just that tools.  They are a technology that can be used for good or bad, just like any form of intelligence or information.  They are to their credit trying to guide the industry to use their products and services in a way that does not cause the self destruction of their own market base of customers.

That’s the thing, the mortgage industry has the creative power to create financial products that anyone can buy up front but no one can afford on the back end.  Furthermore, the mortgage industry has the marketing connections to also create marketing campaigns that are about as irresistible as crack is to a crack addict.  The issue for the industry is that when they provide these products that harm their own customers, they are essentially wiping out their own future market and possibly harming the economy in which they do business themselves.

The Opportunity

Now, I come from a background that lends me to believe that if given enough knowledge, people will more often than not use that knowledge to do something good rather than bad.  By definition almost, that makes me an idealist and I recognize the pitfall in that perspective, but that is my cross to bear and not yours.

The point is that I believe that the mortgage industry can also utilize these same products and services provided by marketing intelligence companies to help identify customers that are ready, able, willing and capable of using the right mortgage product at the right time.  Mortgage brokers and realtors do not have to hook their customers on a Cadillac at Kia price point.  They need instead to focus on finding the right package all around for their customers.  The house that fits, snugly and the mortgage that fits not only this year but over the next 30 years.  They need to avoid teaser rates that pull people in and sucker them into problematic financial products that they have to flip out of in 2 years time as they progress in a downwards spiral toward financial destruction.

The mortgage industry has the power to avoid running the country into ruin.  I am hopeful that they will act to save their own industry from calamity.  I expect them to act out of their own self interest and desire for success or at a minimum self preservation.  One thing that the mortgage scandal has taught us is that many of the companies that chose to be extra greedy ended up going out of business or getting consumed by larger smarter, and safer rivals.  This industry has to realize that opting for a quarterly profit number as opposed to long term financial viability for themselves and their customers is a zero sum game.

Lower fees, easier process, less credit checks or income verification, all of those things probably mean that you are going to pay a higher interest rate on your mortgage.  Lendors are like the mob in that they always take a sure bet, and their bets can be assured when they charge you enough interest to profit!

This video is a little dated, but the concept can definitely be extrapolated even in today’s mortgage crisis world.  Just because the industry is in ‘crisis’ over sub prime, it doesn’t mean they are not going to have a profitable year.  If Las Vegas could come up with a great idea to run into ‘financial trouble’, I’m sure they would like to go to capital hill for a bail out too!