Archive for December, 2006
A Rising Tide Lifts All Boats
That was certainly true of the appreciation that carried real estate values high up the beach in the first half of this decade. However, the tide has since rolled out, exposing the rocks and broken glass on the beach and leaving many a boat on its side in the sand. This is the story of one such wreck.
A real estate agent with whom I do business called a few weeks back. She had a friend in financial trouble and wanted to bring her in for advice on her loan. The friend had refinance in 2005 into a loan that she thought was fixed but later discovered it wasn’t. She was not sure what to do.
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In Part II of the Creating Affordable Payments series, we looked at 40 and 50 year loans to see if the advertising claims about lower were true, and we found that these loans do not really help, and the overall interest cost is much higher.
In Part III , we looked at Intermediate ARMs to see if they were the answer to today’s most common challenge. Unfortunately, with the inverted yield curve in U.S. Treasury securities, the rate on a 5/1, 7/1, or 10/1 ARM is often higher today than the 30 year fixed.
So today let’s have a look at interest-only loans to see what they can do.
I get a lot of calls these days from real estate agents wondering what effect a short sale or deed in lieu of foreclosure (DLF from here forward) will have on borrowers’ credit. That is a really important and interesting question, since the last real estate downturn preceded the widespread use of Fico scores and automated underwriting (AU) systems.
Everyone now seems aware that debt cancellation creates taxable income. In a short sale, the amount of the lender’s loss is reported to the borrower as income, creating an income tax liability for the borrower. If the borrower is insolvent at the time, the tax liability can be avoided, but only to the extent that liabilities exceed assets.
But how will credit scores be affected? And if a loan is approved through LP or DU, Freddie Mac’s and Fannie Mae’s automated underwriting engines, will the underwriter overturn the approval when she sees the typical “settled” comment on the mortgage tradeline?
For answers to these questions, I turned to my credit reporting agencies and representatives from the capital markets to see what is boiling inside the pot.
We’re all aware by now of the recent legislation making mortgage insurance (MI or PMI) tax deductible in 2007. As review, here are the current limitations:
- Applies only to mortgages closed in 2007
- Annual household income cannot exceed $100,000
- Temporary, must be extended to remain in effect for 2008 and beyond
- Must itemize deductions to qualify
But how much is this really going to “help Americans overcome barriers to home ownership” and are we truly “addressing the key issue of housing affordability?” After reading a lot of the early blog posts and announcements, I thought I’d look for some clarity beyond the hype.
If anything makes me spit nails these days, it’s the way lenders are pushing “Pay Option” Arms. Back in the day, if you uttered the words “negative amortization”, people would leap up and run the other way. Everybody knew somebody with a horror story to tell. So we shelved these loans for a few years, gave them a face lift, and hauled them out to help folks buy homes they can’t afford.
My wholesalers tell me stories of new mortgage shops full of inexperienced telemarketers hyping these loans. My title company reps talk of 22 and 23 year olds bragging about the fees they’ve earned duping little old ladies. And befuddled clients file through my office each week trying to figure out this weird loan their daughter’s boyfriend put them in All too frequently, I have the unpleasant task of telling them that there’s not much they can do. You see, aside from creating artificially low payments that can jump suddenly, these loans carry stiff prepayment penalties that make them difficult to escape. And all the while, your loan balance is growing. Think of it as a Trojan horse.
Sacramento Mortgage Rates
Sacramento Mortgage Rates
The benchmark 30 year fixed stood its ground at 6.125% (no points) and 5.875 (with one point), both having fallen nearly 125 basis points from their highs earlier in the year.
The FOMC announcement today was a yawner. As expected, the Fed left the Fed Funds rate unchanged at the current 5.25% level. The experts had forecast that the Fed would stand pat as they continue to ponder the tug of war between inflation and a slowing economy. Until this week, Fed Funds futures contracts were pricing in a probable rate cut by next March.
As of today, those hopes seemed be evaporating until the Fed can get a better idea of which way the pendulum will swing.