home loans

All posts tagged home loans

A few days ago, Ben Bernanke said that mortgage lenders should reduce the principle amount on loans to home owners to prevent major defaults. While this is quite a bizzare thing to say, at some level it makes sense. Rather than foreclosure on a house and sell it for 50 cents on the dollar, the lender might as well knock off 30% of the principle and keep collecting interest on the remaining 70%.

However, in principle I feel its the worst thing to do. Speculators who buy “investments” they can’t afford do not deserve to be saved and neither do the banks that lent them money – they both deserve to be punished. That is actually what recessions accomplish. They shake out the excesses of past booms and clear the way for fresh blood to have their chance at creating wealth. Remember what happened in Japan, where it is common for loss-making companies to be propped up by banks and the government? Their recession last for 15 years and it’s still not clear whether there are fully out of it or not.

Before I get flamed for being un-American by actively supporting a recession, let me clarify my position. There has been a world-wide asset bubble. The natural order of things is to let the bubble burst quickly so the next boom can start again. I resent a slow deflating of this bubble that Bernanke is engineering through his “soft landing”, which is nothing more than inflating the pricing of everything else (except wages). It will only serve to extend this down-cycle and will eventually result in the Federal Reserve losing its credibility and ability to manipulate the economy.

As if in deference to Ben Bernanke’s wishes, a CountryWide (CFC) rep called me today asking if I wanted to refinance my property since I had a 5 year ARM. I was surprized to hear that I had a 5 year ARM, since it was supposed to be a 10 year ARM! The rep explained that it was in fact a 10 year loan with a 5 year ARM, which I think was completely false since the rep sounded like a telemarketer rather than a loan officer. Anyway, he said I should refinance and suggested that I go for a 30 year fixed at the same rate as my 5 year ARM. When I said I wasn’t interested, he suggested that I find out whether I qualify for the Loan Modification Program.

A Loan Modification Program is where the bank extends the length of the term on the loan. So instead of the rate adjusting in 5 years, they can extend it out for another 5 or 10 years. So basically its like a no-doc refinance, only you don’t have to pay for it! This is a much better option than a no-cost refinance, which has a cost, but it’s actually rolled into the mortgage so you don’t pay for it upfront. Instead you pay for it over 30 years, which is usually a terrible financial decision. Even worse, you accept a higher interest rate and in exchange the bank picks up the cost of the refinance. That means you end up paying thousands of dollars more on your principle to save a few thousand dollars. Unless you’re planning to move in 2 years, that’s a really big, but common, blunder.

Considering that I don’t currently have any W-2 income, it should be easy to qualify for the Mortgage Modification Program. Since all my income flows through my corporation, and I don’t need to draw a salary, I’m technically unemployed. (I know what you’re all thinking but no, I don’t qualify for unemployment assistance). Even though I am gainfully unemployed, I still qualify for the modification program!

Don’t know if I’ll take them up on their offer though. I think things could get a lot more interesting over the next few years.

A few of my friends who own homes got into the habit of getting interest-only loans and refinancing them every year. Apparently there was some math that “made it cheaper” to refinance every year. Starting every year with a new loan didn’t seem like a good investment but I’d never really understood the math. Of course, with the drop in home values, LTV ratios decreasing and the drying up of liquidity, this fad has disappeared, but I always wondered how the math worked. I was too lazy to actually do it since I knew intuitively that it must be wrong.

Fortunately ace mortgage broker, Randy Johnson, send me an email with the math.

many homeowners will never burn their mortgages because they make poor choices, like continually refinancing into 30-year mortgages.

Assume that a homeowner started out with a $100,000 loan at 6.5% and that he has been in his home for 5 years. He refinances the existing balance to a new loan at 5.5%. If he is like most Americans, he looks just at how much he saves per month. He gets modest interest savings, $14,265, less if you deduct the costs, which I will ignore. But in choosing to make the new lower payment, he goes out to the lousy end of the amortization curve again. He actually adds 10 months to the total time payments are made, a total of 370 months. That’s why it never gets paid off.

It is much smarter to make the old payment he was paying. He afforded it for five years and he can keep affording it. This converts his interest saving into principal reductions. It shortens the remaining repayment time from 300 to 249 months and doubles his interest savings compared with the first option. Now he saves $32,377.

The most valuable opportunity, however, is to get a 15 year loan which also carries a lower interest rate, 5% today. The payment is about equal to the original payment plus $100. That reduces the remaining payback time to 180 months. The interest during this 15 year period drops by over 60% from what it would have been had no refinance taken place.

To summarize

Interest due in remaining 25 yrs without refinance $96,009

Interest if refinance and make lower payment $81,743

Interest if keep payment the same $63,632

Interest if move to a 15 year loan $39,690

The cost of refinancing is usually never zero. Even if you don’t pay for it, its somehow baked into the loan.

I strongly recommend Randy Johnson’s stellar book How to Save Thousands of Dollars on Your Home Mortgage. If you don’t know what Yield Spread Premium (YSP) or Paid Out of Closing (POC) means on a HUD-1 you definitely should read this book. If you own a home and don’t know a HUD-1 is then get your spouse to smack you and then go buy the book! I promise you’ll save thousands of dollars on your mortgage.

I was listening to the radio yesterday and I was listening to an investment show. The announcer was talking about mortgages and I heard him mention a NINJA loan.

It stands for “No Income No Job or Asset” verification! If that isn’t a liar loan I don’t know what is. You basically show up at the bank(or mortgage broker’s office) and say I have a job and assets to qualify for this loan to buy a house but I don’t want to show you anything. Just take my word for it!

Talk about easy money and excess liquidity! No wonder there has been such a boom in the real estate prices in some parts of the country. I wouldn’t be surprised if these loans end in tears for someone people.

Seems like there’s a lot of easy money chasing global investments. The Swiss and Japanese carry trades (where borrowers could borrow money under 2% in these currencies and invest them in something else, say a US T bill yielding 5%, and pocket the difference) has created a lot of excess liquidity that is chasing investments all over the place.

Some people think that asset prices have now become a function of liquidity and are no longer a fucntion of value.

I wouldn’t be surprized if the subprime meltdown caused coastal property prices to drop 40-50% from the peaks.

I’m on a lot of mailing lists, which usually get sold and result in my getting a ton of spam. Most of it is effectively filtered out, but sometimes “relevant spam” filters through. Here’s an interesting example from a mortgage company.

Did you know that one or more rate changes per day is normal? Most people do not know that. Rate quotes can easily change when you call back later that same day. In the lending business, a rate change can also include a change in the point cost for the same rate. In other words, a rate can be no points in the morning, then later that day cost ΒΌ point. That is a rate change to lenders. Did you also know that regular fixed mortgage rates are not directly affected by what the Fed chairman Ben Bernanke does?

Mortgage rates change primarily based on:
1) the perception of inflation,
2) times of uncertainty and
3) the movement of money in and out of the stock market–that’s it.

When a piece of news shows weakness or uncertainty in the economy, that helps rates fall. The opposite is also true. A drop in the unemployment rate, a rise in durable goods orders, a rise in the consumer confidence index–rates go up.

These influencing factors can present themselves all the time, many without warning, affecting mortgage rates instantly. There is no “delay”. It doesn’t take time to “filter down” like some people think. Reading the paper for quotes doesn’t really work because the information is old by the time you read it. Radio, TV and billboards are not the answer because the details are always missing. They just want to get you on the phone. Competitive lenders can deliver nearly identical rates to each other. Most borrowers don’t ask the right questions and focus only on the interest rate. A professional will always be competitive and deliver what is promised.

To really know about your mortgage I strongly recommend How to Save Thousands of Dollars on Your Home Mortgage. My dog-eared copy is currently vacationing in Egypt with a friend. Its not difficult to understand and is a great resource.