"Credit Crunch" - the new hit financial drama

Handy links to HUD homes in different states

2010-01-10T21:12:00.000-08:00

Here's a very handy link to a site which has HUD homes for sale in different states.

For example, here's a list of HUD homes for sale in Colorado.

Enjoy!

Home equity loan delinquencies reach new record levels

2009-07-08T05:52:00.000-07:00

The American Bankers Association reported yesterday that job losses contributed to new record levels of home equity loan delinquencies. With more than 6 million jobs lost since the current recession began, people are falling behind in paying their bills.

The ABA considers a home equity loan payment to be late if it is made more than 30 days after its due date.

This is one of the contributing factors which make it very difficult to obtain or refinance home equity loans or home equity lines of credit in today's market. If you have a HELOC or a 2nd mortgage in place and you're not "upside down" in your financing (that is, if your home is worth more than the sum of your mortgage balances), your best bet may be to refinance both loans into a single new FHA mortgage. FHA rates less than 6.000% are still easy to get, and that rate will cover not just your first mortgage, but also the portion of your financing which has been covered by your second.

FHA loans do come with FHA mortgage insurance, but FHA monthly premiums are lower than private mortgage insurance, and chances are you'll be saving money on the portion of your financing currently held in your second mortgage.

Denver real estate losses are relatively good

2009-06-05T14:58:00.001-07:00

Hard to put a headline to this data; on Wednesday, May 27th, the Denver Post said "Metro home slide not off cliff".

Here's the essence of what they're saying -- the latest real estate market data released (for March) shows a 5.5% decline in the Case-Shiller home price index, the least bad result for 20 major cities.

We beat out Dallas, which had a 5.6% decline. Not too shabby, compared to Phoenix (36.0%) or Detroit (25.7%). And although their Lakers seem on their way to another NBA championship after beating our noble Denver Nuggets, our decline was less bad than theirs (22.3%).

Maybe we should all move to Phoenix, where it's cheap.

A realtor might tell you that this shows that Denver is the most stable market among the top 20.

Call me if you want to buy a home (go to http://www.jordangraham.com/).

Sub-5% mortgage rates are going...going...gone?

2009-05-29T07:11:00.000-07:00

Here's the picture worth a thousand words, and more than a thousand dollars for the typical mortgage borrower -- it's a graph of the yield for the 10-year US Treasury note (from Yahoo), which is the foundation on which fixed rate mortgages are built. When the yield on the 10-year goes down, so do fixed mortgage rates for new loans.

That dip you see toward the left of the graph took place on March 17th - a couple of days after China's premier Hu Jintao voiced his concern at how much the United States is borrowing in order to stimulate our economy. The US Federal Reserve responded by announcing a plan to buy $1 trillion worth of government debt and mortgage-backed securities -- prices for Treasuries shot up (which means that yields plummeted), and I spent all day the next day on the phone locking refinances for people I knew who were waiting for the right time to lock.

That day I locked 30 year fixed rate refinance loans at 4.375% with no origination or discount points. That's a "novelty" interest rate -- unbelieveable from a historical perspective.

But a look at the 10-year yield graph since then shows movement steadily upward, and the past week and a half have seen particularly steep climbing. All good things must come to an end, as I'm learning in my personal life right now, and it seems as though reality is catching up with the US mortgage market.

Fundamentally, US government bonds are trading at unsustainably high prices. China cannot afford to continue buying our bonds (read: lending us money) as much as they have in the recent past; they desperately need their cash for domestic spending projects to stimulate their own economy. We've seen interest rates at historic low levels for a long, long time.

My take is that rates will be back in the 6.000% range for 30 year fixed rate loans before too long. That's a great interest rate, by the way, if you look at historic averages. The days of novelty sub-5% interest rates look like they're going. . . going. . . gone.

How long are sub-5.000% interest rates going to last?

2009-04-27T14:06:00.000-07:00

I read a piece today by my well-published friend Vitaliy Katsenelson about the pickle in which China finds itself these days. What struck me as the understated punch line is that mortgage interest rates are as low as they are right now (I quoted someone 4.375% for a 30 year fixed rate loan this morning with 1.500% in discount points) largely because China is continuing to buy US Treasuries at unsustainable levels.

In the old days it worked like this: China bought US Treasuries, driving down their yields -- and since fixed rate mortgages are built on the yields of US Treasuries, this drove down our mortgage interest rates. Americans refinanced their homes and spent money, fueling demand for China's exports. This gave China more money to buy US Treasuries. . . and so the circle went.

In this financial crisis, though, Americans have pulled way back on spending. China is responding with a stimulus of its own, forcing banks to lend and going on its own spending spree, hoping that the global financial crisis will ease before it runs out of money to spend propping up its own economy. For this it needs cash, and it's eyeballing its huge portfolio of US Treasuries, wishing it could use some of those funds.

To quote Vitaliy, here's the pickle China's in:

Now China needs to stimulate its economy. It’s facing a very delicate situation indeed - which is a nice way of saying that China’s screwed. China needs the money internally to finance its continued growth. However, if it were to sell dollar-denominated treasuries, several bad things would happen. Two come immediately to mind:

1. Its currency would skyrocket - not good for China, because it would lose its (relatively) competitive low-cost producer edge.

2. US interest rates would go up dramatically - not good for the US (its biggest customer), and therefore, not good for China.

This is why China is desperately trying to figure out how to withdraw its funds from the US dollar without driving the dollar down. Good luck with that.

And the US government isn’t helping: It’s printing money and/or issuing Treasuries at a fast clip, and needs somebody to keep buying them. If China reduces or halts its buying, we may be looking at high interest rates, with or without inflation.

The latter scenario worries me most.

Me too. On Saturday, March 14th, China's premier Wen Jiabao expressed concern about China's investment in the United States, saying "We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

Three days later, the Fed announced that it would begin buying US Treasuries (to reassure global financial markets?); the next day, long term mortgage interest rates hit the lowest I've ever seen them. I spent all day on the telephone, only calling people who were ready to lock interest rates on refinances -- I got 4.375% 30 year fixed rate loans with no points at all that day (the best I've ever seen; I doubt rates will be that low again).

Of course, the market reaction was brief, and by the late afternoon rates were rising again.

I've been harping on sustainability for years. China is buying Treasuries at unsustainable levels. The Fed cannot step in and take China's place. Soon -- and I don't know when -- demand on Treasuries will begin to drop, and long term mortgage interest rates will return to 6.000% and higher.

Shared equity down payment assistance

2009-01-22T17:25:00.000-08:00

Douglas County (Colorado) has a new down payment assistance program called the Shared Equity program. They provide up to 20% for qualified first time home buyers to use as the down payment on their new home -- but unlike traditional down payment assistance, no interest ever accrues on their piece, and no payments are ever required.

Instead, the home buyers pay the county back when they sell or refinance their home, paying the same percentage of the home's then-present value as the percentage given as down payment assistance.

For more details, click here: Shared equity down payment assistance program

3.99% 30-year fixed rate mortgage

2009-01-22T08:15:00.000-08:00

The Wall Street Journal reported yesterday that home builder Toll Brothers (based in Horsham, Pennsylvania) is offering 30-year fixed rate financing at 3.99% for buyers of their homes.

The rate requires no "points" (origination or discount fees), and is for loans:

Under the conforming loan limit ($417,000 or less)
Made to borrowers with credit scores of 720 or higher
For purchases in which buyers have 20% or more for down payment

This following last week's record-setting low mortgage interest rates.

Rates rose Friday and Monday of this week, and although they are higher than last week's best, borrowers can still get 30 year fixed rate loans in the 5.000% range.

For more information or to find out what interest rate you can get, contact me.

Treasury Department considering 4.5% mortgage loans

2008-12-05T05:42:00.000-08:00

The US Treasury Department is thinking about making 4.5% fixed rate mortgage loans available to home buyers through Fannie Mae and Freddie Mac in its latest effort to stabilize the real estate market. Rates this low haven't been around since the early 1960's; the theory is that home buyers who have been waiting on the sidelines would flock to the closing table, buying homes, reducing home inventories and stabilizing the real estate market.

As recently as September, Fannie Mae and Freddie Mac fixed-rate mortgages had interest rates as high as 6.375%. With that interest rate, a home buyer's monthly payment of $1,350 could buy a home worth only $179,000. With a 4.500% interest rate, that same monthly payment could buy a home worth $214,000.

Sounds pretty good so far. The New York Times' headline reads "Washington’s New Tack: Helping Homeowners" - but far from helping homeowners, the new plan would rescue banks by placing the risk of falling real estate values squarely on the shoulders of American families. Inventories would be reduced (that's the piece that helps banks; the country is littered with foreclosed properties which banks have had to repossess - they sit empty, costing the banks more money every day) - but what effect would this have on real estate values?

In the short term, buyers would quickly pick up on the logic of being able to afford more home. Americans love MORE MORE MORE; a few years ago we rushed to take out subprime mortgage loans because we could buy bigger homes. We save almost no money for our future; we open financing accounts with Best Buy so that we can bring home larger televisions with flatter screens; we buy bigger homes.

But what are homes really worth? These below-market mortgage interest rates would only artificially prop up home values. If you bought that $214,000 home today and went to sell it years from now when the 4.5% mortgage plan was no longer being offered, who would pay you $214,000 for it? The home which cost you $1,350 a month to live in would cost someone wanting to buy your home $1,552 a month. The "hangover" after this plan tanks will depress real estate values years from now.

The subprime market collapsed largely because the assets in the mortgage-backed securities involved weren't worth what the financial whizzes thought they were worth. Sure, if a buyer is willing to pay you $214,000 for your home, in one sense your home is worth $214,000 -- but economists point out that the ratio of home prices to household incomes is still very high.

As long as Americans sign up for living that life - paying more and saving less because we're buying the illusion that that will make us happier - this house of cards that is our economy will sputter along as it has for the last couple of decades. Our parents and grandparents probably shake their heads in disbelief, and I think they're right to do so.

1.0% Fed Rate; GDP shrinks by 0.3%

2008-10-30T09:36:00.000-07:00

The good news is that the Government is still spending money, and that America is exporting for the moment -- the New York Times reports today that consumer spending is down for the first time since 1991, when President George Bush Sr. went to war in Iraq.

Even after 9/11, American consumers were spending. It was the patriotic thing to do, after all.

Now we're having the economic hangover from all of that spending -- and the borrowing that fueled it.

The Federal Reserve Board met yesterday and did what was expected of them -- they dropped the key benchmark Federal Funds Rate to 1.0%, the lowest rate since our emergency response to the attacks of 9/11.

Bloomberg reported this morning that the Fed may not stop there:

Bernanke is drawing on an academic career studying the failed efforts to prevent the Great Depression, and yesterday's shift indicates he's prepared to revisit his 2003 commitment as a governor to lower rates to zero percent if necessary. Should lending fail to revive by December, the central bank will probably cut by another half point, said former Fed Governor Lyle Gramley.

The Fed most recently lowered the Fed Rate three weeks earlier, on October 7th, 2008; long-term mortgage interest rates responded by climbing steadily higher. With its many rate cuts over the last couple of years, that's what has happened -- long term mortgage interest rates rose after the Fed lowered its rate. Sometimes rates were higher only for a few days; other times they were higher for several weeks.

Interest rates on mortgages opened higher today.

Banks should eat their vegetables

2008-10-24T10:13:00.000-07:00

I read this article in the New York Times last night about a member of the Senate Banking Committee wanting the banks that we as taxpayers have propped up to do more, quickly, to help homeowners in danger of foreclosure.

My favorite part:

Senator Charles E. Schumer, Democrat of New York, told the officials that they seemed to be giving the banks “a little too much dessert and not making them eat their vegetables.

Most loan modifications have been made on a "voluntary" basis with banks. Loan modification is expensive to banks -- both in absolute dollar amounts and in time -- and banks haven't been very proactive about making them.

After John McCain suggested that we as taxpayers pay full price for distressed loans (rewarding the banks who made bad loans), I thought of an alternate plan in which the US Government could buy servicing rights to distressed loans, modify the monthly payment terms and create negative equity accounts for loans in which the new payments are less than the cost of providing the modified financing; those negative equity accounts could be attached to the homes through a lien which would look a lot like a second mortgage. In time, if the borrowers' financial standing improved or property values increased, this negative equity account could be brought to zero through a refinancing or selling of the home.

The cost to Americans would be minimal; basically interest on the negative equity accounts, which would start small and grow over time.

Sorry to say that neither Presidential candidate has approached me so far to ask me more about this idea.

Down Payment Assistance is dead -- long live Down Payment Assistance!

2008-10-13T20:45:00.001-07:00

Back at the end of July, when this credit crunch was just a bad dream to only a handful of people like Paul Krugman (the winner of this year's Nobel Prize for Economics) and Barry Ritholtz, President George W. Bush signed the Housing and Economic Recovery Act of 2008 into law. With it came the October 1st sunset of one of the last good scams in the real estate business -- the seller-funded "Down Payment Assistance" scheme.

Here's how the shell game worked: Suppose I'm trying to buy your house and I don't have any money for a down payment. These days, when making an offer to buy your home I'd be likely to make an offer for less than your list price -- maybe 3% - 5% lower. But the days of "no money down" mortgage financing are over; the best deal around (since I'm not a veteran) is an FHA loan, which until recently required that I bring a down payment of 3%.

How much is your house worth? Say, $285,000? That 3% works out to $8,550. My closing costs will likely be another 2 1/2 %, or $7,125 -- add that to the down payment assistance and I need to bring at least $15,675 to closing in order to buy your house.

But I don't have any money for a down payment, remember? So I'm stuck. Can't buy your house. My real estate agent can't get a deal out of me, and her mortgage broker can't either.

Enter the "Down Payment Assitance" scheme. Instead of negotiating a lower purchase price, I make a full-price offer to you. . . but, being a charitably-minded guy, I require as part of my offer that you donate 3% of my purchase price to my new favorite not-for-profit organization over here on the side. Aw shucks, while we're at it let's make that requirement 3% plus 2 1/2% (that's what my closing costs will be, after all).

What happens next? Surprise, surprise; this not-for-profit organization makes a gift to me of 5 1/2% of the purchase price (less a $500 administrative fee). I never need to pay it back. I'm certainly willing to pay $500 to the not-for-profit for them to launder the money for me, since now I have gift funds from a not-for-profit which I can use not only for my down payment, but also to pay the closing costs on my loan to buy your house. I "give you" the money back as part of my offer to buy your house.

You get the same amount of money you would have gotten had I negotiated a lower purchase price for your house. I get to buy your house, even though I had no money to use as a down payment (and therefore couldn't honestly qualify for an FHA loan to buy your house). And my newly-favorite not-for-profit organization gets $500 for managing a handful of documents and passing your money back to you through this circuitous route. My real estate agent gets her commission (usually 2.6% of the purchase price, or $7,410 -- how psyched is she if she gets 10 Down Payment Assistance deals a year, huh?) and of course her mortgage broker gets about 1%, or $2,850, so he's happy too.

It's a win-win-win-win-win, right? Everybody happy?

So why did Down Payment Assitance (referred to, in this anacronym-happy culture, as "DPA") get shot down?

It turns out that you and I, as American tax payers, are on the hook for the losses that FHA experiences when no-money-down borrowers masquerade as 3%- down borrowers and end up getting foreclosed on.

The Wall Street Journal reported this summer that FHA was posting a $4.6 billion loss -- its largest in years -- based to a large extent on seller-funded Down Payment Assistance. Although that amount seems quaint in light of our $700 billion bailout and tonight's announcement that the US Government is forcibly buying ownership interests in major US banks to the tune of $250 billion, that $4.6 billion loss was based on the effects of a lie. That lie is that I am a 3% down borrower when I use a seller-funded Down Payment Assistance program, not a no-money-down borrower.

FHA charges a mortgage insurance premium as a part of every loan -- in an up-front mortgage insurance premium payment, as well as a monthly payment that's part of my mortgage payment. FHA charges 1.75% for the up-front MIP fee, and 0.55% per year for the ongoing piece -- and these amounts are based on FHA loan underwriting guidelines, which require a minimum down payment of 3%.

My belief is that FHA should charge a progressive MIP (mortgage insurance premium), costing me less money if I bring a larger down payment than they would charge for a lower down payment. They don't do it that way; they charge me the same percentage if I bring 19% down payment ($54,150) as they would if I brought my 3% statutory investment of $8,550. (To be sure, 0.55% of my lower loan amount -- in the first scenario -- is only $1,269.68 a year, lower than the $1,520 a year I'd pay if I only brought 3% -- but the risk premium is the same.)

I believe that a no-money-down loan is a riskier proposition than a 3%-down loan, and should cost more.

In any case, seller-paid Down Payment Assistance programs died because that's true -- no-money-down loans are riskier, and you and I (as American tax payers, on the hook for FHA's losses) ended up footing the bill for way more foreclosures than we would have had if we'd had a pool of true 3% down buyers.

I can hear the real estate agents screaming; this has been a cash cow for them for years. And yes, there are good, solid buyers who would have maintained integrity with their financial commitments under DPA purchases who can't buy a home using that scheme any more, and that's bad -- not just for the family itself, but for America. We need those good, solid, responsible people in ownership of homes, reducing bank-owned property inventories which depress the real estate market, in turn creating new waves of foreclosures.

I've seen legislation being pushed by the incredibly effective DPA lobby, asking for seller-funded down payment assistance to be reinstated, with new risk premiums. Sadly, the legislation is still too risky and you and I would end up bailing out the FHA down the road, as well.

With seller-funded down payment assistance in the morgue, there's only one option available to ultra-low-money-down buyers: The $100 HUD home program.

Since November of last year, HUD has had a program in which you can use a down payment of only $100 if you buy a HUD home, and:

make a full price offer
live in the property as your primary residence, and
use an FHA-insured loan for your purchase

Interesting, isn't it? HUD is perfectly OK taking on a no-money-down buyer -- making an exception to the new 3.5% statutory minimum buyer investment -- on its own properties, while it's not OK for that same buyer to use the same financing structure to buy a bank-owned (or family-owned) home through a DPA program.

That's irony.

But in the meantime, the HUD $100 down program is the only game in town.

$50 million in new housing counseling grants

2008-10-08T07:36:00.000-07:00

The Secretary of HUD -- the U.S. Department of Housing and Urban Development -- announced yesterday a grant of $50 million to housing counseling agencies around the country to work with Americans on getting them into homes they can afford or keeping them in the homes they have now.

Since 2001, HUD has increased funding to 2,300 approved housing counseling agencies by 150 percent. More than $47 million will support 21 national and regional organizations and 376 state and local housing counseling agencies. In addition, HUD is awarding $3 million to two national organizations to train approximately 2,600 counselors who will receive the instruction and certification necessary to effectively assist families with their housing needs.

Of the $50 million grant announced yesterday, $4 million will go toward helping elderly people understand reverse mortgages (also known as Home Equity Conversion Mortgages, or HECM's). In a reverse mortgage, a homeowner can stay in her home and receive a monthly check from the lender to help cover medical and other costs of living.

Here's a list of the HUD approved housing counseling agencies in Colorado:

Aurora: City Of Aurora Community Development Division
Boulder: Boulder County Housing Authority
Colorado Springs: Partners In Housing, Inc.
Commerce City: Adams County Housing Authority
Denver: Brothers Redevelopment, Inc.
Denver: Colorado Housing Assistance Corporation
Denver: Denver Housing Authority
Denver: Northeast Denver Housing Center
Denver: Southwest Improvement Council
Durango: Housing Solutions For The Southwest
Fort Collins: Neighbor To Neighbor

Fed Rate lowered again by half a point

2008-10-08T07:28:00.000-07:00

I drove my wife to the airport this morning at 4:45 am Mountain time (that's love, isn't it?) and on the way back -- at 5:15 -- I heard the news that the Federal Reserve had lowered its key rate, the Federal Funds Rate, by an additional 0.500% (it now stands at 1.500% -- the lowest it's been since 2004).

The first thought I had when I heard the news was that those lads at the Federal Reserve sure get up early -- it was only 7:15 Eastern time, and they were already busy lowering rates.

In the past 18 months, nearly every time the Fed Rate has been lowered, long-term fixed mortgage rates have risen -- at least temporarily -- for anything from a few days to several weeks.

This morning's interest rates are actually lower than yesterday afternoon's, by about an eighth of a point (0.125%).

Announcing Hope for Homeowners ("H4H") program

2008-10-03T12:10:00.000-07:00

One of the critical goals we have in bolstering our financial system is stopping the slide in real estate values. Some argue that real estate values are still too high; nevertheless, if values continue to slide, more and more homeowners will go "upside down" in their mortgages, owing more than their homes are worth -- a condition that leads in many cases to more foreclosures.

Through the Housing and Economic Recovery Act of 2008, Congress created the Hope for Homeowners ("H4H") program to help reduce foreclosures.

The Hope for Homeowners program allows borrowers who are struggling in their current mortgages to refinance into fixed rate FHA loans they can afford. For qualified borrowers, lenders will have to "write down" the size of the mortgage to 90% of the borrowers' new appraised value (meaning that even if a homeowner is upside down in her loan -- owing $200,000 on a $175,000 home, for example, she could refinance into the H4H program with a loan amount of only $157,500.

Additional requirements of the Hope for Homeowners program are:

Their mortgage must have originated on or before January 1, 2008
They cannot afford their current loan
They must have made a minimum of six full payments on their existing first mortgage and must not have intentionally missed mortgage payments
They do not own a second home
Their mortgage ("front end") debt-to-income ratio must be at most 31 percent
They did not knowingly or willfully provide false information to obtain the existing mortgage, and they have not been convicted of fraud in the last 10 years
They must follow FHA’s long-standing and strict policy of fully documented income and employment
Homeowners must agree to share both the equity created at the beginning of their new HOPE for Homeowners mortgage and any future appreciation in the value of their home
To participate, existing subordinate lenders must agree to release their outstanding mortgage liens

The new HOPE for Homeowners mortgage payment must be at or below 31 percent of the borrower’s income, unless there is ‘trial modification’ period prior to loan application. A trial modification would give borrowers the opportunity to demonstrate their capacity and willingness to make a mortgage payment that does not exceed 38 percent of their monthly income.

The program is effective from October 1, 2008 to September 30, 2011.

As many as 400,000 homeowners could avoid foreclosure through this program over the next three years. If you or anyone you know are having trouble making your mortgage payments, contact me to see if we can help you through the HOPE for Homeowners program -- by refinancing your loan into a new 30-year fixed rate loan with lower payments.

Change to FHA guidelines

2008-09-26T16:26:00.000-07:00

One healthy aspect of our recent real estate market has been the opportunity to buy a new personal residence and keep one's old residence as a rental property. It's healthy because it takes two homes out of the real estate for sale inventory (high inventories push down home values) and the credit worthy home owner is, in effect, guaranteeing both mortgages, but his or her rental income provides a significant offset to the cost of the two combined.

Safety. Credit worthy borrower. Housing for the renter, who may not be able to qualify for a loan on his own.

FHA just changed their guidelines, however:

Homeowners vacating an existing primary residence and purchasing a new residence, will not be allowed to use rental income from the property being vacated for qualifying purposes. The borrower must qualify with both full PITI payments. The only 2 exceptions to this policy are as follows:
Relocation with a new employer or being transferred with the current employer to an area not within reasonable commuting distance.
If the current principal residence being vacated has a 75% or less LTV based on an appraisal dated within the previous 6 months or based on the original Sales Price of the property.
Additional details on the new guidelines are spelled out in Mortgagee Letter 2008-05.

If you're really interested in more info, call or email me.

Quote of the day on the bail out

2008-09-25T08:28:00.000-07:00

This is one of the best pieces I've read about the proposed bail out of Wall Street and American consumers who bought homes they never could afford -- from Jim Welsh of Welsh Asset Management:

"We will be told that the Federal Reserve and the Treasury have finally gotten it right. The scope and size of the proposed program will arrest the decline in home prices, restore stability to the financial markets, enable banks to get back to the business of lending, and restore the confidence of the American consumer.

While the program certainly has each of these points as a goal, the amount of time to achieve each goal is unknowable, but an important factor. Moses was told he would lead the Jews to the Promised Land. He didn’t know it would take 40 years. And, in all due respect to Bernanke and Paulsen, Moses was working with God. They are working with Congress."

HUD's $100 down payment program

2008-09-10T22:44:00.000-07:00

With all of the foreclosures FHA has been experiencing, HUD has initiated a program in which buyers can buy a HUD home for owner occupancy using only $100 as a downpayment.

Click here for more information on the HUD $100 down payment program.

Housing and Economic Recovery Act of 2008

2008-07-30T19:00:00.000-07:00

This was a huge piece of legislation, signed into law by President George W. Bush on July 30, 2008. Among other things, the Housing and Economic Recovery Act of 2008 established the Federal Housing Finance Agency, put an end to seller-paid down payment assistance ("DPA") programs such as Nehemiah and Neighborhood Gold and created the Hope for Homeowners program.

If you google the Housing and Economic Recovery Act of 2008 you'll find a lot of garbage information -- here are links to two good documents with good information on it:

Here's the full text of the legislation

Here's a summary of the law

Of course, if you want to know how any or all of this affects you personally, please contact me!

The dollar and foreign exchange

2008-07-23T15:46:00.000-07:00

Actually, the dollar is off of its recent lows -- but this is just too good to pass up.

Thanks to Barry Ritholtz.

Cinema: Batman and "The Dark Knight"

2008-07-21T15:07:00.000-07:00

I saw The Dark Knight last night and really loved it. Glad to see Batman movies being done with this much budget; Christian Bale is the best Bruce Wayne / Batman I've ever seen and I love Michael Caine.

Before I go any further: Do not bring the kids. There is a strong "your parents cannot make you safe" element to the movie. I make no apology if this tells you too much about the movie; just don't bring the little kids. Twelve, thirteen -- maybe.

I've never seen Heath Ledger before; what an incredible performance. I found myself happy to see him enter the scenes; he absolutely stole every scene he was in. In the personal work I've done I've come to know my own rebel personality -- that part of me that rejects rules. In his portrayal of The Joker, Heath Ledger brings a dark brilliance to the rule breaker. I could hear a young man (teenager?) behind me loudly enjoying The Joker's darkness -- perhaps this young man recognized in the character his own internal rebel.

As I've said, I loved the movie -- but as I left I realized that something was bothering me. There's a theme in this movie that it's OK to go against what is right and proper, as long as you're doing so in the service of "the greater good." One of my college degrees is in philosophy, and I remember studying this notion -- we called it "utilitarianism." I believe that it cedes moral responsibility to whoever is deciding what is "the greater good" -- and I see it at work in our country.

I see Abu Graib prison, Guantanamo and water boarding all being done in the name of "the greater good," and I see my fellow Americans allowing others to decide what "the greater good" is.

I once read that our horror movies show what we're afraid of. In a way, it's Batman I'm afraid of, not The Joker -- because Batman symbolizes this notion of abdicating my own moral responsibility, letting others do things in my name which I cannot support in good conscience.

Jordan Graham for President?

2008-07-14T06:35:00.000-07:00

A good friend emailed me this link this morning, asking if I was really running for President.

At first I thought that the article would have been about this Jordan Graham, running for President -- but the new video doesn't actually show the "candidate" at all. (My younger brother clued me in to this particular Jordan Graham -- there was a time when I was spending a couple of hours a day in the gym, lifting weights -- but I never got to looking quite like this particular Jordan.

Just a couple of years ago, I was at a coffee shop ordering my usual four-shot mocha (with just half the usual chocolate) and I discovered to our mutual amusement that the young woman behind the counter was also named Jordan Graham. Perhaps she's the one who's running for President now.

Just for the record: I am not running for President.

Love the publicity, though!

What's the difference between getting pre-qualified and pre-approved?

2008-07-09T03:43:00.001-07:00

When you submit an offer to buy a home, the listing agent (that's the real estate agent representing the sellers) will ask for a "lender letter" -- and what they mean is either a "pre-qualification letter" or a "pre-approval letter." Either one works for the sellers; they just want to know that you've spent some time talking to a mortgage company.

There's a huge difference between the two, and sometimes you can lose a property you want to buy by having the wrong one.

Getting pre-qualified is easy -- you can call a mortgage company and give some basic information to them, such as your monthly income and bills and rough estimates of your bank account balances, and they'll write a letter saying that you're pre-qualified to buy the home.

But they haven't pulled your credit, so they don't know what your scores are, and they're taking your word for everything. You could call me and say "Hi Jordan, I'm Donald Trump. I make $50 million a month and I have no personal debt," and I'd be able to dutifully write a letter for your purchase offer which says that you are pre-qualified to buy the place.

Getting pre-approved, on the other hand, takes a few more minutes but dramatically increases the confidence on all sides that you can in fact buy the home. To pre-approve you, I would indeed pull your credit report and ask you for a lot of information (where have you lived and worked for the past two years, what's your compensation structure, etc.) I'd upload all of your information to Fannie Mae's secure automated underwriting system, which would then not only give us an "approve-eligible" finding, but tell us exactly what paperwork they'll require for your loan file. For example, they might say that they only need to see bank account statements showing a certain amount of money (a recent one I did asked only to show $1500 in assets), or they might not require paycheck stubs or tax returns at all.

When I write a pre-approval letter for you, the listing agent knows that I've done a lot more homework on your loan -- I know a lot more about you and I know what it will take to get us all to the closing table. That's why, if they receive two offers at the same price, they might accept the offer with a pre-approval letter instead of the one with just a pre-qualification letter.

Here's a link to my site to get your pre-approval process started.

Buying foreclosures and pre-foreclosures

2008-07-09T02:48:00.000-07:00

It's 3:56 am, and for some reason my mind has just been racing all night. If I weren't working, I could be downstairs in front of the TV watching infomercials on how to make a killing buying foreclosed properties (with no money down, I'm sure!) -- but instead, I'm going to set out the basics on buying foreclosures and pre-foreclosures.

First, to dampen your enthusiasm: There are very few killer foreclosure deals in the Denver metro area. The vast majority of today's foreclosures were originally bought with little or no money down, so if a home cost $250,000, chances are the bank that owns it today is in to it for about that much. What's worse, much of the Denver metro area has seen declining property values -- meaning that the bank may have a $248,000 loan against the property, but recent comparable sales might average $235,000 -- so the chances of you getting that $250,000 home for $75,000 are pretty low, with rare exceptions.

If you're still reading, I'll go back a few steps and start with pre-foreclosures. You'll find pre-foreclosure homes for sale, for the most part, by searching the MLS. (That's the realtors-only database of homes -- click here to send me a note if you want help with the MLS.) These homes are listed because the owners are behind in their payments and are trying to sell the house to get out from under their mortgage payments.

If their loan amount exceeds the market value for their property (as in our example above), the owners are said to be "upside down" in their loans, and they'll either have to bring money to the closing table to make up the difference or negotiate a "short sale" with the bank, in which the bank agrees to accept less than the full amount owed on the mortgage.

So when you find a property on the MLS which looks like it might be a good buy, the listing agent will tell you if it's a short sale. That's good information to know, because buying a short sale property is a process unto itself.

The listing agent will be looking for a lowball offer -- anything credible (meaning it's from a qualified buyer) which he can take to the bank which has the mortgage against the property. In our example above, the bank has $248,000 against the property, which is worth only $235,000 -- so you might offer $220,000, just to get things going. The listing agent will take your offer to the bank, which will then begin its incredibly slow process of evaluating what it should do with the property.

It can take weeks to hear back; banks have loss mitigation departments which review thousands of troubled properties each month. You'll almost certainly not have your offer accepted; quite likely yours will not be the only offer they're looking at (that's part of why they take so long) -- they may counter, or they may reject your offer outright -- but they'll communicate to the listing agent what they think they'll end up selling it for.

Quite likely they'll ask all of the parties who have made offers on the home to give their "best and final" offer -- what's the maximum you'd be willing to pay for the property. You can write your offer to beat any other offer on the table by $500, up to your maximum -- so if your high end is $230,000, you can write it for $225,000 with this clause and only end up spending $228,000 if the highest other bid is $227,500 (for example).

So that's a short sale. You'll do yourself a favor by being pre-approved for your financing before you make your offer; banks usually have many offers on the table and they'll take the one that is most certain to close, all else being equal.

If the home doesn't sell in time, the bank may foreclose on the property. Often owners will remove all of the appliances as they leave (including the dishwasher and the stove); people are in a tough spot in their lives when they're losing their home.

The home will be re-listed on the MLS, most often with a new listing agent whom they use to handle their foreclosure portfolio. The process is the same as a short sale, in that the bank has to sign off on your offer. Real estate agents who specialize in foreclosures can set you up to receive emails of all new foreclosure properties listed on the MLS meeting your basic criteria -- again, click here to email me if you'd like to be set up to receive this kind of emails.

There are two other strategies I'll mention, and both of them involve auctions. There are auctions held by the counties themselves, and then there are auctions held by private companies which take a bunch of foreclosure properties which banks have not been able to sell and move them at whatever price they'll go for.

Buying at the county auction, you need to have your money with you in certified funds on the day of the auction. Imagine that -- in our example above, you'd need a cashier's check or a money order for around $220,000 with you the day you go to bid on the home. This dramatically restricts the number of people who bid at county auctions; it's possible to get financing in advance, but it takes non-refundable research fees of $2,500 or more and interest rates of around 14% -- obviously designed to get you on title and have you refinance immediately.

Private auctions are less frequently held, but I have some clients who have actually done pretty well. Check out REDC's website to see what they're about -- they'll hold an auction for a particular geographic market, publicizing the list of homes they'll be offering and minimum bids. You'll need to go see the home according to their posted schedule of when they'll have it open for your examination; you need to know what improvements or repairs it'll need, and base your bidding accordingly.

In private auctions you have a reasonable amount of time to get your full financing. You'll need to show up with a cashier's check for $5,000, plus either cash or a check so that you can put a total of 5% down as earnest money. They'll hound you to try to get you to use their lender, but if you're pre-approved before the auction you won't need to buy into their fear tactics around financing.

Those are the elements of buying foreclosures and pre-foreclosures. If you've read this far, here's an action plan for you:

Get pre-approved for your purchase with an honest mortgage broker
Ask an experienced realtor to email you newly listed bank-owned and other properties meeting your search criteria
Be prepared to move quickly if you find a good property -- the good ones are snapped up before you know it!

Remember those 1.95% loans?

2008-07-09T01:16:00.000-07:00

I read a very interesting article the other day about a class action lawsuit filed by a couple from Wisconsin who discovered that the loan they'd thought had a 1.95% interest rate fixed for five years was not fixed at all.

The district court found that the lender (Chevy Chase Bank) had violated the Truth in Lending Act, but the real kicker was that

The judge transformed the case from a run-of-the-mill class action to a potential nightmare for the U.S. banking industry by also finding that the borrowers could force the bank to cancel, or rescind, their loans. That decision was stayed pending an appeal to the 7th U.S. Circuit Court of Appeals, which is expected to rule any day.

Rescinding a loan means returning the borrowers to where they were before the loan began -- returning to them all closing costs and interest paid on the loan, for example.

Where do I even begin on this one? First of all, what on earth was the couple thinking -- did anyone really believe those junk mail pieces that promised 1.95% or 1.25% interest rates? Those are "option ARMs" -- named so because every month, the borrower had four options to choose from for his or her monthly payment -- and internal interest rates were never fixed. Your minimum monthly payment was fixed, but your outstanding loan amount could increase every month.

I remember when World Savings came to my office to pitch this idea to me and I repeatedly said that I didn't understand the product; it transferred all of the interest rate risk to the borrower. "It's about the cash flow," they said.

Turns out I did understand the product.

As a loan officer, I can tell you that it would be really easy to run afoul of the Truth in Lending Act with an option ARM. The Truth in Lending Act requires that you disclose and categorize all of the fees and payments on a loan such that your APR is within 1/8 of a percent of the note rate. I remember wanting to know how to set up the Truth in Lending Statement (one of the required disclosures for a mortgage loan) and not finding anyone who knew how to do it -- the good people at World Savings were more concerned with selling their product than ensuring proper disclosure.

But option ARMs became really popular. The logic was that "as long as your home value increases, you don't have to worry about your outstanding loan balance growing every month." If the courts rule that option ARM borrowers can rescind their loans, the losses that banks have been showing due to foreclosures will be overshadowed by all of the interest they'll need to repay to borrowers who rescind.

More to come on this one -- I for one am watching for the appellate court decision.

Senate housing bill has it backward

2008-04-10T21:45:00.000-07:00

From today's New York Times:

The Senate on Thursday moved to stabilize the battered housing market by approving a bill to provide tax breaks for home builders and other businesses, a $7,000 tax credit for buyers of foreclosed homes, $150 million for counseling borrowers and $4 billion for local governments to buy foreclosed properties.

Sounds good, doesn't it? We're really doing something now! Tax credits, counseling for borrowers (does that mean I can go see my shrink again? I have a mortgage) and support for local governments.

I was all set to send out an email piece on this legislation, until I realized that it's almost completely backwards.

Home sellers these days are competing with banks with foreclosed properties on their books. The few qualified buyers who haven't been scared out of the market are looking for the best deals -- so if I'm trying to sell my home, and the buyer can get a $7,000 tax credit by buying the foreclosed property around the block from me, I'll have to lower my price to be competitive.

Whom does this help? Certainly not me, as the seller of a house. The buyer gets a free ride, courtesy of you and me, for $7,000 (consider for a moment that according to the IRS, the average American individual paid $9,231.53 in Federal income taxes in 2006) and the banks get this darned foreclosed property off of their books.

I'd be more supportive of offering a $10,000 first time home buyer's tax credit. They might buy a bank-owned property, and they might not. If they bought my house, I wouldn't have to drop my price precipitously just to compete, and I'd be able to move on and buy a new home of my own -- which would enable the sellers of my new home to do the same. The economic benefit of that $10,000 tax credit could go on for dozens of cycles.

I joke about how the whole country is waiting for just one qualified first time home buyer to start it all off. But they're the ones we need to support, not the banks themselves.

Generate your own meaningless Fed rate announcement

2007-12-25T10:07:00.000-08:00

I love this one.

Seems as though most people still cling to the notion that when the Fed lowers the Fed Rate, long-term mortgage interest rates go down as well.

Here's a handy site where you can auto-generate your own meaningless, fake Fed rate announcement:

http://www.kedrosky.com/cgi/spew2.cgi

Here's an excerpt from the announcement I just got:

The Committee is somewhat convinced that a restrictive stance of monetary policy, coupled with irritating underlying growth in the price of Nebraska real estate, is providing ticklish support to economic activity. However, the increase of Web 2.0 conferences has lowered, generally speaking, ethanol prices, reduced Robert Shiller's book sales, and reduced debt markets. These developments, along with the neutral stance of monetary policy and ongoing vertiginous increase in high-beta stocks, should foster increased economic stability over time.

Have fun!

Merle Hazard's song "In the Hamptons"

2007-11-19T06:40:00.000-08:00

Ready for some mortgage-backed securities fun?

Meet "Merle Hazard," otherwise known as Jon Shayne, a 46-year old money manager with a philosophy degree from Harvard. In his time off from managing $120 million from his office in Nashville, he's made himself into a country music star and sings about the current state of the bond market.

His stage name, "Merle Hazard", evokes the concept of "moral hazard" -- in which bad financial choices are encouraged by transferring the negative consequences of those choices onto others.

His latest song is sung to the tune of Elvis' "In the ghetto", and begins:

"At Georgica Beach, one windy morn
A mortgage bond trader sits forlorn
In the Hamptons"

Pretty entertaining. The video includes an appearance by the supply-side economist Arthur Laffer and references to Milton Friedman.

http://www.youtube.com/watch?v=B8PwqQ5guYk

Enjoy!

Inflation Watch: Fed Rate expected to drop again today

2007-10-31T07:29:00.000-07:00

I'm bullish on refinancing right now or buying real estate investment properties right now as a way to protect yourself from inflation. In just a couple of hours, the Federal Reserve is expected to once again lower their key interest rate, the Federal Funds Rate ("Fed Rate," popularly).

(Once again, let's all repeat together: "Lowering the Fed Rate doesn't mean that mortgage interest rates will go down." Remember back in September when the Fed lowered rates? Long-term mortgage interest rates surged upwards by nearly a half percent -- instead of 6.000% on 30 year fixed rate mortgages, people were paying 6.375% to 6.500%.)

Fixed rate mortgages are built on the US Treasury's 10-year note, which opened higher this morning than its highest point yesterday.

My take on this is that it's a dangerous move, since it has the effect of increasing money supply in our economy. That doesn't sound bad, at first blush, until you learn that it can contribute to inflation -- and then learn how bad inflation is right now on a global basis, as well as here at home. Quoting the outstanding Barry Ritholtz:

We know that energy prices have skyrocketed: From 2001, when Oil was $18 a barrel, to a recent price of $92, Oil has risen 411%, for an annualized inflation rate of 31.24%. Foodstuffs are also up a similar amount: Beef, dairy, wheat, corn, rice, soy beans all recently hit record highs.

But as we know, the Fed and the BLS do not like counting the very products we each need to eat, travel to work -- to survive every day -- as part of the inflation basket. If they did, it would force them to admit that inflation is actually quite robust.

Inflation reduces the power of your dollars in your economic life -- it's when costs rise and income doesn't necessarily rise with it. To protect yourself, refinance now into a low, fixed-rate mortgage -- that will make sure that your single highest monthly bill will not increase -- or buy real estate investment properties, in which your rental income can increase over time, but your financing costs stay fixed for 30 years.

How do I check my credit report for free?

2007-10-30T14:53:00.000-07:00

Identity theft protection: If for no other reason, you should know what's on your credit report to protect yourself against identity theft.

The U.S. Government recognizes not only that it's important that you stay on top of your credit report, but that it's your right as a consumer, too -- so by law, the credit reporting agencies must give you a free copy of your credit report at least once a year.

Bear in mind that the credit reporting agencies make money by selling your credit information to you and to others -- so when you go to get your free credit report, expect them to try to sell you on other products and services.

Your credit score, for example, is one of the products that they are not required to give to you for free.

Here's what your credit report will contain:

Any public record information about you such as bankruptcies or foreclosures
Any collection items -- bills that have been referred to collection agencies
Any "trade lines" (credit accounts) which have a derogatory history or status -- late payments, for example
Any trade lines which do not have a derogatory history or status -- includes information on when you opened (and closed) accounts, maximum credit limit, current balance and payment history
Information on who has pulled your credit in the past 12 months
Information on addresses you have used
Your employment information
"Also known as" information -- other names which you have used for yourself
Addresses of all companies reporting on your credit report, and telephone numbers for some

Here's what your credit report won't contain, for free:

Your credit score
What you need to do in order to bring up your credit score
What to do if you find something on your credit report that is not accurate

To get your free credit report, go to:

http://www.annualcreditreport.com

From this website you will be directed to each of the three credit reporting agencies' websites (TransUnion, Equifax and Experian), each of which will do everything that they can to rope you into spending money with them. If you only want your credit report, "just say no" to giving them any money and you'll get the data mentioned above. If you'd like, you can pay for additional services like credit report monitoring or your credit score itself.

Pardon me while I wax a bit classist

2007-10-24T08:40:00.001-07:00

I just finished reading Ben Stein's excellent piece in last Sunday's New York Times ("The Gloomsayers Should Look Up", October 21, 2007) in which he says:

. . . it’s a bit too predictable that [U.S. Treasury Secretary] Mr. Paulson would basically pooh-pooh the subprime problems until major Wall Street powers got in trouble and then — presto! — swing into action. It might have been inspiring had he stepped up to the plate when smaller players like home buyers were getting burned, but that’s not really his style.

Meanwhile, on the radio comes news from Southern California about the Santa Anna winds and the terrible fires that have destroyed 600 square miles -- Michael Chertoff, the same Secretary of Homeland Security who was blissfully unaware of the poor people trapped in New Orleans' Superdome during the Katrina debacle, is on the case this time. Bush is on his way out, too.

And this morning I cannot escape the observation that the Powers that Be are all over both of these issues, now that they're impacting rich white people. Famous people too, as is the case in Southern California.

Inflation watch: CPI figure higher than expected

2007-10-17T08:06:00.000-07:00

A couple of weeks ago (October 1, 2007) I published a piece declaring inflation as a significant economic threat, just over the horizon.

Today the U.S. Bureau of Labor Statistics released its figure for the Consumer Price Index ("CPI".) The CPI is the US Government's official measurement of inflation. U.S. policymakers pay closer attention to another figure released by the BLS, the "Core CPI" figure, which removes housing and energy costs. Many economists see the Core CPI as depicting an unrealistic American economic experience (e.g. for whom are housing and energy costs not part of everyday economic life?)

The 0.3% CPI figure today was higher than the economists' consensus figure of 0.2%.

The bond market has responded this morning with lower prices, dropping yields on the 10-year US Treasury bill to 4.58% -- a rate which is up by more than a quarter since September 7, 2007 (the day on which the BLS released its unemployment figure showing the first net job loss in four years.)

For more on inflation, click here.

Protecting your family against inflation

2007-10-01T08:01:00.000-07:00

There has been a lot of news about the financial and real estate markets lately, and I’m writing to you today to boil it down to two key points: (1) inflation poses a dramatic threat, just over the horizon from where we are today, and (2) if you can, you should buy long-term real estate rental properties to protect yourself.

A little background: Last month, the Federal Reserve dropped its key interest rates by half a percentage point – the first drop since November of 2002. The stock and bond markets seem to be temporarily calmed as a result, although some analysts are pointing out that this action poses a moral hazard to our society: By protecting investors from the negative consequences of their bad decisions, we encourage more risky behavior from them in the future.

Back to inflation: Our government has a significant vested interest in having us believe that inflation is under control, and leaves out the key energy and housing components from the “Core CPI” (the core index of consumer prices, which they use as their main benchmark of inflation.) That’s a bit disingenuous, if you ask me: Who lives in a part of America where housing and gas costs aren’t a factor in the cost of living?

Our global economy is screaming along right now. Here are a couple of tidbits to show you what inflation our world is experiencing:

In China, food costs are up 18.2% from a year ago, led by meat and poultry (49%) eggs (23.4%) and vegetables (22.5%).
Illinois corn and soybeans are up 40% and 75%, respectively, from a year ago. Kansas wheat is up 70% or more.
Crude oil is trading over $80 a barrel.
“The day Bernanke cut rates, the price of [gold, a traditional inflation hedge investment] soared to heights not seen since 1980, when inflation ran at nearly 12 percent!” – Daniel Gross, in Newsweek’s Oct 8^th issue

The most important thing that you can do to protect yourself against inflation is to lock into a fixed-rate mortgag. Beyond that, to further protect your family’s economy against inflation (now, while it’s still over the horizon), consider buying rental properties. Did you know. . .

A rental property that just breaks even on monthly cash flow can produce double-digit returns on investment?
Vacancy rates in Denver are at only 6.2% -- the lowest in six years
The foreclosure boom is nowhere near finished; many more families will turn to renting
Denver house rental rates are up from 2006

With a rental property, you can buy at prices lowered by the foreclosure crisis, lock most of your costs in at today’s low interest rates and let your rental income rise over time along with inflation – further protecting your family’s economy against rising inflation.

Science update: If you're bringing coffee, choose hot over iced

2007-07-31T10:39:00.000-07:00

There's an article in today's New York Times that describes psychological experiments that "prime" the subconscious mind to be more open to certain behavior.

In particular, they cited one study in which laboratory assistants -- who were in on the experiment -- bumped into subject participants on their way to the lab and asked them to hold a cup of coffee. They found that when it was iced coffee, the subjects rated a "hypothetical person" as "much colder, less social and more selfish than did their fellow students, who had momentarily held a cup of hot java."

It's a great article -- talks about current theories around the subconscious mind, and how the brain makes decisions about what behavior to choose next.

So if you're trying to make a good impression, don't give them cold coffee!

Inverted yield curve: ARM's are on their way back

2007-07-01T17:09:00.000-07:00

I'm going to take a moment to get technical and talk about the yield curve on US Government bonds, bills and notes; specifically, I'm going to address what an inverted yield curve is and why it's important to you.

The yield curve is a graph that plots yields (that's an interest-rate adjusted return on a bond) vs. maturity length for the bonds that the U.S. Government issues when it borrows money.

Here's a peek at the yield curve as reported by yahoo's finance site this afternoon:

Not very exciting, as curves go. It's almost flat -- it shows that the market expects about the same return on long-term, fixed interest rate securities as it does for short-term securities.

Missing from this graph is the Fed Rate -- the rate at which banks borrow from one another overnight in the US banking system. Since June of 2006 it has stayed level at 5.25%, to which it was raised by 17 consecutive rate hikes as our economy recovered from 9/11.

An inverted yield curve is one in which short-term yields are higher than long-term yields -- and it presents a question (put succinctly by the good people at Fidelity:

Why would long-term investors settle for lower yields while short-term investors take so much less risk?
The answer is that long-term investors will settle for lower yields now if they think rates -- and the economy -- are going even lower in the future. They're betting that this is their last chance to lock in rates before the bottom falls out.

An inverted yield curve is one in which the market believes that the economy is going down.

Now here's an interesting historic note: Since 1954 (when we first started keeping track of this kind of thing), inverted yield curves have never righted themselves without the Fed lowering interest rates. And with a couple of momentary exceptions (like we had in recent weeks, when the yield on the 10-year climbed to 5.32%), we've had this inverted yield curve since April of 2006.

And how has our economy fared with this inverted yield curve? Real GDP growth for the first quarter of 2007 was only 1.9%, down from 3.7% for the same quarter in 2006.

To quote Bloomberg's Caroline Baum,

The impact comes from the fact that the Fed is holding the short-term rate too high relative to the market-determined long-term rate. Until the spread turns positive on a sustained basis, by either the Fed's or the market's action, the economic outlook is for more of the same.

Stepping back from the bond market, this all feels much closer to home if we consider the remarkably parallel mortgage interest rate market (it may not surprise you that they're parallel, considering that long-term mortgage rates are based on the 10-year treasury.) Before this quarter's dramatic spike in 30-year fixed interest rates, many borrowers found that 3 year ARM's were actually more expensive than 5-year ARM's (that's inverted, isn't it? you would expect a shorter fixed interest rate period to have a lower rate) -- and 5-year ARM's saved very little money as compared to 30-year fixed mortgages.

That's why borrowers came in droves to refinance out of their ARMs: As Fidelity says, they were "betting that this [was] their last chance to lock in rates before the bottom [fell] out."

Here's why this is important to you: The days of cheap 30-year fixed rate mortgages could be coming to an end. The Fed has shown that they're nervous enough about inflation that they don't want to lower rates any time soon, so this inversion will likely right itself through market forces, if it does at all.

That means that ARM's -- which have come under such fire lately -- will once again present a compelling financial question: "How long do you know you're going to want to be in this loan?"

Adjustable rate mortgages are on their way back. Only this time, let's be more responsible with them.

How deep does the subprime debacle go?

2007-06-28T06:44:00.000-07:00

If only it were limited to a handful of lenders making aggressive loans to some irresponsible borrowers. . .

To understand how deep this goes, take a moment to look at what happens when a subprime loan is issued: The lender packages it with other similar loans and sells the bundle to Wall Street, where they're structured into funds -- very loosely similar to mutual funds -- called Collateralized Debt Obligations ("CDO's".)

The Wall Street Journal reports that there are nearly $500 billion in CDO's out there. Bear Stearns made headlines in the past week by bailing out investors in one of its funds, when the fund started experiencing losses as a result of defaults in the underlying loans of the fund.

Leaving aside the classist observation that nobody bailed out the "little people" who lost their homes to foreclosure, yet Bear Stearns reached into their own pockets to the tune of billions of dollars so that investors in their fund wouldn't lose any money. . . why did Bear Stearns cover the losses?

The answer is one that will look and feel a whole lot like the Enron scandal.

Bear Stearns and other firms packaging CDO's have their own financial models that determine the value of the loans -- and with the subprime market experiencing such tremendous defaults, those values are way off: They're much too optimistic.

They call this "mark to model" valuation, instead of "mark to market" -- let's let the model determine the real value of the underlying assets, not the market. Kind of like dreaming up a spreadsheet about the house you want to buy and telling the lender not to insist on an appraisal: Let's just use the value from my financial model.

If Bear Stearns hadn't bailed out its investors, they would have forced the firm to sell the underlying assets to give the investors their money back -- and the market would have determined the true value of the underlying assets. Investors would have lost billions of dollars.

Sounds like the subprime borrowers' experience, doesn't it? Suddenly they cannot afford the payments on their own homes when the rates reset to higher levels, but with their homes actually worth less on the market than they were at purchase, they would lose money by selling. Only at this level, there's nobody reaching into their institutional pockets to cover the losses, and most subprime borrowers cannot afford to bring money to the closing table and get out from under their crushing monthly payments -- so they walk away, lose their house and add another unit to the homes for sale inventory, driving down values for everyone.

If you're still with me this far in the article, you may be wondering how this is likely to affect you. The answer lies in one word: illiquidity.

"Liquidity" is a financial term that refers to the availability of capital. After 9/11, the government provided tremendous liquidity by dropping the Fed Rate to near-all-time lows. Everyone had money to lend; everyone could borrow.

Now, the global economy is growing like crazy and banks all around the world are raising rates (tightening the money supply) -- creating illiquidity.

Now, CDO's are crashing (click here to read more technical analysis of how similar this debacle is to the Enron scandal) and the huge institutional investors who have been buying them are turning off the faucet -- more illiquidity. Less capital available to invest in CDO's; less money available to borrowers.

Fewer borrowers can qualify for homes, inventories are rising and we're not halfway out of the foreclosure wave associated with the subprime loan crash.

Look for real estate values to stay soft with exceptions in desireable markets. Look for long listing periods and frustrated sellers, wondering what their realtor is doing wrong or not doing at all.

Whither interest rates?

2007-06-27T12:47:00.000-07:00

We've seen interest rates rising globally in response to two factors -- increased energy costs and economic growth. Domestically, inflation is being measured as within the margin that we'd like to see, although some economists judge that our key benchmark (the "core" CPI) understates inflation. Typically, monetary policy is to raise interest rates to cool inflation.

The growth in our economy seems to be healthy, though other economic indicators (new home sales, for example) continue to show that Americans aren't convinced that we should be optimistic.

The foreclosure activity with which Colorado led the country for 9 out of the 12 months of 2006 have benefitted us by keeping home values at a "reasonable" level (by contrast, the average home in Santa Barbara County, CA is overvalued by 41.9%.)

The subprime market fiasco is having the effect of significantly reducing capital available for borrowers in that market; with fewer subprime borrowers able to purchase homes, the oversupply in inventory of homes for sale will continue to apply negative pressure to listing prices.

I don't see long-term interest rates decreasing significantly for the rest of the year, and I do see lots of pressure on rates to rise. As long as our economy continues to show even modest signs of growth, my gut tells me to look for rates to rise gently through 2007 (from 6.500% now to an average of 6.875% by 2008.)

My well-read and -published friend Vitaliy Katsenelson observed on his finance weblog Contrarian Edge: "At this point predicting the direction of interest rates is like flipping a coin. The global economy is roaring on all engines - a case for higher interest rates. At the same time, we are walking on a subprime, weaker housing, leveraged-consumer mine field. I am so glad that I am not in the interest rates prediction business."

A graph worth a thousand words

2007-06-27T05:32:00.001-07:00

I'll save the thousand words and show you this graph that I came across on one of my favorite economics blogs (calculatedrisk.blogspot.com.)

The graph shows historical data for new home sales; the gray areas indicate periods of recession in the US economy (a recession is defined as a period of two or more consecutive quarters during which there is a decline in gross domestic product.) With the exception of the recession in 2001 (the end of the dot-com era, preceding September 11th), each recession followed a decline in new home sales.

Yesterday, the commerce department announced that new home sales fell in May for the fourth time in five months and home prices slid in April for the 17th month in a row.

This painful piece of economic news gives support for long-term fixed interest rates to stay relatively low, for now.

Slackers: Putting the slack in our "tight" job market

2007-06-25T06:12:00.000-07:00

Looking ahead to this week's meeting of the Federal Reserve Board governors, speculation has moved past current inflation (with last week's release of the Philly Fed data, showing the "core" consumer price index for May down in the 1% range) to where inflation is going to be a year from now.

With unemployment figures low, the theory goes, continued growth in the economy will lead to wage inflation -- if there aren't additional workers, new jobs will have to pay more, which leads current jobs to pay more in order to retain current employees.) Positive wage inflation leads to higher short and long-term interest rates.

But some teenagers -- mysterious to their parents in many aspects of their behavior -- are not even looking for jobs. The impact of that "slacker" behavior is to introduce slack into our seemingly tight job market: There are millions of potential employees available to our economy who are not even on our radar screen.

According to the Wall Street Journal, only 41% of Americans between the ages of 16 and 19 were looking for work, at last count. That's down from 55% two decades ago, representing 2,380,000 potential employees who don't appear on unemployment rolls (and therefore aren't "measurable" statistically when economists calculate unemployment figures and related inflation predictions.)

Abraham Mosisa, an economist for the Bureau of Labor Statistics, points out that teenagers not looking for jobs may be responding to the competitive environment for low-end jobs: They're competing with illegal immigrants and other low-skilled workers, including single moms who have been nudged off the welfare rolls in the past ten years.

This means that we're better positioned than the data shows to keep our unemployment figures at their healthy current rate as our economy continues to grow.

Why you're more in touch with real inflation than the Fed

2007-06-21T05:35:00.000-07:00

Today the Philadelphia Fed will release its monthly index of the economy, and it's widely expected to continue to support the Fed's policy of keeping interest rates where they are (the Fed rate hasn't been changed since June of 2006.) One key benchmark that they'll take into account is the "Core CPI," or the core consumer price index -- intended to give an accurate measurement of the consumer's experience of inflation in his or her life -- released last week at the lower-than-expected level of 0.1% for the month of May.

That's a nice, low figure.

But your gut may be telling you that it's worse than that -- especially if you're in a lower income bracket -- because left out of the "core" are food and energy goods, which have continued to climb significantly. (Gut check: been paying more at the pump lately?)

To quote Jeffrey Saut, Chief Strategist of Raymond James, "These inflationary leanings were reflected in last week’s headline CPI figures (+0.7% in May), which were the second highest in 16 years, that is still not being reflected in the laughable “core figures” (+0.1%)".

We could laugh, but the problem is that growth isn't keeping up with real inflation. That's bad news -- some call it "stagflation" (as in: a stagnant economy during a period of real inflation; remember the '70s?) Tough choices for financial policy makers, since one major tool to fight inflation is being able to raise interest rates or keep them high -- but economic growth is stimulated by lower interest rates.

When the Fed meets next week, they'll give more weight to the "Core CPI" than to real inflation. Look for them to keep interest rates high.

Hey Denver: Are you ready for some good news?

2007-06-19T13:42:00.000-07:00

Thank heaven you don't live in California!

Amidst the gloomy news about interest rates rising globally and record-pace foreclosures comes this tidbit from Global Insight and National City Mortgage: Homes in Denver and its surrounding area are, on average, not badly overvalued.

If you're thinking "that's not very strongly worded good news, Jordan," thank heaven you don't live in Santa Barbara, California, where the average home is 41.9% overvalued.

Take a look at this map:

Here's a map of the U.S. of A., showing data for different regions. To me it's a bit puzzling that they chose the color gray for areas that are undervalued; nevertheless, green shows home values that are "Fairly Valued."

The map is really fun and interactive on their site, so click on it here to go play with it, or click here.

So that's good news, to me -- and it might be the silver lining inside the cloud of foreclosure activity we've had lately. Remember, for nine out of the 12 months of 2006, Colorado led the nation in new foreclosures (and foreclosures artificially increase the inventory of homes for sale, which plays into the "supply and demand" effect, driving home values downward.)

So what this means to you and me is that we can buy a home today and not fear that when the time comes to sell, we will have to lose a major piece of equity simply because we paid too much.

I told you so! (rates take highest jump in over three years)

2007-06-18T09:47:00.000-07:00

Interest rates on long-term mortgages have risen sharply in the last couple of weeks. Last Thursday, Freddie Mac announced that the average 30 year fixed rate mortgage stood at 6.74% -- the highest it's been in nearly a year.

"Mortgage rates moved sharply upward this week, with rates on 30-year fixed-rate mortgages jumping more than 20 basis points, the largest upward movement in over three years," said Frank Nothaft, Freddie Mac vice president and chief economist. "These moves parallel rising yields on Treasury securities, as concerns about inflation pressures and continuing strength of consumer and business spending have dimmed hopes for an interest rate cut."

Let me get it out of my system up front, so I can focus on what this information means to us:

I TOLD YOU SO!!

Thanks. I feel better already.

Before I get into what you should do with this information, let's go a level or two beneath the headlines to see what's going on that has caused rates to spike in the last couple of weeks.

The global economy is facing inflationary pressure these days -- and that's not a bad thing, in many ways, since it shows good growth globally. The European Central Bank raised its interest rates to their highest level in six years (back to pre-9/11 levels) last week, and the central banks of England, Canada and Japan are expected to follow suit in the coming months -- so the market forces at work are not limited to the United States.

Here in the US, the service economy is running strong, which means that unemployment figures are down. Despite the fact that we're still setting records for foreclosures (which hurts the housing market by dumping more homes into the "for sale" inventory), housing has not crashed -- the fact is that if people have jobs, they like to own their own homes.

This brings me to what to do with this information:

In the short term, wait until Thursday
Beyond that, if you still have an adjustable rate mortgage, it's as important as ever to look at refinancing -- but keep an eye on fees with your new lender

Here's what I mean on both points:

This week's economic calendar has its most important data coming in on Thursday (initial jobless claims and Philadelphia Fed index) -- good news on Thursday will push rates even higher. My take on this is that rates are so much higher right now than they were a month ago that further increases are becoming less likely.
We've already seen that interest rates are rising globally; that means that if you're in an adjustable rate mortgage, your low interest rate is even more likely to reset higher than today's 30-year fixed rate loans. They're rising together. The key in a refinance is to be sure that the rate and fees you're getting are as low as they can be. One reason that I like Clarion Mortgage is that they allow me to be incredibly competitive -- we're large enough to enjoy discounts, and Clarion's whole business model is built on efficiency: If mortgage capital is water flowing from Wall Street to your closing table, then Clarion Mortgage is a pipe that leaks less than any other I've seen.

Our fee structure is lean -- tomorrow I'm closing a loan for a client who shopped aggressively and found that through Clarion, I could save him significant money every month on his mortgage.

Legislation vs. greed?

2007-06-11T05:46:00.000-07:00

In yesterday's New York Times Sunday Business section, Gretchen Morgenson looked at the continuing foreclosure wave and quoted a Harvard Law School professor as saying that it's "proof that consumers need protection from financial products that can wipe them out." (subscription required)

I couldn't disagree more.

The data is that last year there were 1.2 million mortgage foreclosures -- that's when people lose their houses to the bank after defaulting on their mortgage agreements. Behind every one of those foreclosures is a sad human story -- a family going through terrible financial stress; a couple's relationship strained over money. Shame. Sadness. Anger.

And it's not over: Ms. Morgenson has tracked risky pools of mortgage loans all the way to Wall Street, where they're traded on the bond market. Bond traders have financial models which include foreclosures -- they expect a certain level of foreclosures within a pool of loans in which they're investing. One problem is that way too many loans still in these pools are delinquent -- more than 30 days past due -- which shows that we're not done with the wave of foreclosures that made headlines a few months ago when New Century, the subprime lender, crashed and burned.

Blame is being laid on two optional mortgage features: Adjustable interest rate ("ARM") loans and interest only loans. Both features offer payments that are initially lower than a traditional 30 year fixed rate loan -- and both features come with reset periods, after which borrowers' payments increase.

Are the features themselves inherently bad for borrowers? Not at all. Consider the quintessential capitalist: someone who can either choose to pay down his mortgage loan (usually the least expensive form of capital available to individuals) or to invest that same money in his business, increasing it over time. In finance they look not only at the interest rate that you might pay on your mortgage, they also look at the opportunity cost -- at the amount of money that you could have made over time by putting capital to work for you rather than paying down your mortgage balance.

Or consider someone whose credit is on the mend -- say, after a consumer credit counseling program (which lenders see as a form of bankruptcy.) A person with poor credit who has learned from the mistakes that hurt his or her credit to begin with would in all likelihood do much better by getting an adjustable rate loan initially, then refinancing to a long-term fixed rate loan after a couple of years' responsible financial management has improved his or her credit score.

The problem isn't with the features themselves; it's how they're used. And that gets to the all-American value of more, more more.

Greed.

People use these features to buy homes they couldn't otherwise afford, or to pay off credit card debts they've run up by spending more money than they take in as income without changing that pattern in their lives.

It's greed. It's our American culture of Stuff. Flat screen TV's -- SUV's -- nice suburban manicured lawns -- iPods for our children -- bigger, better, MORE. And late at night we turn on the TV to avoid the fear that gnaws at us: that we're not making enough money.

The emotional drain is terrible -- who can think about it and not want to help those caught up in this cycle, especially those about to lose their homes?

As a culture it's easier for us to legislate products than to inculcate values. Better for the economy, too.

Maybe regulating the use of ARM's and interest only loans will, in the end, make some people realize that they cannot buy that big house after all. But the house is only one piece of the financial puzzle, and frustration with "not enough" house will combine with the American ethos of more, more, more and manifest itself in other irresponsible spending.

We cannot save ourselves from the impact of our cultural values without being honest about the values themselves.

Grow your net worth with a mortgage checkup

2007-03-21T07:30:00.000-07:00

Managing your mortgage isn't something you do once or twice in a lifetime. If you want to stay fiscally fit, you need to examine your mortgage at least once a year. A mortgage checkup can help you build your net worth, move into a larger home, create a retirement plan, send your children to college or put more money in the bank.

A mortgage checkup is a review of your current mortgage and how well it supports your lifestyle and your plans for the future. We will look at many aspects, such as interest rates, home values and life changes, including career moves, new family members, college expenses and investment opportunities. From there, we will construct a viable financial strategy that helps you hit your financial goals.

If any of these scenarios apply to you, contact me today for a FREE mortgage checkup:

I want to lower my mortgage payment.
I want to consolidate a first and second home loan.
My ARM loan is resetting to a floating rate.
I want to roll my home equity debt into a new loan.
I plan to relocate in the next couple of years.
I want to send my children to college.
I want a bigger house.
I want a smaller house.
I want to eliminate credit card debt.
I want to explore real estate investment financing.

It's a smart move to view your mortgage as a financial instrument that can help you save money and achieve other life goals. Contact me today and let's schedule an appointment.

Jordan Graham
720-297-8002

The screeching sound of the mortgage industry, hitting the brakes

2007-03-12T12:08:00.000-07:00

That screeching sound you hear is the mortgage industry hitting its brakes as hard as it can.

Every week brings the news of yet another mortgage company closing; and I'm not talking about single office brokerage firms -- these are publicly traded lenders whose stock prices have tanked, just like when the dot com bubble burst.

I've just finished reading an outstanding article on the subject by Gretchen Morgenson in yesterday's New York Times business section, which reads in part:

"On March 1, a Wall Street analyst at Bear Stearns wrote a surprisingly upbeat report on a company that specializes in making mortgages to cash-poor homebuyers. The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three weeks.

What happened next seems all too familiar to investors who bought technology stocks in 2000 at the breathless urging of Wall Street analysts. Last week, New Century said it would stop making loans and needed emergency financing to survive. The stock collapsed to $3.21."

It seems that just as borrowers have been eager to overspend on housing, borrowing as much as they possibly can using mortgage products designed to extend their reach into debt even further, investors have been greedily funding these borrowers' habit, buying mortgage-backed securities based on these loans. Ms. Morgenson goes on to say:

"Investment manias are nothing new, of course. But the demise of this one has been broadly viewed as troubling, as it involves the nation’s $6.5 trillion mortgage securities market, which is larger even than the United States treasury market.

Hanging in the balance is the nation’s housing market, which has been a big driver of the economy. Fewer lenders means many potential homebuyers will find it more difficult to get credit, while hundreds of thousands of homes will go up for sale as borrowers default, further swamping a stalled market."

Getting technical, let me say that these mortgage-backed securities are mostly offered in the form of bonds. These bonds, like the mortgages on which they are based, are “promises to pay,” and investors gauge their risk by seeing what quality the bond rating agencies (like Standard & Poor’s and Moody’s) assign to them. As borrowers default on their loans, quality drops on the underlying securities that hold them. Morganson observes:

“Nevertheless, some investors wonder whether the rating agencies have the stomach to downgrade these securities because of the selling stampede that would follow. Many mortgage buyers cannot hold securities that are rated below investment grade — insurance companies are an example. So if the securities were downgraded, forced selling would ensue, further pressuring an already beleaguered market.”

How does all of this affect you? If you are trying to sell your home or are thinking of doing so this year, these market forces are going to work against you. On the other hand, if you’re buying a home – either as a personal residence or as a rental property – you’re in luck: With over 25,000 homes for sale in the Denver market (and many more coming soon, with the summer moving season and more foreclosed homes hitting the market), the next few months should give you great opportunity.

If you’re not interested in buying a home, it seems to me – all else being equal – that these market pressures are going to help keep interest rates low. Just last week I quoted someone 5.750% on a 30 year fixed rate mortgage (whereas a typical 5-year ARM coming out of its fixed interest rate period today is shooting up to 7.42%), so if you’re one of those clever people who took advantage of the crazy low ARM rates a few years ago, now is a great time to refinance into a fixed rate loan.

The cost of procrastination

2007-01-12T06:13:00.000-08:00

I spoke with a new client yesterday (I'll call him Jason) about the house he's buying in Silverthorne (in Summit County, Colorado -- home to Copper Mountain, Keystone and Breckenridge ski resorts.) Jason had gotten back at 1:00 am from a meeting with the sellers, and was a little dazed by how quickly he had gone under contract, putting a $10,000 deposit down on the house. In just over 36 hours, he had gone from seeing the house for the first time to being under contract to buy it, already approved for his mortgage.

Bear in mind that Jason loves this house. He's seen many in recent weeks, none of which excited him very much. "As soon as I stepped inside," he said, "I knew that I could keep this house for a long time."

A few minutes later I was on the phone with the seller, who told me that just a few hours after Jason got home from signing the contract, the seller received another offer at full price to buy the house.

That's how it is to buy property in Summit County -- when you see a place that will work for you, you have to act.

In today's paper there's a report on a study by a Canadian researcher on the scope and cost of procrastination (the study took 10 years but was only supposed to take five -- click here for the full article.) In short, the study found that with all of the technology around us (TV, online video, cellphones, video games, blackberries and iPods) the number of people who say they have serious procrastination problems has gone up by more than 500% since 1978.

The researcher, University of Calgary professor Piers Steel, says that the U.S. gross national product would probably rise by $50 billion if the icon and sound that notifies people of new e-mail were to disappear.

In the field of personal finance, right now there are millions of Americans with adjustable rate mortgages from the past few years which had their interest rates increase (or will shortly.) Every month that goes by without acting -- like refinancing into a fixed-rate mortgage -- costs them more money.

Professor Steel says that one key cause of procrastination is "whether you believe you can get the work done." Mortgages can be complicated, with different programs and payment options to consider; properly done, a refinance takes you whole financial picture into consideration.

To be proactive, follow these steps:

find a mortgage broker whom you can trust
be open about your finances with him, and
let him guide you to the closing table

Don't let another day go by without acting in your financial best interest!

For a great article on the importance of NOW in your life, click here.

2006 in the rear view and what 2007 might bring

2007-01-09T18:57:00.000-08:00

2006 in review....

Denver experienced a 7.64% decline in units sold, a reduction of around approximately 4000 homes. Total Denver home sales numbered 47,817.

The average price decreased to $306,307 but this figure represents a 3% increase from a year ago.

Apartment vacancy decreased by 6.7% and rent increased to $866 average.

Homes in foreclosure remain high, with around 16,000 units on the market right now.

Gas prices dropped by about 25 cents per gallon in the fourth quarter of 2006.

Long term fixed interest rates bumped up and down but ended the year remain slightly lower, at 6.18% with 0.400% in fees and points (down from 6.21% with 0.500% in fees and points.)

The Dow Jones Industrial Average closed up 14% higher than year end 2005.

2007
Should be a year with an upswing in home starts, sales and a year of reducing inventories (homes listed for sale on the market.)

Long term fixed interest rates are expected to remain at current levels, with a possibility of a decline in the 2nd and 3rd quarters.

Job Growth - Colorado is expected to add 42,300 jobs in 2007 - a 1.9% increase compared to the national average which should be 1.5%.

Understanding mortgage rates: fixed rate loans

2007-01-08T08:06:00.000-08:00

(This article is the first of a three-part series on understanding different types of mortgage interest rates.)

To understand interest rates in long-term fixed rate loans, the first thing to do is tune out the media noise around the Fed and the Prime Rate.

Long-term mortgage interest rates are based on the bond market -- specifically, how the bond market is trading the U.S. 10-year Treasury bonds. In short, when the price for bonds goes up, long-term interest rates go down (or, to put it in terms that you'll understand by the end of this article, long-term mortgage rates move up and down with yields on the 10-year Treasury.)

A bond is a promise to pay, basically; the 10-year Treasury bond is a financing tool used by the U.S. Government with which it borrows money from investors and promises to repay them over a 10 year period at a certain, fixed interest rate. Since their interest rate is fixed, those fixed rate promises to pay become more valuable or less valuable based on how things are going in the economy.

Let's look at an example -- how the bond market would change its opinion on the US Government's promise to pay 5.5% on its 10-year bond in response to a government news release showing strong job growth. Good news on job growth is a positive sign for our economy; with more people employed, more money will be available for spending on goods and services -- all else being equal, investment returns should increase (meaning that an investor can make more money with his investment funds.)

In this light, the U.S. Government's promise to pay 5.5% is not as exciting as it was before the good economic news came out.

(Time for some bond market jargon: Bonds are priced per $1,000. If I buy a bond for $1,000, I am buying it at "par" (at face value, you could say -- the price at which nobody is making any money.) If I buy it for $950, I am buying it at "discount"; if I buy it at $1,050, I am buying it at a "premium.")

Back to our example, then, I would be less likely to pay $1,000 for a unit of the 10-year priced at 5.5%; I might think that $960 is a price that better reflects the value of that 5.5% income stream based on how I feel about today's economy.

(More bond market jargon: the "current yield" of a bond is what you get when you divide the amount of income a bond will pay by its current price.)

So if I'm willing to pay $990 for the 5.5% 10-year Treasury, its yield would be $55/$960 = 5.73%.

Back to our example, if before the good jobs data came out I was willing to pay $995 for the 5.5% 10-year, the current yield would have been 5.53%.

That means that the impact on mortgage rates of this good piece of jobs data would be increasing rates by (5.73% - 5.53%) = 0.20%, or just less than a quarter of a point.

In short: good economic news made interest rates increase. Conversely, bad economic news makes bond traders willing to pay more for the 10-year Treasury, which makes yields (and long term mortgage interest rates) decrease.

Next in our series: Understanding mortgage rates: Adjustable rate loans

Our nation's debt to income ratio

2007-01-07T08:16:00.000-08:00

What ever happened to the stigma associated with paying interest?

There are still some people -- usually older than 50 -- who recoil at the thought of paying interest for something like a couch or a car. By contrast, Americans today are so culturally addicted to overspending that we think nothing of buying things for which we cannot afford to pay cash. And the more we borrow, the more expensive it becomes to borrow.

One of the key benchmarks that lenders use to evaluate a new mortgage application is the Debt to Income Ratio ("DTI".) It's calculated by adding up the monthly minimum payments required to sustain a borrower's current credit accounts plus the new loan in question and dividing by the borrower's gross monthly income. Here's an example for a hypothetical (but typical) American borrower who is seeking to take some equity out of his home with a Home Equity Line of Credit ("HELOC"):

First Mortgage: $1,780
Car payment: $ 425
VISA cards: $ 300
Student loans: $ 325
Furniture payments: $ 185
subtotal: $3,015

New HELOC: $ 395
Total: $3,410

Monthly Income: $7,000 (gross; that's $84,000 a year)
DTI: (3,410 / 7,000) = 48.71%

This borrower would probably be approved for the new HELOC; many lenders will let you commit to a DTI of up to 50%. Bear in mind that after taxes, his monthly take-home income is $5,040 -- so after making the minimum payments on
his debt obligations, he has $1,630 left.

Sounds like a lot of money, right? But remember -- he's only making minimum payments, which means he's effectively getting nowhere on paying down his debts. Quite likely, he has an adjustable mortgage ("ARM") -- his new HELOC is certainly adjustable -- which means that his interest payments can increase over time, further chipping away at his $1,630 per month.

Never mind saving for retirement, or college fund planning.

Sound familiar? Far too many Americans push their fears about their own debt load to the backs of their minds every night so they can get to sleep.

Let's look at another borrower whose finances are structured a little differently, split between "Mandatory Spending" (think of that as being installment loans, like car loans or financed furniture) and "Interest." How easily would sleep come to you in this scenario? (please scroll down a bit; I cannot figure out how to get this table to move up on the page)

Year	Mandatory spending	Interest	Total (% of income)
2005	63%	10%	73%
2010	67%	11%	78%
2015	73%	13%	86%
2020	81%	19%	100%
2025	94%	24%	118%

I'll identify the borrower in this case -- it's the US Federal Government (data from the Congressional Budget Office, December 2005, "The Long Term Budget Outlook, Scenario One".) I'll start by saying that under no circumstances would a lender lend anything to a person with this kind of cockamamie financial plan.

It's not sustainable. The tough part is that "Mandatory Spending" includes Social Security and Medicare, which sooner or later will have to be cut -- we simply cannot spend more money than we take in. Borrowing to pay our Mandatory Spending bills gets more and more expensive, too, so that's not a viable option.

I read an article in this morning's New York Times about Chile, which “spends practically nothing on interest payments, because we have been able to reduce public debt” and instead use the savings for social programs, according to Chile's Finance Minister, Andres Velasco.

I know that there is a vast difference between the global priorities of the US and Chile, but I long for a culture of sustainability -- in which we act today in such a manner that we will be able to afford sustaining our lifestyles in the years to come.

For more information on sustainability in Federal spending, see the Concord Coalition's website.

Tax law update: mortgage insurance is now deductible

2007-01-05T13:08:00.000-08:00

In its final hours at the end of 2006, the 109th Congress passed a bill which President Bush signed into law, giving the mortgage insurance companies a break they've been pushing for for years: Mortgage insurance payments are now tax deductible.

In just a moment I'll tell you why mortgage insurance is still usually a bad deal.

In case you don't know what mortgage insurance is, it's an extra fee added on to some mortgages where the loan amount is more than 80% of the value of the property. Lenders are always worrying about what they would do if you decided to blow off and go to Jamaica and stop making your mortgage payments. If they've lent you 80% or less than the value of your home, they figure they can foreclose on you, hire a realtor to sell your place, clean up the weeds and still recover their loan amount -- but more than 80% makes them nervous.

It's this increase in perceived risk that comes with any financing above 80% LTV (that's "Loan to Value") that costs consumers. You could, for example, pay for mortgage insurance, which works just like auto insurance -- about one in 358 borrowers will be foreclosed on, so your mortgage insurance premium will help the bank recover their money from that borrower's loan.

Or you could get two loans -- a first mortgage for no more than 80% LTV and a second mortgage for the rest, up to 20% for full 100% financing. The second loan will carry the bulk of the risk, so its interest rate will be higher than the first mortgage's rate.

Here's why the new tax law doesn't excite me: Mortgage insurance is still a bad deal for almost everyone. I've run side by side comparisons (and if you want me to analyze your own situation, click here) and have always come out with lower payments for clients using two mortgages.

Here's where you would need to act: If you have a large second mortgage that you didn't use to purchase your home (in other words, if you've taken equity out of your house) -- mortgage interest on cash-out seconds is not deductible, so refinancing into a loan with mortgage insurance may take that non-deductible expense and turn it into something deductible.

Especially if you're in a home equity line of credit with an interest rate of 8.5% or higher.

Foreclosures -- the crisis and opportunity

2006-09-15T09:01:00.000-07:00

The news is that Colorado leads the country per capita in foreclosures. In the wake of September 11th, mortgage interest rates plummeted and Coloradans borrowed as much as they could get their hands on: We bought the biggest houses we could afford and we took out home equity loans, borrowing against the last scraps of equity that we had built up.

With rates that low, people were buying real estate like crazy, which drove up home values. Higher values meant more home equity to suck out through home equity lines of credit.

Last December, a home equity company sent me a flyer, suggesting that I send it to everyone on my list. The flyer recommended taking out a home equity line of credit to pay off holiday bills. "How about just not spending so much money?" I thought, tossing the flyer in the trash. Our culture is all about spending and acquiring more, more and more -- never mind sustainability.

Of course, to stretch even farther and buy even larger homes, people took out adjustable rate mortgages during this shopping spree -- in many cases, loans that feature interest-only payments for the first couple of years. These loans are built on a couple of premises (that the borrower will be able to afford his payment or that he'll be able to sell his house and change his housing expenses when it adjusts.)

But the housing market has cooled dramatically, and regular folks aren't making much more than they were when they stretched their paychecks as far as they could go to buy these homes. As a result, now that their adjustable rate mortgages are adjusting upwards, they can't make their mortgage payments -- and they can't afford to sell their homes either, since values are down.

Hence our nation-leading foreclosure rate.

I've analyzed several hundred foreclosure properties in the past few weeks, and observed a couple of trends:

Most foreclosures don't offer any exceptional values -- Since many of the people in trouble bought their homes with little or no money down, the amount that they owed the bank in many cases is higher than what their houses are worth.

The ones that look like steals usually aren't good properties -- I've seen dozens of properties listed far below what they should be worth on paper. When I've gone out to walk through them, they're in terrible shape or would require so much work that by the time they were up to standard, you would have spent about as much as buying a house that wasn't listed as a foreclosure.

Three ways that you can benefit from the foreclosure boom

The good news is that there are some good deals out there. Here are a couple of ways that you can benefit from the foreclosure boom:

1. Fix and flips -- Right now I have two properties under contract -- beautiful homes that don't need all that much work to bring them up the the best that they can be. In each case, my clients are bringing less than $50,000 to the table to buy and improve them, and they expect to get their initial investment back plus a profit of around $12,000 to $15,000 after all expenses.

As the year end approaches, banks are going to be more aggressive in what they'll accept for foreclosure homes that they own. That means that you'll be able to offer them less than their listed price and have a greater likelihood of them accepting your offer. This could give you a $5,000 to $10,000 cusion, increasing your margins and reducing your risk as an investor.

2. Buying and holding rental properties --
I found a condo the other day worth $105,000 which could probably be bought for less than $70,000. After a few thousand dollars' worth of improvements, you could put a renter in it and make a choice -- do you want to have it pay you income every month, or would you rather refinance and pull enough out of it to buy another place?

3. Sell your house and buy down -- A revolutionary idea! If you're feeling the pinch of your own bills, project out a few years and see where you're headed. It may take swallowing some ego, but remember that how you treat your money is reflective of how you treat yourself.

Call me and let's talk about which of these three is most appealing to you.

Introducing Clarion Mortgage

2006-04-07T11:04:00.000-07:00

Two weeks ago this morning, I logged in to Quotemearate's website (that was the company through which I provided mortgages) only to find that they had unceremoniously gone out of business! Just like that. No warning, no notice. All gone.

You can imagine how disconcerting that was. I had loans in the process of being underwritten, people who were counting on me, and my family to think about.

So I researched the mortgage marketplace to find my new home. I thought about using my own company, and LLC that I own; I looked at dozens of other "net branch" mortgage companies.

And all of my searching led me right back home to Colorado, to Clarion Mortgage Capital. They're 10 years old, enjoy a very solid, honorable reputation and their business model allows me to offer the very best rates available to my clients.

The change will be transparent to you, my clients and friends -- I will have all of the same lenders available, the very best pricing to you; I'll still be able to help you buy a house with no money down or refinance into the really low fixed rate loans that we have today.

This move means stability -- to you, to me and to my family.

So call me! Even if it's just to say hello. Of course, if you or anyone you know is looking to purchase, refinance or invest in real estate, let's talk!

Best,
Jordan
720.297.8002
click here to send me an email!

About Jordan Graham and Harper High School

2006-01-12T15:00:00.000-08:00

I'm Jordan Graham, and I'm a mortgage broker with Quotemearate Lending. Right now I'm spearheading a campaign to collect used musical instruments for an underfinanced, neglected high school on the South Side of Chicago.

Reading the New York Times recently, I came across an article that mentioned Harper as an example of an underfunded school, in which (among other shocking realities) the band class has 220 members but only 40 instruments.

When I was in the Kenwood Academy band, just six miles away from Harper, I was fortunate in that my parents had bought me a trumpet a couple of years before. I remember afternoons in the band practice room at school, trying to blow my trumpet through the braces on my teeth that I was still wearing; as I look back on those days I think about how tough it would have been had I not had a trumpet on which to practice.

That trumpet is in my garage right now. I haven't played it more than fifteen minutes in the last ten years, I'd bet. I'm giving it to the band director at Harper High School.

I began this drive by asking some friends for their help; some asked their friends as well. Dave Barry, the outstanding humor columnist, author and soul of my home page (Dave Barry's Weblog) posted an item on the collection on his weblog, and look at what we have found so far:

4 trumpets
2 trombones
2 clarinets
2 flutes
1 saxophone
1 snare drum
1 mandolin
1 bass guitar

also a ton of literature books for the library and $600 in financial donations, including a corporate match from Wells Fargo Bank.

This feels good to me, and I'm going to push ahead and see if we can get enough instruments so that everyone in band at Harper High School has something to play. (Paul Carter, the band director at Harper, says that even though violins, bass guitars, mandolins and the like are not marching band instruments, having them available for students who want to explore them is a blessing.)

Will you join me? You'll get a tax letter from the school for your donation.

Please call me at 312.224.1782 or email me at jordan*at*jordangraham*dot*com if you'd like to help (but fix that email address; I put it that way to keep the spammers from overloading me!)

Email your friends and family! Even if you don't have an instrument to donate, perhaps someone you know will have one.

Thanks!

-- Jordan

A bit of background on me:

With an MBA from the University of Denver and 16 years of business and financial services experience, I am the branch manager of Quotemearate's Parker, Colorado office. As an "experienced, honest and human!" mortgage broker, I help people buy, refinance and invest in real estate.

I specialize in residential real estate, from helping first-time home buyers to seasoned real estate investors.

Originally from Chicago's South Side, I live with my family in Parker, Colorado.

Story: We saved her from foreclosure!

2006-01-12T10:24:00.000-08:00

Today we finished a transaction in which we helped a woman avoid foreclosure and stay in her house, and I want to share the details with you because this is something we can do for others, too.

I'll call the woman "Lisa" to keep her identity private. Basically, Lisa bought her house with another person, who shirked the financial responsibilities and didn't pay any of the bills. Lisa was overwhelmed trying to keep up with it all, and a couple of months ago she found out that her mortgage company was going to foreclose on her house and that she would have to find somewhere else to live.

We spoke with her and presented a plan for her: She would sell her house to an investor, who would rent it back to her so that she could continue to live in her home. Over the next two years, she will work on her credit report and fix the trouble caused by depending upon the person who didn't pay the bills.

In two years, her credit is likely to be far better than it is today. Under the terms of sale to the investor, she will be able to buy her house back at a set price.

She stays in her house. She avoids the huge damage that a foreclosure does to one's credit report. She gets to buy the house back at a pre-set price once she's back on her feet.

I feel really good about that one.

It doesn't work for everyone, but if you know someone who is facing foreclosure who might be interested in this plan, call me at 720-297-8002 or email me at jordan*at*jordangraham*dot*com (but fix the email address; I do that so that I don't get hit by spammers.)

It's time for Hanukah glasses again

2005-12-05T14:52:00.000-08:00

Back by popular demand. . .

They look like 3D glasses, but there's a huge difference! Look at any sharp point of light (like a candle) and a holographic Star of David appears. A Christmas tree is suddenly bursting with Judaica -- street lights are soooooooo much fun.

I have a limited quantity of them available again this year. If you'd like a pair, send me an email with your:

Name
Address
City, State, Zip
Phone number
Whether you're older than 18

Send those emails to jordan*at*jordangraham*dot*com, or call me at 720-297-8002.

Happy holidays!

Legal Disclaimer: Don't use while driving. Really. Don't.