The current market crunch is largely due to investor confidence. It's not like the investors don't have the money. They do, they're just unwilling to invest in several sectors, these investments are largely in commercial paper and mortgage-backed securities.
As many investors continue look abroad, the eye falls on Brazil and its potential.
Known for its vast resources, Brazil is only starting to get into its stride. Let's take a look at some figures.
The Bovespa index .BVSP has gained 43.5% this year alone. The Brazilian stock market comprises about 70% of the total investing done in all of Latin America. You can read about the Bovespa's history here.
Latin American mutual funds have been top performers, posting gains of 48-52% for the last 5 years, per annum. While the fund BlackRock Latin America I (MALTX) has a year-to-date return of 45.63%, the initial investment required is 2MM. However, for the rest of us,
the BlackRock Latin America A (MDLTX) fund has posted a year-to-date of 45.33%. The great news is that the initial investment is $1,000....this is more to my taste. (You'll notice both these funds have the same fund manager).
Let's take a look at the future resources Brazil has. They are the world's trendsetter for sugar-cane derived ethanol, used for biofuels. Read what one newsgroup says here. And, if that weren't enough, they have discovered what may be one of the worlds largest oil reserves. The Brasilian oil company, Petrobras, has discovered an oil reserve that would rival Venezuela and Saudi Arabia. You can find what the BBC News reports here. Apparently, Brazil isn't a member of OPEC....yet.
Lastly, the currency....is it for real? (this is the extent of my humour) The Brasilian REAL has posted gains of 20.8% year-to-date against the US Dollar. You can expect the demand for this currency to grow as Brazil's natural resource grow as well. People want to be associated with a country that has potential. The Real is here.
So, we have the following.
1. A Roaring Stock Market up 43.5% on the year
2. Latin American Mutual Funds performing 48-52% on average each year for the past 5 years
3. Strong in the Boifuels industry and if that tanks....we've got some serious oil here, folks
4. The currency is being gobbled up, and is up 20.8% year to date
Given these four factors, I'd say it's definitely a good investment strategy. However, someone should study a more developed country that's similar, and see what stage of that country's development Brazil would analogously be in...that might add some wisdom to this article.
I do believe one thing. As the credit market continues to feel the crunch, and as Central Banks across the world seek to add liquidity, we don't see this kind of news coming from Brazil. Sure, they're creating liquidity, but not as much (it would appear) as other central banks. Given this, they're a good investment.
Friday, December 28, 2007
Thursday, December 20, 2007
Amendment to my comment yesterday on: Senate Bill 2452...
I just received word from Alexandra, who works in the Banking division at Senator Dodd's office [D-CT] that, yes, YSP can be collected on "prime or near-prime loans" and that points and fees can be financed into these 'non-high cost mortgages'.
This is good news. Why? This is good news because the S 2452 Bill is basically eradicating subprime mortgages. Honestly, I have no problem with that. My only fear is that this will also eradicate, if passed in its current form, any legitimate Stated Income loans for self-employed borrowers or any Investment loans for investors.
So, ultimately, I must confess that I am not entirely opposed to such a bill. However, I think the market and 'reasonable regulation' should decide. Who knows....maybe this is reasonable regulation?
I would like to state that the mortgage broker will not be eliminated as a result of this bill. Why did I not understand this yesterday? Well, I read the bill in its entirety, and the legaleese got me. However, I did blog a bit prematurely on it.
Thanks for your patience!
This is good news. Why? This is good news because the S 2452 Bill is basically eradicating subprime mortgages. Honestly, I have no problem with that. My only fear is that this will also eradicate, if passed in its current form, any legitimate Stated Income loans for self-employed borrowers or any Investment loans for investors.
So, ultimately, I must confess that I am not entirely opposed to such a bill. However, I think the market and 'reasonable regulation' should decide. Who knows....maybe this is reasonable regulation?
I would like to state that the mortgage broker will not be eliminated as a result of this bill. Why did I not understand this yesterday? Well, I read the bill in its entirety, and the legaleese got me. However, I did blog a bit prematurely on it.
Thanks for your patience!
Wednesday, December 19, 2007
Senate Bill 2452, The Dissolution of Yield Spread Premiums....The Mortgage Broker Extinction?
Just recently, Senator Christopher Dodd [D-CT]sponsored a bill to amend the Truth in Lending Act, "providing protection to consumers". Let's see if it really does just that.
I want to focus on the two main parts of this bill, that I believe (and others) will eliminate the role of the mortgage broker. If this happens, we will revert to a bank-only industry dominated by the big banks (due to the elimination of 205 banks this year here).
Title I, Section 102, subsection (c), part (m) states, "No Yield Spread Premiums" and goes on to labour the fact that no mortgage loan originator can receive any YSP (Yield Spread Premium) from the bank they broker the loan to.
What does this mean? Well, the broker buys the interest rate at a wholesale price (typically 0.5% less than retail banks), and they increase the interest rate to earn a commission from the bank and lower the borrower's closing costs. For example, if I get a 30 year fixed interest rate at 6% and sell it to you, the consumer, at 6.25%, then that typically means I will get 0.75% of the loan amount. If the loan amount is $300,000, that means I will get $2250. This can reduce your closing costs by $2250. *As a sidenote, easy loans with high credit and down payment normally experience of about 0.75% YSP and 0.75% Mortgage Broker Fee with maybe a $300-500 processing fee from the broker as well. More difficult loans get charged anywhere from 2% to 3% total, these would be 100% financing loans or FHA loans with poor-average credit. Don't believe me? Take a look at your former HUD-1 Settlement Statement.
Effectively, then, the elimination of Yield Spread Premium will make the mortgage broker a discounted interest rate provider. While providing interest rates 0.5%+ less than retail banks, they will charge all fees upfront, thus increasing costs to the borrower.
Section 102, subsection (c), part (o) states "Restriction on Financing Points and Fees" and goes on to practically state that the mortgage broker's fee (including processing fee and any other fee) cannot be financed into the loan. This means that the borrower would need to pay for this out of pocket.
So, the mortgage broker cannot be paid YSP by the bank, and the fee cannot be financed into the loan amount. This, I predict, would effectively eliminate the role of the mortgage broker.
Why? Aren't Yield Spread Premiums not beneficial to the consumer?
Let's take a look...
By going to a bank, you'll typically find lower closing costs, but a higher interest rate. By going to a good, honest broker, you'll find lower interest rate with higher closing costs. Which is more important? Well, if my interest rate is 0.25% lower because I'm using a broker, but my fees are $3,000 higher on my $300,000 loan...that means that after 48 months I will start saving $750/year because of my mortgage broker.
But, you say, the average American only keeps their home for 36 months before upgrading or relocating!?!
Ok, I'll take that argument. That argument, right there, proves why mortgage brokers need to be allowed to receive Yield Spread Premium--to keep the borrower's out-of-pocket costs low. (I'm not saying it's wise to move around so often, though!)
If Senate Bill 2452 is enacted under its current form, we will see a recurrence of the big banking industries controlling mortgage lending practice. We will, in short, see a monopolization. It's plain and simple logic to those who understand that 2+2=4, that, the fewer people participating in a business, the less the competition. If you have less competition, you will have higher fees ultimately.
Banks make a Yield Spread Premium, it's just called "Service Release Premium". Think there's really a No Fee Mortgage? See this. Remember, you can't get anything for free. Ultimately, with less competition, the banks will charge more Service Release Premium, which means higher interest rates.
What is the solution?
The solution is less federal government interference, with state goverments regulating both bankers and brokers. Both thriving retail and wholesale lending businesses should be allowed to enjoy free competition with eachother and amongst themselves. It should never be only brokers nor should it be only bankers. Let the consumer educate themselves, shop around, and decide who has the best loan scenario. It should be up to you how to get your own loan.
Vote Ron Paul!
I want to focus on the two main parts of this bill, that I believe (and others) will eliminate the role of the mortgage broker. If this happens, we will revert to a bank-only industry dominated by the big banks (due to the elimination of 205 banks this year here).
Title I, Section 102, subsection (c), part (m) states, "No Yield Spread Premiums" and goes on to labour the fact that no mortgage loan originator can receive any YSP (Yield Spread Premium) from the bank they broker the loan to.
What does this mean? Well, the broker buys the interest rate at a wholesale price (typically 0.5% less than retail banks), and they increase the interest rate to earn a commission from the bank and lower the borrower's closing costs. For example, if I get a 30 year fixed interest rate at 6% and sell it to you, the consumer, at 6.25%, then that typically means I will get 0.75% of the loan amount. If the loan amount is $300,000, that means I will get $2250. This can reduce your closing costs by $2250. *As a sidenote, easy loans with high credit and down payment normally experience of about 0.75% YSP and 0.75% Mortgage Broker Fee with maybe a $300-500 processing fee from the broker as well. More difficult loans get charged anywhere from 2% to 3% total, these would be 100% financing loans or FHA loans with poor-average credit. Don't believe me? Take a look at your former HUD-1 Settlement Statement.
Effectively, then, the elimination of Yield Spread Premium will make the mortgage broker a discounted interest rate provider. While providing interest rates 0.5%+ less than retail banks, they will charge all fees upfront, thus increasing costs to the borrower.
Section 102, subsection (c), part (o) states "Restriction on Financing Points and Fees" and goes on to practically state that the mortgage broker's fee (including processing fee and any other fee) cannot be financed into the loan. This means that the borrower would need to pay for this out of pocket.
So, the mortgage broker cannot be paid YSP by the bank, and the fee cannot be financed into the loan amount. This, I predict, would effectively eliminate the role of the mortgage broker.
Why? Aren't Yield Spread Premiums not beneficial to the consumer?
Let's take a look...
By going to a bank, you'll typically find lower closing costs, but a higher interest rate. By going to a good, honest broker, you'll find lower interest rate with higher closing costs. Which is more important? Well, if my interest rate is 0.25% lower because I'm using a broker, but my fees are $3,000 higher on my $300,000 loan...that means that after 48 months I will start saving $750/year because of my mortgage broker.
But, you say, the average American only keeps their home for 36 months before upgrading or relocating!?!
Ok, I'll take that argument. That argument, right there, proves why mortgage brokers need to be allowed to receive Yield Spread Premium--to keep the borrower's out-of-pocket costs low. (I'm not saying it's wise to move around so often, though!)
If Senate Bill 2452 is enacted under its current form, we will see a recurrence of the big banking industries controlling mortgage lending practice. We will, in short, see a monopolization. It's plain and simple logic to those who understand that 2+2=4, that, the fewer people participating in a business, the less the competition. If you have less competition, you will have higher fees ultimately.
Banks make a Yield Spread Premium, it's just called "Service Release Premium". Think there's really a No Fee Mortgage? See this. Remember, you can't get anything for free. Ultimately, with less competition, the banks will charge more Service Release Premium, which means higher interest rates.
What is the solution?
The solution is less federal government interference, with state goverments regulating both bankers and brokers. Both thriving retail and wholesale lending businesses should be allowed to enjoy free competition with eachother and amongst themselves. It should never be only brokers nor should it be only bankers. Let the consumer educate themselves, shop around, and decide who has the best loan scenario. It should be up to you how to get your own loan.
Vote Ron Paul!
Monday, December 17, 2007
Should I borrow equity from my house and invest it?
In this post, I will cover a widely debated topic: Should a homeowner take equity out of their house to invest? I will cover three aspects. The investment here are mutual funds with a 20 year history of 13-16%...
and can be found: http://www.thestreet.com/funds/mutualfundinvesting/10385337.html)
We will assume our homeowner has a $300,000 mortgage at 7% on a 40 year fixed. I'm using 7% because it is a little high right now, and the mortgage amount is right for the Pacific Northwest market. The 40 year fixed is becoming the norm.
The first aspect will be the homeowner who takes out a 40 year mortgage and doesn't invest. He just makes his payments and gets the appreciation out of the house and the tax benefits from the interest deduction.
The second aspect will be the homeowner who pays off his $300,000 mortgage early and invests the mortgage payment into mutual funds. Once his mortgage is paid off, let's assume for sake of conversation that he continues to make his payment, but into a mutual fund.
The third aspect will be the homeowners who takes $150,000 cash out from the equity he has built up in his house and dumps it down into a mutual fund, then proceeds to make his monthly payments for 40 years to pay off the mortgage. He does not invest further into the mutual fund. (I am using a 150K mortgage instead of a 300K mortgage because many folks in the Pacific Northwest, who've owned a home for the past 3 years, have realised 150K in equity. Using a 300K perspective would be too favorable and unrealistic)
Our guy in the first perspective will realise this. He has a 300K mortgage at 7% interest for 40 years. His monthly payment is $1864.29. At the end of 40 years, he will have paid $894,861.04 in total payments. His total tax deduction is $594,861.04. If he's in the 25% tax bracket, that means that he will get $148,715.25 back. That means, ultimately, he will have paid $746,145.79 in total payments. At the end of 40 years, it's safe to say the home will be worth $968,611 (assuming a 3% annual appreciation rate).
So, our 1st guy has paid $746,145.79 in total payments to get a home worth 1.5MM tops. Think you can retire on that?
Let's continue...
Our second gal pays off her 300K mortgage early, and starts to invest. Let's say it takes her 10 years to pay off the mortgage, which isn't unrealistic (the median income in Seattle, WA is 70K per year). She then invests for 30 years, which would equal the 40 years of our guy in scenario #1. She invests at an annual rate of return of 15%. You can click on the above link to find the Best Performing Funds over a 20 year Period. Yes, these 20 funds have performed anywhere between 13% and 16% for each of the past 20 years! She invests the monthly payment of our guy in scenario #1 into a mutual fund through her 401K/IRA/SEP/Deffered Tax Retirement Fund. That is $1865 each month into a fund. At 15% annual rate of return, she will have made: $11,189,036. When she taps the retirement account, she'll get taxed at roughly 30%. That means she only brings home 7.8MM dollars.
Now, do you think you can retire on that?
Our third aspect involves a hard working husband and really smart, savvy wife (whom the husband listens too). They realise their current appreciation and take $150,000 out of the equity of their home. That's all they invest into the same fund that our gal from scenario #2 invests in. They don't pay monthly into the fund, they just watch their investment grow. They use a Retirement Account for deferred tax purposes. What do you think they're worth at the end of their 40 year mortgage?
$40,179,532 dollars. Yes, that's right. But we can't forget the 30% tax can we? Awww....too bad, that means they only get 28MM dollars.
Now, do you think they can not only retire on that, but leave the principal untapped and retire only only on the interest payments? Then, when they die, they can give like they've never given before.
Work hard to live well and then give gladly~thanks!
and can be found: http://www.thestreet.com/funds/mutualfundinvesting/10385337.html)
We will assume our homeowner has a $300,000 mortgage at 7% on a 40 year fixed. I'm using 7% because it is a little high right now, and the mortgage amount is right for the Pacific Northwest market. The 40 year fixed is becoming the norm.
The first aspect will be the homeowner who takes out a 40 year mortgage and doesn't invest. He just makes his payments and gets the appreciation out of the house and the tax benefits from the interest deduction.
The second aspect will be the homeowner who pays off his $300,000 mortgage early and invests the mortgage payment into mutual funds. Once his mortgage is paid off, let's assume for sake of conversation that he continues to make his payment, but into a mutual fund.
The third aspect will be the homeowners who takes $150,000 cash out from the equity he has built up in his house and dumps it down into a mutual fund, then proceeds to make his monthly payments for 40 years to pay off the mortgage. He does not invest further into the mutual fund. (I am using a 150K mortgage instead of a 300K mortgage because many folks in the Pacific Northwest, who've owned a home for the past 3 years, have realised 150K in equity. Using a 300K perspective would be too favorable and unrealistic)
Our guy in the first perspective will realise this. He has a 300K mortgage at 7% interest for 40 years. His monthly payment is $1864.29. At the end of 40 years, he will have paid $894,861.04 in total payments. His total tax deduction is $594,861.04. If he's in the 25% tax bracket, that means that he will get $148,715.25 back. That means, ultimately, he will have paid $746,145.79 in total payments. At the end of 40 years, it's safe to say the home will be worth $968,611 (assuming a 3% annual appreciation rate).
So, our 1st guy has paid $746,145.79 in total payments to get a home worth 1.5MM tops. Think you can retire on that?
Let's continue...
Our second gal pays off her 300K mortgage early, and starts to invest. Let's say it takes her 10 years to pay off the mortgage, which isn't unrealistic (the median income in Seattle, WA is 70K per year). She then invests for 30 years, which would equal the 40 years of our guy in scenario #1. She invests at an annual rate of return of 15%. You can click on the above link to find the Best Performing Funds over a 20 year Period. Yes, these 20 funds have performed anywhere between 13% and 16% for each of the past 20 years! She invests the monthly payment of our guy in scenario #1 into a mutual fund through her 401K/IRA/SEP/Deffered Tax Retirement Fund. That is $1865 each month into a fund. At 15% annual rate of return, she will have made: $11,189,036. When she taps the retirement account, she'll get taxed at roughly 30%. That means she only brings home 7.8MM dollars.
Now, do you think you can retire on that?
Our third aspect involves a hard working husband and really smart, savvy wife (whom the husband listens too). They realise their current appreciation and take $150,000 out of the equity of their home. That's all they invest into the same fund that our gal from scenario #2 invests in. They don't pay monthly into the fund, they just watch their investment grow. They use a Retirement Account for deferred tax purposes. What do you think they're worth at the end of their 40 year mortgage?
$40,179,532 dollars. Yes, that's right. But we can't forget the 30% tax can we? Awww....too bad, that means they only get 28MM dollars.
Now, do you think they can not only retire on that, but leave the principal untapped and retire only only on the interest payments? Then, when they die, they can give like they've never given before.
Work hard to live well and then give gladly~thanks!
Monday, December 10, 2007
The Home Loan Prepayment Penalty
This post will cover the nature of a prepayment penalty in how it relates to your home loan. What is it? Why do I consider it a negative thing? How do I know if I have one? Why do lenders offer prepayment penalties? What can be done to avert it?
First, what is a prepayment penalty?
A prepayment penalty is simply a 'penalty for paying your home loan off before an agreed time'. For instance, subprime loans, which most of you have heard of, come with prepayment penalties. What this means is that you typically aren't able to sell or refinance your home loan until 2-3 (in some cases, 5) years have passed. Considering that the statistical average for people paying off their home loan is 36 months, that's a tough rule to abide by.
There is a 'soft' prepayment penalty. This applies if you refinance only.
There is also another penalty, called a 'hard' prepayment penalty. This applies if you sell or refinance. Be sure which one you have.
Why do I consider a prepayment penalty a negative aspect of a home loan?
For instance, I bought a home on a 2 year fixed, subprime ARM back in 4/2006. I did my own loan, and knew it was a 2 year fixed...it was the only thing my 600 credit score could get, so the benefit outweighed the cost. My loan came with a 2 year prepayment penalty. This means that I couldn't sell or refinance within 2 years without having to pay "6 months' interest". Well, if my loan is 220,000 and the interest rate is 6.6%, then 6 months interest = $7260. WHEW! Yes, that's right: $7260. (As you're now figuring out, this is another potential hidden fee the banks place on certain loans). Let's just say I'm definitely not touching the loan until 4/08.
For obvious reasons above, I'm sure you now understand why a prepayment penalty is not a desirable thing. Some lenders will say, "You can always buy out of it!". Yeah, sure, for a 1-1.5% increase in interest rate! That isn't desirable.
However, in certain cases, a loan with a prepayment penalty is the only way you might get a home loan. The cost-benefit analysis needs to be employed; pros and cons both need to be weighed.
How do I know if I have a prepayment penalty?
Get a Truth in Lending Document from your broker/banker. There is a box near the bottom of the form, that says "You May/Will Not have to pay a penalty". You would want the "Will Not" section checkmarked.
Why do lenders offer Prepayment Penalties?
This is a more difficult question. There's no one answer. Lenders, when they fund your loan, package the loan and sell it to investors. These investors expect the loan to be performing for a certain numbers of years (3 years or so), and so the funding lender will put a prepayment penalty on the loan in order to guarantee a certain amount of income from this loan. If the borrower refinances early, then the income comes from the penalty; if the borrower keeps the loan for the specitfied period of time, then the lender gets the income from the monthly payments. Sometimes, lenders will put a prepayment penalty on the loan when the funding lender pays a 'rebate' to the broker. This is especially the case with the negative amortization/ negative interest/ Pay Option Loans (the 1% loans). I could go into this further, but suffice it to say that the prepayment penalty here is the amount of commissions your broker got when he first originated the loan....chew on that awhile.
What can be done to avert a prepayment penalty?
Trust your lender.
More specifically, try to get a Full Documentation of Income loan, where you prove your income. Some brokers/bankers will do a Stated Income loan just because it is easier and requires less documentation. Now, for those of you who are Self-Employed, like myself, and who's tax returns look like a foreign language Do-It-Yourself Handguide, Stated Income may be your only option. But, unless you write off everything under the sun, a good mortgage broker should be able to use your Tax Returns. However, there are still some very restrictive guidelines out there, and Stated Income may be the only way to go; just make sure there's no prepayment penalty. You may even have to switch loans (say from a 5/1 ARM Interest Only to a 30 year fixed full amortization).
Ultimately, though....you've got to Trust Your Lender. That's the real bottom line.
First, what is a prepayment penalty?
A prepayment penalty is simply a 'penalty for paying your home loan off before an agreed time'. For instance, subprime loans, which most of you have heard of, come with prepayment penalties. What this means is that you typically aren't able to sell or refinance your home loan until 2-3 (in some cases, 5) years have passed. Considering that the statistical average for people paying off their home loan is 36 months, that's a tough rule to abide by.
There is a 'soft' prepayment penalty. This applies if you refinance only.
There is also another penalty, called a 'hard' prepayment penalty. This applies if you sell or refinance. Be sure which one you have.
Why do I consider a prepayment penalty a negative aspect of a home loan?
For instance, I bought a home on a 2 year fixed, subprime ARM back in 4/2006. I did my own loan, and knew it was a 2 year fixed...it was the only thing my 600 credit score could get, so the benefit outweighed the cost. My loan came with a 2 year prepayment penalty. This means that I couldn't sell or refinance within 2 years without having to pay "6 months' interest". Well, if my loan is 220,000 and the interest rate is 6.6%, then 6 months interest = $7260. WHEW! Yes, that's right: $7260. (As you're now figuring out, this is another potential hidden fee the banks place on certain loans). Let's just say I'm definitely not touching the loan until 4/08.
For obvious reasons above, I'm sure you now understand why a prepayment penalty is not a desirable thing. Some lenders will say, "You can always buy out of it!". Yeah, sure, for a 1-1.5% increase in interest rate! That isn't desirable.
However, in certain cases, a loan with a prepayment penalty is the only way you might get a home loan. The cost-benefit analysis needs to be employed; pros and cons both need to be weighed.
How do I know if I have a prepayment penalty?
Get a Truth in Lending Document from your broker/banker. There is a box near the bottom of the form, that says "You May/Will Not have to pay a penalty". You would want the "Will Not" section checkmarked.
Why do lenders offer Prepayment Penalties?
This is a more difficult question. There's no one answer. Lenders, when they fund your loan, package the loan and sell it to investors. These investors expect the loan to be performing for a certain numbers of years (3 years or so), and so the funding lender will put a prepayment penalty on the loan in order to guarantee a certain amount of income from this loan. If the borrower refinances early, then the income comes from the penalty; if the borrower keeps the loan for the specitfied period of time, then the lender gets the income from the monthly payments. Sometimes, lenders will put a prepayment penalty on the loan when the funding lender pays a 'rebate' to the broker. This is especially the case with the negative amortization/ negative interest/ Pay Option Loans (the 1% loans). I could go into this further, but suffice it to say that the prepayment penalty here is the amount of commissions your broker got when he first originated the loan....chew on that awhile.
What can be done to avert a prepayment penalty?
Trust your lender.
More specifically, try to get a Full Documentation of Income loan, where you prove your income. Some brokers/bankers will do a Stated Income loan just because it is easier and requires less documentation. Now, for those of you who are Self-Employed, like myself, and who's tax returns look like a foreign language Do-It-Yourself Handguide, Stated Income may be your only option. But, unless you write off everything under the sun, a good mortgage broker should be able to use your Tax Returns. However, there are still some very restrictive guidelines out there, and Stated Income may be the only way to go; just make sure there's no prepayment penalty. You may even have to switch loans (say from a 5/1 ARM Interest Only to a 30 year fixed full amortization).
Ultimately, though....you've got to Trust Your Lender. That's the real bottom line.
Friday, December 7, 2007
Wanna Buy a Countrywide Foreclosed Property for $1 ???
I owe this to Floyd Norris of the New York Times.
Everyone hears that the market's bad, right? Well....try this...
What would you do if you could buy a house for $1? If that sounds crazy, how about 50 houses for under $1,000? Dead serious here, folks. Try Countrywide's REO (Bank Owned Properties) in Detroit, Michigan. There's six houses in Detroit for $1. Here one address: 19200 RUNYON ,DETROIT , MI 48234. Oh, and if you call: 888-622-7361, you'll want to talk to "MCB Michigan". Apparently, there's so many foreclosures in Michigan that they've been assigned to a team instead of a live person.
But, for those of you with more realistic goals, try a Kirkland, WA house going for 379K that zillows at 445K? That's not too bad, but if you offered 350K, I bet Countrywide would go for that!
This simply goes to show; banks hate foreclosing on houses!
Here's the website friends, fresh with the phone numbers to contact people regarding this homes as well. Just make sure, when shopping for these properties a few of the following:
1. Is there a redemption period for any old liens (if applicable)
2 What liens stay on title? (You want to buy a house for $1 that has 90K in tax liens?)
3. Buy local, don't go outside an area you know
4. Check out the duplexes
Happy Hunting! This is how you get your high net worth on!
http://www.countrywide.com/purchase/f_reo.asp
Everyone hears that the market's bad, right? Well....try this...
What would you do if you could buy a house for $1? If that sounds crazy, how about 50 houses for under $1,000? Dead serious here, folks. Try Countrywide's REO (Bank Owned Properties) in Detroit, Michigan. There's six houses in Detroit for $1. Here one address: 19200 RUNYON ,DETROIT , MI 48234. Oh, and if you call: 888-622-7361, you'll want to talk to "MCB Michigan". Apparently, there's so many foreclosures in Michigan that they've been assigned to a team instead of a live person.
But, for those of you with more realistic goals, try a Kirkland, WA house going for 379K that zillows at 445K? That's not too bad, but if you offered 350K, I bet Countrywide would go for that!
This simply goes to show; banks hate foreclosing on houses!
Here's the website friends, fresh with the phone numbers to contact people regarding this homes as well. Just make sure, when shopping for these properties a few of the following:
1. Is there a redemption period for any old liens (if applicable)
2 What liens stay on title? (You want to buy a house for $1 that has 90K in tax liens?)
3. Buy local, don't go outside an area you know
4. Check out the duplexes
Happy Hunting! This is how you get your high net worth on!
http://www.countrywide.com/purchase/f_reo.asp
Tuesday, December 4, 2007
H.R. 3915: Mortgage Reform and Anti-Predatory Lending Act of 2007, a review and commentary
On October 22, 2007, mortage reform legislation was introduced by Democratic Representative Bradley Miller of North Carolina. Here is a brief synopsis of that legislation, and my opinion of its pros and cons.
I think it would be safe to say that everyone, who has a mortgage and is keeping up with the recent news concerning the US Housing Market and the current mortgage market, would agree that there needs to be a change in the current lending industry. Let me recap briefly how we've gotten where we are.
For the past 3-5 years, anyone with a pulse and a semi-decent credit score (at times as low as 580) could get a loan, zero down, without even proving their income and assets! These loans, known as "Stated Income & Stated Asset" loans have been the bane of our industry, wreaking havoc among the international credit markets and increasing delinquincies on a rapid scale. Other weird loans were "No Income & No Asset" loans. These differ from the "Stated" documentation loans in that the borrower wasn't even required to list their income!
These loans were the ethical alternative to the stated documentation loans because oftentimes loan offices would grossly overstate someone's income in order to obtain a loan for them. The recourse here is that the lender could pull the borrower's tax returns and charge the original loan officer with fraud if they saw that the loan officer had lied about the borrower's income. Now, although these No Income loans were an ethical alternative, they didn't much help the industry because there was no repayment ability determined at all.
And the loans kept getting worse and worse. They were then packaged together, with attractive loans (good credit, income, assets), and sold on Wall Street to hedge funds, private equity investors, and others. The issue here is that when these packaged loans were sold on Wall Street, investors simply didn't know what they were getting. This resulted in many people thinking they had "AAA" investment ratings, then holding the bag when the credit hit the fan.
This is the scenario that legislators walked into this year, which has resulted in HR 3915. People, for better or worse, are looking to the government to bail them out and help them. What's worse is that the investor-minds who devised these original plans for these subprime loans (subprime is defined as above by and large) are now also seeking the government to bail their banks out! But, that's life, right?
Let's jump right in. HR 3915 is divided into 7 titles. I will be discussing the first two, which are the more immediately relevant. Title I covers the method that loan officers are to practice when originating loans. Title II establishes a minimum standard for mortgages. Title III covers and defines high-cost mortgages. Title IV covers homebuyer counseling. Title V discusses a universal way of disclosing fees (currently known as the Good Faith Estimate). And, Title VI & VII go on to describe servicing and appraisal standards.
I will cover my main concerns with titles I & II below.
Title I has "Anti-Steering" language. What does this mean? Essentially, the title requires that banks do not provide incentives to loan officers for certain products. For instance, banks were paying loan officers up to 4.75% of the loan amount (this is known as Yield-Spread-Premium/YSP or Rebate). Imagine that! You have a loan of $300,000, and the bank is paying the loan officer $14,250 to do the loan! This would be one of those negative interest/amortization loans where the payment rate is 1% but the actual interest rate is 8-10%. If you have one of these, you've probably noticed that your loan balance is continually going up each month, and on top of that, you likely have a 2-3 year prepayment penalty that will penalize you 3% of the loan amount if you refinance within the 2-3 year period. (The YSP has to be paid for somehow, and the bank will charge YOU for it if you refinance before they can make their money) Interesting eh?
I am in favor of Title I's 'anti-steering' language as long as it affects these negative interest loans. However, the problem is that the language is so vague that any good lawyer can make a case that YSP shouldn't be paid at all. If that happens, the borrower's closing costs will go up because YSP is a legitimate way to make 1%-2% of the loan in order to reduce the borrower's closing costs. The problem here is that consumers have been lied to for too long. Consumers think that banks/brokers only make 1% or they don't charge me anything at all (yay!). Not even close. The average total compensation on a loan is 2-3%. Brokers typically charge 1.5-2% total, and banks top it off around 2-3%.
Ultimately, while I'm in favor with the spirit of the anti-steering language found in Title I, I am a bit skeptical how it will play out. I'm afraid that the spirit will be overcome by weighty lawsuits, and YSP may be done away with entirely, thus resulting in higher borrowing costs. We'll see what happens.
Title II establishes a minimum standard. This establishes a determination that the borrower has the 'ability to repay' the loan. Ultimately, this would phase out many subprime mortgage lenders, which can be a good thing, and will make conventional lending beneath a 680 credit score more and more difficult. I believe the FHA will step in and loosen their guidelines in order to pick up the subprime mess here, but we'll see. I'm largely in favor of this title. The fun one here is that prepayment penalties will essentially be illegal....this is good!
Ultimately, the spirit of the legislation is simply this. The government wants loan officers to put the interests of the consumer above their own interests, but isn't every long-standing business run this way??? The government wants the consumer to be educated about the product they're buying, but is this a new thing???
I am a little afraid though that this will increase the closing costs due to increased disclosures. After all, who pays for increased costs in the end? You think the business does? Not so! The consumer will pay for these additional disclosures, the additional time it takes to underwrite these files, etc.
Also, we might see a reduction of competitors in the industry. If this happens, the costs will go up because there will be fewer people offering the same product. This is basic economics, folks.
On a more personal note, regarding subprime mortgages, I cut my teeth on these loans. These are the first loans I ever knew existed, and I oftentimes did zero down 2 year fixed mortgages at 5.75-6.25%. Why? This is because the only alternative was a 30 year fixed at 6.75-7.25%. This is how I bought my first house. These were all Fully Documented loans (income and assets proven). The problem is found in the overstatement of income on stated income loans and these negative interest loans where the consumer thought he had something too good to be true. These loans, ironically, do have their place as well for people needing immediate cashflow to fix a current/short-lived situation. But, these are few and far between. The point is this: we must not be hasty in our judgment of subprime and negative interest mortgages, although I personally don't want one if there is a viable alternative. If there is no alternative, well...that's another story.
For now, we are in a holding pattern, waiting to see what the government will decide. Chances are, this legislation will pass (which is actually a good thing for those of us who are already licensed and in the industry long-term as much as we can).
One thing is for sure; there will be a huge reduction of loan officers in the industry, come1/1/2008.
I think it would be safe to say that everyone, who has a mortgage and is keeping up with the recent news concerning the US Housing Market and the current mortgage market, would agree that there needs to be a change in the current lending industry. Let me recap briefly how we've gotten where we are.
For the past 3-5 years, anyone with a pulse and a semi-decent credit score (at times as low as 580) could get a loan, zero down, without even proving their income and assets! These loans, known as "Stated Income & Stated Asset" loans have been the bane of our industry, wreaking havoc among the international credit markets and increasing delinquincies on a rapid scale. Other weird loans were "No Income & No Asset" loans. These differ from the "Stated" documentation loans in that the borrower wasn't even required to list their income!
These loans were the ethical alternative to the stated documentation loans because oftentimes loan offices would grossly overstate someone's income in order to obtain a loan for them. The recourse here is that the lender could pull the borrower's tax returns and charge the original loan officer with fraud if they saw that the loan officer had lied about the borrower's income. Now, although these No Income loans were an ethical alternative, they didn't much help the industry because there was no repayment ability determined at all.
And the loans kept getting worse and worse. They were then packaged together, with attractive loans (good credit, income, assets), and sold on Wall Street to hedge funds, private equity investors, and others. The issue here is that when these packaged loans were sold on Wall Street, investors simply didn't know what they were getting. This resulted in many people thinking they had "AAA" investment ratings, then holding the bag when the credit hit the fan.
This is the scenario that legislators walked into this year, which has resulted in HR 3915. People, for better or worse, are looking to the government to bail them out and help them. What's worse is that the investor-minds who devised these original plans for these subprime loans (subprime is defined as above by and large) are now also seeking the government to bail their banks out! But, that's life, right?
Let's jump right in. HR 3915 is divided into 7 titles. I will be discussing the first two, which are the more immediately relevant. Title I covers the method that loan officers are to practice when originating loans. Title II establishes a minimum standard for mortgages. Title III covers and defines high-cost mortgages. Title IV covers homebuyer counseling. Title V discusses a universal way of disclosing fees (currently known as the Good Faith Estimate). And, Title VI & VII go on to describe servicing and appraisal standards.
I will cover my main concerns with titles I & II below.
Title I has "Anti-Steering" language. What does this mean? Essentially, the title requires that banks do not provide incentives to loan officers for certain products. For instance, banks were paying loan officers up to 4.75% of the loan amount (this is known as Yield-Spread-Premium/YSP or Rebate). Imagine that! You have a loan of $300,000, and the bank is paying the loan officer $14,250 to do the loan! This would be one of those negative interest/amortization loans where the payment rate is 1% but the actual interest rate is 8-10%. If you have one of these, you've probably noticed that your loan balance is continually going up each month, and on top of that, you likely have a 2-3 year prepayment penalty that will penalize you 3% of the loan amount if you refinance within the 2-3 year period. (The YSP has to be paid for somehow, and the bank will charge YOU for it if you refinance before they can make their money) Interesting eh?
I am in favor of Title I's 'anti-steering' language as long as it affects these negative interest loans. However, the problem is that the language is so vague that any good lawyer can make a case that YSP shouldn't be paid at all. If that happens, the borrower's closing costs will go up because YSP is a legitimate way to make 1%-2% of the loan in order to reduce the borrower's closing costs. The problem here is that consumers have been lied to for too long. Consumers think that banks/brokers only make 1% or they don't charge me anything at all (yay!). Not even close. The average total compensation on a loan is 2-3%. Brokers typically charge 1.5-2% total, and banks top it off around 2-3%.
Ultimately, while I'm in favor with the spirit of the anti-steering language found in Title I, I am a bit skeptical how it will play out. I'm afraid that the spirit will be overcome by weighty lawsuits, and YSP may be done away with entirely, thus resulting in higher borrowing costs. We'll see what happens.
Title II establishes a minimum standard. This establishes a determination that the borrower has the 'ability to repay' the loan. Ultimately, this would phase out many subprime mortgage lenders, which can be a good thing, and will make conventional lending beneath a 680 credit score more and more difficult. I believe the FHA will step in and loosen their guidelines in order to pick up the subprime mess here, but we'll see. I'm largely in favor of this title. The fun one here is that prepayment penalties will essentially be illegal....this is good!
Ultimately, the spirit of the legislation is simply this. The government wants loan officers to put the interests of the consumer above their own interests, but isn't every long-standing business run this way??? The government wants the consumer to be educated about the product they're buying, but is this a new thing???
I am a little afraid though that this will increase the closing costs due to increased disclosures. After all, who pays for increased costs in the end? You think the business does? Not so! The consumer will pay for these additional disclosures, the additional time it takes to underwrite these files, etc.
Also, we might see a reduction of competitors in the industry. If this happens, the costs will go up because there will be fewer people offering the same product. This is basic economics, folks.
On a more personal note, regarding subprime mortgages, I cut my teeth on these loans. These are the first loans I ever knew existed, and I oftentimes did zero down 2 year fixed mortgages at 5.75-6.25%. Why? This is because the only alternative was a 30 year fixed at 6.75-7.25%. This is how I bought my first house. These were all Fully Documented loans (income and assets proven). The problem is found in the overstatement of income on stated income loans and these negative interest loans where the consumer thought he had something too good to be true. These loans, ironically, do have their place as well for people needing immediate cashflow to fix a current/short-lived situation. But, these are few and far between. The point is this: we must not be hasty in our judgment of subprime and negative interest mortgages, although I personally don't want one if there is a viable alternative. If there is no alternative, well...that's another story.
For now, we are in a holding pattern, waiting to see what the government will decide. Chances are, this legislation will pass (which is actually a good thing for those of us who are already licensed and in the industry long-term as much as we can).
One thing is for sure; there will be a huge reduction of loan officers in the industry, come1/1/2008.
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