Super-Low Mortgage Rates Mean A Great Time To Re-Fi

Although the economy is hurting, in many crises there are hidden bright spots. While many businesses are operating on life support, certain sectors of the economy are being boosted by the current economic situation. One of these is the mortgage industry.

The mortgage industry is benefitting from very low-interest rates, which help to fuel demand for new loans. CNBC reports that the average interest rate for a 30-year fixed-rate loan has declined to 3.30 percent. The Federal Reserve cut interest rates to zero in mid-March in an effort to help boost the economy.

As a result of the dropping rates, mortgage applications are up 21 percent over last year. Almost two-thirds of the new loan applications are for refinances of existing loans rather than new purchases. Since many Americans have been laid off, furloughed, or have otherwise lost income due to the Coronavirus pandemic, a mortgage refinance is an alternative way to improve cash flow.

The growing popularity of refinances does not mean that the real estate sales market is tanking, however. So far, residential real estate prices 9have weathered the storm even as house listings have increased per MarketWatch. The reason is that surging demand has propped up real estate values.

HousingWire reported that seasonally adjusted demand for houses was 25 percent above pre-pandemic levels. High demand has led to bidding wars and nearly half of new listings are sold within 14 days.

The pandemic may have lasting effects on the real estate market, however. After a firsthand look at the risks of contagion within urban areas, homebuyers seem to be trending toward rural and suburban homes. City homes are currently spending more time on the market before a sale than their country cousins.

I was one of the many Americans to take advantage of low interest rates to refinance our mortgage over the past few months. Even though we had only been in our home for about two years, we took advantage of the low rates. This was made possible by the fact that home values had not declined as the economy faltered.

If you are thinking about refinancing your mortgage, there are a few factors to consider. If you have a high interest rate or an adjustable rate mortgage (ARM) and you also have good credit and stable income, this could be a great time to save money with a refinance. As a rule of thumb, if you can save more than one point on your interest rate and plan to stay in your home five years or longer, you could benefit from a refinance.

In our case, we got a new interest rate that is 1.5 points lower than our old one. The new, lower payment will offset the closing costs of the loan in about two years.

If you need extra money and have equity in your house, you can also use a refinance to pay off other debts or get cash out. I would recommend proceeding cautiously with these options, however, since you lose equity and may put your home at greater risk if you lose your job. Less equity also means that your home may be more difficult to sell, especially if home values start to decline.

If you’re interested in a refinance but need to clean up your credit or build more of a work history, you may not have to hurry. Interest rates are currently at record lows, but they may not return to normal for a while. Most members of the Fed say that they don’t plan on raising rates until 2023.

Originally published on The Resurgent

The mortgage mess lingers on

We bought our home four years ago in 2006. It is a modest, three bedroom house in a quiet neighborhood in Villa Rica, a small town to the west of Atlanta. The town was rapidly growing and had recently added a super Wal-Mart and a Home Depot. A Chick-fil-A opened shortly after we moved in.

Realtors and mortgage loan officers offered interest only loans to us. They said that we could use this type of loan to buy a bigger house, then refinance in a couple of years when the value of the home had gone up. Instead, we chose to take the responsible path and buy a smaller home financed with a 30-year, fixed rate mortgage. Our plan was to buy the house, live there a few years, then sell it at a profit to finance a larger, more permanent home.

Our plans were shattered by the mortgage meltdown of 2008. Overnight, the value of our home crashed. We had no idea by how much because no homes were selling to compare it to. Of the five houses, closest to ours (one on each side and three across the street), three went through foreclosure over the next two years. Two are still vacant.

To read the rest of this article, please click the link below:

http://www.associatedcontent.com/article/5878444/mortgage_mess_lingers_on.html?cat=9

Recession Home Prices In Villa Rica

Villa Rica is a small town to the west of Atlanta. Like many areas around Atlanta, this city, whose name ironically means “rich village,” has been hit hard by the mortgage crisis. Home prices here were rising quickly over the past few years as Atlanta’s real estate market blossomed amid rising home values and a booming local economy. Homeowners in Villa Rica, the site of a gold rush in the early 1800s, found that their homes were an investment that was as good as gold.

All that came to a swift end when the mortgage crisis hit in 2008. Development all but stopped as home sales crashed to a halt. Rising numbers of foreclosures meant that many homes sat empty for months on end.

In my neighborhood on the north side of town, near Wesley Chapel Road, home prices had increased by 30% over the previous ten years. This is a small, quiet subdivision with newer houses that were close to the median price for the area. Almost overnight, the market value of these homes fell by approximately half. A planned subdivision that was being built behind my neighborhood now sits silent. Its roads are completed but there are no houses along them.

For Sale signs went up but brought in few prospective buyers. Most prospective sellers stopped bothering with real estate agents and put out For Sale By Owner signs. For a period of almost a year, we had vacant foreclosure houses on either side of my home. It has only been in the past few weeks that a family has bought one of these houses using seller financing. The other is still vacant.

The credit freeze is an important aspect of the fallen real estate prices. With banks afraid to lend money, it can be hard for many people to qualify for mortgages. Since we have owned our house for several years, as interest rates fell I contacted our loan officer to discuss refinancing our mortgage.

He told me that even though we have excellent credit, a refinance is out of the question because of the declining values of homes. As home prices fell, we lost equity so that, like many other homeowners around the country, we now owe more on our mortgage than our home is currently worth.

The same trend makes it difficult for new homebuyers to secure financing. In sharp contrast to the past decade, most banks are now requiring borrowers, even those with excellent credit, to make a down payment of at least twenty percent of the purchase price of the home. When combined with the crash of the stock market and other investments, this means that many prospective buyers do not have a sufficiently large nest egg to take advantage of the many great real estate deals that exist. The one recent sale in my neighborhood was financed by the seller and did not involve a bank.

Eventually, the economy will begin to grow again and the real estate markets will wake from their slumber. Banks will begin to lend more money and people will once again be able to purchase their dream home. As buyers enter the market, home prices will once again start to rise. For homeowners in Villa Rica and around the country, that day cannot come soon enough.

3/25/09
Bedford MA

Buying a First Home in a Tight Economy

The mortgage crisis has created a surplus of homes for sale with very few buyers. This means that many people have a golden opportunity to get a great deal on a nice home. Plunging prices tempt buyers to purchase homes at a discounts of approximately fifty percent of what the house sold for a few years ago in many cities. First time homebuyers might be skittish about buying a home in such an unstable economy, but if you do your “homework” you can safely get a good deal.

First, look at the big picture. Examine the industry in which you work and take a close look at how your company is faring. If your industry is particularly unstable, or if your company is considering layoffs or pay cuts, you should be very careful about committing yourself to a mortgage. You should try to minimize the chance that you will not be able to pay your bills by considering the chance that you will be facing unemployment or decrease in pay.

Second, when you start shopping for a home, carefully consider how much you should spend. Traditionally, lenders have desired that a mortgage payment be no more than 25% of borrower’s take-home pay and that all payments be less than 32% of the total take home pay. For example, if you make $5,000 per month after taxes, your mortgage payment, including escrows for homeowner’s insurance and property taxes, should be less than $1250 per month. Similarly, your total monthly obligations, including credit cards, car payments, etc. should be less than $1600 per month. This ensures that there will be plenty of money left over to pay utilities and buy other necessities, such as food and clothing. In the current economic climate, a borrower would be wise to be even more conservative than these traditional guidelines.

In the past, borrowers could finance almost all of the cost of a home. Now, however, mortgages with no money down or small down payments are a thing of the past. To minimize their own risks, most banks are requiring a down payment of at least twenty percent of the sale price. This means that most borrowers will need a sizable nest egg to qualify for a mortgage. Banks normally require that the down payment money be verified over a period of time. For example, it is not uncommon to require six months of bank statements or documentation showing the source of the funds. Gifts are normally acceptable, but it is common to require that the donor complete forms that state that the money is a gift and not a loan. Gifts or abnormal sources of down payments will likely trigger additional scrutiny of loan applications these days.

Shop around to find the best interest rate and down payment. Dealing with a mortgage broker instead of individual banks makes it easier to find the best deal. A major cause of the current crisis is that many people were not fully aware of what type of mortgage they were buying. Ask questions and find out exactly what is being offered. This is particularly important if you are buying an adjustable rate mortgage (ARM). You should find out how much the interest rate can adjust and how much that will increase your payment. Also find out if there is a prepayment penalty or a balloon payment. If you do not understand what you are signing, don’t sign!

The best way to shop for a house is to get pre-approved for a mortgage before you start looking at houses. This way you will know in advance how much the bank is willing to loan and you can shop for houses within your price range. This also makes it easier to close on your house quickly when you find your dream home. Since your finances have already been approved by the lender, only items dealing with your specific house will have to be completed.

When you begin shopping for a house, consider foreclosures and other distressed sales. These homes often sell at deep discounts, but do carry some additional risks. For example, such homes are often sold “as is” with no warranty. Since the previous owner could not afford to make the mortgage payments on the home, it is unlikely that they were able to pay for upkeep and maintenance on the home as well. In some cases, the previous owner may even have vented their frustrations on the house’s windows, walls, and doors. This damage will probably not be repaired by the seller and therefore will add to the real cost of buying the home. If the house has been unoccupied, there may be damage from vandals as well.

To minimize the risk of finding unpleasant surprises in the form of expensive repairs after closing on your new home, it is essential to have both an appraisal and a home inspection done before you buy your home. The appraisal confirms the market value of the home and will likely be required by your lender. The home inspection checks the condition of the house and protects the borrower from hidden defects. Additionally, you should maintain a cash reserve to cover any unexpected expenses that arise after the closing.

You can also obtain valuable inside knowledge on local real-estate markets from realtors. You should understand that the listing agent on a house works for the seller. To get the maximum benefit of a realtor, you should hire your own realtor to work for you. This creates a fiduciary relationship between you and your realtor that does not exist between you and the seller’s realtor. Having two realtors will not add to the cost of the house since the two realtors will split the commission.

The collapse in home prices has caused many problems within the financial sector of the United States, but for certain individuals it is also a great opportunity. For a prospective buyer who has excellent credit and money for a down payment, there are plenty of opportunities to buy a very nice home at a fire sale price.


March 24, 2009
Enroute from Atlanta to Newark NJ

Origins of the Subprime Crisis

Over the past few months, America’s financial sector has been hit with its largest crisis since the Great Depression. The crisis began with a rise in foreclosures and the failure of some small banks. The problem spread to investment company Bear Stearns failed in May 2008. Liquidation was avoided by a government-orchestrated takeover of the company by JP Morgan. Bailouts of Fannie Mae and Freddie Mac followed. Over the past week, two prominent companies failed. Lehman Brothers, another investment bank, was liquidated, while American International Group (AIG), an insurance conglomerate, was judged by the Federal Reserve to be too big to fail. This prompted the government to bail out AIG by purchasing an 80% interest in the company with taxpayer dollars.

As the crisis grows, there are more and more calls for increased regulation on Wall Street. To determine whether regulation will solve the problem, the cause of the problem must first be determined. If the source of the problem is not simply short selling, fraud, or basic greed, then new regulation might cause further problems instead of resolving our current ones.

When we delve deeply into the causes of the crisis, it is soon apparent that lack of regulation is not necessarily the problem. Along with healthcare and commercial aviation, finance is one of the most heavily regulated sectors of the US economy. The law of unintended consequences states that any purposeful action will produce unintended consequences. An example of unintended consequences is the passage of the Renewable Fuels Standard in 2007. This law was intended to lower fuel prices by mandating increased production of ethanol. Instead, the net result was that food prices almost doubled while oil prices kept rising. With that in mind, we should look at some of the regulations that the government has enacted on the banking industry.

Many point to the Community Reinvestment Act of 1977. This Carter-era law was intended to combat the practice of “redlining,” denying credit to people who live in certain areas. The law’s language was originally so vague that it only required banks to show a good faith effort. This began to change when the law was strengthened in amended in 1989 to grade banks on a four-point scale and to make these reviews public. In 1991, Congress passed the FDIC Improvement Act, allow regulators to consider a bank’s CRA performance when processing applications for FDIC services.

The law was strengthened yet again by President Clinton in 1995. The Clinton Administration changed compliance of the law from a matter of making an effort to one based on hard numbers of specific loans and specific levels of service. It also significantly stepped up enforcement of the law.

Since the passage of the CRA, the purchase of mortgages by minorities and in minority neighborhoods has risen sharply. The problem is that the underlying assumption that minority loans were denied on the basis of racism rather than credit turned out to be erroneous. According to a 1999 report by Freddie Mac, one of the mortgage companies now in dire straits, revealed that African-Americans have disproportionately large number of credit problems. For example, the report states that on average blacks with incomes of $65-70,000 per year have more credit problems than whites with an income of under $25,000. Consequently, as banks were pressured to make more loans to minorities and low-income borrowers, they were also making more loans to people who were poor credit risks.

A second possible root of the current crisis is the repeal of the Glass-Steagall Act. The Glass-Steagall Act was passed in 1933 during the height of the Great Depression. The banks of the era were accused of speculating in unsound investments. Banks would make loans to companies that were shaky, and would then recommend the same company’s stocks for their investment clients. The GSA established a wall between investment banks and commercial banks. The law was intended to prevent the use of deposit accounts to cover a bank’s investment losses.

In 1999, President Clinton signed the Gramm-Leach-Billey Act into law and repealed the GSA. This was done to make banks more competitive with foreign companies that offered a broader range of financial services. In addition to removing the barriers between banking and investing, the GLBA also allowed banks to offer insurance-related services. The predictable result of an increase in the number of sellers in the marketplace was more competition for the available investors.

At the same time, the United States was experiencing an economic boom. The Federal Reserve under Alan Greenspan was aggressively cutting interest rates. The inexpensive cost of borrowing money combined federal pressure for banks to lend to low-income borrowers. As the competition among lenders became fierce, banks began issuing loans that were more and more risky. Loans were made to borrowers without down payments, without income verification, or with poor credit records.

Borrowers who wanted more house than they could afford were sold Adjustable Rate Mortgages (ARMs). These loans had low interest rates and payments at inception, but since interest rates were at historic lows, both the rate on the mortgage and the mortgage payment had nowhere to go but up. In some loans, teaser rates were artificially low at first, and then adjusted sharply upward. In any case, as payments rose, borrowers found that they could no longer afford their homes. Tightening credit made it impossible to refinance into a fixed rate loan and falling real estate prices made it impossible to sell the home for enough money to pay off the loan. For many, the result was foreclosure.

Yet another commonly cited source of financial problems for companies is a change to arcane accounting rules that occurred over the past fifteen years. In the past, companies used cost accounting, which applies historical costs to a company’s their assets. More recently, the SEC and the Financial Accounting Standards Board have changed accounting rules to a method known as Fair Value Accounting. Assets are now valued at their market price. In other words, assets are valued not by their true economic value, but by what they can be bought or sold for on the current market.

The obvious problem is that when a market suffers a sharp decline, so does the value of the company’s assets. It doesn’t matter that the decline may only be temporary or that the company had planned to hold the assets for the long term. In effect a company’s holdings are required to be valued at an unrealistically low price. When the market was high, fair value accounting was one of the tools used to artificially inflate Enron’s bottom line.

In aviation, there is the concept of an accident chain. There are few instances in which an accident is caused by only factor. In most cases, there are multiple factors that link together to form an accident chain. If any of the factors are missing, the chain is broken and the accident does not occur.

The subprime mortgage crisis is also the result of numerous factors. Government pressure convinced banks to make risky loans. Low interest rates, deregulation, and increased competition all combined to fuel a housing bubble that eventually burst in 2007. When the bubble burst, fair value accounting principles exacerbated the problem by magnifying the decrease in value of the securities held by banks.

Old-fashioned greed also undoubtedly played a role. Some companies, such as Countrywide Financial, focused almost exclusively on the subprime market. Many of these companies did not service their loans, but instead immediately bundled them into mortgage-backed securities and sold them to other companies, such as Fannie Mae and Freddie Mac. In this way, the cancer of failing mortgages was metastasized throughout the financial community.

Some lenders engaged in predatory lending practices. Likewise some borrowers defrauded banks. For whatever reason, many borrowers were either misinformed or failed to care about the terms of the loans that they obtained. Bad loans were either sold off to other companies or the homeowner simply walked away from the house, leaving the bank to foreclose.

Hedge funds, aggressive funds that catered to limited numbers of ultra-wealthy clients, snapped up risky financial products in their attempt to boost returns. Naked shorting, selling short without having stocks to cover the position, occurred even though the SEC considered the practice fraud and attempted to rein it in.

The greed and fraud did not stop within the bounds of the financial community. Countrywide made loans with generous terms to VIP borrowers. The list of Friends of Anthony (Mozilo, Countrywide’s founder and CEO) is long and distinguished. Democratic Senators Chris Dodd, chairman of the Senate Banking Committee, and Kent Conrad received favorable loans from Countrywide. So did numerous members of the Clinton Administration such as cabinet members Alphonso Jackson and Donna Shalala, staffer Paul Begala, and Postmaster General John Potter. Henry Cisneros, Clinton’s secretary of Housing and Urban Development was a former Countrywide director. Franklin Raines and Jim Johnson, former CEOs of Fannie Mae as well as fundraisers and advisors to Barack Obama, also received preferential loans from Countrywide.

In 2003, three years before the crisis broke; President Bush did make an attempt at reforming Fannie Mae and Freddie Mac. The housing industry and realtors opposed the plan, which went nowhere.

Representative Barney Frank of Massachusetts, now chairman of the House Financial Services Committee said, “These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

In 2005, John McCain sponsored the Federal Housing Enterprise Regulatory Reform Act. This law would have established a new independent regulatory agency to oversee Fannie Mae and Freddie Mac. Unfortunately, the bill was allowed to die in committee; the same committee headed by Friend of Anthony Chris Dodd.

There is another saying in aviation: “Don’t just do something. Sit there.” Hastily doing the wrong thing is often worse than doing nothing at all. Government pressures and corruption were largely responsible for the unfolding financial crisis. Hasty and ill-advised additional regulation is more likely to make the problem worse instead of resolving it.

Sources:
http://www.answers.com/topic/community-reinvestment-act-of-1977
http://www.cato.org/pubs/regulation/regv17n4/vmck4-94.pdf
http://www.city-journal.org/html/10_1_the_trillion_dollar.html
“How To Save the Financial System,” William M. Isaac, Wall St. Journal, September 19, 2008
http://www.nysscpa.org/cpajournal/2006/1106/infocus/p14.htm
http://www.investopedia.com/articles/03/071603.asp
http://www.investopedia.com/terms/g/glba.asp
http://www.prospect.org/cs/articles?article=the_conservative_origins_of_the_subprime_mortgage_crisis
http://www.portfolio.com/news-markets/national-news/portfolio/2008/07/16/Countrywide-Deals-Exposed
http://sweetness-light.com/archive/bush-mccain-tried-to-reform-housing-finance
http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190

Morality and the Law

We live in a society where morality has been defined downward for years. Many people, elected officials included, believe that the law only applies to others. For example, Republican Senator David Vitter and Democratic New York Governor Eliot Spitzer were both implicated in prostitution scandals. Various other elected officials and businessmen have been implicated in everything from sexual harassment to bribery to tax evasion.

In truth, society is held together by morality. When morality fails, it is necessary to pass laws to resolve issues that good ethics would have prevented. The finance industry is currently in a state of chaos at least in part because mortgage companies loaned money to people who could not pay and then sold the bundled mortgages to other companies. Other companies have normal business practices that include denying legitimate claims, submitting false billing, and the old fashioned bait and switch.

The law is a good place to start in determining morality. It has been said that morality cannot be legislated, but nothing is further from the truth. Our laws reflect our national morals. When we pass laws against murder it is because we, as a republic, have respect for the sanctity of life and believe that it is wrong to deprive another of their life. When we pass laws against robbery, burglary and theft, it is because property rights are strongly ingrained in the American morality. If a limit on carbon emissions is enacted, it will be because we, as a republic, have decided that we believe that it is wrong, immoral, to allow unrestricted emissions of carbon.

What is legal and what is moral are not always the same, however. Some things are legal, but not moral. Others are not immoral, yet are still illegal.

It would be a stretch to argue that driving 56 miles per hour is immoral, but doing so in a 55 MPH zone is illegal. A law in Georgia made it illegal to buy alcoholic beverages by mail order. A similar law made it illegal to buy a car over the internet without involving a local dealer. Neither of these laws is grounded in morality or ethics, instead they were passed to benefit specific industries.

Similarly, what is legal is not always moral or ethical. One of the best examples of this is Nazi Germany. In the 1930s, Hitler’s government passed laws stripping Jews of their rights and property. These laws, which resulted in the deaths of millions of Jews, were both immoral and unethical, even though they were totally legal under existing German law.

Slavery is another example. Keeping human beings in life long, involuntary servitude was once the norm around the world, including the United States. Doing so was legal under national and international law of the times. A growing number of people around the world became convinced of the immorality of slavery and eventually eradicated it in most countries.

Today, there are several moral issues that face the United States and the world. Among these are abortion, gay marriage, pollution, terrorism, and genocide. We must decide what we believe is the moral answer to these issues and then determine what action should be taken, if any.

To lead the way, we need leaders who share our morals. Our leaders should be held to a higher standard of behavior and not given a pass based on the office they hold or which party they belong to. These leaders should set a positive example for the rest of society and initiate a return to ethical behavior from the boardroom to the classroom and beyond.

If we do not return to a moral and ethical society, the very foundations of our country will continue to erode as politicians pad their pockets at the expense of taxpayers and corporate executives sell out their employees and stockholders. The race will not be to create wealth, but to find someone from whom to take it. The resulting morass of legislation will eventually strangle more and more of our freedoms.