Supreme Court Tells States: Hands Offa That Bank

It a Supreme Court ruling that came down yesterday with Ruth Bader Ginsburg writing the opinion, the high court decided that under the National Banking Act (NBA), federally chartered banks and their subsidiaries were not regulated by the states, and are, in fact, immune from state legislation.

So this moves the mortgage lending arms of national banks out of the reach of the individual states and into the loving arms of the Feds.

The New York Times has the story here.

I don't know what this means for borrowers who are losing their homes due to foreclosure. Where's Willie Nelson when he's needed? Who going to put together the rock concert to bail out homeowners? Come on Hollywood, flex those money muscles.

Housing v. Human Rights

Yesterday I attended a New York State Banking Department conference on Abusive Lending called HALT.

It was an interesting educational conference for me, though it seemed as though many attendees wanted a forum to air their grievances with the subprime foreclosures throughout the state.

A couple of thoughts about the conference:

First off, is this a human rights issue? I can see that shelter is a human rights issue, but is home ownership? There are most likely some discrimination issues afoot. From the data it seems as though minorities have been placed into subprime mortgage products far more, particularly African-Americans and Hispanics who appear to make up the bulk of the subprime borrowers. There might have been other products for some of these borrowers.

I don't think this is a human rights issue up there with hunger, shelter, false imprisonment and other basic human rights. I'm not trying to lessen the impact, nor mitigate the blame, I just don't think it falls under this category.

The other issue that I heard frequently is a 6 month moratorium on foreclosures. Even Senator Clinton is calling for this in Congress. I don't know if this is a solution either. There are some borrowers who have taken out loans that they cannot repay, if this is the case, these loans should result in foreclosure. I don't know if it's the lender's fault for loaning the money to them. There are others who are victims of fraudulent colusion between real estate brokers, mortgage loan originators and appraisers who may have originally overpaid for their property (how they didn't check on the internet for comparable sales is beyond me), these homeowners should certainly seek some relief until a solution is found for them either dealing directly with the lenders or with a regulatory agency.

Pointing Fingers

Interesting how no one wants to take responsibility. It's all "pass the buck" all the time. I read an article in the Post that Mayor Bloomberg laid some of the blame for the rise in New York foreclosures on the borrowers themselves for taking out loans they knew they could not pay. Housing and consumer advocates say the Mayor is wrong, that the lenders are to blame.

So if the disclosures are confusing to consumers, and they don't understand the Good Faith Estimate and the Truth-In-Lending Disclosure, is more of the same the answer? Wouldn't it be a better response to try to simplify a document that at more than one closing I've attended has been described by the borrower's attorney as "it's confusing, just sign it."

I guess it's one of the those cases of "it's going to get worse before it gets better."

Condo Conversion Update

Well one thing I could do is get the current mortgage holder to allow the conversion and move the lien to the condo still owned by the original owner of the 2 family.

They are keeping one of the units as their home. Currently they have 2 mortgages totaling more than the value of the remaining condo that they own. However if they payoff the Home Equity Line of Credit the proceeds from the sale of the other side of the house they are making a condo, then the existing first mortgage is less than 75% of the value of the condo they are continuing to live in. Confused yet?

So if I can get the existing lien holder to allow the change in property type and transfer the lien to just one of the units instead of the whole building, that might be a solution. There are, however, complications. First off, the mortgage is being serviced by a different company that the original lender, so that means dealing with 2 entities on the issue.

Also a change a property type effectively puts the mortgage in default and the lender could call in the whole note forcing the payment of the entire mortgage, which is a significant amount of money. More than the sale.

2 units converted to condos in Nantucket

Here's an interesting deal.

A client of mine bought a side by side duplex last year on Nantucket Island where he lives and works. It was a great rental property. Now he has changed the property type to 2 condos and sold one of them for $510,000.

That's less than he owes in total against the house, but the appraisal on the other half, which includes a separate studio/ workshop (meaning, no heat) is $750,000.

Here's the deal. Refinance the half that he still owns keeping the mortgage high enough that he can pocket most of the proceeds from the sale, while paying off the first mortgage (5/1 Interest Only) and the Home Equity Line of Credit against the whole property.

It gets trickier...the borrower's credit score has dropped from 698 to 648 in the last few months.

As a Mortgage Broker who works with investors, this is exactly the kind of deal that turns me on and lights me up.

I'll blog the solution as soon as it's approved, don't want to jinx it.

30 Year Fixed Rate Interest Only

The subprime market is imploding or exploding, depending on which side of the fence you are standing. The rumors circulating among homebuyers are that all interest only mortgages are risky and should be avoided. In many cases that may be true, but I think, more true, is a confusion among buyers about mortgage programs in general.An interest only mortgage is not a subprime mortgage necessarily. In fact, it's generally an option for only the most qualified buyers. It even makes sense for those who plan on prepaying the balance of their mortgage on their own. Why? Payment recast.With a 30 year interest only mortgage, the payment due each month is an interest only payment. So on a $400,000 mortgage at 6%, the monthly interest only payment is $2000, rather than the principal and interest payment of $2398.20, where $2000 is the interest payment and $398.20 is paying back the loan each month at the same 6% interest rate.If a well-qualified, disciplined borrower chooses the interest only option, and continues to pay the same payment as the fully amortizing payment, her payment will be reduced based on the new principal balance each month.Here's an example:Keiko, buys a $500,000 coop here in New York City. The coop requires a 20% down payment, so her mortgage is $400,000. She decides on a 30 year fixed rate interest only mortgage. Her first month's payment is $2000, but she pays $2398, indicating that the additional amount goes directly toward principal on her statement when she mails her payment. The next month, her payment is reduced to $1998.01 based on the new loan balance of $399,601.80. If she continues to pay $398 in addition to the interest only payment each month, at the end of the first year, her interest only payment will be reduced to $1976.11. If she chooses, she may elect to pay the interest only payment giving her the freedom to spend the difference in another manner (hopefully paying down credit card debt that's more expensive).Her payment is reduced to reflect the lower principal balance offering her immediate gratification for her discipline. A well disciplined borrower may welcome the freedom of being to either pay down the principal or put the money to use elsewhere on a month to month basis while having the security of a fixed rate for the life of the loan.

Condo Buyers: The Stats

CondoDomain.com did a 2 month study on internet condo buyers in 33 markets in the US and Canada and found:

46% are young professionals, 20% are first time home buyers
78% are looking for a home for themselves (primary residence), 12% are looking for a second home
45% want to buy in a high rise building, 27% want to purchase in a low rise building
73% want to pay under $450,000, although 1% is willing to pay over $3,000,000 for their home

It seems that the luxury buyers were unwilling to register for this survey, and may be under-counted.

It's not so different than I might have expected, but it's nice to look over the data and establish a marketing plan.

This is what card I am

You are The High Priestess

Science, Wisdom, Knowledge, Education.

The High Priestess is the card of knowledge, instinctual, supernatural, secret knowledge. She holds scrolls of arcane information that she might, or might not reveal to you. The moon crown on her head as well as the crescent by her foot indicates her willingness to illuminate what you otherwise might not see, reveal the secrets you need to know. The High Priestess is also associated with the moon however and can also indicate change or fluxuation, particularily when it comes to your moods.

What Tarot Card are You?
Take the Test to Find Out.

Deductions Explained

Straight from the IRS:

Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home (your main or second home). It also must be secured by that home.

If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. The additional debt may qualify as home equity debt (discussed later).

Home acquisition debt limit. The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). Debt over this limit may qualify as home equity debt (also discussed later).

Refinanced home acquisition debt. Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt is not home acquisition debt, but may qualify as home equity debt (discussed later).

Mortgage that qualifies later. A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. For example, a debt that you use to buy your home may not qualify as home acquisition debt because it is not secured by the home. However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. However, if the property later becomes a qualified home, the debt may qualify after that time.

Mortgage treated as used to buy, build, or improve home. A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. This applies in the following situations.

1. You buy your home within 90 days before or after the date you take out the mortgage. The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). (See Example 1.)

2. You build or improve your home and take out the mortgage before the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage.

3. You build or improve your home and take out the mortgage within 90 days after the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage.

19% of B and C mortgage in delinquency

Not being an originator of subprime mortgages, I enjoy reading the news about the implosion of the subprime lenders. I just saw an article that Countrywide is saying that 19% of their B and C mortgages are in some sort of delinquency. That's almost 1 in 5 loans that aren't being paid back. That's gonna leave a mark.

NAR Against Banks Owning Real Estate Brokerages

On one level it's no surprise that the National Association of Realtors is against banks owning real estate brokerages, and on the other hand what does the organization itself stand to lose?

Their bullet points are:

1. The same large-scale consolidation that has taken place in the banking industry itself would likely occur in the real estate business.
Fewer entities conducting real estate brokerage would mean less competition. The result: fewer choices and higher costs for consumers.
2. An additional effect of the proposed regulations would be pressure on bank-affiliated real estate brokers and agents to market and sell other financial products such as insurance, securities and credit cards.
3. Banks could share private consumer data obtained in real estate transactions with their affiliates and other third parties business entities.
4. Banking conglomerates would have unfair competitive advantages. These financial institutions that could operate real estate brokerages under the proposed regulations would benefit from access to capital at lower rates – thanks to federally insured deposits. That benefit is not available to local real estate companies.
5. According to a J.D. Power survey, 28 percent of home buyers had problems with their lenders. Those problems included errors in closing documents, miscommunication of loan terms and unavailable or unresponsive loan consultants or mortgage brokers. That means almost one in three home buyers did not get adequate customer service just during the loan process. How will they be better served by banks during the much more complex process of buying or selling a home?

Of course, it piques me to read #5 on their list. I'm not saying it's not correct, it just always bothers me that lenders aren't doing their jobs to the best of their capabilities.

As a Mortgage Broker who doesn't work for a huge company and works hard to compete in the marketplace, I agree that banks owning real estate companies is a mess. However, there has been an erosion of the seperation of banking institutions and commercial activity for some time (thanks to Sandy Weill & Citigroup when they purchased Traveler's Insurance) and it looks like it's going to continue.

I love the independents. And thankfully here in New York's wacky real estate market there seems to be some room for them...for now.

For the rest of this article, click here.

Low down payment financing on a 2 family house

Without getting a subprime mortgage, a borrower can obtain 95% financing on a 2 family home. These loans can be structured in many ways, but the most common is probably an 80% first mortgage and a 15% second mortgage or Home Equity Line of Credit. This can also be done when the purchase price is more than $1,000,000 which is common here in New York City. With these properties, sometimes the first mortgage will be at a better rate if the first mortgage is less than $1,000,000 and the rest is a second mortgage.

Decade High On Default Rate

One thing that is a blessing about focusing on the Manhattan coop market is that the board approval process and the down payment requirements don't create a market for subprime mortgages. I've avoided the subprime market for this simple reason, and I'm glad when I read that the default rate has risen to 10% of the mortgages sold to investors. That's up from 6.62% according to a report by investment bank Friedman Billings Ramsey & Co. I saw this report in REALTOR Magazine's Daily News.

Run for the Hills

According to the January issue of The Real Deal, many local lenders are going out of business and the industry could shed as much as 25% of it's New York workforce in 2007. That's not necessarily bad news. Mortgage Brokers should be focused on the local real estate market, know the players and the nuances of the local property types.

There are still many people in the mortgage business who are more interested in collecting high fees, than getting the deal done. Still too many order takers, who are little more than telemarketers. By focusing on a sub market, and knowing everything one can about their chosen area of expertise, whether it's new construction, coops, condos or mixed use buildings, one can develop a mortgage business that will be profitable and productive.

Buildings on Leased Land

Generally speaking, you should have no problems getting a mortgage in a building that sits on leased land. Here in New York City, some of the finest buildings are on leased land, whether they are cooperatives or condos like in Battery Park.

Generally speaking, if the lease on the land runs longer than the term of the mortgage, there shouldn't be any problems. Often these leases are for many years, such as a 99 year term. Best to get a copy of the lease, read the terms, calculate any rent increases during the term of the lease and find out the expiration date.

It's not the most common type of building, but it's common enough to finance.

MLN out of business as a lender

Recently I've received 2 faxes from a lender, MLN, which stands for Mortgage Lenders Network. The first one said that they were no longer lending in New York, and the second said that they were working on a solution for the loans that were currently in the works with them.

I've never done any business with them. And don't have the skinny on why they are shutting down exactly, but I found it interesting.

Happy New Year

Here's to wishing you and yours a happy, healthy and prosperous 2007

I'm in the Top 50

According to Broker magazine and a National Association of Mortgage Brokers survey, I placed #36 in the US for mortgage originations. Of course I had the list framed...

56% of the 8 out of 10

Wells Fargo & Co. did a survey of property owners with ARMs. Survey shows that 8 out of 10 are worried about their interest rate rising, but only 56% said that they would refinance when the rate changes. 21% said they would take no action when their rate adjusts. The survey found that only 14% of respondents had ARMs.

I wonder if this speaks more about the quality of the loan officer (broker or banker) than it does about homeowner's concern over a rising housing payment.

Anyway, it is important for those with ARMs to have a plan for when their rate adjusts, even if the best action is to do nothing.

Happy Holidays

Have a happy and healthy holiday season...

The Next Carnival of Real Estate Investing

Cash Flow Treasures will be hosting the Sixth Edition. Be sure to check it out. For more information on the Carnival of Real Estate Investing, please click here.

Carnival of Real Estate Investing 5th Edition

Welcome to the 5th Edition of the Carnival of Real Estate Investing. I didn't receive many posts this week, since we are in the full swing of the holidays, so I'll be able to comment on each post that I received.

The top post was a dead heat between two that I found very helpful on a practical level and in the end I chose Photo Marketing Tips To Say "Attention Buyers!" posted by Steve Burns. This is a more personal choice, since here in New York City, even for rentals, it's extremely important to have excellent photos or the ad won't even be viewed. I know that many prospects who search through Craigslist won't even look at the post unless there is a photo. So this information on how to take photos was extremely useful to me as a non-photographer who needs to learn more.

The rest of the posts were also very interesting. I very much enjoyed hosting this week's Carnival. The posts were varied enough to educate and entertain.

Anesia Springborn's New Manager Invites Excuses and Abuses was an excellent personal experience of how tenants are likely to test the waters when a new property manager takes over a rental property. I enjoy learning from others' personal experiences so this post was especially interesting to me.

In the same vein, Paul's Increasing your hourly rate in order to get rich reminds us to work smarter, not harder. I especially liked the focus on education.

Joshua Dorkin's timely post Keeping Your Tenants Happy During the Holidays was a nice reminder to keep our tenants happy and they will reward us by being timely rent paying happy tenants who may be more accepting of a new property manager in the future.

With the Fed being among the most watched bodies these days, Why The Fed Matters to Real Estate by Dan Green was helpful in putting the big picture into perspective.

In keeping with the Fed's influence on interest rates, Nick Gifford shows us some surprising conclusions that Adjustable Rate Mortgages might, in the end, be a better way to go than Fixed Rate Mortgages when historical data is taken into account in his post The ARM vs. Fixed Rate Mortgage Dilemma

Commercial Real Estate: How You Win Even If You Lose by Craig S. Higdon goes into the basics of using financing to purchase real estate even if you've put together a syndicate to provide the down payment. It shows us that when you put together all of the benefits of owning property, you can sell at a loss and still make an overall profit. A very basic primer for those interested in commercial real estate.

Praveen's post Top 10 Real Estate Books of 2006 might help in purchasing a gift for the real estate investor near and dear to your heart this year.

And lastly, Will Chen presents what is fast becoming (in my opinion at least) the "Save Karyn" of the real estate world with this video lecture Must watch video for new real estate investors. Is there a book deal in the works for this guy yet?

I had a great time reading these posts. The Carnival of Real Estate Investing is off for the next two weeks for the holidays. So check back for the next host of the Carnival of Real Estate Investing!

Update - Mortgage Insurance Payments are Deductible

Unfortunately it's not retroactive, but yes, MI (or PMI) payments are income tax deductible starting January 1st 2007. Any new mortgage insurance policies written after the new year will be deductible.

According to BankRate.com there are some caveats:

Caveat No. 1: The tax deduction applies only to mortgages that are closed in 2007. If you have a loan with mortgage insurance in 2006, you won't be able to deduct the premiums in the 2007 tax year unless you refinance in 2007.

Caveat No. 2: There are income limits. You get the full deduction if your adjusted gross income is $100,000 or less. The amount you can deduct phases out rapidly after that, and no mortgage insurance deduction is available if you make more than $110,000.

Caveat No. 3: This is a one-year deal, and Congress would have to renew the deduction to make it apply for the 2008 tax year and beyond. Congress probably will extend the deduction, but you can't know for sure.

Caveat No. 4: If you take the standard deduction instead of itemizing deductions, the new law makes no difference to you. "You need to have a mortgage of about $130,000 or so to even pay enough interest to hurdle the standard deduction," says Bob Walters, chief economist for Quicken Loans. In practice, he says, this means that the deduction is available to households with incomes between $50,000 and $100,000.

For more on the specifics and how mortgage insurance compares to taking a piggy back loan, please see BankRate.com.

Mortgage Insurance is Now Deductible?

I read something today saying that Congress passed the bill making mortgage insurance, or private mortgage insurance deductible. I don't know the details yet, though I'm sure there's more information to come.

Mortgage Insurance is a type of insurance that the lender requires when the mortgage loan balance is greater than 80% of the value of the property. In the last few years, borrowers have been skirting this expense by obtaining second mortgages as piggy back mortgages. This made sense since the interest paid on these loans was deductible whereas mortgage insurance was not.

I was aware that the insurance companies were lobbying for a law change to make mortgage insurance deductible. The insurance lobby is very powerful, so it was only of matter of time.

Might create some more stable loans for buyers with lower down payments.

Carnival of Real Estate Investing

This week, I'm hosting The Carnival of Real Estate Investing. So please submit your posts at www.carnivalofrealestateinvesting.com.

Thanks,

Home Equity Line of Credit for Coops

Yes, you can obtain a Home Equity Line of Credit for your cooperative apartment. Basically, the underwriting guidelines are essentially the same as with any other property type; they are based on loan to value, credit score, debt to income ratios.

Loan to value is the percentage that your total loan amount, including the Home Equity Line of Credit for which you are applying, is of your coop's market value. A $600,000 total loan amount on a $1,000,000 coop has a 60% Loan to Value (LTV). Generally speaking on a coop, the lenders will go a higher loan to value than the cooperative board will allow.

Credit score is the middle score that is pulled from all 3 credit repositories (Equifax, Experian, and TransUnion). Home Equity Line of Credit are very credit score driven, if your score is too low, then you cannot qualify at all, if your score is high enough, you will not have to verify income or assets in order to qualify.

Debt to Income Ratio (DTI) is the percentage that your monthly obligations is of your gross monthly income. If it's below 40% including your housing payment, then you should be in good shape.

A couple of things about the Home Equity Line of Credit, it can be a good financial tool when used properly. However the borrower should understand that the interest rate is generally adjustable based on the Prime Rate as published in the Wall Street Journal. This means that Prime goes, your payment goes -sometimes up, sometimes down. If you have a Home Equity Line of Credit pay attention to the Federal Funds Rate. That will let you know what your interest rate is going to do.

Lenders are now allowing Home Equity Line of Credit borrowers to fix a portion of their balance's interest rate and payment, so you might want to inquire about the details.

Happy Thanksgiving!!!

Have a wonderful holiday.

Conforming Loan Limits Will Remain the Same

It looks like the Office of Federal Housing Enterprise Oversight will not reduce the current $417,000 conforming loan limit for a single family home in 2007. They may raise it if necessary, or let it stand for 2007. If prices drop they will average that against the 2007 levels when deciding the 2008 conforming loan limit.

That's good news for housing from the financing perspective, as it will hopefully keep housing at a more affordable level with favorable interest rates for mortgages.

Gifted Down Payments

So Mom & Dad are finally coming through and giving you the down payment for a brand new New York City apartment. That's great! There's a couple of things to be aware of when applying for a mortgage with a gifted down payment.

In a perfect world, you would receive the gift funds at least 3 months before you plan to purchase the apartment. Underwriting rules for full documentation mortgages require that a borrower show 2 months (occasionally 3 months) of your most recent bank statements showing enough liquid cash for the down payment and the closing costs with no large deposits. A large deposit is defined as any unusual deposit greater than 2% of the purchase price of your apartment. So if mom and dad kick down the cash after you've signed the contract of sale, you may not qualify for a full documentation mortgage since there will definitely be a large deposit in your bank account.

This would also be the easiest way to get around the asset requirements required by the Board of Directors in a cooperative purchase.

If they just can't part with the money until they are sure you aren't going to spend it recklessly at Barney's and the Darkroom, then you'll have to be prepared to document the down payment as gift funds.

This is done by having the donor (mom and dad in this case) sign a statement that they are giving you the money and will not require it's repayment. Additionally they will have to show 2 months of the bank statements of the account that they emptying to give you the funds to prove their ability to give the money without you having to pay it back. I find that parents rarely want to comply with this last step.

So the best move is to either have an extremely high credit score to override the showing of assets or prove to mom and dad that you can handle having the money in your bank account for a few minutes without running to the Nike store.

There is another sneakier way too. Simply put your name on mom and dad's nest egg account that holds that precious down payment money making it a joint account in your name as well as theirs.

Existing Home Sales Ease

Also according to the National Assocation of Realtors:

Existing-home sales eased in September, as did the number of homes available for sale – indicating the housing market is stabilizing. Total existing-home sales dipped 1.9 percent to a seasonally adjusted annual rate of 6.18 million units in September. This pace was 14.2 percent down from a year earlier. David Lereah, NAR’s chief economist, said: “Considering that existing-home sales are based on closed transactions, this is a lagging indicator and the worst is behind us as far as a market correction – this is likely the trough for sales.”

Pending Home Sales Level Off

According to the National Assocation of Realtors:

Home sales are expected to hold fairly steady in the months ahead, according to the latest reading on pending home sales. The Pending Home Sales Index, based on contracts signed in September, slipped 1.1 percent to a level of 109.1, following a 4.7 percent gain in August. The September index was 13.6 percent down from a year earlier. David Lereah, NAR’s chief economist, said the index shows home sales will not be moving much in one direction or another.

Say What? Conforming Loan Limit May Decrease?

I saw this short article about the conforming loan limit (the maximum loan amount that Fannie and Freddie will purchase) may drop as the average price of homes nationally is dropping.
That decision will be up to the Office of Federal Housing Enterprise Oversight. But if the latest figures regarding home prices from the Federal Housing Finance Board are any indication, the ceiling on loans that can be purchased by Fannie Mae and Freddie Mac could slip next year, perhaps substantially.
The limit is based on the percentage change in the average price of both new and existing homes sold from one October to the next as measured by the FHFB, so the final word on the maximum for '07 is still a month away.
But according to the FHFB's latest survey, which was released last week, the average price of houses fell 2.9% in September, from $306,100 to $297,200. If that percentage decline is applied to the full year, the GSE loan limit would fall to $404,907.
But with home sales continuing to slow and the inventory of unsold homes continuing to build, the decline, if indeed OFHEO decides a lower limit is in order, could be even more drastic.
Over the last 12 months, the average price of houses has been lower than September's figure only once. That was in January, a traditionally slow month in the housing market, when the average was $295,700.
As recently as June, the housing finance board reported the average price as $317,900.

Bubble Schmubble

CNN Money came out with an article that says that New York City is one of the country's top five bubble proof markets. Limited availability and the fact that the city's financial sector can't stop making tons of money seems to be big factors in their assessment.

See the details from cnnmoney.com.

Top 5 Housing Bubble Proof Markets:
1. San Francisco - If developers were allowed to go all out with building on San Francisco’s Treasure Island, Presidio and the Marin Headlands across the Golden Gate Bridge, the price of housing would fall close to the cost of construction. But those pristine natural amenities are the product of one of the most anti-development political cultures in the country - and a perennial magnet for the highest earners.
2. Los Angeles - Along with San Francisco, Los Angeles was the first major metro in the United States to become “filled up” during the 1960s and 1970s because of geographic constraints and political restrictions on building. Three-quarters of new construction is now in-fill development, and much of it is high end. The gentrification is pricing out middle and lower income families, who are moving in-land.
3. Seattle - The newest graduate to join this elite class of super-expensive cities, Seattle is the least likely to hold its place. New zoning laws approved by the city council this year lift restrictions on building heights in the downtown core, and promise to generate $100 million worth of affordable housing.
4. Boston - Boston had the strongest wage growth of these cities through the tech bust and jobless recovery. Over the next five years, it will have the highest per capita income, next to San Francisco.
5. New York City - The force with which middle class households here are getting replaced by wealthier ones was reflected in the recent hysteria over the Tishman Speyer group’s $5.4-billion acquisition of 110 apartment buildings in lower Manhattan, the largest real estate deal in recent history. The apartment blocks are home to thousands of rent-controlled tenants who should have been priced out of the city years ago - and fear they now will be by market rents under the new owner.

NY Mortgage Brokers to Be Registered

A story appeared in the NY Times about a new law requiring individual Loan Officers to be registered with the New York State Banking Department. This is an excellent idea. There will be minimum educational requirements so that we can at least hope to have a base level of expertise in our industry.

The angle of the story is that those who perpetuate fraud won't be able to move to another state to continue defrauding consumers. That may or may not be true, I can't say. But I think that the vast majority of mortgages originated here in New York City are on the up and up.

I like the law because it will serve to create expertise in mortgage lending. Right now if you can fog a mirror and are over the age of 18, you can be a Loan Officer. My competition is anyone who fell into the position, or saw some easy money a few years ago. Mortgage originating is a complicated business that in which there are many variables that need to be juggled effectively in order to close a loan properly and professionally. It's not simply selling, nor is it entirely knowing lending guidelines or understanding the housing types and the economy in general. It's a combination of so many different abilities, that a license might help keep those out of the business who aren't willing to put in the time to learn what it takes.

This is a business that requires specialization and constant updating of one's skillset to be proficient. I think it's time that it was recognized as such.

"Toxic" Mortgages -- The Next Refi Boom

It's everywhere. The magazines are running cover stories, the news is full of reports, the powers that be are holding hearings. Consumers are shaking in their boots. They will want to refi before their monthly adjustable ARM eats their house like on the cover of Business Week.

Now the mortgage originators are ready to refi these mortgages into fixed rate mortgages. The borrowers will be safe..or will they?

What were the motivators for accepting the payment option ARM in the first place? Some may have been seduced into it by their Loan Officer (yeah I said it). Some may have tried to buy more than they could afford with a fixed rate mortgage. Some borrowers may have thought that we weren't going to live in the property this long- that it was a prime flip. Some may have been thinking about freeing up capital to put into another investment.

It's not a no-brainer to immediately think that this is the next refi market. It's necessary to know what the initial motivation was when the borrowers purchased the property. I didn't originate many of these mortgages, maybe 2 or 3 out of a few hundred mortgages in the last few years, so I can't just immediately assume that these are all refi fodder. Also do these borrowers now owe more against their home than they initially borrowed? What is the prepayment penalty? One reason why I stayed away from these pay option ARMs was the steep prepayment penalty would have prevented the borrower from refinancing their mortgage down the road should rates drop. That would have prevented my doing another loan with them, bad for business in my opinion.

These borrowers are going to be hard to refinance. They may not qualify for a fixed rate mortgage that will increase their payments, most pay the minimum payment option resulting in negative amortization. The higher payment even if only interest only is going to be much more than they are used to paying each month. I think that we as Mortgage Brokers need to spend a little extra time, work with the borrowers to find the best solution and provide more education about what a mortgage entails and the responsibilities inherent in borrowing mortgage money.

Trending Toward Fiduciary Duty To Borrowers

The trend among regulators in states such as New York, New Jersey, Ohio, and others is to make the mortgage broker, in essence, have a fiduciary duty to the borrower, according to E. Robert Levy, executive director of the New Jersey Association of Mortgage Brokers. Speaking at the group's annual convention in Atlantic City, Mr. Levy said the burden would therefore rest with the mortgage broker to select the loan product for the consumer. As a result, the mortgage broker could be held liable for making the wrong choice. He said consumer advocates are in favor of this position. Mr. Levy, who is also chairman of the advisory council of the American Association of Residential Mortgage Regulators, said it became clear in a meeting of that council that regulators were enamored with the "suitability test." However, Mr. Levy reminded the audience of New Jersey's experience with the original version of its predatory lending law, which contained a "net tangible benefits" test. That test closed the secondary market for loans in the state, and was eventually removed from the law.

Of course, this type of relationship should exist in some form. For the Mortgage Broker it only makes sense in order gain referral business. Certainly with Mortgage Brokers working within a community, such as New York City, it makes sense to fit the borrower to the mortgage if you want to keep working in the field. Perhaps some of the national lenders who rely on TV commercials to generate business will be opposed to actually knowing who their borrowers are.

The IRS Is Going High Tech.....Finally

The Internal Revenue Service plans to return transcripts summarizing mortgage applicants' income and tax data to lenders in an electronic format within two business days, starting on Oct. 2. As a result of the change, mortgage lenders should no longer cite the slow, paper-driven process of faxing 4506-T requests to the IRS as a reason for not verifying the income of borrowers who intend to take out "stated income" and other mortgages requiring limited documentation. "This is going to be light-years ahead of where the IRS was before," says Mike Summers, vice president of Veri-tax.com, a third-party vendor in Tustin, Calif. The move by the IRS also could have a big impact on curbing mortgage fraud, considering that many problem loans have falsified income tax filings; however, it will also mean that lenders will have to pay $4.50 for each tax year covered in a 4506-T request, whereas the service was free in the past.

It's about time that there was an efficient way to verify tax returns. And it may even generate revenue which is their middle name.

"Exotic" Mortgages Are Still Being Discussed

'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?

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.

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.

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

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...

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.

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?

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?

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.

Developers Slobbering Over Biggest NYC Deal Ever

Metropolitan Life is putting Stuyvesant Town and Peter Cooper Village on the block for $5 billion bucks. This is a huge apartment complex development on Manhattan's East Side that has long been a haven for working families in the city. But it's not like there wasn't fair warning, the apartments have been going to market rent as quickly as possible in recent years.

Now even at the $5 billion price tag, the buyers are circling to grab this prize. Check it out in the New York Times.

Interest Only With A Bit Of Security

There's been much ado about interest only mortgages, payment option adjustable rate mortgages (ARM) and other mortgages considered risky by some. The fear is that once these mortgage payments adjust the homeowner will immediately go into foreclosure and their families will be living on the street. At least that's what I'm hearing.

The example Ms. Clinton used on the Senate floor to argue in favor of legislation to curb the "predetory" practices of mortgage brokers was a West Virginia waitress with a 6th grade education. This woman lost her husband and began a series of refinancings that ended in her losing her home because she couldn't make her house payment. It's a terrible thing. But is a person with a 6th grade education who repeatedly pulls the equity from her home to spend recklessly truly indicative of the American populace? Is she the typical consumer? Or is this one of a few isolated cases?

I don't have any problem with the legislation that was passed, or any that I've read is coming. The more the consumer knows the better. That's the reason I've joined the blogging fray. To give information on mortgages and the process of borrowing money against one's home. I'm just asking if this is another example of a alarmist call to pass laws too hurriedly to address the real issues?

There is a place in the market for all the mortgage products available. Some people here in New York live mostly on their end of the year bonus. That bonus is often more than 75% of their yearly income. That means that throughout the year, these high net worth individuals are getting a much smaller paycheck each month. Add that to the fact that they are savvy investors who know where they want to put their money. So sometimes these individuals will prefer a payment option ARM, perhaps even with a negative amortization feature that allows them to pay a smaller monthly payment throughout the year (especially in the last couple of months before bonus time) and then when their bonus comes, they will make a principal payment that erases all the negative amortization they have built up and creates an equity build up instead.

Is every mortgage for every consumer? No, absolutely not. That's why there is a vast array of mortgage options. Yes they can be complicated. People don't deal with mortgages everyday. That's why mortgage brokers and loan officers exist. We have to step up and learn the products and their implications in the lives of homebuyers. One question that a mortgage professional should always asked is "How long do you intend to stay in the property?"

Americans are on the move, upwardly mobile is our credo. We don't stay in a home for long (I think the average is somewhere between 4 and 7 years), that's the fact, so it may be more expensive for a homeowner to finance a home purchase with the standard 30 year fixed rate mortgage than a 7 year hybrid ARM (rate is fixed for 7 years then adjustable, frequently the initial fixed rate is a lower rate than longer fixed term mortgages like the 30 year fixed rate). But if when working with a client the mortgage professional is given the sense that for peace of mind, the homeowner needs a fixed rate mortgage, then that's what should be quoted. Ultimately it's the homeowner's choice, it's their home, their security, all we can do is advise, inform and allow the homeowner to make their decisions after learning the alternatives.

So what's the title of this blog all about? Given today's somewhat flat yield curve, the 30 year fixed rate mortgage is a very similar rate to the 5/1 hybrid ARM (same explanation as the 7/1 above just that the initial rate is fixed for 5 years then adjusts - and by the way, the interest rates on these mortgage can go down as happened in 2000-2004 when everyone with an adjustable rate mortgage was a "real estate genius" because they were paying mortgages with a 1% interest rate).

By adding an interest only feature to the 30 year fixed rate mortgage, homeowners may be able to get it all. A lower payment for the first 10 or 15 years of the mortgage because it's interest only and the security of a fixed rate mortgage. Another strong feature of this mortgage option is that the payment will recalculate (or recast) when a principal payment is made. That means that when the homeowner gets their tax refund check, they can pay down their loan balance and the very next month see a reduction in their monthly mortgage payment.

Since the first few years of a mortgage are mostly interest anyway, this will result in a principal reduction on par with a fully amortizing mortgage in the end anyway. And no, I'm saying that all homeowners need to throw their whole tax refund at their mortgage to make a principal reduction. They can still buy some of those consumer items they had their eye on all year, just not all of them at once.

Again no single mortgage solution is right for every homeowner or homebuyer. We are all in different situations with our lives that impact our financial, personal and professional lives. A home is a big investment, but once you check out your Truth-in-Lending disclosure, you'll see that a mortgage is a bigger investment. Make sure you know your options, put some thought into where you are in your life, what your plans are and make an informed decision.

Rates went lower last week

The 30 year fixed rate dropped last week to a national average of 6.56%, down .06 basis points from the previous week. This is the lowest since late March when rate were beginning their march upward. 5/1 Hybrid ARMs also felt the down trend with an average of 6.30%.

Sales of both new and existing homes continue to decline, as the combination of prices and interest rates continue to dampen affordability at a time of slowing economic growth. The headlines for home sales predicted doom and gloom for all as a result of a housing correction. This may not be as bad as the papers want us to believe. 6 million homes sold per year is a peak that is very hard to sustain year after year. There may be some buying opportunities in the near term as the seller's market cools, and mortgage rates level at these historical lows.

If rates stay at the current levels, perhaps trending downward slightly, the hype about the pay option ARMs may not pan out as these homeowners may be able to refinance their Treasury indexed adjustable mortgages into fixed rate mortgages at similar rates to their fully adjusted ARMs. This will keep their payments at the same level, without increase as the markets fluctuate.

An economic soft landing is not a foregone conclusion, however. It will take an extended period of subpar growth to keep rates low, and housing is only one component of the economy (the financial industry head hunters that I know are having terrific years as Wall Street hires seem to be up). The economy numbers don't seem to be bringing any good news, though unemployment remained steady at about 330,000 claims last week. The Chicago Federal Reserve index of national economic activity pointed to below trend growth for July. The Fed's Richmond district also saw slowing.

It is summer with it's typical market slowdown and we are heading into a 3 day weekend, so the markets aren't expected to do much. September will bring more indications of where we are headed as everyone comes back to work from vacation and other summer distractions.

Appetite For Coops and Condos Growing

I just read an article in Broker Universe that nationally, people are choosing to live in urban environments so they are choosing condos and coops instead of good ole fashioned single family homes. New York is still the largest market for these property types, but interest in growing nationwide.

The article puts it this way:

In May, existing condominium and cooperative housing sales increased 1.9% to a seasonally adjusted annual rate of 852,000 units, up from a pace of 836,000 in April, according to the National Association of Realtors, Washington. However, sales were 6.6% below the 912,000-unit pace in May 2005. Meanwhile, total existing home sales including single-family, townhouses, condominiums and co-ops dropped by 1.2% to a seasonally adjusted annual rate of 6.67 million units in May, down from a pace of 6.75 million in April, and were 6.6% below the 7.14-million-unit level in May 2005. "There's now a clear pattern of slower home-sales activity in many higher-cost markets, which are more sensitive to rises in interest rates, and higher home sales in moderately priced areas which have experienced job growth," NAR's chief economist, David Lereah, said. "Although mortgage interest rates remain historically low, the uptrend in interest rates this year is affecting those buyers who are at the margins of affordability.

NAR reported the median existing condo price was $229,300 in May, up 1.9% from a year earlier, which is another indicator of growing demand and price appreciation. Granted there are regional differences with New York being probably the largest co-op market in the country.

If the market for coops and condos is increasing, then many more mortgage brokers and loan originators will attempt to get into the market to help bolster up their sagging loan production. One thing that is tricky about coops and condos is that the building must also be approved during the loan process, it must have adequate insurance coverage, sound financials and high owner occupancy. If the building is subpar, the buyer won't be able to obtain financing at preferred rates, or perhaps not at all. It won't sit well with the other players in the transaction to have a deal fall through because the building wasn't up to par. Fortunately many lenders are publishing their database of buildings online for mortgage brokers, so that we can check the maximum financing restrictions, what coop or condo documents need to be updated in order to close the purchase or refinance transaction. It would be great if all institutional lenders did this, but they don't.

In short, it's best with these property types to work with a mortgage broker who is experienced in handling coop and condo financing.

Chalk One Up for the Local Guy

As a local doing business locally, I sometimes get the question, "How is my service any better than one of the big internet lenders?". Well one way that my service is better just dropped into my lap in an email newsletter today...

Flaws Seen in Survey of Closing Expenses
Patriot-News (PA) (08/11/06) ; Miller, Dan

Some real estate professionals in Pennsylvania disagree with a Bankrate.com survey that pegs average closing costs statewide at $3,175, insisting that the calculation includes "junk fees" that are not imposed by every lender. Homesale Mortgage Services President Jennifer Goldbach says it is difficult to calculate a meaningful average because of the numerous variables that must be considered, adding that it is possible to calculate five different closing costs for a single house. Bankrate.com senior reporter Holden Lewis says only the fees charged by Internet lenders were included, but he acknowledges that local brokers produce more accurate first estimates than online lenders. According to Lewis, "Some online lender based in Orange County, Calif., probably doesn't have the title insurance formulas for every county in the country."

That's right, local brokers know the fees for their market, and can quote a much close estimate from the beginning of what the various closing costs are going to be so that there are no surprises at the closing table. Especially in New York City where there are exceptions and some specific circumstances based on property type, such as the NY city and state mortgage recording tax doesn't apply to coops, but Mansion Tax does.

History of Coops in New York City

It’s important to understand the difference between coops and condos before addressing which property type is best for you to purchase. This is a short history of the two property types in order to help you understand the differences.
The population in New York City is denser than other parts of the US, thus it makes economical sense to develop large multiple family properties to house this population. Coupled with the fact that land is more expensive than in most other parts of the country it makes sense to build vertically, creating a housing market that is unlike most of the country.
Historically, the majority of vertical empires took the form of rental buildings that were developed and owned by the landlord for the purpose of renting the apartments to people for a profit. The majority of today's coops and condos are a product of the demand for home ownership in New York City combined with forces of rent regulation laws.
Over time, there grew an appetite for home ownership. At the same time rent stabilization did not keep up with inflation, and it did not take long before the cost of each apartment became more than the regulated rents could cover. Many landlords were in a money losing situation, forced to burden a negative monthly cash flow. So how would a landlord get out of such a situation? The answer was to coop or to condo. During the 1980's, many landlords with negative cash flows, became sponsors and converted their buildings from rental buildings to coops or condos and sold their interest to individuals one apartment at a time.
The conversion was a fairly simple process. The landlord, or sponsor, gave each tenant a choice of buying their apartment through a non-eviction offering at an insider’s price generally less than what was offered to outsiders who were not protected by the non-eviction offering plan, or each insider would be guaranteed the right to continue renting under the terms already established under the laws of rent control and stabilization. The terms of each conversion or offering are detailed in a large book called an offering plan or prospectus.
The big question then becomes: Why did most sponsors choose to convert to coop and very few to condo? There are five basic reasons. A major reason was that condominium ownership was not allowed until 1964 in the State of New York. Another important reason for more coops was the familiarity with the cooperative conversion process. Other factors include a better economical position for the sponsor, marketability, and the importance of "exclusivity" was a premium only offered by the cooperative form of ownership.
Financial gain was an undeniable motivation for a sponsor to coop their buildings. Until very recently, only a cooperative could have an underlying mortgage, and many sponsors had existing mortgages secured by their rental buildings that needed to be dealt with at the time of the conversion. So, under the terms of many conversions, the sponsor’s existing mortgage became an underlying mortgage to be paid by the newly formed not for profit cooperative corporation as part of each shareholder’s (or apartment owner) monthly maintenance charges.
To further the financial position of some sponsors, upon converting, they were able to obtain an entirely new mortgage for a larger amount, or a wrap around mortgage. These mortgages were secured by the sponsor’s newly created value of being able to sell the apartments, and pass the mortgage payments onto the shareholders. This allowed some sponsors to tap their newly created value or equity without having to wait for each apartment to be sold.
Because the sponsor was able to get money from the underlying mortgage, freeing up capital immediately, the sponsor could then offer the cooperative units at a lower price to sell them quicker. For example, let's say a sponsor could sell each of their 100 units as condos for $100,000 each; the result would be gross revenue of $10,000,000 when all the condos are sold. Or, the sponsor could choose to sell each as a coop for $85,000 and hold an underlying mortgage of $3,000,000, which was realized immediately and to be paid by the cooperative corporation over time. The net result would be $11,500,000 in gross sales with almost a third put immediately into the sellers' pockets.
The more conservative sponsors were prudent about the size of mortgage passed onto cooperatives, others mortgaged without regard to the health of the cooperative corporation and apartment owners down the road. The market timing of some sponsors was better than others too. With the real estate market decline after 1987, some sponsors were left holding a majority of units that they could no longer afford to keep. As a result some coops were not as financially fit as others. An attempt to better inform prospective buyers of the activities of sponsors before buying into a cooperative, the State of New York enacted laws designed to protect the homebuyer. The law, the Martin Act, is better known as the AG Disclosure (the Attorney General Disclosure of the Sponsor). The Martin Act made it mandatory for sponsors owning ten percent or more of apartments in any coop or condo project to make a timely amendment to the offering plan that is filed with the New York Attorney General’s office.
This disclosure makes the Sponsor’s financial information relating the coop available as public information. Useful information contained in each filing is disclosure of the sponsor's unsold shares, the rent received from tenants in those apartments and the amount of maintenance the coop receives from the sponsor for these apartments, if the sponsor is using the unsold shares as collateral for a loan, a list of other coops or condos the sponsor has an interest, and if the sponsor is current on obligations to the coop or condo as well as to other parties.
Another main reason for converting to coops rather than condo was an issue of exclusivity and control. Owners and buyers were concerned about who might become their neighbor, and this type of control was valuable in the market. Condominiums did not and currently do not offer this homebuyer approval process. In today's market, people find value with in ownership with fewer restrictions, while others find value in exclusivity.

Some Difference between Coops & Condos

Ownership - The main difference between condos and coops is the form of ownership each takes. A condominium is real property and ownership is evidenced by a deed allowing the entire bundle of rights that come with real property ownership. Coop ownership is evidenced by shares of stock in a non-profit corporation that owns the building in combination with a Proprietary Lease allowing each shareholder the right to occupy an apartment under specific guidelines. Condominiums have a condominium association and coops have a Board of Directors (similar to all corporations), each serves a similar purpose of making decisions on behalf of the owners and shareholders, respectively.

Occupancy Restrictions - Another major difference between coops and condos is the restrictions placed upon the owners of a coop of the occupancy of the unit. The Proprietary Lease may restrict the amount of financing on each apartment, it may restrict a shareholder from renting their apartment to others (splitting), or from having a maximum number of occupants, or from having certain pets, or whatever else the majority of shareholders deem to be best for their building and quality of life. The Proprietary Lease also gives the board of directors the right to refuse any prospective buyers or subfields. Most coops have a very formal application and interview process before the board reaches a decision on who may own an apartment. Condominiums on the other hand have virtually one restriction which is their "right of first refusal." The right of first refusal gives the condominium association first opportunity to buy an apartment from a selling owner at the same terms under contract with a prospective buyer. Condo associations rarely exercise this option.

Feeling of Neighborhood Due to the lack of controls for ownership, condominiums may become more transient in feeling. Cooperative apartment corporations on the other hand tend to be morehomogeneouss and more stable in terms of neighborhood.

Purchase Prices - Coops tend to have lower purchase prices than condos.

Common Elements and Services - Condos generally may be slightly less expensive to maintain over time. Owners of condominiums pay for the common elements (management staff, doormen, plumbing, roofing, common walls, etc.) in the form of common charges, and they pay their taxes separately. Most condo owners are generally responsible for paying their own utility usage. Coops on the other hand pay for the common elements in the form of maintenance charges which generally include everything to upkeep the building, including taxes and frequently utilities. Another component of the maintenance fee that generally does not exist with a condominium is the cost of the underlying mortgage. Some coops and condos offer recreation, parking, storage and other facilities as a part of the common charges or maintenance. It is important to itemize what costs are included in the common charges or maintenance, and what services are offered in return.

Mortgage Vs. Assessments - Coops have no restrictions other than that imposed by the lender in terms of size of underlying mortgage. Underlying mortgages on condos have restrictions. In the event the building needs money, coops may be in a more flexible position not to assess each owner for additional monthly charges.

Settlement Costs - The closing costs to obtain a mortgage for a condominium are more expensive than settlement costs to finance coops. The major differences in New York City are: a mortgage recording tax, title insurance premiums and charges and taxacrosss when obtaining a mortgage for a condo. These items are not required to close on a cooperative apartment loan.

Availability - In Manhattan, even with the recent building of condos and condo conversions of existing buildings there are relatively very few condos. Most buildings, particularly older buildings are coops.

It is up to the homebuyer to become an informed consumer, to identify their personal preferences, look at the spaces, and analyze the cost and benefits of each.

Mortgage Broker (kinda) Defined

The mortgage lending business has being evolving so rapidly the last few years that it’s hard to keep track of all of the changes and trends. I’ve frequently read that approximately 70% of all mortgages are originated by Mortgage Brokers nationwide. That’s a vast majority of mortgage loans. I think the reason for this is Mortgage Brokers tend to be smaller entities and more able to sense a change in the marketplace and act on it.
In my opinion, large lenders such as Citi Group, Wells Fargo, and Chase are divided into two separate mortgage lending entities. One is their retail operations located in their branches or mortgage lending storefronts and the other is their wholesale lending operations. Mortgage Brokers work with the wholesale lending operation. The Mortgage Broker is the retail presence of the lending products.
They seem to compete against one another as well. Sometimes the retail operations will have a better deal than the wholesale division on a specific product like a Home Equity Line of Credit, or a 30 year fixed rate conforming mortgage, while the wholesale division may do better with jumbo mortgages or interest only solutions. These products are merely examples for this description, not intended to state any specifics of the marketplace at this time.
Thus, a Mortgage Broker generally isn’t more expensive to the consumer, and may possibly be a better deal. I recently originated a fixed rate mortgage on a new construction condo here in New York City in which my rates, terms and closing costs were less than a major bank’s employee benefit program, which was a surprise to me.
The frequent perception that Mortgage Brokers are better able to provide more lending solutions to an individual consumer is true. We are able to scan through many lenders finding each one’s best programs (which I think are largely driven by the secondary mortgage market) and offer the best to our clients. This is the one major advantage that we have.
Another advantage, in my opinion, is the transparency of the process when working with a Mortgage Broker. Mortgage Brokers must disclose all fees and their commission whether payable by the lender or the client. All of my clients are aware of my firm’s commission on every deal. Everything is upfront and above board. That’s not true with lenders who do not have the same disclosure requirements.Also I’m able to maintain my relationship with a client for longer, I believe. Perhaps a client and I first work together on a primary residence purchase. Then later, this same client may decide to purchase a second home, or a coop for their child, or an investment property. I can provide solutions for all of these purchases. I don’t have to say to a client with whom I’ve built trust and commitment that I cannot do this deal and they will have to call someone else and establish a whole new working relationship. That puts them back to square one again, back to the uneasiness and uncertainty of working with someone for the first time.

It's Official...New York has the highest closing costs

What we always knew to be true was just confirmed by Bank Rate. New York has the most expensive closing costs in the land. On the average, it costs $3887 to close a mortgage in our great state, while Missouri, the lowest the nation, costs an average of $2713. Texas and Hawaii are number 2 and 3.

Of course this numbers seems low to those of us in New York City, with it's 1.8% mortgage recording tax and high purchase prices, $3887 is a drop in the bucket. And of course, the state just increased (yep read it again...increased) the mortgage recording tax. The refi boom of the past couple of years only seems to have whetted the state's appetite for homeowner's money.

Pre-Qualification v. Pre-Approval

There is a difference between these two tools used by everyone in the home buying process, from Real Estate Brokers, Attorney, Coop Boards to Mortgage Brokers. The Pre-Qualification Letter is a letter that a Loan Officer will write based on what the buyer has described as their situation and the Loan Officer's understanding of the mortgage programs out there. It's not a rigorous process and I don't recommend them at all.

The way to go for everyone involved is a Pre-Approval Letter. This process is a process by which the Mortgage Broker (or Loan Officer) takes the entire application, getting all the information from the borrower, from present address and employment history to income and assets along with account numbers. A credit report is pulled on the borrowers, tradelines are matched up and verified with the borrower. Then the application is run through Fannie Mae or Freddie Mac's underwriting engine and it comes back "Approved".

After a Pre-Qualification Letter is given to the borrowr from the Loan Officer, all that needs to be done is for the borrower to provide the documentation reflecting the information on the application. The mortgage is essentially approved and pre-sold to the secondary market once it funds.

Yes, this process costs the Mortgage Broker or Loan Officer money, they must pay for the credit report and the Desktop Underwriting of the file at a minimum, but borrowers and Real Estate Brokers should insist on nothing less. A Pre-Qualification Letter means that the borrower and the Loan Officer had a conversation, nothing more really. A Pre-Qualification Letter means that subject to verification, the mortgage is approved and the purchase will happen.

My understanding is that the only valuable information a Mortgage Broker has for a Real Estate Broker is the closing date. A Pre-Qualification Letter can give the Real Estate Broker the information they need.

Rational Negotiations

An article published by Harvard Business School entitled When Not to Trust Your Gut just caught my eye this morning. There is an intuition test that is astonishing. 2 tables are placed in a graphic that are identical, but they don't appear that way at all. This graphic is used to illustrate the point that our intuition is not always trustworthy.
When applying for a mortgage, it's best to make a list of what the goals of the financing are. When purchasing this may, on the face of it, seem very easy - "I want to buy the property". It does take some more thought than that. How long do you intend to stay in the home? What are your plans after that? Do you want to keep it as a rental, a second home, is another member of your family, perhaps a child, going to live there? Also things to keep in mind are whether your income will increase, or decrease in the future, will your spouse start working or stop working during the term of the mortgage? And if so, when? What are your other investment plans? Do you plan on investing in another fashion that may allow you pay down the mortgage or pay it off entirely. When will this happen?
When refinancing, this is equally important. You really need to have some specific goals when refinancing your home. Are you paying off higher interest credit cards, is your current mortgage going to adjust to a higher rate soon? How long are you going to stay in the property? What the principal balance of your current mortgage? Sometimes the costs don't justify a refinancing even if your payment is going to be lower. Are you going to improve the property or make some large purchase? When refinancing for this purpose, try to envision other large ticket items that you may purchase in the future and get the funds to act on those as well, as the closing costs can add up if you refinance year after year.
The Harvard Business School article makes for a very interesting read, it is aimed more at business negotiations than at mortgage financing, but many of the concepts apply.