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Part 1. Big Needs in a Bad Economy and How to Demystify the Process
Part 1. Big Needs In A Bad Economy And How To Demystify The Process
First Let's Look at Shopping for a Mortgage in a Stressed Market
by Jack M. Gutentag
Current stresses in the home loan market have changed the ground rules for borrowers in many ways. A recent column focused on the confused state of affairs in the market for jumbos (loans larger than $417,000). Jumbos are priced higher than smaller loans even when they can be purchased by Fannie Mae and Freddie Mac -- and much higher when they can't.
This article reports on the results of an online shopping exploration I did on December 12. I priced conforming loans of $400,000 that can be purchased by Fannie and Freddie and $800,000 (jumbo) loans that cannot. Within each size class, I looked at 15- and 30-year fixed-rate mortgages, as well as 5/1 adjustable-rate mortgages (ARMs in which the rate is fixed for a period of five years). Prices were obtained from sources including the four largest depository institutions in the market: Bank of America, Citicorp, Chase, and Wells Fargo.
To assure comparability, I posed as a prime borrower purchasing a single-family house in California with a large down payment, while fully documenting my income and assets. What I learned probably holds for non-prime transactions as well.
Price Diversity: The differences in prices quoted by different lenders were extremely large. On the popular 30-year conforming fixed-rate mortgage (FRM), on which spreads usually are the smallest, the highest quote was more than 1 percent above the lowest quote. On ARMs, the spreads were even larger. On a 5/1 jumbo ARM, one lender quoted 8.125 percent plus $9,800 in points, while another quoted 5.75 percent with zero points.
Bottom Line: Borrowers can save a ton of money by shopping loan providers.
Conforming ARMs: One striking fact about the current market is that conforming ARMs cost more than 30-year FRMs, something I cannot remember ever having seen before. The rate difference between the 30-year FRM and the 5/1 ARM, holding points constant, was almost 1 percent. Furthermore, 3/1 and 7/1 ARMs were both priced higher than the 5/1s. On the other hand, all the lenders -- with the exception of one -- offering jumbo loans priced ARMs below the 30-year FRM, which is the usual pattern.
Bottom Line: There is no reason for a borrower to select a conforming ARM, but on jumbos, ARMs continue to enjoy a significant rate advantage.
15-Year FRMs: The 15-year FRM has always been my preferred instrument for borrowers who could afford the payment, because it carried a significantly lower rate than the comparable 30, and it amortized much more rapidly. On jumbo loans, the 30-15 spread remains very attractive at about 5/8 percent, but on conforming loans, it has dwindled to about half of that.
Bottom Line: There is no reason to avoid 15-year FRMs, but on conforming loans the advantage is not what it was.
Interest-Only Version of the 30-Year FRM: Until recently, the 30-year FRM that allows interest-only (IO) payments for the first 10 years was very popular. Borrowers could avoid making payments to principal for 10 years. To get the IO option, borrowers typically paid a rate premium of about 1/8 percent.
In an environment of declining home prices, investors don't like loans that build no equity for 10 years, and they have raised the premium to 1.4-2 percent.
To illustrate, one lender priced a standard 30-year FRM for $400,000 at 5.75 percent and the IO version of the same mortgage at 7.25 percent. This means that the borrower was offered a choice between paying a) $2,354 a month, of which $1,917 is interest and $437 is principal, and b) $2,416 a month, all of which is interest. This pricing eliminates the only benefit borrowers receive from an IO, which is the lower payment.
Bottom Line: Borrowers should avoid the IO option on the 30-year FRM. On ARMs, however, the rate premium to get an IO option is still reasonable.
Paying Points to Reduce the Interest Rate: Stressed markets do offer one significant bargain: buying down the interest rate by paying points. In 2005 it cost about 1.5 points to buy down the rate by .25 percent on a 30-year FRM. In early 2007 it cost about 1.125 points. Today the price is down to about half a point.
In part, the lowered price is due to the shorter average life of loans, which increases the value to investors of collecting points upfront. In addition, lower rates carry lower payments, which reduce the likelihood of default. In a stressed market, this carries a lot of weight.
Borrowers viewing a rate buy-down as an investment can earn a very high return. For example, one lender on December 12 offered a rate reduction of .5 percent for 1.119 additional points. Using calculator 11c on my Web site, I determined that this investment in points would yield 28 percent over five years and 32 percent over 30 years.
Bottom Line: Buying down the interest rate is a very good investment.
http://us.rd.yahoo.com/finance/allnews/columns/mortgage/SIG=14m141s...*http://www.amazon.com/Mortgage-Encyclopedia-Authoritative-Programs-...
The Mortgage Encyclopedia
An authoritative yet concise guide to the mysteries of mortgage finance, arranged alphabetically from "A-Credit" to "Zero Balance." Includes information that will help you decide whether to use a mortgage broker, learn if you can avoid mortgage insurance, and much more. Reach for this indispensable guide and get the fast, accurate information you need!
How do you get into buying foreclosed homes or homes at auction?
by Ranscott
Best Answer
I have bought and sold many foreclosures. I started in the 1980's when many fewer people were doing it. The process varies from state to state. In both FL and NC the auctions are held on the courthouse steps, in the county seat. In FL, lets say the home is sold for $100K. If you don't research the title, you may be purchasing a second mtg. You would then be responsible for the first mtg and the second. It is very important to do your homework. Then, you will need 5% down in the form of cash or a chashiers check made payable to the clerk of the court. The balance will be due after 10 days also in the form of cash or cashiers check. Not very often, the owner will be able to hold off the foreclosure process in that 10 day period by filing for chapter 7, 9, 11, or 13. When that happens, the courts will refund you your money but it takes about 4-6 weeks. In NC, you also need 5% down on the day of the auction but now the 10 day period after the sale is open to anyone that wants to still put in an "upset bid". This process continues until a 10 day period goes by without anyone bidding again. Then the balance is due in the form of cash or cashiers check. All other mtg's are wiped clean in NC. The process is different from state to state. I would suggest you go to the courthouse and lookup the upcoming sales (they are posted somewhere just ask) and watch the process. Then, contact and pay an attorney for advice on how it works in the state you are in. I should say I have all but left the foeclosure business because of the volitility of the market. Be very careful, do your homework, and make sure you know what you are buying.
Is a Reverse Mortgage a safe loan?
by infoDoc
Best Answer
A reverse mortgage is a really great thing if you have lots of equity in your home, and you don't have very much liquidated cash to enjoy your retirement. My mother had a house paid in full in Santa Barbara, CA but was living off of social security checks. I helped her get a reverse mortgage loan from Financial Freedom. Then she was living life to the fullest until she passed away 6 years later. My siblings were livid when they found out she got that loan, because they thought she would eat up their inheritance. But she sure loved life those last years of her life, going to the off-track horse racing, bought a new car, new hi-def tv, remodeled her kitchen with Viking appliances. So, yes it can be a very good thing. But you must remember that it is basically selling your house slowly back to a financial institution. If my mom would have lived long enough, my brother and sister (and me) would not have inherited a dime, but that was ok with me.
The Best Way to Refinance With a No-Cost Mortgage
by Jack M. Gutentag
The current refinance boom has focused attention on no-cost mortgages (NCMs), which have attractive features to refinancing borrowers. NCMs help borrowers avoid being overcharged, and they eliminate most of the uncertainty involved in determining whether a refinance will pay. These no cost loans are not available for new purchasing of a home, but can be found for refinancing, although finding it can be difficult.
On the other hand, the price of NCMs -- as measured by the interest rate increase borrowers must pay to avoid refinance costs -- is unusually high in the current market. The challenge is to obtain the benefits of NCMs without paying an excessive price for them in higher interest rates.
An NCM is a mortgage on which the lender pays the borrower's settlement costs, with certain exceptions. The lender won't pay your tax escrows, homeowner's insurance, or transaction taxes if there are any. You will also be stuck paying interest on two loans for a few overlapping days. All other costs, including the mortgage broker's fee if there is one, are paid by the lender.
No-Cost Isn't No-Cash
Don't confuse no-cost with no-cash. No-cash means the settlement costs are added to your loan balance at closing. The borrower pays them, but over time and with interest.
NCMs help borrowers avoid being overcharged by reducing multiple price dimensions to one: the interest rate. Typically, in selecting a loan provider, borrowers shop for rate and points, ignoring other settlement costs. They usually find out about these costs after they submit an application, and then they receive "estimates" that are subject to change. This provides lenders with ample opportunity to pad their own fees and mark up those of third parties.
When responding to a borrower inquiring about an NCM, however, lenders do not have that luxury because the borrower is shopping strictly for rate. The rate lenders quote on an NCM, therefore, is likely to cover their true costs rather than a padded cost.
Competitive Constraint on Broker Fees
Borrowers shopping for an NCM can shop brokers and lenders interchangeably. Brokers must include their own fee in the quoted interest rate, which they know is being shopped. This imposes a competitive constraint on broker fees.
NCMs also eliminate most of the uncertainty involved in determining whether a refinance will pay. If there are refinance costs, the borrower must decide whether the costs are offset by the lower rate. I send readers faced with this puzzle to calculator 3a on my Web site. But if there are no costs, you don't need a calculator because any rate reduction is a winner.
The rate quoted by a lender on an NCM is one that, from the lender's standpoint, justifies paying the costs. The lender willing to accept a rate of X percent on a loan where the borrower pays the costs will quote X + I on an NCM, where I is the rate increment needed to cover the cost.
Challenges of the Current Market
Unfortunately, in the current market I is more than twice as large as it was just a year ago. The reason is that lenders are assuming they won't have the rate increment for very long because market rates will decline further and many of the loans refinanced today will be refinanced again in the near future. This is the same reason why, as I indicated in an article a few weeks ago, the best bargain in today's market is buying down the interest rate by paying points.
The upshot is that borrowers refinancing today -- unless they expect to move within a few years -- should pay their own settlement costs and, if they have the cash, pay points to reduce the rate. To do this while retaining the strategic benefit of shopping for an NCM, follow these steps:
1. Shop for the best rate on an NCM.
2. Shop for the lowest points -- but otherwise no cost -- at a specified rate.
For example, assume three NCM quotes come in at 5.5 percent, 5.625 percent, and 5.75 percent. Ask all three lenders how many points you would have to pay to reduce the rate to, say, 5.25 percent, emphasizing that the loan otherwise remains no-cost. You are now shopping for a modified NCM on which the borrower pays the points required by a specified rate but the lender pays all other settlement costs.
In the above example, you should select the lender quoting the lowest points for the 5.25 percent rate. Do not select the loan provider quoting the lowest rate on the NCM, then subsequently ask about buying down the rate. The loan provider who has already been selected may well give you a much less advantageous quote than one who is competing to earn your business.
Combating the Financial Crisis: The Foreclosure Challenge
by Jack M. Guttentag
The government's efforts to combat the worst financial crisis since the 1930s can be divided into three phases. Phase one, executed largely in catch-as-catch-can fashion, was directed toward shoring up financial firms that were undercapitalized and had lost the confidence of their creditors. The goal was to prevent their failure, which would have made the crisis worse -- far worse.
Phase one is far from over; new flare-ups continue to arise, money continues to be injected into the banks, and dramatic new approaches for recapitalization may need to be considered. The battering of bank stocks that occurred on Inauguration Day highlighted the crisis and proved that investors are not satisfied with Washington's bailout efforts thus far.
Phase two, executed in much more deliberate fashion, was to reduce interest rates to mortgage borrowers. Where phase one has had the highest priority, phase two is low priority, adopted largely because it is easy to implement and helps some homeowners -- although not those who most need it.
A Refinance Boom With Limited Impact
Lower rates have generated a refinance boom in the midst of a growing recession, like an oasis in the desert. But the impact is limited because access is restricted to homeowners who qualify for loans that can be purchased by Fannie Mae or Freddie Mac, or insured by FHA. To lower their rates, borrowers must have equity in their property and good credit; the thirstiest homeowners can't drink from this oasis.
Phase three has yet to be defined, but the focus has to be on shrinking the foreclosure rate. The financial crisis started in the housing market and will not end until home prices stop declining and foreclosed homes stop flooding the market.
None of the existing programs, including loan programs (Hope for Homeowners and FHA Secure), counseling programs (Hope Hotline), and foreclosure moratoriums have made a significant dent in the foreclosure rate. The same will be the case if bankruptcy laws are amended to allow judges to modify mortgage contracts, a proposal currently under discussion.
Returning Loans to Good Standing
To make major inroads into the foreclosure rate, we need a marked increase in contract modifications of mortgages on the path to foreclosure, returning these loans to good standing and keeping them there. The private sector has made efforts in this direction, but the loans they have modified are too few and the modifications too small to make a substantial difference. In particular, very few modifications reduce the loan balance, which is why about half of them re-default within six months.
Another important objective of phase three is to begin the process of restoring confidence in the quality of financial assets, which the crisis has undermined. With the loss of confidence has come the loss of ascertainable values and marketability. This is the major reason that borrowers today who need loans larger than those that can be sold to Fannie Mae or Freddie Mac have to pay a rate premium of about 2 percent, which is about 8 times larger than it was before the crisis.
The following are the main features of a plan directed to these objectives, which a colleague and I submitted to the US Treasury. A more detailed version is on my Web site (see Breaking the Back of the Financial Crisis).
• Government will encourage servicers/investors to mark down loan balances to 90 percent of current market value by contributing to the markdowns, and by guaranteeing timely payment of principal and interest on modified loans. Eliminating negative equity on modified loans will lower payments and incent borrowers to remain in their homes, which will reduce the incidence of re-defaults.
• The government outlays required to support balance write-downs will be large, but they will be secured by second liens which borrowers will be obliged to repay in the future. In this way, the government will be able to recover some (if not all) of the outlays.
• The government will encourage private mortgage insurers (PMIs) to underwrite and provide payment insurance on modified loans by offering to share losses with the PMIs. In addition, the payment insurance would carry full faith and credit back-up insurance by the Government National Mortgage Association (GNMA), which will make it highly desirable to investors.
• Payment insurance supported by GNMA will make modified loans marketable, and shift some of the workload in processing modifications from understaffed servicers to PMIs. GNMA will receive a piece of the insurance premiums, which should make this part of the program self-supporting or even profitable for the government.
Maybe the Banks Should Be "Hoarding" Money
by Jack M. Guttentag
"Is it not shameful that our financial institutions receive capital infusions from the government and, instead of lending the money out, they hoard it?"
I hear this complaint a lot, and the government has not done a very good job of responding to it. My view of government intent is that the capital infusions were meant to be "hoarded," defining that word as adding to the firm's capital rather than adding to its loans.
A necessary backdrop: The financial crisis began in the home mortgage market and then spread like wildfire to engulf the entire financial system. The core reason for the conflagration was that financial institutions were over-leveraged -- meaning that their debt was excessive. They were also under-capitalized, which means the same thing.
The Major Roles of Capital
Consider a financial firm that has $100 billion of earning assets, $90 billion of debt, and $10 billion of capital, which is the difference between its assets and its debts. The major role of capital is to absorb potential losses on the assets, some of which will default. A closely related role is to instill confidence in the firm's creditors, whose concern is always whether or not capital is sufficient to absorb all losses. If it isn't, the firm may not be able to repay its creditors.
Let's assume the year is 2000 and the firm's assets consist entirely of home mortgages. Defaults and losses on the mortgages are very low because home prices are rising; the firm views its capital as more than adequate and it sets out to increase earnings by borrowing more in order to acquire more mortgages. It is increasing its leverage.
By year-end 2006, the firm has increased its assets and its debts by $200 billion, with no change in its capital. The $10 billion of capital must now cover losses from $300 billion of mortgages rather than $100 billion.
When the World Changes
That would not be a problem if the world didn't change. Indeed, the firm's expansion was based on just that premise. But the world did change: Home prices peaked and started to fall in late 2006, the default rate on the firm's mortgages began to rise, and everything pointed to continued increases in defaults and to substantial losses. Anticipating that rising losses could entirely deplete the firm's capital, creditors feared that the firm would not be able to meet its obligations.
In actuality this type of banking effected our whole nation and the rest of the world. Most of America is borrowed up to the hilt. Everything that America owns has been bought on credit, and paid for at least three times over the original cost paying for massive amounts of interest over the cost of the product. There is only one cure for having to over pay on everything you buy. DON'T buy on credit. Save your money until you have enough to pay cash. Yes, hoard it! Do not let go of your hard earned money until every nickel is accumulated for whatever it is that you wish to purchase. It make take sacrificing in order to accumulate your cash, but in the long run you will save so much money over a lifetime that you will have money to spare, and maybe even enjoy your retirement instead of being in a bind at that time, or the for all of the other times of your life. It beats the alternative for what has already happened in the banking industry.
Fast-forward to 2008, when some of the firm's existing obligations came due. The creditors involved would not extend them but insisted on being paid. Since the old creditors wanted out, there was little inducement for potential new creditors to take their place. Unable to raise new money to pay their debts, the firm faced bankruptcy, even before all its capital was depleted.
Enter the Government
Enter the government, which decided to make a capital investment in the firm. The purpose of the investment was not to provide the means for the firm to make more loans but to avoid the firm's failure and the devastating consequences of failure for the economy. The investment increased the firm's capital, which strengthened its ability to meet future losses and hopefully restored the confidence of its creditors.
Sometimes such investment decisions by the government have to be made very quickly, perhaps over a weekend, because the firm faces cash needs that it won't be able to meet when it opens for business on Monday.
In other cases, the need is not imminent but may arise in the future, probably when some debts come due. Many if not most financial firms are under-capitalized by the standards of today's harsh economic environment. A capital infusion from the government gives them a safety margin going forward.
A Misguided Reaction
It was reported on December 22, 2008, that the Associated Press had asked 21 banks that have received capital infusions of $1 billion or more from the government to report exactly what they have done with the money. None gave specific answers, which has been widely viewed as evasive and shameful. This is an understandable reaction, but it is misguided.
A bank‘s sources and uses of funds are like a bathtub with multiple pipes and drains. If a bathtub has water coming in from pipes A, B, C, and G (for government), and leaving through outlets W, X, Y, and L (for loans), the question of which outlet the water coming in through pipe G empties into is not answerable. Even if the tub were rigged so that the G inlet was connected directly to the L outlet, the allocation of water from the other sources to the various uses is bound to be affected.
It would be a simple matter, for example, for a bank to allocate 100 percent of the government's capital to various categories of loans while reducing the flow of funds from other sources into loans. We should be pleased that none of the banks have seen fit to play that game.
Besides which, the premise of the AP survey is wrong. The justification for the capital infusions is that it will increase capital, not loans. The goal is to avoid future shocks arising from the failure of under-capitalized firms. The fundamental purpose is to prevent the crisis from getting worse. Other measures are needed for a real cure.
This whole scenario of borrowing a little and paying back a lot has been super for the bankers, and have literally enslaved a nation into debt. At every possible opportunity there are credit cards and loan offices, and mortgage brokers pushing their wares into the faces of the public. The consensus is, "Why wait, when you can have it all now?" Indebtedness is slavery to the lender. The bankers are richly dressed, with extravagant
cars, boats, houses, and lifestyles because you are paying for it with the interest that you are repaying. If every person saved or even hoarded their money to pay cash for everything, they would be the ones who could afford a better life, without a mountain of debt crushing from every side. If is far better to do without things for a while, then it is to have them and pay for the same things over and over again in interest. Save yourself a world of misery, and save your money.
First Let's Look at Shopping for a Mortgage in a Stressed Market
by Jack M. Gutentag
Current stresses in the home loan market have changed the ground rules for borrowers in many ways. A recent column focused on the confused state of affairs in the market for jumbos (loans larger than $417,000). Jumbos are priced higher than smaller loans even when they can be purchased by Fannie Mae and Freddie Mac -- and much higher when they can't.
This article reports on the results of an online shopping exploration I did on December 12. I priced conforming loans of $400,000 that can be purchased by Fannie and Freddie and $800,000 (jumbo) loans that cannot. Within each size class, I looked at 15- and 30-year fixed-rate mortgages, as well as 5/1 adjustable-rate mortgages (ARMs in which the rate is fixed for a period of five years). Prices were obtained from sources including the four largest depository institutions in the market: Bank of America, Citicorp, Chase, and Wells Fargo.
To assure comparability, I posed as a prime borrower purchasing a single-family house in California with a large down payment, while fully documenting my income and assets. What I learned probably holds for non-prime transactions as well.
Price Diversity: The differences in prices quoted by different lenders were extremely large. On the popular 30-year conforming fixed-rate mortgage (FRM), on which spreads usually are the smallest, the highest quote was more than 1 percent above the lowest quote. On ARMs, the spreads were even larger. On a 5/1 jumbo ARM, one lender quoted 8.125 percent plus $9,800 in points, while another quoted 5.75 percent with zero points.
Bottom Line: Borrowers can save a ton of money by shopping loan providers.
Conforming ARMs: One striking fact about the current market is that conforming ARMs cost more than 30-year FRMs, something I cannot remember ever having seen before. The rate difference between the 30-year FRM and the 5/1 ARM, holding points constant, was almost 1 percent. Furthermore, 3/1 and 7/1 ARMs were both priced higher than the 5/1s. On the other hand, all the lenders -- with the exception of one -- offering jumbo loans priced ARMs below the 30-year FRM, which is the usual pattern.
Bottom Line: There is no reason for a borrower to select a conforming ARM, but on jumbos, ARMs continue to enjoy a significant rate advantage.
15-Year FRMs: The 15-year FRM has always been my preferred instrument for borrowers who could afford the payment, because it carried a significantly lower rate than the comparable 30, and it amortized much more rapidly. On jumbo loans, the 30-15 spread remains very attractive at about 5/8 percent, but on conforming loans, it has dwindled to about half of that.
Bottom Line: There is no reason to avoid 15-year FRMs, but on conforming loans the advantage is not what it was.
Interest-Only Version of the 30-Year FRM: Until recently, the 30-year FRM that allows interest-only (IO) payments for the first 10 years was very popular. Borrowers could avoid making payments to principal for 10 years. To get the IO option, borrowers typically paid a rate premium of about 1/8 percent.
In an environment of declining home prices, investors don't like loans that build no equity for 10 years, and they have raised the premium to 1.4-2 percent.
To illustrate, one lender priced a standard 30-year FRM for $400,000 at 5.75 percent and the IO version of the same mortgage at 7.25 percent. This means that the borrower was offered a choice between paying a) $2,354 a month, of which $1,917 is interest and $437 is principal, and b) $2,416 a month, all of which is interest. This pricing eliminates the only benefit borrowers receive from an IO, which is the lower payment.
Bottom Line: Borrowers should avoid the IO option on the 30-year FRM. On ARMs, however, the rate premium to get an IO option is still reasonable.
Paying Points to Reduce the Interest Rate: Stressed markets do offer one significant bargain: buying down the interest rate by paying points. In 2005 it cost about 1.5 points to buy down the rate by .25 percent on a 30-year FRM. In early 2007 it cost about 1.125 points. Today the price is down to about half a point.
In part, the lowered price is due to the shorter average life of loans, which increases the value to investors of collecting points upfront. In addition, lower rates carry lower payments, which reduce the likelihood of default. In a stressed market, this carries a lot of weight.
Borrowers viewing a rate buy-down as an investment can earn a very high return. For example, one lender on December 12 offered a rate reduction of .5 percent for 1.119 additional points. Using calculator 11c on my Web site, I determined that this investment in points would yield 28 percent over five years and 32 percent over 30 years.
Bottom Line: Buying down the interest rate is a very good investment.
http://us.rd.yahoo.com/finance/allnews/columns/mortgage/SIG=14m141s...*http://www.amazon.com/Mortgage-Encyclopedia-Authoritative-Programs-...
The Mortgage Encyclopedia
An authoritative yet concise guide to the mysteries of mortgage finance, arranged alphabetically from "A-Credit" to "Zero Balance." Includes information that will help you decide whether to use a mortgage broker, learn if you can avoid mortgage insurance, and much more. Reach for this indispensable guide and get the fast, accurate information you need!
How do you get into buying foreclosed homes or homes at auction?
by Ranscott
Best Answer
I have bought and sold many foreclosures. I started in the 1980's when many fewer people were doing it. The process varies from state to state. In both FL and NC the auctions are held on the courthouse steps, in the county seat. In FL, lets say the home is sold for $100K. If you don't research the title, you may be purchasing a second mtg. You would then be responsible for the first mtg and the second. It is very important to do your homework. Then, you will need 5% down in the form of cash or a chashiers check made payable to the clerk of the court. The balance will be due after 10 days also in the form of cash or cashiers check. Not very often, the owner will be able to hold off the foreclosure process in that 10 day period by filing for chapter 7, 9, 11, or 13. When that happens, the courts will refund you your money but it takes about 4-6 weeks. In NC, you also need 5% down on the day of the auction but now the 10 day period after the sale is open to anyone that wants to still put in an "upset bid". This process continues until a 10 day period goes by without anyone bidding again. Then the balance is due in the form of cash or cashiers check. All other mtg's are wiped clean in NC. The process is different from state to state. I would suggest you go to the courthouse and lookup the upcoming sales (they are posted somewhere just ask) and watch the process. Then, contact and pay an attorney for advice on how it works in the state you are in. I should say I have all but left the foeclosure business because of the volitility of the market. Be very careful, do your homework, and make sure you know what you are buying.
Is a Reverse Mortgage a safe loan?
by infoDoc
Best Answer
A reverse mortgage is a really great thing if you have lots of equity in your home, and you don't have very much liquidated cash to enjoy your retirement. My mother had a house paid in full in Santa Barbara, CA but was living off of social security checks. I helped her get a reverse mortgage loan from Financial Freedom. Then she was living life to the fullest until she passed away 6 years later. My siblings were livid when they found out she got that loan, because they thought she would eat up their inheritance. But she sure loved life those last years of her life, going to the off-track horse racing, bought a new car, new hi-def tv, remodeled her kitchen with Viking appliances. So, yes it can be a very good thing. But you must remember that it is basically selling your house slowly back to a financial institution. If my mom would have lived long enough, my brother and sister (and me) would not have inherited a dime, but that was ok with me.
The Best Way to Refinance With a No-Cost Mortgage
by Jack M. Gutentag
The current refinance boom has focused attention on no-cost mortgages (NCMs), which have attractive features to refinancing borrowers. NCMs help borrowers avoid being overcharged, and they eliminate most of the uncertainty involved in determining whether a refinance will pay. These no cost loans are not available for new purchasing of a home, but can be found for refinancing, although finding it can be difficult.
On the other hand, the price of NCMs -- as measured by the interest rate increase borrowers must pay to avoid refinance costs -- is unusually high in the current market. The challenge is to obtain the benefits of NCMs without paying an excessive price for them in higher interest rates.
An NCM is a mortgage on which the lender pays the borrower's settlement costs, with certain exceptions. The lender won't pay your tax escrows, homeowner's insurance, or transaction taxes if there are any. You will also be stuck paying interest on two loans for a few overlapping days. All other costs, including the mortgage broker's fee if there is one, are paid by the lender.
No-Cost Isn't No-Cash
Don't confuse no-cost with no-cash. No-cash means the settlement costs are added to your loan balance at closing. The borrower pays them, but over time and with interest.
NCMs help borrowers avoid being overcharged by reducing multiple price dimensions to one: the interest rate. Typically, in selecting a loan provider, borrowers shop for rate and points, ignoring other settlement costs. They usually find out about these costs after they submit an application, and then they receive "estimates" that are subject to change. This provides lenders with ample opportunity to pad their own fees and mark up those of third parties.
When responding to a borrower inquiring about an NCM, however, lenders do not have that luxury because the borrower is shopping strictly for rate. The rate lenders quote on an NCM, therefore, is likely to cover their true costs rather than a padded cost.
Competitive Constraint on Broker Fees
Borrowers shopping for an NCM can shop brokers and lenders interchangeably. Brokers must include their own fee in the quoted interest rate, which they know is being shopped. This imposes a competitive constraint on broker fees.
NCMs also eliminate most of the uncertainty involved in determining whether a refinance will pay. If there are refinance costs, the borrower must decide whether the costs are offset by the lower rate. I send readers faced with this puzzle to calculator 3a on my Web site. But if there are no costs, you don't need a calculator because any rate reduction is a winner.
The rate quoted by a lender on an NCM is one that, from the lender's standpoint, justifies paying the costs. The lender willing to accept a rate of X percent on a loan where the borrower pays the costs will quote X + I on an NCM, where I is the rate increment needed to cover the cost.
Challenges of the Current Market
Unfortunately, in the current market I is more than twice as large as it was just a year ago. The reason is that lenders are assuming they won't have the rate increment for very long because market rates will decline further and many of the loans refinanced today will be refinanced again in the near future. This is the same reason why, as I indicated in an article a few weeks ago, the best bargain in today's market is buying down the interest rate by paying points.
The upshot is that borrowers refinancing today -- unless they expect to move within a few years -- should pay their own settlement costs and, if they have the cash, pay points to reduce the rate. To do this while retaining the strategic benefit of shopping for an NCM, follow these steps:
1. Shop for the best rate on an NCM.
2. Shop for the lowest points -- but otherwise no cost -- at a specified rate.
For example, assume three NCM quotes come in at 5.5 percent, 5.625 percent, and 5.75 percent. Ask all three lenders how many points you would have to pay to reduce the rate to, say, 5.25 percent, emphasizing that the loan otherwise remains no-cost. You are now shopping for a modified NCM on which the borrower pays the points required by a specified rate but the lender pays all other settlement costs.
In the above example, you should select the lender quoting the lowest points for the 5.25 percent rate. Do not select the loan provider quoting the lowest rate on the NCM, then subsequently ask about buying down the rate. The loan provider who has already been selected may well give you a much less advantageous quote than one who is competing to earn your business.
Combating the Financial Crisis: The Foreclosure Challenge
by Jack M. Guttentag
The government's efforts to combat the worst financial crisis since the 1930s can be divided into three phases. Phase one, executed largely in catch-as-catch-can fashion, was directed toward shoring up financial firms that were undercapitalized and had lost the confidence of their creditors. The goal was to prevent their failure, which would have made the crisis worse -- far worse.
Phase one is far from over; new flare-ups continue to arise, money continues to be injected into the banks, and dramatic new approaches for recapitalization may need to be considered. The battering of bank stocks that occurred on Inauguration Day highlighted the crisis and proved that investors are not satisfied with Washington's bailout efforts thus far.
Phase two, executed in much more deliberate fashion, was to reduce interest rates to mortgage borrowers. Where phase one has had the highest priority, phase two is low priority, adopted largely because it is easy to implement and helps some homeowners -- although not those who most need it.
A Refinance Boom With Limited Impact
Lower rates have generated a refinance boom in the midst of a growing recession, like an oasis in the desert. But the impact is limited because access is restricted to homeowners who qualify for loans that can be purchased by Fannie Mae or Freddie Mac, or insured by FHA. To lower their rates, borrowers must have equity in their property and good credit; the thirstiest homeowners can't drink from this oasis.
Phase three has yet to be defined, but the focus has to be on shrinking the foreclosure rate. The financial crisis started in the housing market and will not end until home prices stop declining and foreclosed homes stop flooding the market.
None of the existing programs, including loan programs (Hope for Homeowners and FHA Secure), counseling programs (Hope Hotline), and foreclosure moratoriums have made a significant dent in the foreclosure rate. The same will be the case if bankruptcy laws are amended to allow judges to modify mortgage contracts, a proposal currently under discussion.
Returning Loans to Good Standing
To make major inroads into the foreclosure rate, we need a marked increase in contract modifications of mortgages on the path to foreclosure, returning these loans to good standing and keeping them there. The private sector has made efforts in this direction, but the loans they have modified are too few and the modifications too small to make a substantial difference. In particular, very few modifications reduce the loan balance, which is why about half of them re-default within six months.
Another important objective of phase three is to begin the process of restoring confidence in the quality of financial assets, which the crisis has undermined. With the loss of confidence has come the loss of ascertainable values and marketability. This is the major reason that borrowers today who need loans larger than those that can be sold to Fannie Mae or Freddie Mac have to pay a rate premium of about 2 percent, which is about 8 times larger than it was before the crisis.
The following are the main features of a plan directed to these objectives, which a colleague and I submitted to the US Treasury. A more detailed version is on my Web site (see Breaking the Back of the Financial Crisis).
• Government will encourage servicers/investors to mark down loan balances to 90 percent of current market value by contributing to the markdowns, and by guaranteeing timely payment of principal and interest on modified loans. Eliminating negative equity on modified loans will lower payments and incent borrowers to remain in their homes, which will reduce the incidence of re-defaults.
• The government outlays required to support balance write-downs will be large, but they will be secured by second liens which borrowers will be obliged to repay in the future. In this way, the government will be able to recover some (if not all) of the outlays.
• The government will encourage private mortgage insurers (PMIs) to underwrite and provide payment insurance on modified loans by offering to share losses with the PMIs. In addition, the payment insurance would carry full faith and credit back-up insurance by the Government National Mortgage Association (GNMA), which will make it highly desirable to investors.
• Payment insurance supported by GNMA will make modified loans marketable, and shift some of the workload in processing modifications from understaffed servicers to PMIs. GNMA will receive a piece of the insurance premiums, which should make this part of the program self-supporting or even profitable for the government.
Maybe the Banks Should Be "Hoarding" Money
by Jack M. Guttentag
"Is it not shameful that our financial institutions receive capital infusions from the government and, instead of lending the money out, they hoard it?"
I hear this complaint a lot, and the government has not done a very good job of responding to it. My view of government intent is that the capital infusions were meant to be "hoarded," defining that word as adding to the firm's capital rather than adding to its loans.
A necessary backdrop: The financial crisis began in the home mortgage market and then spread like wildfire to engulf the entire financial system. The core reason for the conflagration was that financial institutions were over-leveraged -- meaning that their debt was excessive. They were also under-capitalized, which means the same thing.
The Major Roles of Capital
Consider a financial firm that has $100 billion of earning assets, $90 billion of debt, and $10 billion of capital, which is the difference between its assets and its debts. The major role of capital is to absorb potential losses on the assets, some of which will default. A closely related role is to instill confidence in the firm's creditors, whose concern is always whether or not capital is sufficient to absorb all losses. If it isn't, the firm may not be able to repay its creditors.
Let's assume the year is 2000 and the firm's assets consist entirely of home mortgages. Defaults and losses on the mortgages are very low because home prices are rising; the firm views its capital as more than adequate and it sets out to increase earnings by borrowing more in order to acquire more mortgages. It is increasing its leverage.
By year-end 2006, the firm has increased its assets and its debts by $200 billion, with no change in its capital. The $10 billion of capital must now cover losses from $300 billion of mortgages rather than $100 billion.
When the World Changes
That would not be a problem if the world didn't change. Indeed, the firm's expansion was based on just that premise. But the world did change: Home prices peaked and started to fall in late 2006, the default rate on the firm's mortgages began to rise, and everything pointed to continued increases in defaults and to substantial losses. Anticipating that rising losses could entirely deplete the firm's capital, creditors feared that the firm would not be able to meet its obligations.
In actuality this type of banking effected our whole nation and the rest of the world. Most of America is borrowed up to the hilt. Everything that America owns has been bought on credit, and paid for at least three times over the original cost paying for massive amounts of interest over the cost of the product. There is only one cure for having to over pay on everything you buy. DON'T buy on credit. Save your money until you have enough to pay cash. Yes, hoard it! Do not let go of your hard earned money until every nickel is accumulated for whatever it is that you wish to purchase. It make take sacrificing in order to accumulate your cash, but in the long run you will save so much money over a lifetime that you will have money to spare, and maybe even enjoy your retirement instead of being in a bind at that time, or the for all of the other times of your life. It beats the alternative for what has already happened in the banking industry.
Fast-forward to 2008, when some of the firm's existing obligations came due. The creditors involved would not extend them but insisted on being paid. Since the old creditors wanted out, there was little inducement for potential new creditors to take their place. Unable to raise new money to pay their debts, the firm faced bankruptcy, even before all its capital was depleted.
Enter the Government
Enter the government, which decided to make a capital investment in the firm. The purpose of the investment was not to provide the means for the firm to make more loans but to avoid the firm's failure and the devastating consequences of failure for the economy. The investment increased the firm's capital, which strengthened its ability to meet future losses and hopefully restored the confidence of its creditors.
Sometimes such investment decisions by the government have to be made very quickly, perhaps over a weekend, because the firm faces cash needs that it won't be able to meet when it opens for business on Monday.
In other cases, the need is not imminent but may arise in the future, probably when some debts come due. Many if not most financial firms are under-capitalized by the standards of today's harsh economic environment. A capital infusion from the government gives them a safety margin going forward.
A Misguided Reaction
It was reported on December 22, 2008, that the Associated Press had asked 21 banks that have received capital infusions of $1 billion or more from the government to report exactly what they have done with the money. None gave specific answers, which has been widely viewed as evasive and shameful. This is an understandable reaction, but it is misguided.
A bank‘s sources and uses of funds are like a bathtub with multiple pipes and drains. If a bathtub has water coming in from pipes A, B, C, and G (for government), and leaving through outlets W, X, Y, and L (for loans), the question of which outlet the water coming in through pipe G empties into is not answerable. Even if the tub were rigged so that the G inlet was connected directly to the L outlet, the allocation of water from the other sources to the various uses is bound to be affected.
It would be a simple matter, for example, for a bank to allocate 100 percent of the government's capital to various categories of loans while reducing the flow of funds from other sources into loans. We should be pleased that none of the banks have seen fit to play that game.
Besides which, the premise of the AP survey is wrong. The justification for the capital infusions is that it will increase capital, not loans. The goal is to avoid future shocks arising from the failure of under-capitalized firms. The fundamental purpose is to prevent the crisis from getting worse. Other measures are needed for a real cure.
This whole scenario of borrowing a little and paying back a lot has been super for the bankers, and have literally enslaved a nation into debt. At every possible opportunity there are credit cards and loan offices, and mortgage brokers pushing their wares into the faces of the public. The consensus is, "Why wait, when you can have it all now?" Indebtedness is slavery to the lender. The bankers are richly dressed, with extravagant
cars, boats, houses, and lifestyles because you are paying for it with the interest that you are repaying. If every person saved or even hoarded their money to pay cash for everything, they would be the ones who could afford a better life, without a mountain of debt crushing from every side. If is far better to do without things for a while, then it is to have them and pay for the same things over and over again in interest. Save yourself a world of misery, and save your money.
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