Christina Dunham's Random Real Estate Musings

Daly City, CA – Subprime mortgages have now been credited for bankrupting well over 110 lenders and seriously damaging operations at many major mortgage firms. They've reportedly wiped out 5 hedge funds, tens of thousands of jobs, and have led to millions of foreclosures with millions more on the way. And, as if that weren't enough, subprime mortgages are also blamed for massive volatility in the stock, bond, credit, futures, and real estate markets here in the US and around the globe. Some say losses in the mortgage securities market alone could reach hundreds of billions of dollars this year.

This means that, for any Americans looking to buy, sell, or refinance a home, they are confronting a very different market from the one that existed just 6-12 months ago.

How did this happen?
The recent real estate boom was fueled by a period of record home appreciation and historically low interest rates. Banks, in order to compete, loosened guidelines and began offering more funding to more borrowers through riskier, non-conforming or "exotic" mortgages.

These ideal lending conditions persisted for several years, supported by high demand, historical real estate data, home prices, and massive trading volume/profits on mortgage-backed securities and other financial instruments on Wall Street.

Then, in 2006, a slowdown in real estate led to a deterioration of home values, an increase in inventories, and ultimately to today's tightening of credit guidelines, leaving many investors unable to sell or refinance out of their existing positions. Many Americans who had tapped into their equity were suddenly tapped-out and overextended as home values fell. Foreclosures followed in record numbers and a re-valuation of mortgage bonds and other financial instruments created the credit/liquidity domino effect we're now experiencing.

Unfortunately, it's going to get a lot worse before it gets better. According to the latest estimates, over 2 million subprime and Alt-A adjustable rate mortgage (ARM) holders will face payment increases of up to 30%-100% when their loans reset in the next 2 to 18 months. These loans make up less than 40% of the total mortgage market, but the negative effects, as we have seen, of increased foreclosure activity can have a ripple effect throughout the industry and around the globe.

What does this mean to you and your mortgage?

Sellers: If you're planning on selling your home, be prepared for an even smaller pool of qualified buyers. While some experts predict a settling of this credit crisis over the coming year, tightened credit guidelines and diminishing mortgage products could knock out as many as 15%-30% of potential qualified buyers. Now is not the time to sit and wait for the best possible price. Have a serious talk with your real estate agent. Having experienced buying/selling transactions in your area, he or she can help you price your home accordingly. He or she can also help ensure that your buyers are pre-approved and stay pre-approved throughout the entire transaction.

Buyers: Get pre-approved by your mortgage professional. While there are a lot of great deals out there, getting credit is becoming tougher and tougher, and it's taking longer and longer to complete a transaction. Remember, what you qualify for today could change tomorrow in a volatile market. For those looking to refinance, keep this in mind. There is no time to delay! Communicate with your lender. Don't do anything that could negatively affect your credit, and make sure you get all your documentation in on time.

ARMs Borrowers: If your ARM is scheduled to reset in the next 2-18 months, you need to schedule an appointment with a mortgage professional right away. Whether your ARM is subprime, Alt-A, or even if you have a pre-payment penalty, don't let a default or foreclosure situation sneak up on you. Did you know that your monthly payments can increase anywhere from 30% to 100% once your loan resets? At the very least, give yourself the peace of mind of knowing what your adjusted payment will be.

Borrowers with less-than-perfect credit: Each week it seems lenders are shedding more and more mortgage products. Many lenders have stopped offering No-Doc loans and are reducing all forms of Stated-Income loans. While it might be challenging, borrowers with credit issues need to see a loan expert. Often they have credit repair resources and other strategies to help you reach your financial goals.

Finally, there's an important concept to embrace: all markets, while cyclical in nature, are self-correcting, be it credit, real estate, stocks, or bonds. For the last 6 or 7 years, real estate was booming and riding high. The correction we're experiencing now – while it seems harsh and could get much worse – is, in a sense, "natural" and directly related to the extremely loose guidelines and perhaps overzealous lending and leveraging during the boom cycle.

Each year, millions of Americans move into the home of their dreams. As time goes by, families expand, kids grow older, and suddenly that home isn't quite so perfect anymore. Or perhaps you still love your home, but you really want a gourmet kitchen and a larger master bedroom. Should you start looking for a new house? Or would it be better to stay where you are and remodel instead?

Both options involve a significant investment of time and money, so it's important to take your time and make an informed decision. You'll also want to be sure to consider both the financial and the emotional sides of the equation. Let's begin by examining the financial factors involved.

Moving:
A good local real estate agent should be able to assist you with estimates on these numbers.
· How much will it cost to purchase a home that will meet your needs?

· How much could you sell your existing home for? Don't forget to subtract the agent's commission from this total.

· What will it cost to move? According to real estate consultant and best-selling author of Remodel or Move, Dan Fritschen, a typical move costs 10% of the value of your home.

· How much will your property taxes increase as a result of the move?

Remodeling:
· What projects do you want to have done and how much will they cost? An architect or general contractor will be able to assist you with these figures.

· How much will the improvements add to the value of your home, also known as the "payback"? A local real estate agent can assist with this as well.

If the decision about whether to renovate or move were purely a financial one, then it would be quite easy to look at the numbers and come to the right conclusion. However, there are also emotional factors that come into play, and they have a value as well. Let's consider some examples.

Reasons you may want to move:
· If you relocate to a new neighborhood, your children could attend superior schools.

· You would like to reduce your commute or have better access to local amenities, such as restaurants and shopping.

· You're not particularly fond of your current neighborhood.

· Your yard is too small, and you cannot expand it.

Reasons you may want to stay and remodel:
· You're happy with your location. It's convenient, you love your neighbors, and the schools are either excellent or are not a factor.

· You love the layout of your home.

· All you need is a little more space, and your home will be perfect.

Of course only you know what is truly important for your happiness, so try to use these questions as a starting point. Create a list of the pros and cons of each scenario and leave it someplace accessible, so that you and your spouse can add to it as you think of additional factors. You may also want to consider attending open houses and visiting new housing developments to see what is available and how your home compares.

Once you've completed your list and your financial assessment, it's time to draw some conclusions. Are the numbers and the emotional factors pointing you in a clear direction? If you're still feeling unsure and would like some additional assistance, you may want to read Dan Fritschen's book, Remodel or Move, or visit his website at www.remodelormove.com. Both contain a calculator that will assist you with the difficult task of quantifying the ramifications of your decision. In addition, you can learn tips to assist you with the next step, after you've determined what it will be.

If you choose to remodel, then you'll need to have a clear idea of what you want to accomplish before finalizing any details with the contractor or architect. One of the most expensive things you can do is change the project midstream.

If you decide to move, then there are low-cost improvements you can make to your existing home that will help it to sell more quickly. The kitchen and the bathrooms provide the biggest return on investment in this area.

Whether you decide to remodel or buy a new home, it's important to ensure that you have proper financing in place prior to moving forward. If you decide to purchase a home, a mortgage originator will help you to determine how much you can afford, as well as which loan package works best with your overall financial plan. In the case of remodeling, you should meet with a mortgage professional before any construction takes place. Otherwise you may severely limit the type of financing options available to you.

Additional Resources:
Remodel or Move?: Make the Right Decision, by Dan Fritschen

This morning, I checked out rates from one of the largest players in the subprime market, Long Beach Mortgage. Acquired by WaMu in 1999, LongBeach originated nearly $30 billion in mortgage loans in 2005, the height of the subprime extravaganza. Back then, 2-Year Fixed Rates for Full Documentation Loans at 80% loan-to-value with a 620 FICO score was at 5.10%. Many first-time homebuyers took advantage of this low starter rate, most borrowing up to 100% of the home’s value.

Two years later, these rates started to adjust upwards, some by as much as 6%, causing many subprime borrowers to fall behind on their mortgage payments. In mid-July, many subprime lenders pulled their short-term 2-Year and 3-Year Fixed loans off the shelf, keeping only longer term programs like the 5-Year Fixed and 30-Year Fixed.

Today, the lowest rate a subprime borrower can get with the same profile – Full Documentation, 620 FICO score, 80% loan-to-value – is at 8.85%. That’s a 3.75% jump in the rate, an almost 75% increase. And Long Beach no longer offers 100% financing. The maximum they will lend is at 90% of the home’s value. This leaves many subprime borrowers stuck, unable to refinance due to lack of equity exacerbated by late payments in their credit history. Thus, foreclosures spike.

Loan Performance, a San Francisco firm that tracks the delinquencies in the mortgage industry, indicates in its March 2007 report that nationwide, 8.28% of subprime mortgages were seriously delinquent (90+ days late) while Bankrate.com indicates that 16% were at least 30 days delinquent. These figures are expected to get worse as more subprime mortgage rates reset.

The only thing a subprime borrower can do is to take a serious look at their credit history and make the appropriate changes or seek professional assistance and intervention. Financial mismanagement and procrastination can indeed by very hard habits to break.

Until next week, happy home loan shopping!

Economic analysts are expecting the Fed to cut the federal funds rate by another quarter point when they meet next week. Just last month, the Fed cut the federal funds rates by half a percentage point to 4.75%, the first time since June 25, 2003.

Since June of 2004, the Federal Reserve has systematically increased the federal funds rate, causing short-term interest rates to follow suit. As a result, consumers with Adjustable Rate Mortgages (ARMs) tied to volatile short-term rate indices, such as the LIBOR, are finding themselves at the mercy of the Federal Reserve’s war on inflation.

“Higher interest rates function as a tax on people who hold variable debt,” says Daniel Gross, reporter for The New York Times, a “truism that is particularly apparent to homeowners holding adjustable rate mortgages.” In his article, Gross cites Mark Zandi, chief economist at Moody’s Economy.com, who estimates that nearly $2 trillion in ARMs are due to reset by the end of calendar year 2008. This could potentially increase the total interest payments of ARM holders by an estimated $50 billion in 2009, compared to today. For many of these borrowers, reset minimum monthly payments could increase upwards of 50% to even 100% of what they’re paying now – if they haven’t already. And the worst may not even be over!

According to Ben Bernanke, the Federal Reserve’s chairman, the real estate market is experiencing a “substantial correction”. This, economists say, is the result of the Fed’s attempt to engineer a “soft landing” by systematically increasing interest rates to control inflation without fueling a recession. Fed officials believe that they are making strong progress towards this difficult goal. However, even moderate economic growth will give the Fed room to increase short-term rates further, according to David Leonhardt of The New York Times. This means more bad news for ARMs holders with life-caps at 10% or more, and even worse news for the estimated 70% of Option ARM borrowers who chose the minimum or negative payment options of their mortgages and are now actually accruing (and compounding) a larger balance than what they originally borrowed.

If you or someone you know has an ARM, however, all is not completely lost. There is still time to take advantage of alternative loan programs, such as intermediate fixed-rate and tiered-rate loans, that can effectively limit one’s liability before rates increase again. These programs enable borrowers to stabilize their finances and know exactly what their monthly payments will be over the next few years while the Fed does its best to stifle inflation. Remember, the Fed has a habit of overcorrecting the market before changing policies, which means rates could still increase even after their goal of a soft landing has been reached.

If you do foresee a sustained period of paying an interest rate that is significantly higher than what you want or are able to pay, see your mortgage professional today. Don’t be a casualty of the Fed’s war against inflation. Ask about intermediate fixed-rate or tiered-rate products to hold you over until the Fed flips the script and rates finally begin to decrease.

An experienced and resourceful loan professional will have access to a variety of loan programs including 3, 5, or 7-year fixed-rate products as well as tiered-rate programs to counter fully-indexed ARMs and Option ARMs. A 5-year fixed rate mortgage, for instance, converts to an adjustable at the end of that fixed tenure. Taking out such a loan, with no prepayment penalty, may make a lot of sense right now because it will provide some interest rate relief in today's market, while buying the consumer time to refinance once rates begin to decrease.

Tiered-rate products, on the other hand, are essentially fixed-rate loans that act like adjustable rate loans but offer the security of a built-in cap. In fact, these loans actually adjust in your favor, saving you money in the first years of the loan before reaching their final fixed rate. Various types of these tiered-rate products exist, and each offer different money-saving options. See your mortgage professional for the one that’s right for you. Just be sure, however, that he or she caps you out at a rate that’s lower than your current interest rate to receive the full benefit of these products. Finally, confirm that your mortgage professional will be keeping abreast of market conditions and will be ready to refinance you once rates do decrease, saving you even more.

Until next week, happy home loan shopping!

In March 2006, the Wall Street Journal reported that “more than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007.”

That’s $2 trillion worth of adjustable rate mortgages (ARMs) reaching the end of their initial fixed-rate period. An adjustable-rate mortgage has an interest rate that changes based on changing market rates and economic trends. If you currently have an ARM, there are two factors determining your interest rate – the Index and the Margin:

1. Index - the adjusting portion of the interest rate, and a very important feature of the ARM. Indexes fall into two broad categories: averaged indexes and spot rates.
• Averaged Indexes – most lenders use relatively slow-moving indices to protect borrowers from rapid interest rate increases. They include the Certificate of Deposit Index (CODI), Eleventh District Cost of Funds (COFI), and 12-Month Treasury Average (12 MTA).
• Spot Rates – Two of the most popular are the one-month LIBOR, or London Inter-Bank Offer Rate, and the Constant Maturity Treasury (CMT). Being "tied" to these index rates means that when those rates go up, your interest goes up with it. The flip side is that if they go down, your rate also goes down

2. Margin - the stable figure added to the index to determine the interest rate. The margin remains the same for the life of the loan. For example, if the index is 3.00% and the margin is 3.00%, then your interest rate is 6.00%.

ARMs usually offer an initial interest rate that can be up to five percentage points lower than fixed-rate mortgages (such as with Option ARMs), but they don't offer the stability or assurance of a known mortgage payment in the years to come. If borrowers don’t expect to stay in their home longer than five years, an ARM may be a better loan option. Some things to consider when evaluating ARMs are:

- Initial Interest Rate – for some programs, such at the Option ARMs, initial interest rates can be as low as 1.25%, while a 5/1 ARM is at 5.88% compared to 6.09% for a 30-Year Fixed.

- Adjustment Period. How often the interest rate adjusts is determined by the terms of the loan. There is usually an initial period of time during which the rate won't change. This might be anywhere from six months to several years. For example, a 5/1 ARM means the initial interest rate would stay the same for the first five years and then would adjust each year beginning with the sixth year, while a 5/6 ARM means the rate will adjust every 6 months after the initial 5-year fixed period.

- Rate Caps. To protect the borrower, there are CAPS, or limits to how high the interest rate can go over the life of the loan and how much it may change with each adjustment:

o Interim interest rate caps – this dictates how much your interest may change with each adjustment. This varies from 2% to 6%, so be sure to discuss it with your Mortgage Advisor.

o Lifetime interest rate cap - usually expressed as maximum rate, this protects you from possible future high rates for the life of the loan. Lifetime caps can be as high as 12%.

Why should you be concerned? Consider these figures from the Mortgage Bankers Association and MarketWatch:

- In 2004, 33% of mortgage loans were adjustable rate mortgages (ARMs)

- In 2005, ARMs constituted 37% of all home loans

- In 2006, ARMs comprised 25% of all home loans, and 75% of all subprime loans. Of the subprime loans, one-third were purchase loans made to a first-time homebuyer

- Between 2006-2007, foreclosure rates for subprime ARMs doubled from 5.1% to 10.1%, while the delinquency rate increased from 10% to 15.75%

If you are unfamiliar with the terms of your ARM, review the Mortgage Note you signed during your loan closing, or contact your Mortgage Advisor to help you decipher the document. This will outline your index, margin, initial interest rate, adjustment period, and interest rate caps.

Until next week, happy home loan shopping!