Monthly Archive: May 2011

May 25

Churchill Downs Spring Meet 2011

We went to the track Sunday.  It was our first trip out this meet.  Attendance was light which I appreciate because I do not like large crowds.  It threatened to rain all afternoon which may have kept some people away.  But the storms passed on the south side of the track just close enough to cool things off.  All things considered it was a pleasant afternoon.

2011 05 22 001612 300x200 Churchill Downs Spring Meet 2011

Exacta

Deb didn’t cash a ticket and I only hit one exacta but it was good enough to send us home winners.  We saw Calvin Borel hit the winner’s circle but both of us had him

2011 05 22 001549 300x200 Churchill Downs Spring Meet 2011

Let's do it

boxed with a wrong choice for second place.

2011 05 22 001592 300x200 Churchill Downs Spring Meet 2011

Calvin

May 19

Real Estate and Mortgage Industries Start Over

The title of this post may actually be in the news someday. Regulators poke and prod the industries trying to fix the problems but nothing much has changed. I keep hearing about the new tighter mortgage guidelines, I haven’t seen them. Underwriting guidelines are basically the same as they were when I was a kid. Oh sure, it is much more automated today, but the basic rules are no different. Credit scores, they are new right? Equifax opened in 1899, started grading credit soon after.

What about real estate? The current concept we use is quickly approaching a 400th birthday. In England back in the mid 1600′s two guys go out in a field and the seller pulls up a clump of grass and dirt and hands it to the buyer. As he passes the symbolic piece of land he says something like, “Let all ye know that I hereby convey to thee my rights to this real property and the entire estate shall henceforth belong to thee.” The other guy took the dirt and handed over a bag of gold as he recited, “I accept this estate as is, including the radon underneath and hereby give thee all of my hard earned gold.” A couple of neighbors witnessed the transfer, then everyone went to the tavern and the real estate industry was born. Nothing much changed here either.  Except in Kentucky the seller says, “and the entire estate shall henceforth belong to y’all.”

We did not originate the concept; we borrowed it from the old country. Maybe, just maybe, it is a good time to ask if there is a better way. What would happen if we threw out the old system and started over? What would it look like? How would it work? How would it be financed? Could there be a more efficient system? HAHAHAHA, ask a third grader to draw up a system, it would probably be a lot more efficient and a lot easier to understand.

I could think up a basic system over lunch. How about a monetary system based on land instead of fiat? That sounds scary, something actually backing the currency? A title system linked to the zip code system would be very efficient. Why not? Every property has a unique zip code, why not modify that system just a little to incorporate real estate titles and property taxes? Anything pertaining to a specific property would all be under one data entry. No that would probably be too efficient, there would be no need to run title or issue title insurance, bummer. Wait! That could eliminate the need for a deed also. Would never work…

Okay, what next? On the finance side we get rid of mortgages, lend money to the individual instead of using the house as collateral. Keep the loan for as long as you want and the outstanding balance would always act as a credit on the next purchase while maintaining the original terms. Additional financing for a purchase could be arranged with new terms.

Realtors would only help buyers, no sellers involved. When ever a home owner chooses to move they simply contact their realtor and turn in the title to their home to the National Inventory Treasure Chest (NITC). I am making this up so I can name it anything I want.

The Realtor would accept title on behalf of the Treasure Chest and the contributed value would be determined based on the tax value certified by an appraiser. The home owner would receive Estate Chips for their equity that could be used to purchase any home held by the NITC. Talk about liquidity! Honey, bananas are getting too cheap here, let’s move to California tomorrow where they sell for a pretty penny.

In addition to liquidity on steroids this system could eliminate the archaic closing event.  There would be no need for the parties to attend a closing, simply log in to the NITC and accept the property.  By eliminating sellers the buyers would never meet the other side.  No hassles, all disclosures posted online accessible 24/7.  Instant loan approvals, close in an hour or less.  If you move in and decide you do not like the house, no problem, just turn it back in.

No more tracking days on the market. Just pick up and go!

May 11

Real Estate Snapshot for Louisville Kentucky

The Louisville real estate market has been doing much better than many parts of the country but there are still negative figures showing up in the reports.  Most notably is the number of sales, 2,892 as of 5/10/2011 verses 3,435 for the same period last year or 543 fewer homes sold so far this year. 

Most of the price bands below $400,000 show a decline in the number of units sold while the bands above that level showed a dramatic increase.  The percentage increase is skewed because the numbers are so small.  If there was one sale in a band last year and two this year that is a 100% increase but still not hot.  I suspect the increase in sales for the expensive homes is not necessarily a good sign, it could very well be an indication they sold for less overall.  

There is twice the number of monthly inventory today than the same time last year, also a sign of softening.  New listings so far this year are 8,455 with reported sales of only 2,892. 

The interest rates have declined even further this year hitting all time lows, a very big signal it is time to buy.  I have been watching interest rates all my adult life and there is not much left on the downside.  Anyone that is waiting for them to go lower is betting on the wrong side.  There are many more rates available above the current level than there are below it.  There are also some expenses built in to the rates system that no one seems to be pointing out. By that I mean there is an absolute bottom to how low they can go but there is no ceiling for how high they can go.  

Servicing, investor yield, and cost of delivery are just a few examples of expenses imbedded in the interest rate.  The yields to investors are where most if not all of the reduction has been taking place.  At some point (are we there yet?) investors are going to stop buying 30 year bonds at such ridiculously low yields.  Would you buy a 30 year cd at 4% if cashing it in cost 25% of the principal?  I wouldn’t.  

I propose that artificial pressures are holding down mortgage rates.  That is the only answer that makes sense to me.  I filled up my car yesterday, gas prices are not being held down.  My banana index tells me we are in a world of hurt, the value of the dollar slipped again this week against the price of bananas, 11.54%!!!   

5 13 116 300x125 Real Estate Snapshot for Louisville Kentucky

Okay, here is the scoop, when this thing we are living through changes directions it will blast like a rocket.  When the demand for money exceeds the ability to push rates down we can see dramatic jumps in the cost of borrowing money.  Tiny moves in interest rates become a very big pile of money when stretched over 30 years.  A large jump would pay for an entire boat load of bananas! 

It’s time to move!

May 09

LIBOR Adjustable Rate Mortgages (ARM) Return

May 9,2011, adjustable rate mortgages returned to our rate sheet today.  Could this be a sign that things are settling down in the mortgage industry?  I see it as a good sign.  We have not offered ARM’s for a couple of years now.  For awhile they were still listed but with interest rates higher than fixed rate mortgages, then they were removed from our product list entirely.  Historically adjustable rates started much lower than fixed rates.

Today the difference is not as large as in the past but still enough to make them useful in some instances.  Our 5/1 ARM for example has a start rate about 1% lower than the 30 year fixed rate.  If the intended holding period is less than five years the difference could be substantial.  

If the holding period exceeds five years then the current low fixed rates are hard to beat.  

The current ARM indexes are currently the lowest I remember them.  The 1 year LIBOR index was .746 today, that is the lowest it has been since 1989 which was the oldest published rate on the chart at Mortgage-X.  

I am pleasantly surprised that rates have remained as low as they have and they are so incredibly low it is perplexing.  There doesn’t seem to be any problems in terms of availability of funds and yet demand remains low as well.  Strange times.

May 07

Derby Fever, Louisville Kentucky 2011

It is Derby Day, a yet undeclared world holiday.  There should be peace everywhere today.  I am sitting in the car downtown parked on 1st Street while Deb is showing a house.  The people on the street are migrating south towards the track and that is a long walk from here!  Watch out for that bus!

 Neither of us caught Derby fever this year.  We went year before last so I may be immune for a couple more years.

 We will go out sometime next week after all of the tourists go home.  Both airports are covered with private planes and jets parked all over the place.  If you ever wanted to steal a plane last night would’ve been the best time slot.  Plan ahead, next year on Friday during the Oaks!

Balloon Glow

We did go to the Balloon Glow a few nights ago.  They held it at Bowman Field this year, Louisville’s smaller airport.  What a mess!

Balloon Glow 150x150 Derby Fever, Louisville Kentucky 2011It was set up on one of the runways in the middle of a grassy field.  Getting there was a nightmare, traffic was backed up in all directions.  There must have been a 100,000 kids running around in the dark.  The beer was flowing and I think the parents were drinking too.  I bet you hundreds of parents went home with the wrong kids and had to swap them out the next morning.  There is no way that many kids running around in the dark found their way back to their own parents.

I captured a shot of the Bunny balloon with the fire shooting up inside, you can’t tell if it was going in or out, a lot of people just stood around watching that one, HAHAHA.

May 06

Mortgage Rates Remain Low – Louisville Kentucky

Mortgage rates remained low today in spite of better-than-expected unemployment figures.  The bond market was off this morning, with mortgage-backed securities down 11/32 in early trading.  By the end of the day they had regained all of their losses and even gone into positive territory.

I am shocked that the rates are as low as they have been so far this year.  Hold on to your seats when they do start to edge up because it is going to be a fast ride. 

New Mortgage Interest Rate Calculator

I received a new piece of software this week, something our IT guys have been working on for some time.  It is a mortgage interest rate calculator designed to factor in all of the adjustments based on client’s criteria.  It really speeds up the process.

 While I was test driving the new calculator I discovered something exciting.  Conventional interest rates are tiered based on credit scores and loan-to-value but only if the term of the loan is 20 years or longer.  I never knew that!

I plugged in a 15 year fixed-rate loan and made this discovery.  The findings looked strange because there were no adjustments to the rate.  I pulled up the rate sheet and that is when I discovered there are no adjustments for loan terms under 20 years.  This little tidbit makes a 15 year loan a much better deal than the longer-terms.  With rates as low as they are today considering shorter-term makes a lot of sense.

May 01

5 Ways to Commit Mortgage Fraud

Catchy title huh?  This article is not a how to guide, it is a candid commentary on some of the widespread crimes perpetrated by homebuyers during the financing phase of their real estate transaction.  I worded it this way because most of the people that commit these crimes are in denial.  They know it is wrong to misrepresent anything in order to be approved for a mortgage loan but do it anyway. There are two reasons they take the risk; 1) the desire to own a home is compelling  2) the industry implies it is okay to do it, wink, wink. 

It is NOT okay, you could loose the home, go to jail for a very long time, be fined an outrageous sum, or worse, all three!  Yet these things happen somewhere every single working day.  

  1. Credit Repair – There is an entire industry built on charging people to dispute accurate information on credit reports that is negative in nature.  It is wrong to do so! 
  2. Misrepresenting Funds to Close – Most common is on FHA loans, calling a loan a gift.
  3. Income – This one may be the craziest, misrepresenting income, up or down in order to qualify.  
  4. Work Around – Asking the loan officer to help circumvent anything.
  5. Occupancy – There is nothing ambiguous about “Owner Occupied” it either is or isn’t.

  Let’s look deeper at each of these. 

 Credit repair in the traditional sense is simply fraud.  The credit repair industry tells people to dispute anything that is negative on their credit report.  If you lie about something in order to qualify for a mortgage loan it is wrong, period!  That is what a dispute is if the negative information is accurate, a lie.  It is not the same as pleading not guilty in court regardless of what the repair people say.  One is a plea, the other is bank fraud.

 The really bad thing about this one is everything is in writing which makes it easy to prove malice.  The same government that audits mortgage companies and loan applications is the same government that audits the bank that has a copy of your checking account.  The last sentence also applies to the rest of the list.

 The credit repair industry quotes one federal law that protects consumers from inaccurate information in their credit file.  While it is true this law places the burden on the creditor to make sure the information is correct, it was never intended to be used to misrepresent credit worthiness.  Everyone knows if you dispute everything negative a certain number of disputes will not be answered by the creditor.  That is what fuels the credit repair industry. 

 It does not matter who tells you this is legal, lying about anything in order to get a loan is fraud and there is no statute of limitations on fraud.  If your Realtor® or loan officer tells you it is okay, you are working with the wrong person. 

 The second item on our list is about misrepresenting the source of funds to be used at closing for down payment or closing cost.  A very large number of first time homebuyers are guilty of this one.  FHA allows a borrower to use gift funds for the entire amount needed at closing.  A gift is a gift, a loan is a loan.  There is a warning on the bottom of the FHA Gift Letter that makes if very clear any misrepresentation on the form is a federal crime, this applies to everyone.  

 That is just one example; I have had borrowers try all kinds of crazy things from cash advances on credit cards to taking out personal loans. 

 Next on the list is misrepresenting income.  You may believe this refers only to inflating your income, not true.  Some special loan programs are for moderate to low income borrowers.  I have received loan applications where the individual stated a lower income than what they actually earning.

 Another very common statement I hear goes something like this, “I am good for the loan because I have a lot more income than what is on my tax return.”   My standard response when I hear this, “You want to put in writing that you cheat on your taxes?” 

 Item 4 on the list usually pops up when there is an issue with something in the loan application.  The borrower will ask the loan officer how to get around the problem.  Structuring the application properly from the beginning is one thing, trying to circumvent a guideline is something entirely different.  This one is not easy to explain, laying the cards on the table is okay, trying to hide something or making it appear different isn’t. 

 The biggest question for the borrower on this item is: if the loan officer is willing to lie to his or her employer in order to close a loan, what are they willing to do to you during the loan process?

 Last but not least, owner occupied vs. investment property.  Most investors know interest rates and points are higher on investment property than on owner occupied homes.  The standard Fannie/Freddie mortgage form states clearly in section 6 that the borrower will take possession of the property within 60 days of signing the mortgage.  It also says it will be occupied as a principal residence for at least one year following possession.

 In the past week I have had two people inquire about financing a second home in Louisville.  Okay, we are not known as a huge market for second homes, it’s possible but not common.  Turns out both of them wanted to buy a home to rent to a relative; this is an investment property, not owner occupied.  Before any loan officers out there bust my chops, I know FHA allows non-occupying co-borrowers.  That is not what these characters wanted to do.  They did not want their relatives on the deed.

 Another guy a few months ago wanted to buy a home for his girlfriend; again he did not want her on the deed.  I thought it was funny he was willing to borrow money but did not feel strong enough about the relationship to put her on the deed.   

 Contrary to what you may read about the mortgage industry, the rules are very liberal.  The minimum threshold for credit scores are very low, the maximum debt load for monthly payment is very high.  The best way to view the mortgage guidelines is they protect you a lot more than they do the lenders.  A default on your home is 100% for you, it is only a fraction for the lender.