Unfortunately, nothing in this life is simple. The devil is in the details. First you need to understand what comprises the Case Shiller 10 City Composite Index. It’s a weighted sum of the index for 10 cities as follows:

Composite-10 Market	Weights
› Boston:	0.07412188
› Chicago:	0.08886762
› Denver:	0.03682453
› Las Vegas:	0.01480245
› Los Angeles:	0.21161961
› Miami:	0.04986164
› New York:	0.27239040
› San Diego:	0.05513356
› San Francisco:	0.11787881
› Washington, DC:	0.07849949

As you can see it’s largely influenced by New York City, Los Angeles, and San Francisco – not exactly representative of the nation as a whole. Second, the trusts fluctuate in value based upon 3X the percentage change in the index – i.e. if the index moves up 1% the up trust benefits by 3%. Third, the benefit or detriment to the trusts is based upon the cumulative percentage change from the Starting Level of the index, which was somewhat arbitrarily set on February 24, 2009 when the index was 162.17. This level of the index corresponds to both the up shares and down shares having an underlying value of $25 each. Since the most recent index value was 150.34 the underlying value of the up shares is now $19.53. Fourth, the trusts terminate on November 25, 2014 when a payout is made to the shareholders based upon the underlying value of the trusts at that time. Consequently, the up and down shares will trade based upon investors’ expectations of the index value on the termination date – i.e. they will trade at a discount or a premium to the underlying value today. What that means is that in order for you to profit from these securities the index will have to move by more than what the market expected on the day you purchased them and it will have to move in a favorable direction. For example, if you buy the up shares the Case Shiller index will have to move up by more than what was implied in the price on the day you bought the shares. More on this later.

But wait, there’s more! The trusts can terminate early for any of 13 different reasons, including if the index drops below 108.11 or if the amount on deposit in the up or down trusts falls below $10 MM (someone at MacroMarkets explained that it is really based upon the combined value of the two trusts being below $20MM). Well, an index level of 108.11 corresponds to a further 28% decline in the index, which would put it back at June 2000 levels. So maybe that’s not that likely to happen. However, the trusts currently have only $20.5 MM on deposit between the two of them and there are two ways that it can fall further. One is through the redemption process, which is one of the mechanisms that is used to keep the two classes of shares priced reasonably (the other mechanism is the creation process which would increase the assets). The other way the value can fall is through a gradual erosion of value from the very high fee structure, which is 1.25% of assets plus $600,000 per year for each trust. Well, with only $20.5 MM on deposit this thing is on the hairy edge of termination. The last investment vehicle that MacroMarkets created like this, the up and down oil shares, recently died a similar death. And before it died the shares lost about 1% in value per month just due to expense erosion.

So what if the trusts terminate early? Well then, instead of your time horizon being November 2014, it suddenly shrinks to a much closer timeframe. While you might expect the index to move higher by 2014 you might not be as confident of that occurring in the next 3 months. So your entire investment thesis gets discombobulated.

If you can deal with all these nuances there might be a play in here for you. At the very least we might get some insight on what the price of these instruments tells us about expectations for the future. As of today the last trade for the up shares occurred at $14.00, which implies an index value of 135.6 at termination – another 10% drop from current levels. Only thing is we can’t really tell if that is a forecast for November 2014 or a forecast for an early termination before then.

Most notably, there is a provision stating, “Right of first refusal is permitted unless it violates discriminatory conduct under the Fair Housing Act regulation in 24 CFR 100”, essentially lifting HUD’s long-standing policy of denying all condominium projects with a right of first refusal provision.

So, what does that mean to you, the consumer?  It means that more of the condo buildings that contained the right of first refusal clause in their bylaws, that were previously nearly impossible for a consumer to purchase using an FHA loan, will now be eligible for FHA loans.

The changes are set to be effective October 1, 2009.

You can read the entire release here.

You can click on the floor plan above to see the live example.

The interactive floor plan allows buyers to really get a feel for how the home is laid out and what it looks like from various angles. The only downside is that some buyers may think they’ve seen it all and try to make a decision based solely upon the online experience. We would recommend that the interactive floor plan be used only to rule out obvious misses.

Lenders look at  ratios when they consider your application for a mortgage loan. A debt-to-income ratio is your monthly expenses compared to your monthly gross income. Lenders consider two ratios for your application:

• Monthly housing expenses as a percentage of income
• Total monthly debt as a percentage of income

Both ratios are important factors in determining whether the lender will make the loan.

Lenders usually require the PITI (principal, interest, taxes, and insurance), or your housing expenses, to be less than or equal to 28% of monthly gross income. Lenders call this the front-end ratio. In other words, if your monthly gross income is $5,000 or $60,000 annually, your mortgage payment should be $1400 or less:

$5,000 x 28% = $1400 – maximum monthly housing costs

Lenders usually require housing expenses plus long-term debt to be less than or equal to 33% to 36% of monthly gross income. Lenders call this the back-end ratio. In other words, if your monthly gross income is $5000, the combination of your mortgage, $1400, and other long-term debt should be no more than $1800:

$5000 x 36% = $1800 – maximum total debt

If your debt-to-income exceeds these ratios, talk to your lender about your options.  Some lenders allow up to a 41% back end ratio.

BASIC MORTGAGE OPTIONS

15-YEAR MORTGAGE

• Lower interest rate
• Build equity faster
• Less interest to pay
• Larger monthly payment

30-YEAR MORTGAGE

• Higher interest rate
• Build equity slower
• Can deduct more interest
• Lower monthly payment

FIXED RATE

• Interest rate stays the same for the term of the loan
• Interest rates could go down while you are locked into your mortgage at a higher than market rate

VARIABLE RATE

• Interest rate can increase or decrease during the term of the loan
• You might have a low rate for an three, five, seven, or ten years
• Monthly payments can be lower than fixed rate loans

BALLOON MORTGAGE

• A loan that has level monthly payments that will amortize it over a stated term (e.g., 30 years)
• Requires a lump sum payment of the remaining principal balance at the end of a shorter term (e.g., 10 years)
• Interest rate stays the same for the term of the loan

QUESTIONS AND CONSIDERATIONS TO USE WHEN CHOOSING A LENDER

BASIC INFORMATION ABOUT THE LOAN	Mortgage 1	Mortgage 2	Mortgage 3
Type of loan (fixed rate, variable rate, conventional, FHA?)
Minimum down payment requirement
Loan term (length of loan)
Contract interest rate
Annual Percentage Rate (APR)
Points (may be called discount points)
Monthly PMI payments (mortgage insurance)
How long must you keep PMI?
Estimated monthly escrow for taxes and insurance
Estimated monthly payment (principal, interest, taxes, insurance, PMI)
FEES: lenders have different names for similar fees. Listed below are some of the fees you may see on loan docs.
Application fee
Origination/Mortgage broker fees (may be quoted as points, origination fees, or interest rate add-on)
Lender fee
Appraisal fee
Recording fee
Credit report fee
OTHER COSTS AT CLOSING/SETTLEMENT
Attorney Fee
Title search/title insurance
Can any of the fees or costs be waived?
Estimated prepaid amounts for interest, taxes, hazard insurance, payments for escrow
State and local taxes, stamp taxes, transfer taxes
Flood determination
Prepaid PMI
Surveys and home inspections
PREPAYMENT PENALTIES
Is there a prepayment penalty?
If so, how much is it?
How many years does the penalty period last?
Are extra principal payments allowed?
LOCK-INS
Is the lock-in agreement in writing?
Is there a fee to lock-in?
When does the lock-in occur (at application, approval or another time?)
How long will the lock-in last?
When the rate drops before closing, can you lock-in at a lower rate?
IF THE LOAN IS AN ADJUSTABLE RATE MORTGAGE
What is the initial rate?
What is the maximum the rate could be next year?
What are the rate and payment caps each year and over the life of the loan?
What is the frequency of rate change and any changes to the monthly payment?
What is the index the lender will use?
What margin will the lender add to the index?
OTHER IMPORTANT CONSIDERATIONS
Will I work directly with you for the entire process?
What are the closing costs?
How long does it take to close from application date?

HOMEBUYER ASSISTANCE PROGRAMS

There are a number of different programs available for first-time homebuyers. The following are just a few examples of the programs available.

FEDERAL HOUSING ADMINISTRATION (FHA) INSURED LOANS

The 203(b) is the most common FHA loan, featuring:

• Low down payment
• Flexible qualifying guidelines
• Limited lender fees
• Maximum loan amounts

DEPARTMENT OF VETERANS ADMINISTRATION (VA) INSURED LOANS

Features of VA loans include:

• You must be an eligible veteran
• There are no down payment requirements
• Competitive and negotiable fixed interest rates
• Limitations on closing costs
• Longer payment terms

As I mentioned in a previous post, there are ways to submit claims to the City of Chicago for damage sustained from one of the many potholes decorating our streets. I had tried this back in March of 2008 but basically gave up any hope of recovering my loss after waiting months for a response. Well…the response came in the mail yesterday:

“the Committte on Finance hereby offers the sum of $173.00 to settle the above-captioned claim. Final settlement is subject to City Council approval.”

Geez. Chicago is going to hold a city council meeting to discuss my pothole claim.

I guess if you can’t fix the potholes you can always pay for the damage.

So it is with mortgage rates. The government attempted to drive down mortgage rates and other interest rates by buying all manner of bonds, and for a while it worked. However, recently the levies are starting to leak. Check out what has happened to 30 year mortgage rates in the last couple of weeks:

You can see the same pattern in the interest rate on the 10 year government bond:

For a while the interest rate on these government bonds was driven down as investors sought safety, but not any more.

There are a few things going on here and not many of them are good for the housing market. First, the US just has too much debt – too much personal debt, too much government debt, and too much financial leverage – and our creditors have taken note. There is even talk of a downgrade of the credit rating of the US government. All this translates into a higher risk premium for US debt and that means higher interest rates.

The second issue is that in creating huge amounts of money in order to manipulate the market the US government has created inflation fears. Consequently, the dollar has taken a nose dive and with it the price of oil and other commodities have taken off. To get an idea of what is going on with the dollar just look at this chart of the dollar priced in Euros:

Inflationary fears and a weaker dollar (two sides of the same coin) mean that investors need higher interest rates to hold US dollar denominated investments.

So I think higher mortgage rates are going to be the reality – and they’re currently no higher than they’ve been on average over the last 5 years and they are significantly lower than they have been in the past 20 years. So there is still plenty of upside (or downside depending upon your perspective) in mortgage rates. And if inflation really materializes watch out.

There is one potential silver lining in all this – and one can’t help but wonder if this isn’t actually the government’s secret intention. If inflation takes off then we can all pay back our debt with cheaper dollars down the road. The debt stays constant but we all eventually start making more money, even though the money is worth less. It’s one way to work ourselves out of debt.

Of course, for those of us that don’t have a lot of debt and in fact have lent money, it’s not so good. But eventually, in an inflationary environment, housing prices take off and that will bail out a lot of people who are upside down on their mortgages – unless of course interest rates are so high that no one can afford to buy these higher priced homes, in which case maybe home prices don’t go quite that high. I guess we’ll just have to wait and see how all these forces net out. I’m betting that the force of the government will prove to be nil in this equation.

The Giant Pool Of Money – May 9, 2008

This Peabody Award winning show explains how Wall Street and homeowners are connected by a chain of middlemen and tap into a giant global pool of money and how this setup led to the current crisis.

The Watchmen – June 5, 2009

Who was minding the store when all this was going on? This show is very interesting in that it connects events that took place in the 1930s with today’s events and it becomes clear that for every fix the government can come up with there are eventually unintended consequences down the road.

Unfortunately, as I alluded at the beginning, this field is rarely filled in by the listing agent. So, what happens? Buyer and seller enter into a condo sales contract and when buyer tries to get a mortgage the mortgage company balks and the buyer has to get another mortgage – except now mortgage rates have risen and the buyer’s cost goes up. Worse yet, the deal falls through.

The implications are clear for both buyers and sellers of condos. If you are buying a condo you have to know if you have enough POO before you pick your lender because, given your down payment, not all lenders will be willing to lend. According to Tom Fishwick of Guaranteed Rate, you will certainly have an easier time getting a mortgage on a low POO building if your down payment is at least 20% because then some lenders only require a limited review of the condo building and don’t even ask how much POO you have. “The reason you would have trouble getting a loan approved without 20% down is because the Mortgage insurance companies may not insure the loan. Lenders are willing to lend up to 90% but they require mortgage insurance and it is those guidelines that have been changing.” Curiously, an FHA loan, with only 3.5% down, will allow up to 49% renters in a building. Of course, you pay a higher effective total rate for an FHA loan.

If you are selling a condo in a low POO building then you better line up a lender who will be willing to finance the purchase and make sure any potential buyer can qualify for their program. Alternatively, you can sell your condo 3 times before a deal actually takes.

Just to give you an idea of how serious this problem can be consider Millenium Centre at 33 W. Ontario in Chicago. This building has some $1 MM + condos/townhomes in it. It also has 63% renters or 37% POO. (As a side note, this is an American Invsco building and they often actually assisted investors in buying and renting units in their buildings.) You have to wonder if the low POO is contributing to all the problems in that building. Aside from the fact that many lenders wouldn’t touch that building, I would personally be afraid to put a buyer there. Of course, I would be extremely cautious about any building in the South Loop. Just walking through some of them you can tell that they don’t have a lot of POO. And as I recently learned, even nice buildings in the West Loop might have too many renters for some lenders.

First there was the Case Shiller index which indicated that home prices in the Chicago area fell once again in March. They are down 18.6% year over year and down 27.4% from the peak in September 2006.

Then the Illinois Association of Realtors came out with the sales statistics for April. For the third year in a row sales are down more than 20% from the previous year:

I also pulled down the quarterly sales statistics for the city of Chicago from the Chicago Association of Realtors and it shows the lowest level of sales since the 1995 – 1996 time period:

You can always get the latest version of these and other housing market statistics on our Chicago real estate market trends page.

There are several hypotheses as to why it was rescinded.  The first is that law makers believe buyers should have some of their own money invested in the property.   They believe that one of the factors that led to the sub prime meltdown was 100% financing.  When a buyer has their own money invested in a property, they may be less likely to default.  Currently, FHA requires a 3.5% down payment.

The second reason seems to rest on the “bridge loan.”  While in theory, the loan seems safe to the lender, because the IRS is paying the tax credit.  However, they questioned how they would get reimbursed  after the buyer received it.

In the end, it was rescinded.

There have been rumors that third party non for profits like NACA may somehow get involved.

Nonetheless, the $8000 tax credit is still a HUGE incentive.

As we all have just experienced, the rules are changing at a torrid pace, sometimes daily.  It is essential that we all stay up to date so we can provide the best customer service.

If you have any questions you can contact Marc at marcj@aandnmortgage.com.