The current mortgage lending market

[crp]

[michaelaz]

Originally posted by Satori
I know of a couple here that took out a second mortgage and built another house on the property next door to their house. They recently finished it and listed it for $525k and it hasn't sold. Now the second mortgage is about to come due, and they can't afford to make both house payments. Yesterday, they dropped the asking price to $465k. If it doesn't sell soon, they'll lose both houses.

Hate to be callous but serves them right if they tried to build something that expensive and hit a big payday,they should lose both for being greedy and bad investors, they are only helping lead to the demise of prices.

You should NEVER mortgage your primary residence as a backup to a investmant and this is why.

They should waited and bought the lot when they had the money, then took a note AGAINST the lot itself( if they absoulutly had to) and built a house that was resonable and easy to sell.
250-750K is very tough market right now. Over 750k most people dont need to worry as they have either cash or other finacial options available.

[Anemone]

In California, I don't see home prices dropping much more than 20% (and much less in some markets). How long this will take to rebound is anyone's guess. Like Jay said, it's a confidence thing. The fundamentals (structure) could remain exactly the same, and with a return in confidence we could be "back at it" in six months. Personally, I expect more like a one-to-two year depression in the market.

If you're going to stay in your house for more than a few years, and don't have one of those horrible loans, it won't make that much difference either way.

Kevin

[Hattie B]

Up in northern Ca, I don't really see that much of a drop either..

I am now casually looking instead of trying to buy. I stil can not find a house for under 500K in a decent area, that is not a disaster. And for the types of loans they are offering I am already looking a high (for myself) note because the homes are so darn spendy.. I could not imagine spending 5-6k/month on a house payment only, which one place I looked at at the begining of the year was offerning; meaning it was only about 2k for a few months then it went up and up and I was like ya right..

So I will continue to rent and save for the next ???. It might take me a few more years to have a home, but I want to be smart about it and actually want to live there..

[michaelaz]

Originally posted by Hattie B
Up in northern Ca, I don't really see that much of a drop either..

I am now casually looking instead of trying to buy. I stil can not find a house for under 500K in a decent area, that is not a disaster. And for the types of loans they are offering I am already looking a high (for myself) note because the homes are so darn spendy.. I could not imagine spending 5-6k/month on a house payment only, which one place I looked at at the begining of the year was offerning; meaning it was only about 2k for a few months then it went up and up and I was like ya right..

So I will continue to rent and save for the next ???. It might take me a few more years to have a home, but I want to be smart about it and actually want to live there..

Smart investor right there. Take your time and wait it out. If you can try to accumulate a nice little bank roll in case the right house comes along or your dream house about to enters forclosure, you can ride in and BAM ,pick it up

[Kevomac]

Part of the problem is that 20%. Mortgage companies were loaning people %100 of the value of the house by doing two mortgages (called a piggyback) where one loan was for 80% and the other was for 20%. That way the borrower got out of paying MI (mortgage insurance) and didn't have to put any money down. People were literally walking in the door with no money in the bank! No wonder people were defaulting! Now some people are suing their loan officers because they've figured out that they've been lied to and that docs in some cases have been forged! Sadly, most people don't understand even %10 of all of the papers they have to sign when they buy a house, so it's easy to cheat people!

[wizardgus®]

Oh yeah, there was plenty of abuse involved. For awhile I was getting offers of 125% loans! No doc even! Now I won't pretend to be too smart to take advantage of those offers...just lucky that this all hit when I was in a "get out of debt" mindset.

Always said I'd rather be lucky than anything. Totally unrelated events led me to change my product line/marketing strategy at the beginning of the year which put me ahead of the curve on this one as well. First time ever!

Even a blind hog finds an acorn once in awhile.

[onereefnotenuf]

Originally posted by Kevomac
Part of the problem is that 20%. Mortgage companies were loaning people %100 of the value of the house by doing two mortgages (called a piggyback) where one loan was for 80% and the other was for 20%. That way the borrower got out of paying MI (mortgage insurance) and didn't have to put any money down. People were literally walking in the door with no money in the bank! No wonder people were defaulting! Now some people are suing their loan officers because they've figured out that they've been lied to and that docs in some cases have been forged! Sadly, most people don't understand even %10 of all of the papers they have to sign when they buy a house, so it's easy to cheat people!

I've done real estate closings for the last 12-13 years. I have closed pretty much every kind of residential loan closing there is.
there really is two things at a closing that a person needs to understand. the settlement statement and the note(and riders if applicable). I am pretty confident that the people in closings I conducted understood the terms of their loan. pre payment penalties,adjustable rates,interest only terms are issues I go over carefully with people. out of the 5000-6000 closings I have conducted, there were only a very few where someone was surprised at closing by the terms of their loan and even fewer actually decided not to go through with the loan. I've had people tell me that they didn't know that they had a prepayment penalty on a loan they are paying off, but prepayment riders on notes are in bold type, some lenders have buyers sign two different disclosures on top of the note explaining the penalty.i think that people are so focused on getting the house, they don't think ahead to what an arm or prepayment penalty will mean in a couple years. I guess my point is I am not convinced that those people who plead ignorance about the loans they have are really that ignorant.

[kamla]

Originally posted by Satori
Expect to put down a larger amount and to be offered a higher interest rate than expected. In addition, higher monthly mortgage insurance is probable. I had one place this week that wanted $400 per month JUST for mortgage insurance.

Hi Guys i am in the market to BUY a house..
i Think i have an handle on every thing involved in buy a home..

BUT what is a mortgage insurance?????

[Aquaman]

I hate to sound pesimestic but I'm sort of glad that this bubble has finally burst.
Here in Florida home values have soared to the point that I have no chance of buying a home. I'll end up waiting another year and see where the housing prices are at then.

I hope to see a pretty hard correction here in Central Florida

[Niven]

Mortgage insurance is a premium paid by the borrower to insure the mortgage in case of default. It is only for mortgages where there is less than 20% downpayment/equity. Prior to mortgage insurance, you could not buy a house without 20% down.
There are ways to avoid PMI (private mortgage insurance). You can take out a second mortgage, but that interest rate will be higher and the terms will normally not be fixed for 30 years. Each situation needs to be looked at. Each option has its merits.
Hope that helps,
Gareth

PS Some of the good brokers may be saying the last 6-12 months, the unsavory brokers are being weeded out. The legit ones will be left.

[Niven]

This is who we use................
http://www.gemortgageinsurance.com



Here is there rate finder...........

http://mortgageinsurance.genworth.co...ateFinder.aspx

[tyoberg]

Our market hasn't been too bad--it's flattened out a bit. We bought our place about 2 1/2 years ago on an ARM with the plan being to sell it and move back east. Well, it's now that time and I hope I haven't waited too long. We're putting the house up for sale next week.

I've got a good 6 months to get rid of it plus a couple months buffer (which up until yesterday I felt pretty OK with). I'd sure like to get rid of it before the payment goes big.

Ty

[Niven]

Almost all ARM's have caps to how much the rate can change the first year. So a $200,000 mortgage at 5% (P&I $1,073.64) should have a first change cap of 2%, so you're now at 7% (P&I $1,330.61). Yeah it went up $250, but it shouldn't break you.

[tyoberg]

Originally posted by Niven
Almost all ARM's have caps to how much the rate can change the first year. So a $200,000 mortgage at 5% (P&I $1,073.64) should have a first change cap of 2%, so you're now at 7% (P&I $1,330.61). Yeah it went up $250, but it shouldn't break you.

Yep, won't kill us, but I won't be happy. I'm eager to get out of Cali ASAP.

I've got two friends that are going to be in deep doo-doo, both with 80/20 ARMs. One bought a 2nd house against the first in Alabama that they've been trying to sell for the past 18 months.

[Sk8r]

It's not good ever to have an ARM in an economy when the mortgage rate is near a historic low: you want to lock in that low rate as fixed as possible. I recall rates as low as 4.25 [when I was a child] and as high as 14%, back in the last big mess. Remember Murphy's Other Law: sooner or later things do get as bad as they've ever been, and they may get a shade worse, particularly if you've bet against that trend.

[clintrandall]

I also didn't understand why so many people were grabbing flexible rates when you're borrowing the largest amount of your life and borrowing is cheaper than it will probably ever be again. I really wish the brokers had an interest rate historical chart sitting there next to the paperwork to show how it WILL cycle back around. Everyone had the impression that the cycle will always happen later and to someone else. Too bad.

[Anemone]

Originally posted by clintrandall
I also didn't understand why so many people were grabbing flexible rates when you're borrowing the largest amount of your life and borrowing is cheaper than it will probably ever be again.

Because the flexible rate loans allowed a lower starting rate (sometimes an incredibly low starting rate, like 1%), which meant the payments were cheaper than fixed rate loans. Somehow little things like "negative amortization" never got discussed.

People never got qualified based on what their eventual monthly payment would be, only what their initial monthly payment worked out to be.

"Hey, I got a $400,000 loan and I'm only paying $1,000/month!"

And when the six month/12 month/one year/five year rate adjustment or ballon payment comes due, the people are shocked. And even the ones who "planned ahead" thought they'd be making more money, the real estate market would continue to boom so their houses would be worth millions, and what the heck, we can always refinance, right?

Kevin

[wizardgus®]

I really feel compelled to say that it is awful easy to Monday Morning quarterback this...and probably pretty unfair and inaccurate to do so. I'm sure plenty of perfectly good and otherwise intelligent people made this choice. The plan looked good on paper, and remember this was against the backdrop of leveraged buyouts in the corporate world. It looked like a good bet. Likewise the brokers, easy to villainize now, but they were after all competing for customers. Any that did not offer these plans probably didn't last through the boom for lack of business.

Personally I will be very surprised if the industry doesn't come up with a fix, even if it is to forestall the resets. Most of them could not take the hit to their balance sheets that the number of defaults would cause. Until the property is foreclosed it carries the same book value.

[Sk8r]

A lot of first-timers in the home market don't realize that you can actually end up owing more than your house is valued at. They think, well, it's bricks and wood, it is what it is and we'll always have that---but a horse in a horse trade is worth only what somebody is willing to pay; and if your mortgage rate slides, well, we're seeing the outcome.

THe most dangerous thing in finance, and what has broken so many would-be rich guys, is what a certain person called 'unbridled exuberance'. If it looks like everybody is getting rich by a certain practice, and you get into it without really figuring how it works on the downside, you are so, so vulnerable.

"Invest in gold coins! Hedge against the market!"
"0 Down Financing!"
"You can get a house with no down payment!"
"Buy a timeshare! You can sell it for a profit!"
"Get a payday loan!"
"Diamonds are an investment..."
"I made 130000 this week! I can show you how!"
"No-cost re-fi from a major lender---"
"We buy houses!"
It is never, ever, ever that simple. You can, unfortunately, say anything in an ad and the law will rarely come after these guys because they dance real close to the truth. Responding to an ad is absolutely the worst way to handle any financial question. Ask your banker. Ask someone old enough to have perspective. Ask your financial advisor/investment counselor on your IRA...and even then take it with a grain of salt. Understand how everybody in the deal is getting their money, including how your realtor gets paid, and how the lender is making profit, and what happens if the value on which the loan is based changes. Never be hesitant to ask. It's your money, and you have a right to ask. If you don't get a straight answer, or they launch on another sales pitch, bail.

Also don't bite on the one I'm hearing on telly even as I type this, to the effect of, "Never mind the market---we're still lending. COme to us and we can still get you 0 down." Scary. Real scary.

[Scuba_Dave]

I bought my 1st house 10 years ago, the bank agreed to a short sale instead of foreclosure.
House loan was around $80k, I bought it for $23,600
My SUV was worth more

1st tax bill the land alone was valued at $36k
House/land was valued at the old value of $80k, I didn't complain
My 1st loan was not a loan, I saw the house & closed 12 days later. Due to a mess up at the IRS AND the good old state of MA I had almost NO credit
So I bought the house w/some $$ I had saved up & put the rest on credit cards. My cousin the banker laughed his arse off!!

CC gave me 6 months cash advances at low interest
In 6 months I cleaned it up, planted a nice yard, some quick paint
The IRS admitted to error, AND corrected my credit
State of MA did the same
1st loan for $40k 10.25% after 6 months I paid off the CC, all my bills & put $$ in the bank
I refinanced within a year for $50k, 8% rate - lower payment
Bought my dive gear, went on 2 diving vacations to Cozumel
Bought a Hot tub

A few years later I refinanced again & took out $26k
I bought a motorcycle, Jetski, went on vacation
Redid bathroom, kitchen,

Then I met my wife to be
Spending stopped, put a 2nd floor/new roof on
Sold it 7 years after purchase for $200k, loan was $73k
A lot of blood sweat equity & hard work
But the market helped

Put the $$ into this house, we paid 33% down about
No PMI, 5.25% rate, they tried to talk us into other things
You'll move
Not until I'm dead
You'll refinance
I'd rather get a low fixed rate now
oh....
We could have bought a nice house, bigger w/garage for more $$
But we would have owed more, bigger monthly payment

With the work I am doing the house will increase in value by maybe 50% of what we paid
And we get a nice huige sunroom, garage, & great room

Buy what you can afford, not what you might be able to afford
Get the interest rate FIXED that you can afford

[Anemone]

Adjustable rate mortgages are not evil. Qualifying for way too big an amount is.

We bought our first house with 10% down and a 30 year ARM. It was a stretch to afford, but both of us worked and had scheduled raises coming up.

Five years and two more children later, that house was too small. Sold it and bought a larger, more expensive house with 10% and a 30 year fixed (now we could afford the fixed).

Nine years later, refinanced to a 30 year fixed with a lower rate. One and a half years later, refinanced to a 20 year fixed with another lower rate and got the equity over 80% so no more PMI. In neither refinancing did I take any money out.

I'm pretty financially conservative, but an ARM loan allowed us to buy our first home, while keeping our monthly mortgage at about 35% of our income. Without the ARM, we wouldn't have been able to afford that first house, which got us the equity to afford our second (current) house.

So, as I said, it's not the ARM that's evil, it's basing the financial decisions (take the loan or not) on the introductory ("teaser") monthly payment rate, not the "real" long term amount.

Kevin

[Wolverine]

Originally posted by wizardgus®
Well, I just used Countrywide as an example, nothing really wrong with them over most others.

We had a lot of trouble with Countrywide. A LOT. Basically the only thing that got us through everything was our packrat nature, so we had every bit of paperwork we had ever gotten from the original loans. They tried to push back the date we had to wait for to pay back our loans without a prepayment penalty. Under their system, it would have gone 2 years into the adjustable rate time frame, which would have significantly affected our rates.

As for things like the 80/20 loans, I guess you'll have to chalk up on the side of "part of the problem". We knew that we had a salary increase coming, and that we'd be able to pay off the 20 fairly quickly. We probably could have just put the 20% down, but it would have left us with absolutely no reserve, which we weren't comfortable with.

The big problem with the 20% portion, and I think the big problem with many of these loans, was that it was interest only payments. I think that lulls a lot of people into a false sense of security. We calculated how much we would need to pay each month to pay it down as if it were a regular loan, paid that as our own minimum, and then went above it whenever we could afford to. I think many people get these, and they don't realize that 10 years of payments have gone by and they still owe $80,000 on their $80,000 loan.

Dave

[Kevomac]

I agree with the last few statements. If you really pay attention, ARMs aren't that bad. As several people said, if you know your income is going up (maybe you're finishing school), you're credit score is improving so that you can later refinance to a better fixed rate, or if you're for sure going to sell and move before the rate adjusts, then ARM's can be all right.

Part of the problem is ignorance on the part of the borrowers (or downright stupidity in some cases), but that doesn't make it all right for loan officers to be dishonest to take advantage of these people. Brokers have to be licensed, and something needs to be done to insure that they play by the rules. Right now, even when they get caught in outright fraud no one does anything about it. My wife caught a broker dirty dealing (he had an appraiser on payroll working for his company - so much for arms length transactions). but when she turned him in to HUD, they agreed that what he was doing was illegal, but unless the FBI thought it worth pursuing, nothing would be done. As far as I know he's still in business.

Besides, a certain prominent politician who's still in office, committed an unbelieveable fraud in the nineties, and most people don't even know about it. He and his brother owned an S&L in Colorado where they were making phony loans to phony borrowers, selling the loans to Fannie Mae, then pocketing the cash for themselves. When the RTC shut them down during the S&L scandal, it cost the taxpayers billions, and the boys walked away untouched and rich. I won't name the person for fear of starting a political fight, but some probably know who I'm talking about, and I know first hand witnesses from Fannie Mae who worked on the team that busted the scandal so I'm not just speculating. Anyway, I better quit before I get the thread closed.

[Niven]

Every business has it's frauds and every business is mainly about sales. Do you think everyone out there needs life insurance? do you think everyone out there needs a Kirby Vacuum cleaner? Do you think everyone needs that little automatic 360 degree spray cleaner for your shower? (well maybe)
My boss said it right this morning. BrianD sitting in a bar next to Nina KNOWS a lot more than I do when it comes to mortgages and when Nina comes to me and says, "My friend got a mortgage yesterday for 3%, I want the same!" She doesn't get mad at BrianD for making crap up, she gets mad at me for not giving it to her.
I take pride in not screwing people over. I've said it for years, certain mortgage brokers talk to 10 people, get one deal and screw them over. I talk to 10 people, close on 8 of them and make the same money. But the 9 (8+1 from above ) people that got loans will all come back to me, because I didn't screw them over.

Yes Loan Officers/Mortgage Brokers need to be licensed, but until about 1-2 years ago, in Wisconsin, all you needed to do was send the state $250 to be licensed! Now at least you have to pass a test and take continuing education.