The scary part is about this true story is the lack of financial maturity I possessed;  and about that time I was receiving my five year service award having been employed in the mortgage industry for a local bank.   

How different things would have been if I had attended a Homeownership Education class.  I am a big fan now that several of my clients have attended one as a requirement of a down payment assistance program.  Homebuyer Education classes prepare new buyers for homeownership and help you understand how real estate ownership changes your life.  Even if you are already used to making rent payments on an apartment or house, owning real estate has a whole new set of responsibilities.  My clients that are truly ready for homeownership come out of these classes with an increased confidence level, and are fired up about looking for homes.   Education is empowering.

A Homebuyer Education class will prepare you for homeownership by helping you:

• Determine how much house you can afford. These classes offer one-on one budget counseling and spending plans.  You will learn to identify wasteful spending and how to develop a savings plan for unexpected expenses.
• Select a home and identifying home features that work best with your lifestyle, family size, and career.
• Identify the pros and cons of buying –vs.- renting.
• Understand your credit history and getting your credit in order.
• Review your money management habits.

Learn steps to buying a home including:

• How much you will need for down payment and closing costs.
• How to look at houses.  Identifying obvious structural problems like sagging roof lines, termites, stains, mold, leaks, and signs that electric bills may be high.
• Understand seller disclosures and real estate law.
• Making offers and negotiating a purchase contract.
• Getting a home inspection.
• Finding homeowners insurance.
• Understanding what Home Warranties are and what they cover.
• Home maintenance tips and who to call in case of emergencies.
• Preventative education to avoid loan default.
• Finding and selecting a Realtor and a mortgage lender.

Real Estate ownership entails more than going to the closing table.  Today there are many discounted homes that were once someone’s dream home but became a foreclosure nightmare due to a lack of education and long term planning.  Set yourself up for long term success by investing in an eight hour Homebuyer Education class to help you make the right choices for your situation.  Classes are offered by HUD Approved Counseling Agencies in your state, and they are typically free of charge. 

Happy house hunting!

Will mortgage rates rise or drop this summer? Listen to my 90-second opinion here.

Keep something in mind as you listen; my advice is not a svengali-like prediction.  Rather, my advice examines the market movements, from the heart and mind of a former securities trader, with the sole purpose of mitigating risk and looking for reward.  I think you’ll find that I’m more worried about risk than I am of the potential reward.

Are rates going to go higher?  Listen and proffer your argument below.

So far, they’ve stayed pretty stable from yesterday.   A combination of falling oil prices, gloomy economic attitudes, blunt and disappointing earnings reports and a dismal attitude in the stock market helped the bond market make it through a very big week worth of Treasury auctions in pretty good shape.

My recommendation still remains to lock all loans.  Why?  A couple of reasons:

• A “gut” feeling that the bond market has over reacted to the good news and rates fell more than is justified.
• The increased call for a second stimulus package will put upward pressure on mortgage rates.
• The growing “talk” about a change in reserve currency (see this week’s Mortgage Market Week in Review for more on that) if it does anything will put upward pressure on rates.

I’m currently estimating a 70% chance that rates will go up and a 30% chance rates will go down.

• The Treasury auction yesterday afternoon went pretty well.
• Retails sales reports that came in this morning came in down.
• Unemployment claims numbers came in mixed.   The new claims for the week came in down but the continued claims came in higher.

So the bond market is a little better than we were yesterday morning.   

I’m going to sound like a broken record, but I still recommend locking all loans.   With two more big Treasury auctions coming this week yet and a lot of unknowns in the economic reports due out (mainly earnings reports), the upside risk is greater than the downside potential.

I’ll continue to keep you informed.

Mortgage Brokers

Mortgage brokers can be thought of as independent consultants who match you with a lender.  They find new customers, counsel them on appropriate loans, shop for lenders, and process the loan.  The processing includes gathering data including credit checks, appraisals, and employment verification.   Once the loan is processed, it is sent it to a lender who funds the loan.  Brokers have ties to multiple banks so they can shop across many lending sources for lower rates.   They usually make their money by marking up rates they get from lenders, adding fees to the loan, or a combination of the two.

Loan Officers

Loan officers are typically employed by lenders or mortgage brokers.  They find new clients, counsel borrowers on how to choose the best mortgage, and fill out loan applications.  They typically make their money through commissions on the loans.  Loan officers can also be mortgage brokers if they also process and broker loans.  Loan officers are sometimes called mortgage consultants, mortgage loan originators, home loan consultants, and mortgage planners.

Lenders

Lenders are the ones who front the money to fund your loan.  Lenders have various names based on how they acquire their clients and what they do with your loan after it is funded.

•    Retail vs. Wholesale Lenders (how customers are acquired)
o    Retail lenders reach out directly to consumers.  For example, Wells Fargo has loan officers in local branches that perform all loan origination functions.
o    Wholesale lenders fund mortgages acquired through brokers outside of their company.  The brokers process loans and then sell them to wholesale lenders to fund.
o    Many banks, such as Wells Fargo, have both retail and wholesale channels.

•    Mortgage Bankers vs. Portfolio Lenders (what happens to your loan)
o    Mortgage bankers fund loans but typically turn around and sell them in the secondary market to secondary lenders such as Fannie Mae and Freddie Mac.   This is very common.  Mortgage bankers borrower money from banks to fund the loans and then repay the money when the loans are sold.   Most large lenders such as Wells Fargo Mortgage are mortgage banks.
o    Portfolio lenders include many community banks, credit unions, and savings & loans companies.  Portfolio lenders use money from their customers’ bank deposits to fund loans so they can hold onto the loans and keep them in their portfolios.

Correspondent lenders

Correspondent lenders are a mix between brokers and lenders.  They technically fund loans with their own borrowed money but typically lock in rates with wholesale lenders at the same time.  This mitigates their risk since they can quickly turn around and sell the loan.  Learn more about correspondent lenders.

What type of mortgage professional is best?
The type of professional does not matter as long as you get the rate, fees, and loan you were promised.  You should be more concerned about finding the lowest rate and fees, as well as working with someone you trust.

Where can you find the best rates?
It depends.  The lender with the lowest rate could change daily.  Using a broker may help you find the lowest rate and fees since they can search multiple lenders (similar to how Expedia searches multiple airlines).  However, the lowest rate may be at a bank not connected to the broker or may only be found at a given bank’s website (in the travel analogy, this would be like Southwest or NWA who always have their best rates on their own sites).

To search across thousands of loan officers, mortgage brokers, mortgage banks, savings and loan companies, and credit unions, you can use Zillow Mortgage Marketplace.  This service allows you to compare quotes and fees side-by-side, across a broad range of lenders, so you find the best value.  I recommend starting your search there since it is free and anonymous, and then consulting your local bank or mortgage broker to see if they can compete with the rates on Zillow Mortgage Marketplace.

This is a question I’m seeing more and more of lately and they are starting to give me a flash back to 2006. Rolling Stone has a top songs of the year list and in 2006 it was “Crazy” by Gnarls Barkley. Very appropriate as this is when the sub-prime market started to unravel.

In July 2009, people are scrambling to take advantage of low house prices - down 20-30% - in some areas, and low interest rates. This means people are starting to say, “the hell with my low credit score, I want to buy a house now”. People with 600 type scores are looking to buy! A few months ago, the lenders would have scoffed, but what happens if the lending starts to flow more freely?

Here’s the math a potential buyer needs to consider: if you buy a house today with a 620 credit score, on average, you are probably going to get a rate of 6.55% for a $300K mortgage 30 year fixed. If you had a 760+ you might be able to get a 4.980% rate.

So what if you wait? Let’s say interest rates rise a full percentage point. Now that 760+ credit score would get you a 5.980% rate. So, if you could raise your credit score to the top tier, you’d still be better off - if prices don’t change.

Will home prices change? Many economists don’t think so. I saw a market study that shows that prices are going to be stable in most markets for the next five years.

To the folks with low credit scores, I have three pieces of advice

1. Get your credit score higher. How? Pay on time, and lower your amounts owed. Wait until your credit score improves to consider home ownership.
2. Use a true home cost calculator to show yourself you can afford it.
3. Prove you can afford it, by paying into savings that money for several months. If you don’t have to go into credit card debt to afford the house, maintenance, taxes, etc., then you can feel you can proceed. Use a service like SmartyPig to set up a savings goal to prove you can save the difference.

For people with great credit AND a big savings account for 20% down, this is a great time to buy a house. If you start to hear things like “we can work around this item in your credit report”, you should feel like you are back in 2006. That’s where you should catch yourself and be honest with yourself. Don’t chase a train just because your neighbors are doing it. Figure out what’s right for you and be smart.  Home ownership is great, but it’s not for everyone at every moment in time.

• The stock market seems to be gaining back some of what it lost yesterday.
• The bad day in the stock market yesterday spiked some modest improvement in mortgage rates today.
• Today (and tomorrow) there are BIG (billions) in Treasury auctions and they are the longer term ones.  

How those auctions go will have a potentially market moving impact on mortgage rates.   Which way?  A couple of thoughts:

• If the foreign governments continue to buy Treasuries, we could see the markets relax and some slight dropping of mortgage rates.
• If there is any likelihood that the markets are being stirred up by the talk at the G-8 Summit about a different reserve currency or a slowdown in government buying of our debt, we could see a spike upward.

I’m currently placing about a 60/40 odds on the second option rather than the first and therefore I’m recommending locking rather than floating.

I’ll write more as the events transpire.

Getting the loan approval upfront will save everyone alot of headache at the end.  You don’t go shopping for a home first and then find out you don’t qualify for that property.

Step 1

Find a good lender that you trust and get approved.  That means either discussing with them over the phone or in person your situation.  You must have a credit check done, provide income and asset documents and any other required forms for you to be pre-approved.

If you go by credit check alone and do not provide all documents you are only increasing your chances that things will not go as smoothly as you liked.  It really doesn’t take long to get pre-approved for a mortgage.

Step 2

Once you figure out your budget and how much you can be approved for then you can do some shopping!  You will have more leverage once you know exactly how much you can afford.

It is still a great time to purchase a home - especially if you are a first time homebuyer you have until November 30, 2009 to qualify for the 8000 tax credit.

To put this in terms we can all understand, the Federal Reserve MBS Purchase Program has WASTED (that’s right, WASTED!) 621 BILLION dollars since the beginning of the year, and will WASTE approximately $640 BILLION more. Now, why should this anger us all? Well for one thing, it’s 10 times as much as our annual Federal education budget- in SIX MONTHS. That ticks me off. But to put this bluntly, the Fed is ‘Pissing in the wind’. Can I say that? I guess we’ll find out.

Let me explain- What is the money being used for? To purchase Mortgage Backed Securities, which in my not-so-humble opinion should not even exist. Period. See, the Fed thought that buying the MBS would drive rates down and provide stability. It has done everything BUT. We have seen more volatility, and more wild swings than ever. Instead of letting the market take it’s course, the Fed has decided to print up some fake money to buy some fake pieces of paper to accomplish what exactly? Sorry, but letting investors determine mortgage rates is like asking Michael Jackson’s monkey to run the rides at Neverland. BAD IDEA. Did Michael Jackson die by the way? They keep playing his music on the radio….

Back to the seriousness- Can we do anything about this travesty? Probably not. But the next time you get into an argument over how our government spends money, just remember the Fed is printing 1.25 TRILLION fake dollars this year to stuff in the pockets of moronic investors. If someone could explain to me why it’s a good idea to have mortgage rates determined by a bunch of fickle numbskulls, I’d really like to know. Bring it on. 

IF YOU ARE NOT OUTRAGED, YOU ARE NOT PAYING ATTENTION.

In my next blog, I’ll explain why haggling for a ‘rate’ is a complete waste of time.

Index: The index in which you have an adjustable rate mortgage plays a large part in how your rate can adjust, as the yield or interest rate is added to the margin to determine your new rate, subject to any Caps in place.  Many mortgages have an index based on the 1 Year Treasury Bill, LIBOR(London Interbank Daily Offered Rate), or the COFI(Cost of Funds Index).  The MTA is the Monthly Treasury Average over a given timeframe.

Here are the yields of many Market Indices as of 7/7/2009:
Prime:   3.250%
1 Yr Libor 1.511%
1 Yr T-Bill 0.490%
1 Mth COFI 4.244%
1 Mth MTA  4.788%
6 Mth LIBOR 1.023%
1 Mth LIBOR 0.302%

Margin: The margin is a percentage that is added to your Index to determine your fully indexed rate.  Many Prime ARM loans have margins ranging from 2.25% to 3.5%.  Unfortunately, there are Subprime ARM loans with margins ranging from 4.25% to 9.25% or more.  The ARM loans with high margins are the “toxic” ARM loans you read and hear about in the news all the time, because the loans adjust upward to the maximum of the caps each adjustment.

Caps: Caps refer to the maximum amount your new rate can adjust in a given period.  Usually there is a First Adjustment Cap, a Subsequent Adjustment Period Cap, and a Lifetime Rate Cap.  Caps of 2/2/6 would mean a rate could adjust as much as 2% in the first adjustment (regardless of the fully indexed rate), 2% any adjustment thereafter (regardless of the fully indexed rate), and 6% over the life of a loan (regardless of the fully indexed rate).  Some loans may have a “floor” for adjustments as well, meaning that your rate may not decrease a certain amount from the initial rate.

Calculating an adjustment: the possible good news.  If you have a 5/1 ARM based on the 1 year Treasury Bill(.49%) with a margin of 2.75% and 2/2/5 Caps, well, you are in good shape for now.  .49%(Index) + 2.75%(Margin) = 3.24% Fully Indexed.(You may have a floor in your adjustment).  Do yourself a favor and check out your mortgage note you signed, or contact your loan servicer for your ARM details. 

Keep in mind, if you have sufficient equity, that now is still a great time to refinance into a fxed rate or Prime ARM loan depending on your needs.