Mike Mueller, Social Media.ist

We've all heard the cliche, "Location, Location, Location". 

My Uncle Sal, the one who has never owned a thing in his life, would say "It's all about Location".  Every buyer knows the phrase.  I even know of a real estate agent who has a discreet tattoo proclaiming those three words.   How cool is that? 

Location #1

Lafayette, CA is an upscale bedroom community of roughly 20,000 upper middle class families.  In 2005 the income for Lafayette was around $111,400.   This last August showed 38 home sales for an average of  $1,212,500.  Lafayette has a home town feel to it.  Not many first time buyers can afford to buy in Lafayette.

Location #2

Less than 20 miles away you'll find the town of Pittsburg, CA.  The raw numbers of Pittsburg paint a different picture.  Average income for 2005 was roughly half that of Lafayette.  Pittsburg sold 44 properties in August for$406,000 .  Pittsburg is a blue collar town.  If you are a first time buyer, Pittsburg might be your starting location.  Looking for investment property - look at Pittsburg.

Two Calls

This week I was contacted by two different homeowners.  One from Lafayette, the other from Pittsburg.  Both had the very same Lender (a very big lender).  Both bought their single family homes just months apart.  Both had fallen behind in the mortgage payments and were looking for help.  That's about where the similarities end.

Lou in Lafayette

Lou called me because he was behind on his mortgage in Lafayette.  He was just over 3 months behind when the Lender filed a Notice of Default.  This is the first step in the foreclosure process.  In talking to Lou I found out that he had some good equity in his home.  He bought this house after selling his prior house in Walnut Creek.  He applied the proceeds of the sale to the purchase of the new one.  We estimated his position at roughly 65% loan to value.

 

 

Peter in Pittsburg

Peter contacted me just days later.  He too was behind but was calling to learn more about doing a short sale in Pittsburg.  Peter wasn't just behind - he was very behind.  Peter hadn't made a single payment in over 7 months!  In talking to Peter I found out that he was a first time buyer.  He bought using a 80/20 first and second mortgage.  His property value had declined so Peter was now upside down in his position.  I asked Peter when his Trustee Sale was scheduled.  "What Trustee Sale?" was  his reply.  The one that usually follows the filing of the Notice of Default.  "But I don't have a Notice of Default!"

It was true.  I looked it up.  A Notice of Default had not been filed. 

This got me to thinking.  Why would a very large lender put one homeowner into foreclosure and not another?  Had Peter slipped thru some sort of crack?  Perhaps not.

The Big Picture

From a lenders point of view, every loan on their books is an asset.  It may be an under performing asset as it would be in both Lou and Peter's case, but an asset is an asset.

When that loan has gone bad the typical remedy is to send it to foreclosure.  The homeowner will either bring the loan current, refinance the loan, or in the worst case scenario the property goes to Trustee Auction and is sold at a loss or becomes a bank owned property.

Equity is the Key 

If the property has equity, it will sell at auction.  If a property has no equity, chances are there will be no bidders and that property ultimately becomes an REO.  When a bank becomes the homeowner as it does when the property becomes bank owned, it no longer carries it on their books the same way.  Think of it now as a liability.  It's very detrimental to their financials to carry REOs.

So here's we have this very big lender.  They need to look as solid as possible to their investors.  Their livelihood is dependent on their ability to sell loans to the secondary mortgage market now and in the future.  Those investors look at  financial statements.  Remember there is a big difference between how a bad loan is carried on a company's books and how a Bank Owned Property is carried.

Business Decisions

Bad loans are going to happen.  But when they do happen does the lender have a choice as to how they treat those borrowers?  They do.  And furthermore I believe they are making a conscience decision as to which properties to aggressively attack and which properties to temporarily ignore.  I believe they are making a business decision in order to manipulate how their financial looks to an outside investor. 

They chose to aggressively went after Lou in Lafayette because he has equity.  The lender knows Lou can sell the home if he has to.  Lou can refinance the loan.  In the worst case scenario, the property would go to auction and there would be many bidders.  Chances are very slim that Lou's home would ever be bank owned.  The lender knows this.

Peter in Pittsburg has been ignored.  Yes, the lenders collection department called him repeatedly.  So much in fact that Peter changed his phone number.  The Lender is trying to collect his arrears.  They also know Peter is upside down.  They know Peter cannot refinance.  They know at the auction the property will not sell and hence become a REO.  For that reason they have chosen not to file the Notice of Default on Peter.  Instead, they have allowed Peter to stay in the house.

How long will Peter be able to stay?  Nobody knows for sure.  Eventually the NOD will have to be filed.  Eventually peter will have to move.  His credit is already trashed.  His equity?  He never really had any.  So Peter keeps on living like he has for the last 7 months.   

 So sometimes it isn't all about Location.  Sometimes it's more about Equity.   I'm not going to be the first one to run to my local tattoo artist yelling "Equity, Equity, Equity!" 

Not just yet.

  

 

I started this series by explaining the basics of one of the most popular reverse mortgages in the country, the  HECM or Home Equity Conversion Mortgage. 

It does have certain advantages and disadvantages.  The most popular advantage has to be that it's insured by the FHA.  However it was probably what the HECM couldn't do that most likely inspired Fannie Mae to come up with their own brand of reverse mortgage "The Home Keeper".  Just as with the anything, the Home Keeper also has certain pros and cons. 

So there we were, with two very different kinds of Reverse Mortgages.  One offered by the Feds and the other offered by a private corporation heavily regulated by the Feds.  This being America, the land of opportunity,  it was only a matter of time before someone got to thinking as to why the Feds (and Fannie) were the only ones having all the fun.  But what could a private lender offer that the others hadn't already covered?

Living in the San Francisco Bay Area all I have to do is look outside my window for the answer.  Jumbo's! 

What's a Jumbo?

If you recall, the HECM is a FHA program.  That means the maximum loan limit is determined by the county in which the home is located.  That might range anywhere from $200,160 to $362,790.  The Fannie Mae product is also limited by what we call the conforming limit.  This is set forth by the O.F.H.E.O. (the regulators of both Fannie Mae and Freddie Mac).  Currently the conforming limit is set at $417,000, anything above that figure is considered a Jumbo.

Who sets that limit and how do they figure it?

Hang on, here's where it gets really technical.   The OFHEO uses the percentage increase in the average house price from October to October in the Monthly Interest Rate Survey of the Federal Housing Finance Board (FHFB) to adjust the maximum limits for the subsequent year. 

Want to read that report?  Here's the latest 78 page .pdf from OFHEO.   If you want to see where they pulled that data here is the Monthly Interest Rate Survey for September, (it's all of 1 page!) from the FHFB. 

If the average home price this October is higher than that of last October, the maximum conforming limits will be adjusted upward by the percentage increase in price.  Simple right?

"But what if..."

Now, those sharp readers amongst us have already asked the obvious question.  "What if the price doesn't go up?  What if it goes down?"

They have a rule for that.  Remember all real estate is cyclical.  What goes up shall come down.  Should the annual average stay the same or be less than the previous year they'll put a freeze on it, (defer it) for 1 year.   In case you missed it, last year the limit did not increase.  Can you say "deferral"? 

That deferral from last year's decrease would be netted against any increase this year in determining the 2008 limits. If a decrease in average price this year is followed by another decrease next year (which it has), the maximum loan limits will decline in 2008 by at least this year's percentage decrease in average prices.  Go ahead and read that slowly all over again.

Are you completely confused yet?

You should be.  If you are not completely and utterly confused and this makes perfect sense to you - you're hired!  When can you start?  Will the corner office be ok?

To confuse you more, there are various talks going on at this moment to raise the limit contrary to the data and formula that has been used in the past.  Our "Governator" Arnold Schwarzenegger just asked Congress for an exception to the rule, just for us Californians of course.  He asked for us to be included in with Hawaii and Alaska, the only two states that are presently above the $417,000 limit.   That limit ceiling is 50% higher than those other 48 states!

The Moral of the story:

Whatever happens, a Reverse Mortgage is confusing at best.  Which of the three product categories (HECM, Home Saver, or Jumbo) and the five different distribution of loan proceeds (Lump Sum, Line of Credit, Term Monthly Payment, Tenured Monthly Payment, combination Payment) is best for you? 

Are you sure?  That's why it is vitally crucial to use a Reverse Mortgage Professional.  They have the tools and the knowledge to decipher the information and point you to the best Reverse Mortgage solution to fit your needs.

If you are considering a Reverse Mortgage, give me a call. Together we can sort it out.

(925) 288-9977 Ext. 104

For my 200th Post, I thought it would be nice to discuss clouds.

"Partly Cloudy", said my local weather person this morning.  Partly Cloudy is good thing if you are laying back after a picnic with your sweetheart on a summer day.  Partly cloudy is almost always a good thing.  Almost.

Any sentence with the cloud word in it is the last thing you want your real estate professional to utter, especially from your escrow / title person.  A clouded title can easily kill a deal.

What's a Cloud?

Generally, a cloud on a title is due to someone owing someone something.  Generally, that someone either didn't know about the debt, wouldn't pay the debt, or simply couldn't pay the money.  Generally that cloud can be removed by a simple quit claim deed.  That's the end of the generalizations.

Why is this important?

When the stock market has a correction to the downside we see the professional traders looking to buy  bargains.  The same holds true for real estate.  There are some great bargains out there.  The pro's are already looking and buying real estate.  As we continue, the amateurs are going to be tempted to look for that bargain.

Obviously, those bargains can be found in various distress sales.  Those distress sales come in three different flavors and have three very different levels of cloud risks associated with them.

1. Buying a Foreclosure or home that is has a Notice of Default filed against it.
2. Buying a Short Sale
3. Buying a REO or Bank Owned Property.

Buying a Foreclosure

This seller has been running behind for a long time now.  There's a reason they are in default - they couldn't pay.  If they couldn't pay the mortgage, they probably owe other people too.  Some of those people have the ability to put a lien on their home.  There's a cloud.  This lien could be just a little light and fluffy cloud or it could be a thundercloud.  Garbage liens = usually light and fluffy.  Tax Liens or Mechanics Liens have the ability to seriously hamper a deal.

When you are buying a Foreclosure you are buying from the homeowner.  Chances are they are not represented by a real estate professional (can't afford it).  Are they going to initiate the title search prior to your contract?  Not a chance.  in a foreclosure purchase, the cloud is usually discovered after the contract.  You can see how that just doesn't work,  right?

Buying a Short Sale

This seller usually has a real estate professional guiding the way.  They have brought the lender in on the deal.  Usually they have had a title company complete a title search and discovered any liens that might be on that title.  When you purchase a Short Sale, both parties will usually have a clearer picture of the deal.  No surprises.  That doesn't mean there won't be clouds.  But those clouds will be known and can be dealt with prior to the contract.  This is a big difference.

Buying a Bank Owned Property (REO)

The seller is the Lender.  The property has been through the grinder.  It may have started as a Short Sale.  It didn't sell and so the owners fell behind to the point where it became a NOD.  Once again, no sale.  Finally the Trustee Auction came and due to the lack of equity it didn't sell and was turned over to the Lender. 

Here's the bright and sunny on this picture.  Chances are all clouds, all liens, all liabilities attached to this home were taken care of as it as it passed from the homeowner to the lender.  Buying a REO?  You'll probably have a clear day when it comes to title.

Wise Words

If you are looking for deal, no matter which flavor of distress you like,  do yourself two favors. 

1. Always use true real estate professionals who are familiar with the type of deal you are considering.  As my friend Brian Brady says, "If you thought dealing with a professional was expensive, wait until you find out how much dealing with an amateur costs!"
2. Always buy the best title policy you can buy.  This is not a place to try and save a few bucks.  You did know that there were different levels of policies available, didn't you?

Now, just because the REO has the least chance of having a clouded title this doesn't mean you should look only at REOs.  The title issue is just one piece of the puzzle.  Each version has it's own specific Pro's and Cons.  That REO also has the highest chance of being the most abused of the three as well.  But that's an article for another day.

  

Understanding the "Home Keeper"

 

While the headlines today are filled with Bernanke and Paulson and the talk about GSE limits, Discount Rates, Foreclosure Activity and who knows what else I wanted to shine the light on something that might sound like an answer to todays mortgage meltdown woes.

It's called "The Home Keeper"

Unfortunately, it isn't going to save the housing industry. It's a Reverse Mortgage. In fact it's Fannie Mae's brand or version of a reverse mortgage. I think it's even got a trademark!

As you may know by reading the headlines, Fannie Mae is a GSE - or government sponsored enterprise. They are the largest buyer (investor) of home mortgages and as this pertains to reverse mortgages, they are also the largest investor in Reverse Mortgages including the federally insured Home Equity Conversion Mortgage (see: HECM).

Differences

Not content with just the FHA version of reverse mortgage (The HECM) in '96, Fannie Mae came out with their own. They called it the Home Keeper. It was implemented to fill the gaps left open by the Federal HECM product.

Items like:

• Higher Property Values,
• Condos, PUDs, and other property types,
• and even Purchases

Did you know you could purchase a home with a reverse mortgage? - Now you do! Read below for more details.

Most of the same requirements apply - you have to be 62 or older, principal residence, and so on.

Why Home Keeper?

Home Keeper may allow you to borrow more than a HECM as the current limit for Fannie Mae is higher than the FHA limit (two separate agencies). The actual amount is determined by factors such as your current age, the value of the house, and current rates.

The borrower can elect to receive funds in a variety of ways including a lump sum, or a set monthly payment, or a line of credit, or a combination.

Interest Rates?

The interest rate for a Home Keeper loan is an ARM. It adjusts monthly. Surprised? The index is the current weekly average of the one-month secondary market CD rate, as reported by the Federal Reserve. Add the Index to the margin and there is your rate. Caps? Unfortunately there is no cap on the monthly adjustment but there is a lifetime cap of 12% above the initial rate. This surprises some people. Then again, the monthly change may be minimal depending on the current marketplace.

 

Buying a home with the Home Keeper

Yes, you can use the Home Keeper for a purchase! And do it as a single transaction. Many times this is done in conjunction with the sale of a prior house. Doing it in this manner can drastically reduce the costs involved, thereby providing more available income to the homeowner. This transaction is usually seen when moving from a larger home to a smaller one, or maybe moving closer to loved ones.

One word of caution: Consult your tax professional as there is a potential tax consequence in certain situations.

If you need more information - give me a call!

Mike Mueller (925) 288-9977 Ext 104

 

I mentioned on an earlier post that HECM loans were rising.  Not the rate, but the popularity or sheer quantity of loans being funded.   That prompted a reader to call me to help explain what a HECM was.  So what is a HECM loan?

The Home Equity Conversion Mortgage (HECM) is the oldest reverse mortgage product.  It is the "original" from way back in 1989.  Ahh, it seems like just yesterday.

HECM is insured by the Feds!

A HECM loan is going to be insured by the Fed's through the FHA, they are a subsection of HUD or Housing and Urban Development.  To make it easy, we can just call them all the FEDs.  The Feds don't loan the money directly but they are going to guarantee this loan. For many people this insurance is a very important feature.  They want the security of having the government guarantee on the loan. 

How much can you borrow?

The amount of money a borrower is eligible to receive depends on a couple of factors.  Your age, the value of your home, interest rates and where in the state you live. 

Location is important.  The county that you live in determines the limit to which HECM values your home.  Each county has a limit to which the FHA will insure loans.  Sometimes that limit is well above the value, and then sometimes it is not.

Currently (for 2007), the FHA loan limit varies from $200,160 (for rural areas) to $362,790 (for high-cost areas).   This changes annually and there is a chance that it will be increased significantly in the near future.  Here in Contra Costa and Alameda County that limit is that $362,790 limit.

Generally speaking, the older you are and the more valuable the home, the more money you may receive.

What if my home is above the HECM Limit?

Simple, if your home is above the limit, the amount available to you is just calculated as if the value was at the area limit.   For a home in my area, if it was really valued at $650,000 a HECM loan would assume it was valued at a mere $362,790.  The amount you would have available would be determined by that $362,790 ceiling as opposed to the actual value.

That Fed insurance comes at a Price!

From the National Reverse Mortgage Lenders Association Website;

"As part of the closing costs, the homeowner must pay a mortgage insurance premium (MIP) equal to 2 percent of the maximum claim amount (lesser of the home value or county lending limit) up-front, plus an annual premium thereafter equal to 0.5 percent of the loan amount. The insurance premium guarantees that if the loan servicer goes out of business, the government will step in and make sure the homeowner has continued access to his or her loan funds."

Let's decipher that.  Let's use a $300,000 loan amount.  The up front mortgage insurance premium that the borrower would have to pay is going to be $6,000.  Additionally, there is an annual fee for that insurance of $1,500.  This could be built into the proceeds of the loan and doesn't have to be paid out of pocket by the borrower.

That Mortgage Insurance Premium combined with the limit set forth by the FHA will sometimes negate the advantages of a HECM reverse mortgage.  Then again, in some situations a HECM can provide a significantly higher loan amount than other options.

The good news?  There are plenty of other programs available!

The other good news?  Since it is almost impossible for a consumer to determine which particular program is best for them all by themselves, it is vitally crucial to use a Reverse Mortgage Professional.  I know that doesn't sound like good news but by using a professional they can easily run the numbers and determine the pros and cons for each separate program.  Use a Pro and get the good news!

Next I'll explain Fannie Mae's version "The Home Keeper" and then we'll get into my favorite, the Jumbo Reverse Mortgage!

 I recently wrote about perhaps
"The Best First Time Buyer Program in California".  It's just one of the 100% financing options I have in the toolbox. 

Amazingly this was the first that many agents had heard of it.  I received calls from Agents and Buyers, and even other Loan Officers inquiring about the program.

In that article I briefly touched on a particular Down Payment Assistance Program.   Surprisingly, this too garnered a bit of attention, so I thought I'd devote a similar post on what might be "The Best Down Payment Assistance Program in California". 

With 100% programs disappearing off the Lender's shelves like bottled water and batteries during hurricane season this topic could be crucial to the future homeowner.

Are you buying your first home and need a little help?

Would 3% of the sales price be enough? 
(on a $500,000 purchase that would $15,000)

Do you need that money for the Down Payment or to help pay Closing Costs?

Would you like to borrow that money at below market rates and at simple interest?   (current rate is far below 4%).

Here's the best part...

Would you like to not have to make a payment on that loan for the life of your mortgage?

Really!

This isn't a fancy financing scheme.  This is a very simple Down Payment Assistance Program available to every first time buyer in the state of California.  It's not a grant.  You do have to pay it back.  It does accrue interest, albeit very low interest.  It doesn't require a particular loan program.  It's clean, it's clear and it's simple.  You can combine it with seller assistance if you like.   Even your financial planner would like this program as you are borrowing long term and below market rates.  Since your even borrowing below inflation rates most would argue that this is like free money!  There are just a few catches but all in all I think this is...

The Best Down Payment Assistance Program in California

Want more details?  I thought you might.  Just give me a call.

Mike Mueller, (925) 288-9977 Ext 104

  

The San Jose Mercury News sent me a snippet via email entitled...

The Next Big Bargain

A record number of homeowners are in foreclosure, according to data compiled from April to June by the Mortgage Bankers Association. The problem is caused by subprime mortgages in California, Florida, Nevada and Arizona. According to the bankers' association, "were it not for the increases in foreclosure in those four states, we would have seen a nationwide drop in the rate of foreclosure filings."

What does this mean if you live in California? The Golden State has 17 percent of all adjustable-rate subprime mortgages. Declining home prices have made it hard to refinance the loans. And it's also hard to sell the homes: thanks to a building spree the inventory of homes available for sale in the western region of the United States was at an all-time high in June.

And then there are the investors. About one-in-five defaults in California as of June 30 were from mortgage holders who didn't live in their homes.

 

Yes, it's true foreclosures are going high and only going to increase, yes it's hard to sell homes, yes jumbo loans and guidelines have become increasing difficult.  Life is hard.

In a previous life as an Alaskan Brown Bear I learned if all the fish are swimming one way, it's best to face the other way.  Doesn't it make sense to look at this time as a golden opportunity to buy? 

That reminds me of a line from Cannonball Run

If you are going to be a Bear...   Be a Grizzly!

 

Part of what I do is educate clients and readers.  The topics range from topical news stories to mortgage planning strategies, to warnings of potential scams and frauds.  This last month had the liquidity crisis on the front pages.  

So naturally, I spent a good deal explaining how lenders sell their pools of loans, how those loans are securitized.  I also explained what happened to Jumbo loans, Alt-A loans, and the like.

This month may be the month of the LIBOR.  It's just starting to hit the mainstream news.  So here's your official

 "What the heck is a LIBOR and why should I care?"

explanation.

LIBOR is an index.  LIBOR stands for London Interbank Offered Rate. It's the interest rate on dollar denominated loans that one London bank might make to another.  London?  As in London,  England?  Yeah.  Weird, eh?

LIBOR is considered a "cost of funds" styled index.  Actually, it's sometimes called one of the best because it tracks the borrowing cost for some of the most credit worthy, well established banks.   Did you know that 20% of all international bank lending goes through the London banking system?

LIBOR is about short term rates.  It deals in loans from overnight to one year out.  The rates are determined by the British Bankers Association (BBA) each day over tea.  Ok, I made the tea part up.  Call it embellishment.

So Mike, what does this have to with mortgages?

LIBOR is widely used as an index for setting the rates on ARM loans, especially of A and Alt-A quality borrowers. 

Remember the math on computing ARM rates?  Index + Margin = Rate.

Also remember that we have a tremendous amount of ARMs in the US that are going to reset in the near future.

Normally, the LIBOR rate follows closely with the federal-funds rate, (which is the overnight lending rate managed by the Federal Reserve). So why is LIBOR going to be the new buzz word?  The two rates are now diverging, (Fed Funds and LIBOR).  Yesterday, the rate hit 5.7%, marking the rate's fastest rise in several years!  That caught the attention of many in the know as well and in doing so the news media.

Why did it bump so dramatically? 

Here's a great quote I found,

"One reason the LIBOR is trading so high is that banks, many of them in Europe, have heavy commitments tied to struggling commercial-paper markets. They are reluctant to lend out dollars, and that is driving up short-term borrowing rates. Some are also worried that their counterparties in these trades, other banks, might be too weak to pay back the loans!"

Lock that last statement into the back of your mind.  Too weak to pay back loans?  The LIBOR is short term right?  Overnight to 12 months out.  These big multinational banks are worried that other big multinational banks might not be able to cover their payments in the over the next year?

So now you know more than the guy in next cubicle about LIBOR.  Heck, you may now know more about LIBOR than your last loan officer.  That's a scary thought isn't it?

Here's an interesting twist. 

Yesterday I wrote about what might very well be the very best First Time Buyers Program in California.  I got a call almost immediately from a reader who was a first time buyer and was looking at buying a short sale property in bay area.

Buying a short sale is an exercise in patience.  From the Listing Agent's perspective it's often an exercise in frustration. 

Once the offer is made, the numbers are submitted to the Lender and everyone waits for them to accept or deny.  This often takes a considerable amount of time.  The buyer often has a couple of other properties they are considering and in the meantime moves on to one of those instead, hence the frustrated Listing Agent.  Pre-Approvals and interest rate locks go stale very quickly.

That brings us to CalHFA (the first time buyer program I mentioned).  The absolute beauty of this program is that it moves slowly, (well that and it will do 100% financing plus cover a certain amount of closing costs).  Normally that would be a bad thing.  We want lightning quick approvals and locks right?   Speed is a double edged sword.  With the speed that quick approval comes with, it also means that rates can adjust, guidelines can change, equally quick.  That's a bad thing if you are waiting on a short sale.  I have seen entire deals fall out just because a simple little guideline changed making the buyer ineligible. 

CalHFA rates change very slowly.  While we saw rates for traditional programs change twice today for some lenders, CalHFA rates have not changed since August 9th!  Not at all.  That's no change in rates in a month!   Their guidelines change very slowly as well.

That leads me to believe that if you have not owned property in the last 3 years (that you have lived in), and you are looking to buy a Short Sale Property soon, this may be

The Very Best First Time Buyer Program For Short Sales Ever!

I mentioned on the previous post there's one catch. You need to work with a mortgage professional that is certified to complete these special programs. Unfortunately very few mortgage originators are certified for CalHFA loans.

I am - Just give me a call. (925) 288-9977 Ext. 104

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