CNC Mortgage Blog

In 1999 and 2000 it looked like housing prices were going to keep on going up. In Minnesota housing prices continued to increase through 2006. During these years it seemed like there were not enough houses for all the buyers. When a house came on the market there were multiple offers and frequently houses sold for more than the asking price.

No one ever thought of prices ever coming down. Mortgage lenders were sure that the assets that backed up their loans would appreciate forever so they moved aggressively to lend money. 100% financing was common, so was 103% financing and 106% financing. One bank even offered 125% financing. It was a bit deceptive, it really said 125% of the value of the property up to a maximum of $25,000. Anyway, it was aggressive lending.

Not only was 100% financing available, with seller paid closing costs people could really move into a property with $0 down, and since mortgages are paid in arrears they would even skip a month’s rent.

A lot of people who got zero down loans probably barely qualified for the payments, but under those underwriting standards they qualified. They frequently got a 2/28 ARM. That is an adjustable rate mortgage that is fixed for two years and then adjusts for 28 years. The initial “teaser” was affordable, but in month 25 the rate would adjust close to 5% over the initial rate and could adjust up from there. Most of the customers were not sophisticated enough to understand that this was a teaser rate, they never knew about the adjustment. Others were told that this was a “band-aid loan” that would improve their credit and after two years they would be able to refinance. Others were told that they only qualified for a 2/28, but that after two years they would be able to refinance to a fixed year mortgage. And imagine, in two years, the way property was appreciating, they could not only refinance and pay the new closing costs, they could even take out some of the equity that was growing in the property. With property values going up 10% per year, that was 20% at least that they would make. The borrowers weren’t told that the loans came with a two or three year prepayment penalty, equivalent to 2% of the original loan amount or six months of interest. Some borrowers got a 2/28 mortgage with a 3 year prepayment penalty, so they were almost forced to pay that initial rate adjustment. That meant really that a mortgage with an initial rate of 6% went up to 11% in month 25.

What were the investors told? This mortgage is now at a teaser rate that is close to the normal conventional rate, maybe a little lower. But in 25 months that rate is going to go up 5%. So a mortgage with a rate of 6% now will start paying 11% in month 25 for the next 28 years! The mortgage is backed up by bricks and mortar and not only is it an appreciating asset, surely the proud homeowners will make improvements to the house. So even if the borrowers default, your mortgage is backed up by a solid guarantee. Not only that, if they pay the loan off early, you will receive either 2% of the original loan amount or six months of interest along with your outstanding principal.

So investors in the US were given this sales pitch and bought it. When foreign investors heard about these wonderful mortgage backed securities, backed by houses in the United States, they also wanted to get into the business.

All it took was for houses to stop appreciating and borrowers whose income had remained flat and could not afford the adjusted payments to force the properties into foreclosure.

Just some simple, back of the napkin calculations. So a house that had a price of $194,000 was sold for $200,000 with the seller paying the closing costs. If the homeowner wanted to sell the house in two years they would still have to pay a realtor $12,000 (6%) in commissions. But the property did not appreciate, it probably went down and the owners were upside down, they couldn’t afford the payments on the house and they couldn’t sell the house.

And some investor in Manhattan, or Berlin or London was so happy because his mortgage loan would soon start to yield 11% in dollars.

So the homeowner and his family saw their dreams of homeownership disappear and the investor, who did not want to own real estate was now left with an empty house that would cost him around $50,000 at least to sell again.

Obviously those investors who got into the market highly leveraged have lost all their investment and owe money. But somebody still has some bricks, mortar and land out there so that they don’t have a total loss when they are able to sell the property again, even if it is for less than the loan amount.

We are finding more and more customers whose ARM mortgage (adjustable rate mortgage) was a 2/28 arm, fixed for two years, adjustable for 28 with an initial adjustment of 5 or 6 % over the initial rate.

Their incomes are basically the same, their mortgage payment just went up and when we have the property appraised, it has probably gone down in value.

These customers want to keep their houses, however they don’t have enough equity in the property to pay for the closing costs on a refinance transaction. They probably bought the house with 100% financing and the seller paid closing costs of 3% or up to 6%. And with the disappearance of 100% financing, affordability options are even more remote.

These borrowers are in a bind, they want to stay in their house, they want to stay in the neighborhood, and in the school district. They do not want to give up their house and go back to renting. They just can’t afford the newly adjusted ARM payment. Luckily for them, the cities, counties, neighborhoods and banks are in the same predicament.

WHAT IF?

The loan on these properties could be refinanced to 90% of the present appraised value of these houses. If the borrowers qualified for a conventional rate loan on a 30 or 40 year mortgage they would get a new first mortgage. The difference between the new first mortgage and the total outstanding debt would be rolled into a silent second mortgage that would not have payments. The second mortgage would come due if the borrowers sold the house or refinanced the first mortgage. However a window must be left open for the borrowers to be able to get a mortgage for home improvements.

Who would benefit from this?

Banks would avoid costly foreclosure procedures.

Neighborhoods would not deteriorate.

Cities would maintain their property tax base.

School districts would keep children.

And finally, consumers could still be on a path to homeownership.

I am just practical person, so I have no idea where the money for this would come from. Maybe HUD, FHA, Fannie Mae or Freddie Mac have some way to work this out.

This is such a great time to buy a property, a house, a townhouse or even a condominium.

The combination of lower prices and lower interest rates makes this time a very good opportunity to buy if you are considering a purchase.

Banks are sitting on foreclosed properties, they want to sell those homes. Homeowners that are not in foreclosure yet but want to get out of their house and their mortgages are asking the banks to accept “short sales”. A short sale is a sale of a property that is sold for less than the mortgage owed on it. Banks are approving this because they do not want to be in the real estate business. A foreclosure typically costs a bank around $60,000.

I have recently seen some eye-opening transactions. A customer paid $ 241,900 for a townhouse that had a mortgage of $307,750. The bank accepted a $65,850 loss just to move the property.

Another townhouse was initially appraised for $ 270,000; the buyers offered $175,000, the bank countered with a price of $180,000.

So….What should you do???? Keep an open mind as to where you want to buy. There are many good cities, good neighborhoods and good school districts.

Remember, you are the best expert on want you want, need and can afford. Spend time looking at what is on the market. Don´t be afraid to ask for a large price reduction, ask the seller to pay for closing costs.

Take the following steps:

· Get pre-approved for a mortgage loan by a mortgage broker

· Work with a realtor

· Do not use a dual agency realtor. This is where the realtor represents both the buyer and the seller. The realtor is also working with the sellers and does not want to upset them.

· Offer less than your realtor suggests, the realtor wants the deal to close – you want to buy and at the best price.

Keep in mind that unsold inventories are high; you have a lot to choose from.

THIS REALLY IS A BUYERS MARKET!!