finance

All posts tagged finance

With mortgage rates at historic lows, you might think first time buyers will be falling over themselves to buy entry level homes. In California, condos count as entry level homes.  But starting April 1st, Fannie Mae and Freddie Mac have just changed their guidelines for mortgages when it comes to condos.

It may now cost borrowers between 3 and 5% more to finance a condo versus a single family home!

Fannie Mae now has a mandatory fee of 3/4th of a percentage point on all condominium loans, no matter how high the applicant’s credit score. For a once-popular interest-only condo loan with a 20% down payment and a borrower credit score of 690, Fannie imposes the following ratcheted sequence of add-ons:

  • 0.25% as an “adverse market” fee
  • 1.5% for the below-optimal credit score
  • 0.75% for the interest-only payment feature
  • 0.75% fee since the property is a condo

The total comes to 3.25% extra, which can be paid upfront or rolled into the loan. Additionally, condo units with a high percentage of investors or commercial tenants may now be impossible to finance.

Companies like Wells Fargo have also lowered the threshold for total debt-to-income ratios from 45% to 41%.  Their minimum FICO for a conventional loan without 20% is now 720, up from 620!

On top of this, getting an appraisal is now more expensive.  It used to cost about $275-$325. Nowadays, its in the range of $400-$450, with no guarantee that it will come close to where you think it will.

Another issue to be aware of when purchasing a condominium or a townhome is the reserves held by the Home Owners Association. If they don’t have enough reserves, you may be assessed for repairs.  One of my friends was assessed $15,000 for renovating the exterior of the unit. Not a small sum of money!

This is sure to negatively impact the prices of condos, which will put further downward pressure on certain housing markets. There’s nothing like more affordable housing!

Here’s an incredibly interesting video about how the Federal Reserve Chairman Alan Greenspan directly helped the rich become Super Rich by keeping interest rates artificially low. The low interest rates and easy liquidity caused a spike in asset prices (ever wondered what causes inflation?).

I’ve long maintained that globally, assets are no longer a function of value but a function of liquidity. The video explains how leverage has helped home borrowers become incredibly wealthy. I didn’t become super wealthy, but I did profit by using the same idea. Unfortunately, instead of growing a million into a billion, I started out with Zero and made proportionally less. (although technically, I made an infinite return of return!).

In England there are currently 30,000 people earning over half a million pounds a year, and over 50 Billionaires. All of them work in finance related industries like hedge funds and private equity firms.

10 hedge fund managers pulled in 500 million dollars last year with a lucky few pulling nearly 1 Billion dollars!

It also explains the discrepancy in risk-adjusted returns for these finance wizards. They made obscene amounts of money without taking on any risk. Their financial wizardry is what caused the financial crisis with the subprime loans. Of course, they weren’t left holding the bag! It was the shareholder and maybe at the end of the day it might even result in the US tax payers having to bail large investment banks like Bear Stearns.

Check out this video by the BBC starring Robert Preston – its very enlightening.