Interest Rates 101

There are lots of different interest rates that you will hear about and see published. It is important for you to know that not all interest rates are for the same things.

Many, including the Fed Funds rate, LIBOR and the Prime rate are actually short term rates. While they may move in a similar direction to other rates, including mortgage rates, they really have very little to do with them. Mortgage rates are determined largely by the sale of mortgage backed securities or MBS. These reflect long term rates which are largely influenced by long term events. Treasury securities and municipal bonds are also generally long term in nature. When the bond market improves that means the fixed rate securities can be sold for a higher price, which results in lower interest rates. When the price goes up the rate goes down as a matter of mathematical calculation. The rate and the price move in opposite directions. The change in price is usually expressed in basis points or in 32nds. Since bonds, treasury securities, and MBS investments are generally viewed as stable and secure their value generally foes up when investors bail out of other more risky investments. However, since they are long term rates inflation generally decrease their value because the more inflation is in the economy the more interest has to be earned just to keep up with it. That why when the economy starts to heat up interest rates tend to go up as well if there is any hint of inflation. Also these investments compete with other investments for available capital. So if the stock market is bullish rates will generally increase so as to compete more favorably with the return on these other investments. Rates are also affected by government action, most notably that of the Federal Reserve. Often the Fed Chairman has been one of the most listened to-and feared-men in the business world. If you want to read more let me know and I’ll find you some good reading material. If you are an investment specialist and care to enlighten our audience more please post your comments.

Any questions?

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Class action? Do they really benefit the “Class”?

Am I the only one being bothered by class actions suits in which the individual recipients get awards of around $5 but the legal team gets $90,000,000?

The targets are usually large companies who serve a lot of people. Phone companies, insurance companies. It sounds like the lawyers find a good target that probably has skimmed a few bucks off the top somewhere, intentionally or otherwise and then sues on behalf of them. On one hand it’s nice to know that someone is checking the books, but on the other hand they get $90 Mil for saving me $5? Really? I’d just assume let them keep the $5 and maybe since they are not paying so much in legal fees they can lower their price for cell service or whatever down the road. I doubt seriously that the lawsuits do anything for the consumer. All you legal eagles out there let me know your take.

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Showing up…

How much of life is simply showing up?

When you reach a certain age you start to get special perks and opportunities. For me one of those opportunities was to run in a special track meet. The competition was not particularly fierce.  Not because of lack of talent but because of lack of attendance.  I enjoyed it anyway as it gave me chance to reminisce and some much needed motivation to get in a little better shape.

I was moved-and encouraged by a lady who was in her nineties and competed in several events and won all of them.  Of course the field in her age group was pretty sparse. She was the only one in her age group at the event. I have to say that just showing up when you are ninety-four to an event like this deserves a gold medal!  I guarantee you if she spends much time in the rocking chair that she is rocking hard! My goal is to be where she is in 40 years… and to have a lot of company!

Just showing up isn’t what life is all about but it is a good start. Showing up shows that you care and gives you an opportunity to do good something good.  You can’t do it all in this life. You have to pick your spots. Most my age don’t show up for these things because there are too many other things going on. We have careers, kids, spouses and homes that need repair. I get it. We all have enough to do without coming up with something new. We do what is important to us but sometimes we go so wrapped up in the day to day that we wind up saving our lives for later.  One of the problems with that is that sometimes there is no later.  We plan on being around for eighty years but that doesn’t always happen and if it does we might not be physically able to do what we can do now. 

 So try not to let your priorities get out of whack.  While I spend most of my time providing for my family I still know it is important to spend time with my family, keep myself healthy, do things that are fun, and try to accomplish some things that matter. If you work it out right you can get some overlap going.  A word to all you couch potatoes; if your body belongs in the dumpster you might find it hard to do the other things on that list. I’m just sayin’…

So for the most part you work hard and long and take advantage of your opportunities when you can.  Try to spend some quality time with family near and far and to try to mix your passions with your work whenever you can.  For me this week it included meeting some new people and reliving my glory days a little.

By the way, I won all of my events for my age group.  Not due to any great talent on my part. I just showed up.

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Investors are a bigger part of the home purchase picture.

It appears that investors are purchasing more homes as a share of the market than in previous markets. This is partially due to the number of foreclosure homes available at bargain prices and partially due to some of the obstacles preventing other purchasers from buying.  Also, some of these homes are in “unlendable” condition which means that the purchasers are either paying cash or using private financing. The cash required for this type of transaction is beyond most 1st timers.  Some of these are refurbished and flipped, and others are turned into rental units. In either case, the motivation is profit.  Many of these investors know what they are doing, but not all. Those that don’t won’t be doing it very often.   The most common errors are made in underestimating the repair cost, both in terms of time and money.  Holding time is also a factor as an unrented or unsold unit eats up profit pretty quickly. However, if the right property is purchased at the right price it can be immensly profitable.

 One of my first mentors told me that the profit is made in real estate when you buy it not when you sell it.  I believe this to be fundamentally true. A wise purchase is much more likely to be profitable than one that is not made thoughtfully. 

 Questions need to be asked and answered.  How long will it take to repair? How much will those repairs cost? Have I done everything I can to determine and/or allow for these repairs? Once it is finished, how long will it take to return or sell it and do I have the funds required to hold the property for that period?

Veteran investors only purchase if they see a significant profit. There has been a decided shift to an emphasis on cash flow, and this is often the primary consideration. You may also be concerned with the likelihood that you will be able to attract a good stable tenant or buyer, and how often the property will have to be re-rented.  Three and four bedroom homes usually tend to be more stable that one or two bedroom homes, and single family units tend to be more stable that condominiums and townhouses.  LL

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20% down. Really?

I guess it’s a sign of the times we live in. I was attending my brother-in-laws ordination (or Pastorization, as he prefers to refer to it) and I was asked what I do for a living. When I told him I was in the mortgage business he told me he would pray for me. That may have been for past sins, but more likely because of the condition of the industry.

There are still people getting loans, but it certainly is not like the good old days. B of A, Wells & Co have announced layoffs in the thousands. This is on top of the massive fallout of the last few years, and the orchestrated effort to diminish competition from mortgage brokers. If you are still in the business chances are you are a glutton for punishment and/or very good at what you do. In all fairness, the federal government is both at the heart of any remaining lending, and practices choking the real estate and mortgage industry to near death.

The fact is housing affordability is at its highest level in about 40 years. That spans three or four recessions. Investors make up a larger portion of home purchases than is typical, even though financing restrictions severely limit their options and a large down is required to purchase. Take a look around your area and compare what it costs to own verses what it costs to rent. In the higher demand areas the spread is hundreds, if not thousands of dollars in a “normal” market, whatever that is. If the difference is smaller than normal it is a good indication that property values are either in line or somewhat below their potential. In some areas it is actually less expensive to own a home with a small down payment than it would be to rent the same home. This is definitely and indication that the selling price of homes is at or below a sustainable level.

When the shoe is on the other foot, remember that it shouldn’t cost twice as much to buy as it does to rent. That is a sign that housing prices are above a sustainable level. A word to the wise…

There is a rule being proposed that would mandate a 20% down payment if the borrower has certain derogatory items on their credit. Certainly there are times when this is and should be the case, but a giant blanket rule coming from “The Top” is not the answer. Underwriters (the people who approve or disapprove loans) need and deserve more discretion, not less. As I have said many times, common sense should be the norm. These sorts of things should be determined on individual merits. Rules already in place prevent someone with a foreclosure, bankruptcy or short-sale on their credit record from obtaining financing within specified time frames. That makes sense. To extend a blanket rule without considering individual circumstances is a bad idea. We need to exclude those individuals that are bad risk historically, but not eliminate buyers from the purchase market unnecessarily. All of those people who are out of work, had a bad year or two in their business, or have damaged their credit with a BK, foreclosure, short sale, or are simply missed payments are already eliminated as purchasers. That’s quite a few right there. Some of these are responsible individuals with the capability of making a house payment and the desire to own a home.

We need more common sense lending. More mandates that require the disqualification of a borrower without considering the whole picture is not common sense. LL

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Something to consider?

Loan Modification. Is it something for you to consider?

I get asked about Loan Modification all the time.  You should get advice from someone other than your lender if you are going to attempt a loan mod. It’s fine to listen to what they have to say, but they are not necessarily going to tell you everything you need to know. You’ll want to know that if you jump through all of those hoops how likely you are to get your modification approved, and you are unlikely to get a definitive answer from your lender.

First a word about who loan modifications are NOT for.  They are not for people who are able to refinance.  If you qualify to refinance your mortgage chances are really good that you will not qualify for a loan modification.  You make too much money. Yes, even if you are upside down in your home. The people who will qualify for a loan modification are those who will likely lose their home if they do not get one.  You will not be seriously considered until you go delinquent on your house payment.  Before you do that you should research your options, including the possibility of actually getting approved for a modification.  Of course, if you have no way of making the payment that decision may not be a voluntary one, and is perhaps an indicator that a modification should be attempted.  Not all loans are able to be modified, and the lenders generally do not want to modify your loan because the other alternatives they have may make more economic sense for them.  They are in business to make money, and loan modification generally reduce their income.  Some lenders also have made sweet deal when purchasing the assets of a now defunct bank (see Indymac Bank, OneWest Bank) that make it even less profitable for them since the losses may be essentially insured with your tax dollars.

They will generally take a look at you if you are 30 days behind, but in some cases simply being close to that will suffice.  I do suggest that you do your best to preserve what you can of your credit rating, as your credit score will affect many areas of your life.  29 days late does not significantly harm your credit rating. A “rolling 30 day late” will qualify for you consideration in many cases, and will do considerably less damage to your credit than 60 or 90 days late.  Late payments are like earthquakes on the Richter scale.  A 60 day late isn’t twice as bad as a 30 day, it’s more like ten times. A 90 day late is, well you get the picture.  It may take one year to get over a 30 day, two years for a 60 day, and four years for a 90 day, depending on what the rest of your credit profile looks like.  I’ll cover more about the process in my next post. 800-200-9329

 I welcome your calls, comments and questions!

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So…you don’t have enough equity to refinance ?

So…you don’t have enough equity to refinance the “regular ” way…What can you do?

One big problem for people is that if they want to do a loan modification they have to sacrifice their good credit, wade through endless paperwork, and wait around for months for an answer that may or may not be worth waiting for.  Loan mods are for those who can’t make it work any other way.  What are your alternatives?

If you have a mortgage owned by Fannie Mae or Freddie Mac (I know you have heard those names…) you have more options than if you didn’t. Did you know that in some cases those loans can be refinanced to market rates if the property value is exceeded by the mortgage amount? We are finding that 2nds behind those loans will also often subordinate* (give you their permission to refinance the 1st mortgage). There are tools that you can use on the respective websites of Fannie and Freddie to see if you loan is owned by them. Just because you make a payment to Albatross Mortgage doesn’t mean it’s their money. They may just be servicing the loan, which is fancy way of saying they collect the money. It’s a little like a rental agency. They don’t own the properties, they just do the administrative work of maintaining the asset, collecting the payments, and distributing the funds to the owners and other parties as applicable. This behind the scenes stuff is what is known as the secondary market.

If your loan isn’t owned by Fannie or Freddie? Don’t give up! Check with me about strategies we might be able to use, and if I can’t help you I’ll probably suggest that you try to talk to the lender that does own the loan. I’ll have suggestions for that too. I’ll have more detail on what you might try in another issue, but the important thing to do is to realize that things are constantly changing. If things don’t work out right away, keep trying. Lenders are gradually figuring out what they need to do to prevent losses. What didn’t work a month ago may work next month.

Fine print? Yeah, there certainly are restrictions.  You must be current on your mortgage, and the new borrowers in most cases must be the same os the old borrowers.  Not all loan programs will be eligible. But just the same, it’s often an option for those who don’t want destroy their credit trying to get a better rate.  LL

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