'Exotic' Guidance Imminent Federal banking regulators are expected to issue their long-awaited non-traditional mortgage guidance in the next few days, possibly as soon as Friday, according to industry officials. The long-awaited guidance addresses underwriting and disclosure standards on interest-only mortgages, payment-option adjustable-rate mortgages, and "piggyback" loans. Regulators are concerned that some consumers do not fully understand how these products reset and could face steep monthly payment increases. Meanwhile, Friedman Billings Ramsey analyst Paul Miller issued a report saying the impact of the final guidance will be "relatively benign," especially in regard to option ARM lenders. "We believe, though, that the new restrictive guidance could shrink the option ARM market by prohibiting the more marginal underwriting practices," he writes in a Sept. 27 research paper.
The underwriting guidelines for Option ARMs have changed dramatically in the past months, mainly due to the secondary market's trepidation on buying the notes. My clients do not read the disclosures I send them already, and when I force them, their eyes glaze over. Instead of creating more disclosures, can we re-vamp the ones we have to make them better serve their original purpose?
Friday, September 29, 2006
Thursday, September 28, 2006
What is the Fed Thinking?
Who knows. But the Federal Reserve Bank of Cleveland has some charts that show what the expectations of the market are based on the Chicago Board of Trade's Options Market. Apparently we think that the Fed Rate will stay at the current 5.25% in December, and a few think that the rate will be cut to 5%.
Pimco's Bill Gross thinks that the Fed will cut rates in 2007 as the economy cools off. He doesn't say when next year though. Just next year. He goes on to say that the old trick of slashing rates may not do the job as it has in the past. This may be the first time since banking deregulation in the 1980s that housing is the drag on the economy. The Fed may have to come up some new ideas to get us up and running. That's what he says.
If the Fed starts cutting rates, this may help the borrowers who need to refinance ARMs as they mature into fully indexed adjustable mortgages. Refinance activity will increase somewhat. I don't know if purchase activity will increase as a result since there are too many other factors such as sellers who still want (or need) top dollar, currency fluctuations that may not go our way, and the fact that a weakening economy generally doesn't put much money in the consumer's pocket.
Pimco's Bill Gross thinks that the Fed will cut rates in 2007 as the economy cools off. He doesn't say when next year though. Just next year. He goes on to say that the old trick of slashing rates may not do the job as it has in the past. This may be the first time since banking deregulation in the 1980s that housing is the drag on the economy. The Fed may have to come up some new ideas to get us up and running. That's what he says.
If the Fed starts cutting rates, this may help the borrowers who need to refinance ARMs as they mature into fully indexed adjustable mortgages. Refinance activity will increase somewhat. I don't know if purchase activity will increase as a result since there are too many other factors such as sellers who still want (or need) top dollar, currency fluctuations that may not go our way, and the fact that a weakening economy generally doesn't put much money in the consumer's pocket.
Monday, September 25, 2006
What? No Donuts?
You know times are tough when Countrywide cuts the free donuts on the last Friday of the month to their employees. The largest mortgage originator in the country is not only letting go of up to 10% of their general and administrative workforce, but they are comtemplating the unthinkable...no free donuts once a month. I'm sure that will add enough to the bottom line to get through this rocky earnings season.
Thursday, September 21, 2006
Real Estate Workers Singing The Blues
After a five-year boom of unprecedented proportions sent workers flocking to the housing professions, the industry slowdown is seeing more and more mortgage lenders and property agents dropping out of the business--of their accord as well as via corporate payroll cuts. The Bureau of Labor Statistics reports that realty and mortgage jobs topped out at 504,800 in February, falling to 503,100 by June. Chicago-based consultant Challenger, Gray & Christmas, meanwhile, calculates that layoff announcements in the real estate industry hit 3,033 in the first eight months of the year--up a staggering 96 percent from the corresponding period in 2005. Mortgage companies announced 8,513 layoffs over the same time frame, up 70 percent year-over-year. "There will be some decline in employment," concedes Mortgage Bankers Association senior economist Mike Fratantoni, "but it is not going to be the 18-percent decline we're seeing in originations."
Check out the story on Reuters
Check out the story on Reuters
Realtor Prez: "Do as I say, not as I do"
So the president of the National Association of Realtors has been trying to sell his house for a year. He didn't listen to his brokers, who have been telling him to lower the price, so it's been sitting on the market with little interest. Apparently this gap between buyers and sellers in today real estate market goes straight to the top. One interesting quote in the Washington Post article is when he says that he didn't listen to his brokers when originally pricing the property.
I hope he listens to his brokers when he's doing his job as President of the NAR...
I hope he listens to his brokers when he's doing his job as President of the NAR...
Friday, September 15, 2006
Ex-HUD Chief Wins NY AG Primary
Despite Mark Green's efforts, former Department of Housing and Urban Development Secretary Andrew Cuomo revived his political career Tuesday with a victory in the New York State Democratic primary for attorney general. According to the New York Times, with 98% of the vote counted, Mr. Cuomo led his nearest challenger, former New York City Public Advocate Mark Green (the brother of real estate developer Stephen Green), by a margin of 53% to 33%. The current attorney general, Eliot Spitzer, is running for governor. In 2002, Mr. Cuomo ran for governor but dropped out in the midst of the primary campaign. His name still appeared on the statewide general election ballot as the candidate of the Liberal Party, although he did not actively campaign.
Thursday, September 14, 2006
Night Terrors and the Suitability of Mortgage Lending Products
Yes, there have been many different mortgage products that have come to the market in the last few years; this has much to do with creating affordability, and a newly mature secondary market for mortgage debt. The whole secondary mortgage market is only 20 years old, so when the Fannie and Freddie were the only game in town the products were much more limited due to the lack of funding.
As I see it, there are 2 types of mortgages: Adjustable Rate Mortgages and Fixed Rate Mortgages. Within those 2 categories there are a variety of characteristics that may be combined to tailor a mortgage to the borrower’s needs.
With adjustable rate mortgages there are characteristics such as: index, payment amount (interest only or fully amortizing), length of the loan, length of a fixed rate period, rate caps during the adjustable period.
With fixed rate mortgages there are characteristics such as: payment amount (interest only or fully amortizing), length of the interest only period (if any), length of the loan, and negative amortization.
These characteristics are combined in a manner that creates a mortgage suitable to the needs of the borrower and their plans for the real estate purchase.
A suitable candidate for something like a payment option adjustable rate mortgage with the possibility of negative amortization is someone whose income is largely from bonuses and who has significant knowledge of financial markets and the indices that are involved. So a Wall Streeter who makes $1,000,000 per year with $800,000 of it coming from his yearly bonus, who can show a 3 year track record of this bonus might make an excellent candidate for a payment option ARM with the potential for negative amortization. He knows the index, such as the 12 month treasury average is a lagging indicator, he knows that during the course of the year he can pay an interest only payment (creating no negative amortization, but servicing the debt only) or even elect to pay a minimum payment creating adding part of the interest that is due to the loan amount if he would rather do something else with his money on a month to month basis. When his bonus comes he can make a significant principal payment on the mortgage. This type of borrower may view his home as another of his many investment vehicles in his portfolio. In New York, the negative amortization limit is 110% of the original loan balance. This is much lower than the national 125% of the original loan balance limit for negative amortization.
I personally haven’t originated many of these negative amortization mortgages. I’ve originated a few in my career; one was on a $3,500,000 single family home purchase by an Art Dealer who makes around $1,000,000 per year. He put down $2,100,000 on the house and took an option ARM for the remaining $1,400,000 needed to make the purchase. In this case, his income, while large on a yearly basis, comes from the sale of multi-million dollar works of art. He may be better able to carry the payment if he can from time to time pay a minimum payment in order to keep his house payments up to date. He owns the majority of his home; he is savvy enough to know that he is going to add to the balance of his mortgage if he pays less than the interest only payment due. He also makes an income to support large principal payments during the course of the year should he choose to pay off his house further.
A suitable candidate for an interest only adjustable rate mortgage with a fixed period of 3, 5, 7 or 10 years without the possibility of negative amortization is someone like the case scenarios above as well as some others. One candidate might be someone whose plans are to stay in the property less than the fixed period. I have one person now who is going to stay in the property for 5 years. He is going to get married within the next year, his wife and he will live in the condo (new construction in Manhattan) for a couple of years until they have children at which time they are planning to move into a larger home. His fiancé currently owns a Manhattan studio apartment; he is buying a 1 bedroom condo with a home office. When they are ready to move, they will have the proceeds from the sale of her apartment as well as the proceeds from the sale of the 1 bedroom condo in order to purchase the larger apartment. Both are on excellent career paths, so their income is also expected to increase. If you look at an amortization table for a $580,000 mortgage, you will see that for the first several years, the principal payment is fairly low for the first several years. Also since they are not planning to stay in the property for the rest of their lives, which is typical with Americans in general, they would rather take the money that they save in their monthly payments elsewhere to gain value. Another candidate for an interest only mortgage is someone like my mother, who at 62 years of age wanted to sell her larger 2 story and move into a ranch style townhouse. She is downsizing her home and the amount of maintenance that she needs to do (finally). She decided on an interest only mortgage because, at her age, she feels that she isn’t interested in paying off the home. She is unsure of what she will do when she retires (as if that is going to happen – it’s like pulling teeth to get her to take a day off), or whether she may prefer to move closer to me when my wife and I start having children. What she does know is that it’s unlikely she is going to stay in this house for 30 years at her age. So why should she pay more in monthly payments for a fixed rate amortizing mortgage now?
A suitable candidate for a fixed rate interest only mortgage is all of the above and those who are going to stay in their home for more than 7 years. At that point, they may as well finance they homes with a fixed rate mortgage paying interest only payments for the first 10 or 15 years of the loan. The payment isn’t much more than a 10/1 Interest Only most of the time, lately it’s the same if not lower. One nice feature of the fixed rate interest only mortgage over the fixed rate fully amortizing mortgage is the payment recast feature. I have a borrower right now who is moving up in housing. He’s buying a $1,200,000 coop on the Upper East Side; moving from a $790,000 condo on the Upper West Side that he purchase less than 5 years ago. Right now he has to carry both properties until he sells the UWS condo due to timing and the nature of coop approval. So he’s putting down $300,000 on the purchase of the coop which is the 25% minimum down payment required by the coop board. When he sells the condo, he will realize about $400,000, which he will pay toward the principal of the $900,000 mortgage on the new coop. This will immediately reduce his monthly payment because the payment will be re-calculated based on the new principal balance. Furthermore, this borrower plans on paying off his mortgage entirely within 10 years, so as he makes these larges principal payments, his monthly payment will be further reduced. Thus it was more appropriate for him to finance his coop purchase with an 30 year fixed rate interest only mortgage than a 30 year fully amortizing fixed rate mortgage because the fully amortizing mortgage’s payment would remain the same until the entire balance is paid. It’s nice to see the immediate benefit of principal payments and I think it’s an inducement to make extra principal payments if the borrower can immediately see the effects of prepaying his mortgage.
A candidate for the fixed rate fully amortizing mortgage is, of course, all of the above and those who are going to stay in their homes for more than 10 years. Particularly the couple in the interest only example when they buy the house where they want to raise their children. Then, most likely, they will want to stay in the house at least until their children are in college, so that will be close to 20 years. Then it certainly makes sense for them to finance the purchase with an amortizing fixed rate mortgage. Another suitable candidate is someone who has owned the home for several years who is looking to reduce the term of the mortgage and pay it off quicker now that their income is higher. Someone going from any of the above mortgages to a 10 or 15 year fixed rate mortgage.
The length and terms of the financing should be appropriate to the plans of the person who is buying the home. Here in New York, I’m sure there is some concern that static income individuals, or individuals with less than perfect credit are trying to squeeze into homes they can barely afford. And buying these homes with no down payments. I know the press has been about people who bought homes and are now in danger of losing the home due to the inability to pay the payments they promised to pay. On what level is the homeowner responsible? On what level is the mortgage originator? The lender? The secondary mortgage market? All tricky questions that we must navigate. There are several different factors at work here. One is the availability of mortgage products, one is the highest level of homeownership ever, one is the rapid increase in home prices over the last few years and another is the ability to purchase a home with a lower down payment than ever before.
The most important thing that we can do is to educate people on the process, the financing and the responsibilities of homeownership. I’m a big believer that knowledge is the key. Also when I read many of these horror stories, I can’t help but wonder why they didn’t read any of the disclosures, why they didn’t ask questions?
As I see it, there are 2 types of mortgages: Adjustable Rate Mortgages and Fixed Rate Mortgages. Within those 2 categories there are a variety of characteristics that may be combined to tailor a mortgage to the borrower’s needs.
With adjustable rate mortgages there are characteristics such as: index, payment amount (interest only or fully amortizing), length of the loan, length of a fixed rate period, rate caps during the adjustable period.
With fixed rate mortgages there are characteristics such as: payment amount (interest only or fully amortizing), length of the interest only period (if any), length of the loan, and negative amortization.
These characteristics are combined in a manner that creates a mortgage suitable to the needs of the borrower and their plans for the real estate purchase.
A suitable candidate for something like a payment option adjustable rate mortgage with the possibility of negative amortization is someone whose income is largely from bonuses and who has significant knowledge of financial markets and the indices that are involved. So a Wall Streeter who makes $1,000,000 per year with $800,000 of it coming from his yearly bonus, who can show a 3 year track record of this bonus might make an excellent candidate for a payment option ARM with the potential for negative amortization. He knows the index, such as the 12 month treasury average is a lagging indicator, he knows that during the course of the year he can pay an interest only payment (creating no negative amortization, but servicing the debt only) or even elect to pay a minimum payment creating adding part of the interest that is due to the loan amount if he would rather do something else with his money on a month to month basis. When his bonus comes he can make a significant principal payment on the mortgage. This type of borrower may view his home as another of his many investment vehicles in his portfolio. In New York, the negative amortization limit is 110% of the original loan balance. This is much lower than the national 125% of the original loan balance limit for negative amortization.
I personally haven’t originated many of these negative amortization mortgages. I’ve originated a few in my career; one was on a $3,500,000 single family home purchase by an Art Dealer who makes around $1,000,000 per year. He put down $2,100,000 on the house and took an option ARM for the remaining $1,400,000 needed to make the purchase. In this case, his income, while large on a yearly basis, comes from the sale of multi-million dollar works of art. He may be better able to carry the payment if he can from time to time pay a minimum payment in order to keep his house payments up to date. He owns the majority of his home; he is savvy enough to know that he is going to add to the balance of his mortgage if he pays less than the interest only payment due. He also makes an income to support large principal payments during the course of the year should he choose to pay off his house further.
A suitable candidate for an interest only adjustable rate mortgage with a fixed period of 3, 5, 7 or 10 years without the possibility of negative amortization is someone like the case scenarios above as well as some others. One candidate might be someone whose plans are to stay in the property less than the fixed period. I have one person now who is going to stay in the property for 5 years. He is going to get married within the next year, his wife and he will live in the condo (new construction in Manhattan) for a couple of years until they have children at which time they are planning to move into a larger home. His fiancé currently owns a Manhattan studio apartment; he is buying a 1 bedroom condo with a home office. When they are ready to move, they will have the proceeds from the sale of her apartment as well as the proceeds from the sale of the 1 bedroom condo in order to purchase the larger apartment. Both are on excellent career paths, so their income is also expected to increase. If you look at an amortization table for a $580,000 mortgage, you will see that for the first several years, the principal payment is fairly low for the first several years. Also since they are not planning to stay in the property for the rest of their lives, which is typical with Americans in general, they would rather take the money that they save in their monthly payments elsewhere to gain value. Another candidate for an interest only mortgage is someone like my mother, who at 62 years of age wanted to sell her larger 2 story and move into a ranch style townhouse. She is downsizing her home and the amount of maintenance that she needs to do (finally). She decided on an interest only mortgage because, at her age, she feels that she isn’t interested in paying off the home. She is unsure of what she will do when she retires (as if that is going to happen – it’s like pulling teeth to get her to take a day off), or whether she may prefer to move closer to me when my wife and I start having children. What she does know is that it’s unlikely she is going to stay in this house for 30 years at her age. So why should she pay more in monthly payments for a fixed rate amortizing mortgage now?
A suitable candidate for a fixed rate interest only mortgage is all of the above and those who are going to stay in their home for more than 7 years. At that point, they may as well finance they homes with a fixed rate mortgage paying interest only payments for the first 10 or 15 years of the loan. The payment isn’t much more than a 10/1 Interest Only most of the time, lately it’s the same if not lower. One nice feature of the fixed rate interest only mortgage over the fixed rate fully amortizing mortgage is the payment recast feature. I have a borrower right now who is moving up in housing. He’s buying a $1,200,000 coop on the Upper East Side; moving from a $790,000 condo on the Upper West Side that he purchase less than 5 years ago. Right now he has to carry both properties until he sells the UWS condo due to timing and the nature of coop approval. So he’s putting down $300,000 on the purchase of the coop which is the 25% minimum down payment required by the coop board. When he sells the condo, he will realize about $400,000, which he will pay toward the principal of the $900,000 mortgage on the new coop. This will immediately reduce his monthly payment because the payment will be re-calculated based on the new principal balance. Furthermore, this borrower plans on paying off his mortgage entirely within 10 years, so as he makes these larges principal payments, his monthly payment will be further reduced. Thus it was more appropriate for him to finance his coop purchase with an 30 year fixed rate interest only mortgage than a 30 year fully amortizing fixed rate mortgage because the fully amortizing mortgage’s payment would remain the same until the entire balance is paid. It’s nice to see the immediate benefit of principal payments and I think it’s an inducement to make extra principal payments if the borrower can immediately see the effects of prepaying his mortgage.
A candidate for the fixed rate fully amortizing mortgage is, of course, all of the above and those who are going to stay in their homes for more than 10 years. Particularly the couple in the interest only example when they buy the house where they want to raise their children. Then, most likely, they will want to stay in the house at least until their children are in college, so that will be close to 20 years. Then it certainly makes sense for them to finance the purchase with an amortizing fixed rate mortgage. Another suitable candidate is someone who has owned the home for several years who is looking to reduce the term of the mortgage and pay it off quicker now that their income is higher. Someone going from any of the above mortgages to a 10 or 15 year fixed rate mortgage.
The length and terms of the financing should be appropriate to the plans of the person who is buying the home. Here in New York, I’m sure there is some concern that static income individuals, or individuals with less than perfect credit are trying to squeeze into homes they can barely afford. And buying these homes with no down payments. I know the press has been about people who bought homes and are now in danger of losing the home due to the inability to pay the payments they promised to pay. On what level is the homeowner responsible? On what level is the mortgage originator? The lender? The secondary mortgage market? All tricky questions that we must navigate. There are several different factors at work here. One is the availability of mortgage products, one is the highest level of homeownership ever, one is the rapid increase in home prices over the last few years and another is the ability to purchase a home with a lower down payment than ever before.
The most important thing that we can do is to educate people on the process, the financing and the responsibilities of homeownership. I’m a big believer that knowledge is the key. Also when I read many of these horror stories, I can’t help but wonder why they didn’t read any of the disclosures, why they didn’t ask questions?
Wednesday, September 13, 2006
Charge that Down Payment
Buying into a condo that requires a down payment and don't want to put any money down? According to the Real Deal, American Express has got your back. The credit card company has teamed up with the Moinian Group to allow buyers to charge their down payment to their American Express. Of course it's due in 30 days, but you can buy now and pay later.
American Express says that it's a benefit to it's members, that they can accrue precious points to qualify them for round trip tickets to Paris or some remote island. Moinian Group is trying to sell condos. It's win-win right?
When it comes to articles about mortgages these days it's all about how borrower's are taking out riskier and riskier loans to finance their homes. That these risky loans are going to cause mass hysteria and foreclosures across the land. There's no way out.
Or is there? How about charging your down payment to a high interest credit card? Yeah...that's the ticket.
My take, why not let the buyer obtain 100% financing. It's obviously safer than letting them charge their down payment to a credit card. Our debt load is huge, no question. Americans love to charge their purchases. Is it because we get miles? Or are the credit card companies offering these incentives because they want those precious credit card balances at 24% interest?
Here in New York we can charge our rent. Why not charge our down payments too?
American Express says that it's a benefit to it's members, that they can accrue precious points to qualify them for round trip tickets to Paris or some remote island. Moinian Group is trying to sell condos. It's win-win right?
When it comes to articles about mortgages these days it's all about how borrower's are taking out riskier and riskier loans to finance their homes. That these risky loans are going to cause mass hysteria and foreclosures across the land. There's no way out.
Or is there? How about charging your down payment to a high interest credit card? Yeah...that's the ticket.
My take, why not let the buyer obtain 100% financing. It's obviously safer than letting them charge their down payment to a credit card. Our debt load is huge, no question. Americans love to charge their purchases. Is it because we get miles? Or are the credit card companies offering these incentives because they want those precious credit card balances at 24% interest?
Here in New York we can charge our rent. Why not charge our down payments too?
Thursday, September 07, 2006
Give Us All the Information
Mortgages are fairly complicated financial instruments, and deserve a loan officer's undivided attention when structuring the deal for any prospective borrower.
Unfortunately, we get prospects who come to us saying something along the lines of: "I was a quoted 6.5%. Can you do better?" What program? Can you qualify for the mortgage showing full income and assets? What's the loan amount? Purchase or refinance? What is the loan to value? How much are you putting down? Is this an interest only? Fixed Rate or adjustable? What is your credit profile? Any judgment lurking on your credit report? What is you middle credit score?
We ask these questions because we have to ask these questions. I cannot know if a rate is a good one or not until the particulars are divulged. For some 6.5% might be a fantastic deal, for others the worst deal out there. Each mortgage is specific to the inidividual borrower.
This is why it's most important to develop a level of trust with your loan officer, and work with a loan officer who educates you as a consumer along the way, so that your understanding of your financial picture becomes more broad as you progress through the transaction. Ask questions, and answer questions.
Begin the dialogue, the loan officer is on your team.
Unfortunately, we get prospects who come to us saying something along the lines of: "I was a quoted 6.5%. Can you do better?" What program? Can you qualify for the mortgage showing full income and assets? What's the loan amount? Purchase or refinance? What is the loan to value? How much are you putting down? Is this an interest only? Fixed Rate or adjustable? What is your credit profile? Any judgment lurking on your credit report? What is you middle credit score?
We ask these questions because we have to ask these questions. I cannot know if a rate is a good one or not until the particulars are divulged. For some 6.5% might be a fantastic deal, for others the worst deal out there. Each mortgage is specific to the inidividual borrower.
This is why it's most important to develop a level of trust with your loan officer, and work with a loan officer who educates you as a consumer along the way, so that your understanding of your financial picture becomes more broad as you progress through the transaction. Ask questions, and answer questions.
Begin the dialogue, the loan officer is on your team.
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