However, there are situations where owners run into tough times because of the loss of a job, divorce, an accident or medical costs. In such cases there are always nearby friendly hard-money lenders to provide the financing you need — at a cost.

Hard Money Loans

To understand how hard money financing works lets take an example where owner Wilson needs to refinance.

The Wilson property is worth $300,000 and Wilson has $160,000 in equity and $140,000 remaining on the mortgage. With a job and good credit Wilson can refinance the property with a new $210,000 loan at 5 percent plus 1 point in today’s market.

A point is worth 1 percent of the loan balance and is paid or credited at closing. In this case Wilson deducts the point (1 percent of the amount borrowed or $2,100 in this case) from the loan amount leaving $207,900 before closing costs and the repayment of the current loan. After paying off the existing loan of $140,000, Wilson has $67,900 before closing expenses.

Wilson now has a $210,000 mortgage at 5 percent interest. Paid with a 30-year schedule, the monthly cost for principal and interest is $1,127.33

But let’s say times have gotten tough for Wilson. His employer of 20 years has gone bankrupt and his medical insurance lapsed just before he was diagnosed with a disease that will cost $40,000 to treat. His credit is shot and his savings are gone.

Tough Terms

Filling this void are hard money (HM) lenders, sometimes described as lenders, individuals or investment groups. They will loan money but under different and, er, unique terms. In this case they might make a loan equal to 60 percent of the property or $180,000. Seen the other way, they want Wilson to have 40 percent equity. In a strong market HM lenders might accept 25 percent equity, while in slow markets they might only finance properties with 50 percent equity.

In addition, the interest rate will be 15 percent. There will be 5 points at closing.

HM lenders don’t care about income, they care about equity and the value of the property. In this example it’s the 40 percent equity that’s central to the transaction. If Wilson does not make his payments, the HM lender will swoop in and take the property through foreclosure.

At closing Wilson is set to receive $180,000 less 5 points. That means Wilson is actually getting $171,000 — the points are equal to $9,000 up front. Wilson uses his loan to pay off his existing $140,000 mortgage and then has $31,000 remaining before closing costs.

Wilson also has a $180,000 mortgage at 15 percent interest. The monthly cost for principal and interest with a 30-year schedule is $2,276.00 — TWICE the cost of the conventional payments for a bigger loan.

Why would anyone deal with a hard money lender? Is it a foreclosure scam, the step just before losing a home? Because of poor credit the regular lending system has been cut off to Wilson — and remember that the regular mortgage system has not always been so great, think of toxic loans. In difficult circumstances desperate borrowers turn to lenders with tough terms, terms HM lenders can only get because the borrower is so needy.

Is a hard-money loan a predatory mortgage? Assuming that all terms and conditions are plainly known and understood by the borrower, and provided there are no clauses which instantly raise interest rates if a payment is missed, call the loan when a payment is late or have hidden fees and charges, then no. Rather than being predatory, a hard-money loan in the best circumstances is simply a form of financing with hard terms reflecting the borrower’s poor credit.

What’s a Hard Money Mortgage? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Conventional Mortgages

FHA Mortgages

Jumbo Mortgages

VA Mortgages

Go to any of these links and you’ll see that Google generates a search for the type of mortgage you want and that at the top of the page is a yellowish area with a compare rates button. Press the magic button and you get a list of mortgage offers which can be localized for your community.

You can arrange the ads by monthly payment, APR, interest rates, lender fees and lender names. The best strategy is to set the “points” option on the right to zero so see you can see par pricing, the real interest rate without points. This makes comparing loans easy.

Once you have your table set up look for the lowest rate AND the lowest fee level. For instance, with conventional financing I see at this writing that one lender is offering financing at 5.353 percent and $6,140 in fees. Another offers the same loan for 5.297 percent plus fees worth $4,952. While the APRs and lender costs differ, the nominal interest rate for both loans is 4.875 percent and the monthly payments are identical.

Picking A Lender

I very much like the idea of visible, uniform mortgage comparisons. That said, there are concerns with the Google system.

First, the Google system is only open to advertisers and there’s no stone tablet which says advertising lenders always have better rates than lenders who do not advertise.

Second, I do not see lenders at this writing who I think of as being local. I do see at least one lender who by name must be 1,000 miles from my location.

Third, advertised mortgage rates whether online or in a newspaper are, well, the best advertised rates at one point in time. Alas, rates are constantly in flux, the best rates certainly won’t be available for borrowers with weak credit and advertised rates are always subject to a number of caveats such as a check of credit and income, the value of the property, credit scores, etc. In other words, great rates and low costs may not be available to everyone — including you.

Fourth, if everyone is charging 5 percent and $2,000 in fees and someone else is offering 4.5 percent and no fees you need to wonder how that’s possible. Money is money, and while some variance of rates and fees makes sense, caution should be in order when someone has terms which are too good to be believed.

Fifth, borrowers need more information about a given loan program than just rates and costs. For instance, there’s a reason FHA mortgages are often a better deal than other loans (can we spell T-O-X-I-C financing) even if the rate is sometimes higher.

The Real Value Of The Google System

The attraction of the Google system comes in the form of consumer education and intelligence. Borrowers rely on lenders for information, program options and rates — but under federal rules lenders have no obligation to get the best rates and terms for borrowers.

In this system the lender has every advantage — but at least the Google ads provide some sense of the rates and costs available from various lenders. Armed with this information, borrowers can then check with such sources as community banks and local credit unions to see how their offers stack up.

Lastly, the Google comparison system is important if only because Google itself is so huge, so significant and so transformational. It’s an addition to the mix of options available to mortgage borrowers which should be welcomed — as should anything which makes the lending process more competitive, more open and more transparent.

Google Mortgage Ads — Do They Reduce Borrower Costs? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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What’s really amazing, however, is the interest level for adjustable-rate mortgages. In February a typical ARM was priced at 5.03 percent.

You have to wonder: Why would any sentient being want an ARM at these rates? For an initial saving of .10 percent you get the joy of future unpredictability with an ARM. The probability of rates going significantly lower is just about zero. The probability of rates going higher is a mortal lock.

Imagine that you want to borrow $200,000 over 30 years. At 5.13 percent your cost for principal and interest each month for a fixed-rate loan is $1,089.59. For an ARM at 5.03 percent your monthly cost for principal and interest falls to $1,077.31.

In other words, for the instability and risk of an ARM mortgage you save $12.28 a month.

The better alternative — the obviously better alternative — is to take the fixed rate loan. If rates rise you’re protected. And if rates fall significantly you can refinance and pay little or nothing in cash at closing (the costs of closing are reflected in a somewhat above-market interest rate).

Ah, but what about the more liberal qualification standards associated with ARMs? You can borrow more with an ARM.

If you need the extra borrowing power of an ARM to buy real estate then you really should think about purchasing a less expensive — and more affordable — property.

ARMs & Out-Of-Whack Pricing is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The problem with the Obama plan is that a lot of people are about to get very upset. Here’s why: Under the government’s program distressed borrowers will be able in some cases to refinance current loans with an FHA mortgage. Interest rates will fall and so will loan balances — in other words, the size of the debt will be reduced through a principal reduction.

How The Program Works

So what’s the problem? Imagine that you have two borrowers on the same street, Family A and Family B. They both bought in 2006, they both have a $250,000 mortgage and one loses his job. To prevent foreclosure, the troubled borrower — Family A — gets help from the government. According to FHA Commissioner David H. Stevens here’s what happens (including a chart):

• In 2006: Family A took out a 30-year fixed mortgage with a balance of $250,000 and an interest rate of 9.0%. Their monthly payment was about $2,000 per month.

• Today: Home prices have dropped and Family A’s home is worth $180,000.

• With a FHA Refinance: Family A’s loan balance will be reduced to $207,000 and their monthly payment will fall to about $1300 per month. This will reduce their principal balance by about $33,000 and reduce their monthly payments by about $700 per month, saving the family nearly $42,000 over the next 5 years.

Resentment & Reality

Is it good to help Family A? You bet.

First, if there’s a foreclosure on your block you can be sure the value of your home will fall.

Second, it’s good for the country to save homes from foreclosure.

Third, not throwing people out on the street is a decent and humane thing to do.

Fourth, and not insignificantly, the government will spend $14 billion in TARP money to offset lender losses, some of which will go to Family A’s lender. However, lenders are NOT required to participate, the program is entirely voluntary. Lenders who don’t like the federal program can take their chances with a foreclosure.

That said, while Family B will be happy about the good fortune of Family A, the grim reality is that Family B is paying $700 a month more than Family A. When Family B sells their home, they will owe $33,000 more than Family A.

You can pretty much bet that the disparities created with the FHA Refinance Option will not sit well with a lot of Family Bs. While some critics would not be satisfied if Obama cured cancer and ended hunger, even among rational and reasonable people it’s going to be tough to swallow mortgage help for some but not help for others, especially when monthly mortgage payment checks must be written.

Blame The Firemen, Not The Fire

For the Obama Administration the real problem is that the painful cure for the mortgage meltdown is more visible than the lack of action by the Federal Reserve which could have stopped toxic loans and prevented the current crisis. Already there are calls for less banking regulation, as if that’s both an innovative and smart idea.

As Albert Einstein explained, “the thinking it took to get us into this mess is not the same thinking that is going to get us out of it.”

Controversy Brews Over Latest Obama Mortgage Write-Off Plan is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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But for those with real estate the load is made lighter by tax rules which encourage the ownership of homes and investment property. Such rules are not only good for homeowners, they’re also good for the country: About 20 percent of all economic activity nationwide is related to real estate, so policies which encourage real estate activity help everyone.

It seems that almost every year changes to the tax code require the production of new forms and a re-education process. That said, the real estate basics remain in place and they’re good news for buyers, sellers, borrowers and owners.

Mortgage interest is generally deductible.

The IRS says there are three categories of deductible home mortgage interest:

1. Mortgages you took out on or before October 13, 1987 (called grandfathered debt).
2. Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2005 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).
3. Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2005 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).

Substantial profits can be sheltered when a prime residence is sold.

When a prime residence is sold, up to $500,000 in profits can be sheltered from federal taxes if married, $250,000 if single, providing the home has been used as a prime residence for two of the past five years. Generally this deduction cannot be used more than once every two years, according to the IRS.

There are also provisions which may be helpful to individuals who must sell a prime residence in less than two years. Under the 2004 safe harbor rules, individuals may be able to get some capital gains relief under certain circumstances, such as being forced to move because a job has been relocated at least 50 miles or a home that must be sold because of multiple births resulting from the same pregnancy.

Also, individuals in the Armed Forces and the Foreign Service may be entitled to special consideration under the Military Family Tax Relief Act of 2003 (MFTRA). For instance, you may have longer to take a capital gains deduction or to amend a tax return. There are other provisions under MFTRA that also may be helpful, so check with a tax professional for specifics.

Lastly, please see the information below regarding the new tax credit of up to $6,500 which is available to certain owners who obtain a contract to buy their current residence before April 30, 2010 and close before June 30, 2010.

Points may be deducible by both buyers and sellers.

Picture a situation where a home is sold for $500,000 and the owner — to help close the sale — offers to pay 1 point for the buyer. If the property was financed with a $350,000 mortgage, a point would be worth $3,500. According to the IRS, “the seller cannot deduct these fees as interest. But they are a selling expense that reduces the amount realized by the seller.”

Interestingly, in this situation the buyer can also deduct the points when the home is sold.

“The buyer,” says the IRS, “reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them.”

In effect, the seller gets to write-off the $3,500 cost by reducing any profit from the sale. The buyer essentially lowers the purchase price of the property when the home is sold at some point in the future — thus increasing the size of any profit. However, since up to $500,000 in sale profits may be untaxed, most buyers will effectively never pay a tax on the seller’s contribution for points.

If a prime residence is refinanced then the deal with points is different: The expense of a point must deducted over the life of the loan. If the home is sold before the loan term ends, then any cost not deducted for points can be used to reduce owner’s profit from the sale.

Home offices may be deductible.

If a portion of your home is used regularly and exclusively as your principal place of business or for the convenience of your employer it may be possible to write off a portion of such costs as mortgage interest, property taxes and utilities. There are a number of tests which must be met to take this deduction, see IRS Publication 587, Business Use of Your Home for details.

In some cases there may be tax advantages associated with not deducting your home office in the year or two before you move. Speak with a tax professional for specifics.

Mortgage insurance premiums may be deductible.

Mortgage insurance premiums should be deductible. The catch? Not all mortgage insurance premiums are deductible by all borrowers. In general, the rules look like this:

• The deduction applies to loans made after January 1st, 2007.
• The deduction applies to both private mortgage insurance (MI) as well as mortgage insurance through the Federal Housing Administration (FHA), the Veterans Department (VA) and the Rural Housing Administration.
• The deduction applies to acquisition indebtedness, meaning debt used to acquire a home.
• If you refinance remaining “acquisition indebtedness” then you can write off mortgage insurance on the new debt.
• You can take the deduction if you’re married, file jointly and have a gross adjusted income of $100,000 or less. If you’re single or married and filing separately the income limit is $50,000.
• The deduction phases out once income limits are passed. For married couples, the deduction is reduced by 10 percent for each $1,000 in income over $100,000. This means there is no deduction for incomes above $110,000. For singles and those married and filing separately, the deduction is reduced by 10 percent for each $500 in additional income — this means there is no deduction above $55,000.
• The mortgage premium write-off begins January 1, 2007 and is scheduled to end December 31st, 2010. However, the program is likely to be extended.
• Speak with a tax professional for specifics.

Natural Disasters

The Katrina Emergency Tax Relief Act of 2005 provides extensive tax benefits and assistance to those who were victims of hurricanes Katrina, Rita and Wilma. For details, go to the IRS Katrina relief page or call 1-866-562-5227.

If you have been in a natural disaster — a flood, hurricane, tornado, etc., contact your local congressional office to see if special tax help is available. Links to congressional offices can be found by pressing here.

Mortgage Forgiveness Act

Traditionally if you do not pay off a mortgage in full when a home is sold or foreclosed any money not repaid is regarded as “imputed” income — income which is taxable. However, with the passage of the Mortgage Forgiveness Debt Relief Act of 2007, if you can negotiate a partial pay-off with a lender, the amount forgiven will not be taxed by the federal government.

This legislation makes sense because people who have lost their homes, been foreclosed or gone bankrupt have no money to pay. However, the maximum write-off is limited to forgiveness worth no more than $2 million (not a problem for most folks) and — more importantly — the rule applies only to a principal residence.

Some questions to ask: When does this law end? Are home equity loans covered? What about state rules?

The $8,000 Tax Credit For First Time Buyers Extended Until April 30, 2010

Under the FHA reform package passed by the Congress during the summer of 2008, first-time home buyers could be entitled to a tax credit equal to 10 percent of the purchase price of the residence. This credit is limited to $7,500 for married couples and single taxpayers but can be no more than $3,750 for married individuals filing separately.

Since most homes are valued at more than $75,000 the credit will likely be used up with the purchase of a home or condo. The property must be occupied after April 9, 2008 but before July 1, 2009 to qualify. Also, a “first-time” buyer is defined as someone who has not held title to real estate for at least three years. The credit phases out for married couples earning above $150,000 a year and for singles earning more than $75,000.

The catch.

The $7,500 is a credit against taxes due to Uncle Sam. If you owe $10,000 to the IRS you can deduct up to $7,500. But, when you sell the property the $7,500 must be repaid over 15 years — that’s just $500 a year at some point in the future.

Okay, it’s really a $7,500 loan — without interest and when you really need it.

2009 First-Time Homebuyer Credit (Part 1)

In 2009 the deal changed. Under the American Recovery and Reinvestment Act of 2009 the credit amount was raised to $8,000 and NO repayment is required if a first-time homebuyer purchases a residence before December 1, 2009. There is still an income phase out and buyers must own their homes for at least three years.

2009 First-Time Homebuyer Credit (Part 2)

In November 2009 the deadline for the first-time homebuyer credit was extended under the Worker, Homeownership, and Business Assistance Act of 2009 from December 1, 2009 to include contracts made before April 30, 2010 and closed before June 30th.

Also, the income cap to get the full credit was raised from $75,000 if single or $150,000 if married to $125,000 for singles and $225,000 for joint filers. Above the $125,000/$225,000 levels the credit phases out to nothing at $145,000 for singles and $245,000 for couples.

New Credit for Existing Home Sellers

The November 2009 legislation also created a new tax credit for existing home sellers. In basic terms, if you have owned your home for five consecutive years out of the last eight you can get a tax credit for 10 percent of the purchase price but not more than $6,500. The contract to sell your replacement residence must be signed before April 30, 2010 and the deal must be closed before June 30, 2010. The sale price of the property cannot exceed $800,000.

For specifics regarding the November 2009 changes, speak with a tax professional and get a copy of IRS Form 5405. Also, see the IRS first-time homebuyer site for details regarding the new legislation.

Tax Credit For Military Personnel, Foreign Service Personnel and the Intelligence Community

The National Association of Home Builders points out that “the law provides qualified service members who served on official extended duty outside of the United States for 90 days or more at any time between Jan. 1, 2009, to April 30, 2010, another year to buy a home and claim the credit. They have until April 30, 2011, to sign a sales contract, and until June 30, 2011, to settle and close on the home. Both the $8,000 first-time and $6,500 repeat home buyer tax credits are included in the rule.”

“Qualified service members” are defined as a member of the uniformed services of the United States military, a member of the Foreign Service of the United States, or an employee of the intelligence community, according to the association.

For additional information, please speak with a tax professional and see: http://www.federalhousingtaxcredit.com/service_mem.php

Investment real estate can generate substantial write-offs.

If you own rental property you must seek a fair market rental for your property. You may generally deduct mortgage interest, property taxes, repair costs, management by an outside party, depreciation, advertising, insurance, utilities, legal services and other expenses.

It’s possible with rental properties to have both a positive cashflow and a loss for tax purposes. However, the ability to use real estate losses to reduce overall taxes may be phased out as income rises above $100,000.

If a rental involves relatives special rules and restrictions may apply. Check with a tax pro for details.

A 1031 exchange may allow investors to defer all capital gains taxes.

With a 1031 transaction, investment property is exchanged for “like” real estate. The basic requirements are that within 45 days after the “relinquished” property has been sold, a “replacement” property must be identified. The identified replacement property must then be acquired within 180 days after the sale of the relinquished property.

What’s important about a 1031 exchange is that the capital gains tax on the relinquished property is deferred — but it does not disappear. What really happens is that the basis for the new property (the “replacement property”) is reduced by the adjusted value of the “relinquished property” (the old property).

A 1031 exchange is complex and requires the services of a “qualified intermediary.” Among other tasks, a qualified intermediary holds the money from the sale of the relinquished property and applies it to the purchase of the replacement real estate. This must be done because under the rules for 1031 exchanges, the seller of a relinquished property cannot touch money from the sale — it must be held by the qualified intermediary.

Accounting for a 1031 exchange is also complex. Good sources of information include IRS Form 8824, IRS Publication 544, the website www.1031.us and tax professionals.

Death of a Spouse

The capital gains write-off for the sale of a home is $500,000 if married and $250,000 if single. But what happens if a spouse dies?

For years the rule has been that if the couple’s home was not sold by December 31 of the year when the spouse passed then the surviving spouse would be treated as a single home seller. In other words, the maximum write-off would go from $500,000 to $250,000.

There is a certain logic to this approach — and also a certain cruelty. If a spouse dies on November 30th the surviving spouse would have about four weeks to sell the home. This hardly seems right but now the rule has been changed.

Under new legislation passed by Congress, after December 31, 2007 surviving spouses will now have two years from the date of passing to sell the property and still qualify for the $500,000 write-off.

Gifts

For 2009 you can give someone as much as $13,000 per year, tax free. This is up from $12,000 in 2008. For gift information from the IRS, press here.

Sources and Publications

You can be certain that the information presented here is not a substitute for professional advice. As always with taxes, nothing is ever simple or easy. Speak with a qualified tax professional for specific advice — an enrolled agent, a CPA or an attorney who specializes in tax issues.

Also, the IRS itself has excellent information at its website, www.irs.gov, by phone at 1-800-829-1040 and with specialized publications such as those below:

• Publication 523, Selling Your Home
• Publication 527, Residential Rental Property
• Publication 530, Tax Information for First-Time Homeowners
• Publication 535, Business Expenses
• Publication 587, Business Use of Your Home
• Publication 936, Home Mortgage Interest Deduction
• Publication 946, How To Depreciate Property

A Basic Guide To Real Estate, Mortgages & Taxes is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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“The U.S. mortgage giant Freddie Mac said it would no longer buy those high-risk home mortgages that it deems to be the most vulnerable to foreclosure. The surprise move came amid a deteriorating market for subprime loans affected by slumping home prices and rising interest rates.” (See: Freddie Mac tightens home mortgage standards, The International Herald Tribune, Feb. 28, 2007)

But the fact is that home prices are not slumping in some local markets and interest rates are plainly at the low end of historic norms. Such factors are simply not the root cause of today’s mortgage instability.

Instead, problems in the subprime mortgage market — and a growing sense of problems in other parts of the mortgage universe — are the result of dicey loan concepts that turned out to be exactly what any lucid person would expect: risky beyond reason.

Who could have known such things? Anyone with common sense, including readers of this column.

Let’s begin with interest-only loans. These are mortgages where borrowers do nothing to reduce the principal for the first several years of the loan. Once the interest-only “start period” ends then the loan must be repaid at the fully indexed and fully amortizing rate. Given that most interest-only loans are adjustable, and given that fewer years remain after the end of the start period, it follows that such financing will inevitably require higher monthly payments.

“There’s no doubt,” it said here in 2004, “that the newest trend in real estate financing is the interest-only loan, a trend which needs to be examined with care by anyone who prefers to avoid poverty.”

Moreover, said the column, “with an interest-only loan your initial monthly cash payments each month will be — and be sure to read the rest of this paragraph — lower than with a self-amortizing loan of the same size and with the same rate and terms. However, the interest-only borrower has more debt for a longer period and thus higher total costs. And if rates rise, monthly costs and overall interest costs could be substantially larger than with fixed-rate financing.” (See: The Beauty Of Interest-Only Loans — And The Beast, November 30, 2004.)

The reality is that buying homes with little down has always been risky, something that should neither shock nor surprise anyone. Just look at what the New York Times wrote — in April, 2000.

But what happens if housing values or the economy head south — particularly if a homeowner has a huge mortgage and no appreciable equity? Experts like Peter G. Miller, author of ”The Common Sense Mortgage” (Contemporary Books), warn that buyers who suddenly need to sell will face brokerage fees and related costs that they will have to pay out of pocket. ”Where do you get the cash?” he asked. (See: PERSONAL BUSINESS; Zero Down, And Maybe Something To Gain, The Sunday New York Times Business section, April 2, 2000)

Home prices have risen substantially since 2001 and thank goodness. While those in real estate prospered the stock market largely took a snooze during the same period. The catch, as noted in 2005, was that “the only way we’re supporting high real estate prices is by fudging traditional rules. We allow people to buy at levels that would have been unaffordable under past lending standards.”

“Playing mortgage roulette is fine as long as everyone realizes there are massive opportunities to lose.” (See: Are We Facing A Recession? September 13, 2005)

Is anyone “surprised” that a number of lenders are now in trouble — and that their backers are also taking losses? Why? Some of the risk represented by “non-traditional loans” can be offset by rising home values. But two years ago it was pointed out that if home values do not rise — and they plainly have not in many areas during the past year — then “lenders may be using ARMs to offset future rate risk, but what about future asset values? Is it worth originating loans today which may sink lenders tomorrow? A large number of foreclosures won’t look good on anyone’s books, reason enough to tighten ARM loan standards.” (See: Wrong-Way Borrowing Threatens Borrowers, Lenders, June 7, 2005)

One of the most widespread of the new financing concepts seen during the past few years has been the use of “stated-income” loan applications.

In the summer of 2004 it was explained that “stated-income loans represent too much risk for lenders — and too much temptation for borrowers. Perhaps a little rigidity in the lending process is not so bad. After all, how hard is it to produce tax returns and pay stubs? (See: Should Lenders Dump No-Tell Loans? July 27, 2004)

“What’s obviously best is to get the numbers right when making a loan application,” it said here in November 2004. “It’s equally obvious that ’stated income’ mortgages open the vault to temptation. Such no-tell loans ask borrowers what they earn and the borrower then puts down a number. Unlike a typical mortgage application, the lender usually does not verify the figure with tax returns, pay stubs or calls to employers.”

Of course, if it happens that those self-estimates of income are off a touch then lenders will have problems.

“With a growing number of stated income loans on the books, financing with exaggerated numbers could quickly become a lender concern if home values dip, the economy slows and monthly payments don’t show up. That’s the point at which stated income loans will come home to roost.” (See: How Much Is Too Much? November 16, 2004)

It’s hard to look at the tough times now facing the mortgage industry without mentioning the worst of the worst, the option ARM combined with little or nothing down plus a stated-income loan application.

Here’s a loan concept which gleefully allows borrowers to make payment after payment that will not even cover interest costs. Obviously — no “surprise” here — the loan must be repaid at some point which means that monthly costs must rise if the loan is held past the start period.

As stated here in 2005:

“In the next two to four years we’ll see elective payments end for many option loans. Then we’ll find out who should not have bought and who should not have loaned. Don’t be surprised if a lot of cheap real estate floods the market — and don’t be shocked if the value of your home is impacted as a result. As to lender share prices and dividends, how attractive will such companies appear when huge numbers of loans are unpaid, especially if in many cases the size of the debt exceeds the value of the underlying properties?

“Alternatively, if we restrict option loans now by regulation or lender choice, the pool of buyers will shrink and home prices will be under far less pressure to go up. We will see less appreciation and even price declines in some local markets. Acting now we may face moderate and tolerable declines in market activity, an opportunity which should not be ignored in the face of the financial calamity which looms ahead.” (See: The Case Against Too Many Options, June 28, 2005)

The growing number of loan failures has produced a rising volume of foreclosures. RealtyTrac.com reports that foreclosure actions rose from 885,468 in 2005 to 1,259,118 in 2006 — a 42 percent increase.

The huge number of foreclosure means that we have a growing supply of distressed properties, properties which are often available at discount. Even a small number of foreclosures can drag down local real estate prices.

“To believe that an increasing number of foreclosures will not have a marketplace impact is neither logical nor believable. Just ask the people in the subdivisions and condo projects where developers have recently cut prices on just a few units. (See: Foreclosures — No Worries, No Vision, May 5, 2006)

At this writing we have evidence that home values have fallen in about half of all major metro areas. The problem, of course, is that we really do not know the extent of value declines and thus cannot project future loan failures and foreclosure levels.

“While unit sales are easy to track, data regarding recorded prices is less certain. If you have a strong sellers market you can bet that sale prices are indeed what people paid because sellers have no need to offer discounts and buyers will not pay any more than required. But if you have a market that’s losing steam, the same assurance is not plausible.

“The problem with slowing markets is that sale prices may not tell the whole story. Sale prices may be discounted, and the extent of those discounts cannot be reliably estimated.” (See: A Time For Yellow Flags, November 28, 2006)

A major part of the problem has been the untenable view that home prices only rise. Does anyone believe that? Apparently a lot of people did, which is unfortunate:

The prevailing theory seems to be that higher monthly costs are not a problem because one can just sell the underlying property. But such thinking assumes that property values will rise — and that is not guaranteed. If property values merely stay the same large numbers of people in the next few years will be both unable to make monthly payments and unable to sell for enough to pay off growing mortgage debt. (See: Exit Strategy: What If There Is No Way Out? November 1, 2005)

The news today is concentrated on the subprime market, but guess what? This is not a problem that can be contained to poor and marginal borrowers. A lot of well-funded entrepreneurial people bought with toxic loans and they too will be facing tough times as required payments rise and in too many cases property values fall.

“We now have a large percentage of loans that involve negative amortization and potentially huge payment increases. It’s impossible to believe that some portion of these loans — and perhaps a large portion — will not result in financial disaster.” (See: Toxic Loans Threaten Home Values, February 14, 2006)

In fact, it’s not just borrowers and lenders who suffer when loans fail, it’s also neighbors and communities who suffer. How? Just think about what will happen to the value of your home if a neighbor is foreclosed. As I said in a 2006 speech to the Association of Real Estate License Law Officials (ARELLO):

A growing number of recent property owners will find that they have homes and investments which cannot be sold at a profit — as well as homes and investments which cost too much to carry. The fruits of this impossible dilemma will be more properties for sale, more supply, more pressure to moderate if not lower prices, more foreclosures and more bankruptcies. Even those without a mortgage may find that the value of their home will drop as neighbors who financed imprudently rush to dump their properties on the market.

If “nontraditional” mortgages are so great, how come loan buyers and regulators are now demanding a return to long-time lending standards? More importantly, why did they accept such risky concepts in the first place? Surely no one will be “surprised” if lawmakers start asking pointed questions as foreclosure rates rise and increasing numbers of lenders fail.

————————
Published originally by Realty Times on March 13, 2007 and posted with permission.

Mortgage Surprise? What Mortgage Surprise? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Until this point HUD has generally allowed lenders to offer their own Good Faith Estimate of Closing Costs, however the new standard form for all lenders — a form that took 14 years to develop — will finally assure that borrowers actually understand what’s being charged for their loans, why and by whom.

“The mortgage crisis,” says former HUD Secretary Steve Preston, the last HUD secretary appointed by President Bush, “was fueled in part by people agreeing to mortgages that they ultimately could not afford. In some cases, people didn’t understand or know that their mortgages could result in large payment increases after just two or three years. Others did not recognize the total costs that come with homeownership. And others paid higher loan origination and closing costs simply because they did not know about other affordable options.”

So what makes this form better?

First, it’s a three-page document that every lender will have to use — meaning that offers from lenders will be the same and can readily be compared whether you are looking for a conventional, FHA, VA or jumbo loan.

Second, the document is not just a list of fees and charges, it also explains in basic terms the purpose of each expense.

Third, mortgage brokers will have to show their yield-spread premiums (YSPs), costs which Preston says were “rarely understood by, or fully disclosed to, borrowers. These premiums are directly tied to the higher interest rates that borrowers pay. Consumers deserve to understand this and they need to get credit for essentially paying these premiums.”

Fourth, it goes together with the government’s new HUD-1. This is the three-page form which all closing and settlement agents must use after January 1, 2010. It is now easy to compare the GFE with the HUD-1, thus assuring borrowers are not overcharged at closing. For details, please see our consumer’s guide to the HUD-1.

Fifth, there’s no charge for a mortgage application under the new rules, though lenders can charge for a credit report.

Page One

The first page is actually a summary of loan costs — the specifics are found on page two.

Item 1 tells you how long the quoted rate and terms last. Items 3 and 4 concern loan lock-ins — how long the rates and terms will last if you lock them in at the time the GFE is issued.

The loan summary tells you the amount of the loan, the initial loan rate and monthly payment. IMPORTANT: If you have an ARM the next few items will tell you:

• How high the interest rate can go.
• When the interest rate can first rise.
• The maximum monthly payment you can expect.
• If a prepayment penalty is allowed and, if yes, how much it will cost.
• Whether there is a balloon payment at the end of the loan terms.

Next the form will tell you whether the lender will create an escrow or “trust” account to collect money each month for property taxes and insurance. Generally, if you buy with less than 20 percent down an escrow account is required by the lender.

Finally, the form adds your origination charges (the “A” items on page two) with other settlement costs (the “B” items on page two). Be aware that you can have additional costs at closing, depending on how the sale agreement is written.

Page Two

The second page is divided into two parts, A and B. Part A looks at “origination” fees, the cost to buy your mortgage.

First, the form shows your origination fee in a dollar amount, including any yield spread premium (YSP). Under the old rules, the yield spread premium could be shown as either a dollar amount or as a percentage of the loan. Now, the entire cost of the loan, including any YSP, is shown as a single dollar amount.

Next, the form shows if your interest rate is being impacted by the origination fee. In other words, let’s say you can borrow $100,000 at 6 percent interest over 30 years with no points. This is called the par pricing for this loan. But, let’s say that you could also borrow $100,000 at 5.75 percent — if you were willing to pay 1 point at closing. A point is equal to 1 percent of the loan amount or $1,000 in this case. The form shows if you are paying for any reduction of the interest rate OR any increase in the rate by paying a smaller origination fee.

Next we go to part B. This part of the form shows the cash costs you can expect to pay at settlement (or escrow) when the loan closes. As the bottom of part B is a total which shows “Your Charges for All Other Settlement Services.”

The totals for parts A and B are then shown at the bottom of the page and on the bottom of page one as well.

HUD encountered considerable opposition from the lending industry, especially with regard to the question of how yield spread premiums should be disclosed. In an important decision which reviewed 14 years of effort to update the good faith form, a court found in 2009 that HUD had acted fairly and in the public interest with the form it produced.

Page Three

The last page should really be the first page because it contains instructions for understanding the form.

The first section lists charges that the lender cannot increase, charges that can rise by as much as 10 percent, and charges that change prior to settlement. This is important information, it means that you should check the numbers on your good faith estimate with the final figures presented to you at closing.

Next, HUD gets into the issue of higher or lower settlement fees. In the same way that mortgage loans have par pricing, so does the settlement process. In other words, if you are willing to pay a somewhat higher interest rate you may be able to lower your cash costs at closing. Indeed, you may not have to bring any cash to closing.

In the third section HUD offers borrowers the opportunity to compare loan offers from different lenders. This is important because borrowers should look at different loan offers to find the rates and terms which best meet your needs.

Lastly, HUD notes that your loan may be sold in the future. If so, after settlement “any fees lenders receive in the future cannot change the loan you receive or the charges you paid at settlement.” Translation: A contract is a contract.

HUD estimates that the new form will save typical borrowers $700 each time they finance or refinance a home. That’s a lot of money, but more could be done to cut borrower costs — and it shouldn’t take 14 years to make additional changes.

IMPORTANT: Always keep your GFE in a safe place to assure that your loan terms are actually the same as disclosed. For questions regarding GFE issues, speak with your real estate broker and mortgage lender.

How To Read The New Good Faith Estimate Forms is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Ugh. You can see where this is going.

“The first alternative would reduce the maximum mortgage eligible for the interest deduction from $1.1 million in 2012 to $500,000 in 2018 by annual decrements of $100,000 each. That change would boost revenues by only $400 million in 2013 but by $41 billion over 10 years. The $500,000 cap would affect more homeowners in later years as incomes increase and housing prices rise.

“The second alternative would replace the deduction with a 15 percent tax credit for interest on mortgages below the declining limits in the first alternative. (In 2005, the President’s Advisory Panel on Federal Tax Reform proposed a variant of that approach.) The change would reduce taxes for some owners and raise them for others, with a net increase of $13 billion in 2013 and $388 billion over the period from 2013 to 2019.”

Here’s an easier way to raise tax revenues: How about taxing overseas profits? How about having hedge fund operators pay income taxes rates and not capital gains rates on their compensation? How about doubling the tax on any company that sends U.S. jobs overseas?

Real Estate: Will Mortgage Interest Write-Offs Be Reduced? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Today’s interest levels are remarkably low, suggesting a lot of capital and relatively little demand. Being down 1.35 percent from a year ago means substantial savings when compared with the old rate.

For instance, if you want to finance $250,000 over 30 years at 6.47 percent your monthly cost for principal and interest will be $1,575.24. Lower the rate to 5.12 percent and the monthly bill will drop to $1360.45. That’s a savings of $214.19 a month or $2,577.28 per year.

Freddie Mac also reports that:

___The 15-year FRM this week averaged 4.56 percent with an average 0.7 point, down from last week when it averaged 4.68 percent. A year ago at this time, the 15-year FRM averaged 6.00 percent.

___ Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 4.57 percent this week, with an average 0.6 point, down from last week when it averaged 4.75 percent. A year ago, the 5-year ARM averaged 5.99 percent.

___ One-year Treasury-indexed ARMs averaged 4.69 percent this week with an average 0.5 point, down from last week when it averaged 4.72 percent. At this time last year, the 1-year ARM averaged 5.29 percent.

“U.S. Treasury bond yields fell nearly a quarter of a percentage point over the week, and other long-term yields followed suit,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Interest rates on 30-year and 15-year fixed-rate mortgages fell to the lowest level since the end of May, while initial rates on 5/1 hybrid ARMs declined to levels not seen since January 2005.

“Low mortgage rates are helping to reinforce the housing market. New construction on one-family homes rose for the fifth consecutive month in July to an annualized pace of almost 500,000 homes, the most since October 2008. In addition, homebuilder views of housing market conditions for the remainder of the year rose for the second month in a row in August to the most positive reading since June 2008, according to the National Association of Home Builders.”

Mortgages: Interest Rates Retreat is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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That’s a big jump for a seven-day period, but let’s have some context here: Last year at this time the same loan was priced at 6.09 percent.

“Thirty-year fixed-rate mortgage rates caught up to the recent rise in long-term bond yields this week to reach a 25-week high,” said Frank Nothaft, Freddie Mac vice president and chief economist.

“Yet, there are signs that the housing market may be moderating. Housing affordability rose in April to the second highest reading since January 1971 when records began, according the National Association of Realtors® (NAR). As a result, pending existing home sales rose for the third consecutive month by 6.7 percent in April and represented the largest monthly increase since October 2001. Three of the four regions experienced increases, led by a 33 percent jump in the Northeast, the NAR reported.”

Affordability

Of course affordability is up. If the price of corn goes from $10 for five ears to $5 for five ears you can buy more corn — but do you really want to buy more?

As to sales, a huge percentage of sales are not everyday transactions between buyers and sellers, they are now transactions which involve the purchase of lender-owned properties, typically at discount.

Negative Interest Rates

Despite the big increase this week, the point remains that mortgage rates are ridiculously low.  A year ago no one would have thought they could get 5 percent financing, now you can and such rates are characterized as “high” in some quarters.

You’re kidding. These are the rates of a lifetime. It’s possible that rates may again go into the 4 percent range and in theory it’s possible that they could go even lower — during the Great Depression U.S. securities were actually priced with negative interest levels. As Forbes magazine has reported, “T-bills got so popular that for brief periods between 1938 and 1941 they carried negative interest rates.” (See: “A Brief History of Stock Fads,” September 14, 1992)

In other words, you gave the government $100 and a year later maybe you got back $99. Why would people make such an investment? Because the banks were so iffy at the time that it was safer to lose a little with the government than with banks that paid interest — but might close.

We are now into the traditional home buying season. Whether you want to buy or refinance, now is a very good time to speak with lenders and brokers. Look into fixed-rate loans, forget about adjustables. If rates do go down again, and if they go down enough, then consider refinancing with a “no cost” closing — there’s a cost in the form of a rate somewhat above market level but not in the sense of a lot of cash (or maybe any cash) needed at closing.

Are Low Mortgage Rates Over? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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