Given the current economic crisis -- which appears to be growing global in scope -- has made buying real estate more difficult. Credit is tough to come by, and these days you need a job to buy a house. That is, unless you are in a significant cash position, which doesn't describe most Texans. Most of us need credit, and are having diffculty obtaining it.
The credit crisis continues to grow, and uncertainty looms large. Third quarter 401(k), 457, 403(b) and IRAs have dropped. Savings rates have dropped. Gas prices remain high, and wages low.
With the central banks around the world working in concert to lower interest rates, crashing stock markets in the U.S., Europe & Asia, rising unemployment, a dwindling Peso and a hotly-contested and increasingly-ugly U.S. presidential election, even the most optimistic real estate agents and mortgage brokers are getting nervous.
They say that all real estate (like all politics) is local. So...how does the national/global crisis effect San Antonio homeowners or home buyers? As the U.S. economy falls into a recession, jobless numbers have increased and more than 750,000 American jobs have been lost this year. According to the US Dept. of Labor (Bureau of Labor Statistics) as of the end of September 2008, the national unemployment rate was officially 6.1 percent. The number of unemployed persons is 9.5 million, and over the past 12 months, the number of unemployed persons has increased by 2.2 mil-
lion and the unemployment rate has risen by 1.4 percentage points. Some unemployment experts have sugggested that the true rate of unemployment in the U.S.-- if you factor in those making less money than they were two years ago or working at part-time jobs rather than full-time jobs because they can't find the right situation, those who are underemployed, and those who have just given up looking for a job and have fallen off the rolls -- is approaching 10 percent.
There is a strong nexus between rising unemployment and a faltering real estate market because most lenders will not issue a mortgage loan, unless the borrower can demostrate sufficient incme to make the payments. These days, the income won't come from the stock market or from "flipping." As such, jobs are virtually essential for obtaining a mortgage loan.
In Texas, almost 600,000 people, or 5.0% of the workforce was unemployed in August. This was up from 4.7% in July and 4.1% in April. In San Antonio -- which many claim has been insulated from the housing crisis -- new and existing homes sales have dropped. San Antonio builders started construction on 33 percent fewer homes this (3rd) quarter than they did during the same period last year. Sales of new homes in San Antonio are down 36 percent from last year.
The credit squeeze has reminded banks and mortgage lenders that, while credit scores are perhaps decent indicators of whether a borrower has financial stability, they don't make the mortgage payments. Similarly, FICO scores don't take into account whether someone has substantial savings or cash on hand.
On the other hand, if you have a steady job, demonstrable income, and a good credit score, you may want to talk to your lender about refinancing. Just this morning, Freddie Mac announced that interest rates on 30 year mortgages have dropped to below 6% (5.94% to be exact). So there is some good news. Here's some more:
If you have an adjustable rate mortgages (ARM) tied to United States Treasuries, your interest rate may adjust downward -- maybe even to the 4.5 percent range. How could this happen? If the one year Treasury Bill Index is at 1.5 percent, and you have a 3 percent margin attached to your ARM loan, that adds up to a 4.5 percent interest rate.
If you have an ARM tied to the London Interbank Offered Rate (LIBOR) or some form of interest-only loan, certain lenders will lock-in adjustable rates for a small fee (around $250). Find out when and at what interest rate your loan will adjust to. The cost of converting your ARM to a fixed-rate loan may be well worth the savings to be realized long-term. Plus, any financial certainity you can obtain in today's climate is probably a good thing.
While we all have plenty of reasons to worry, smart home buyers with demonstrable income and good credit can find great deals. If you can whether the storm and stay on top of your mortgage payments, a good buy today could result in a terrific sale once the storm has passed.
As always, prior to obtaining a mortgage loan or entering into a real estate sale/purchase contract, you should consult with an experienced real estate lawyer. San Antonio lawyer Trey Wilson of R L Wilson, P.C. Law Firm has a diverse practice related to real estate, residential, construction, mortgage, landlord-tenant, homeowners association and general litigation. In September 2008, Trey Wilson was named by Scene in SA magazine as one of San Antonio's best real estate litigation attorneys. He can be reached at 210/223-4100 or www.sa-law.com.
Attorney Trey Wilson - RL Wilson Law
Showing posts with label Mortgage Loans. Show all posts
Showing posts with label Mortgage Loans. Show all posts
10 October 2008
06 October 2008
MORTGAGE GLOSSARY
Mortgage: A real estate debt instrument under which the borrower gives the lender a lien on the property as collateral for repayment.
Prime mortgage: A real estate loan in which the borrower meets the underwriting standards set by federal home loan agencies Fannie Mae and Freddie Mac. Fannie and Freddie buy mortgages from lenders to sell as bundled mortgage bonds, but the lenders have to make sure their mortgages meet the federal underwriting guidelines to be eligible. A typical prime mortgage covers a maximum of 80 percent of the value of the house, and housing costs should absorb no more than 28 percent of the buyer's gross income.
Subprime mortgage: Type of loan aimed at giving more buyers a chance to own a home, particularly buyers with less money for a down payment, less income and checkered credit histories. In the last decade, lots of subprime mortgages were written with little or no down payments, low but adjustable interest rates and little credit scrutiny. Once the adjustable rates reset, subprime mortgages required substantially higher interest rates than prime mortgages, which made them attractive to investors who bought bundles of these mortgages from lenders.
Alt-A mortgage: Short for "alternative-A." These loans form a class of mortgage between prime and subprime. Typically, they involve buyers who would be considered prime but who have little documentation of their creditworthiness or are seeking jumbo loans beyond the limits accepted by Fannie Mae and Freddie Mac ($417,000 until Congress raised the limit earlier this year).
ARM: An adjustable-rate mortgage. Such mortgages usually have a low introductory interest rate that resets after three to five years at a higher rate.
Statement loans: When a buyer didn't want to bother with documenting income and credit history, some lenders offered statement loans that required nothing more than the buyer's word that he was good for the loan.
Piggybacks: Two loans taken out at once on the same property. A typical prime mortgage requires a 20 percent down payment. Buyers who don't have that amount are generally required to purchase private mortgage insurance, which covers the lender in case of default. To avoid PMI, many borrowers took out two mortgages at once – one for 80 percent of the value of the house and a shorter-term mortgage (typically an ARM) to cover the down payment. Both mortgages were tax-deductible, which made piggybacks more attractive to buyers than PMI. (PMI became tax-deductible in 2007.)
Silent seconds: Second loans taken out without the knowledge of the first lender. Many borrowers who took out piggyback mortgages did so without telling the lender making the first mortgage. This compromised the lender's credit check. Since most lenders planned to sell the mortgage to Fannie Mae, Freddie Mac or an investment bank that would bundle it into a mortgage-backed security, credit scrutiny often fell by the wayside.
Neg-ams: Negative- amortization mortgages. Negative amortization means that the loan amount keeps growing as the borrower makes payments lower than what's needed to pay off the interest and principal. The loans were based on expectations that home values would keep rising so that the borrower could pay off the mortgage when the house was sold.
Prime mortgage: A real estate loan in which the borrower meets the underwriting standards set by federal home loan agencies Fannie Mae and Freddie Mac. Fannie and Freddie buy mortgages from lenders to sell as bundled mortgage bonds, but the lenders have to make sure their mortgages meet the federal underwriting guidelines to be eligible. A typical prime mortgage covers a maximum of 80 percent of the value of the house, and housing costs should absorb no more than 28 percent of the buyer's gross income.
Subprime mortgage: Type of loan aimed at giving more buyers a chance to own a home, particularly buyers with less money for a down payment, less income and checkered credit histories. In the last decade, lots of subprime mortgages were written with little or no down payments, low but adjustable interest rates and little credit scrutiny. Once the adjustable rates reset, subprime mortgages required substantially higher interest rates than prime mortgages, which made them attractive to investors who bought bundles of these mortgages from lenders.
Alt-A mortgage: Short for "alternative-A." These loans form a class of mortgage between prime and subprime. Typically, they involve buyers who would be considered prime but who have little documentation of their creditworthiness or are seeking jumbo loans beyond the limits accepted by Fannie Mae and Freddie Mac ($417,000 until Congress raised the limit earlier this year).
ARM: An adjustable-rate mortgage. Such mortgages usually have a low introductory interest rate that resets after three to five years at a higher rate.
Statement loans: When a buyer didn't want to bother with documenting income and credit history, some lenders offered statement loans that required nothing more than the buyer's word that he was good for the loan.
Piggybacks: Two loans taken out at once on the same property. A typical prime mortgage requires a 20 percent down payment. Buyers who don't have that amount are generally required to purchase private mortgage insurance, which covers the lender in case of default. To avoid PMI, many borrowers took out two mortgages at once – one for 80 percent of the value of the house and a shorter-term mortgage (typically an ARM) to cover the down payment. Both mortgages were tax-deductible, which made piggybacks more attractive to buyers than PMI. (PMI became tax-deductible in 2007.)
Silent seconds: Second loans taken out without the knowledge of the first lender. Many borrowers who took out piggyback mortgages did so without telling the lender making the first mortgage. This compromised the lender's credit check. Since most lenders planned to sell the mortgage to Fannie Mae, Freddie Mac or an investment bank that would bundle it into a mortgage-backed security, credit scrutiny often fell by the wayside.
Neg-ams: Negative- amortization mortgages. Negative amortization means that the loan amount keeps growing as the borrower makes payments lower than what's needed to pay off the interest and principal. The loans were based on expectations that home values would keep rising so that the borrower could pay off the mortgage when the house was sold.
DWINDLING REAL ESTATE APPRAISALS AND VALUES MAKE RE-FINANCING TOUGH & SOMETIMES IMPOSSIBLE
A friend of mine recently went through a divorce. Among the marital estate's community property assets (and liabilities) divided by Court, was the Stone Oak home she and her husband purchased together when the marriage was sailing on smooth waters. However, when it was decided that they could no longer live together, and that divorce was imminent, the not-so-happy couple had to make the tough decision of who would keep the home and who would move on.
Because the soon-to-be-batechelor's job requires frequent travel, it was decided that my friend (the wife) would continue to occupy the home, and assume all liabilities for the purchase price. These liabilities included a six figure mortgage loan (including a home equity loan used to buy furniture and take a vacation) that she and her husband had taken out together. The couple's agreement was soon reduced to writing and incorporated into the Final Decree of Divorce entered by the Bexar County District Court. As is frequently the case, the Court ORDERED that the wife re-finance the home so that a new mortgage loan would issue in her name, and the husband would be free of any liability associated with the home.
Because her credit is good, and she maintains a good job as in-house counsel at a large San Antonio company, my friend assumed she'd have no problem obtaining financing on the home. She couldn't have been more wrong!
My friend quickly contacted a mortgage broker, and was directed to several lending institutions offering mortgage loans in today's tough credit market. She found a lender offering acceptable terms, and was promptly approved for a mortgage loan. All she'd have to do was provide a survey, title poicly and appraisal. That's where the problems began.
When she contacted the appraiser, and told him that the home was in one of Stone Oak's many hidden, hard-to-find, gated communities, he advised that he knew just how to get to the home because he'd performed several appraisals "in that subdivision where every house is on the market." Because my friend wasn't actually selling her home, she didn't immediately realize the implications of that statement. After all, she had noticed that FIVE homes on her street had FOR SALE signs in the lawn, with three more around the corener, but what did that have to do with her? Turns out, it had plenty to do with her ability to re-finance.
The availability (supply) of homes in the neighborhood had caused a curious effect on the price (value) of homes located there. That is, supply far exceeded demand, which resulted in a significant decrease in price. Basic economics resulted in desperate Sellers in the neighborhood selling their homes for far less than what they had paid for them. For example, a 2,000 square foot home which had been purchased for $141.00/square foot ($282,000.00) five years ago had recently sold for $89.00/square foot ($178,000.00). Desperate times call for desparate measures, and San Antonio's loss of AT&T, Washington Mutual and the jobs those firms offered have sent shockwaves of desparation coursing through Stone Oak. This creates a climate of decreased values and surprisingly low appraisals. Wall Street and the stock market are not the only losers when economic times turn tough.
Because the average sales price for a home in her neighborhood during the past 18 months had been $102.00/square foot, the appraisal for my friend's home was based upon that unit value. At the end of the day, the appraiser certified a fair market value of $229,500.00 (2250 square feet x $102/sq. ft.). Too bad the total outstanding amount she and her husband owed on the mortgage and home equity loans they had taken out was $263,000.00!!!!! They weren't nearly so concerned about that amount when they thought the home was worth $310,500.00 (or $138.00/square foot).
In the end, the mortgage company DENIED the re-finance. Turns out my friend and her ex-husband traded blows over who would keep an asset which is today worth NEGATIVE $33,500.00 to them. That is, if the home were sold today according to market trends, she would walk away with a deficiency to the mortgage lenders in the amount of $33,500!
She's looking for another solution, but the picture isn't a rosy one. Americans hold $10.6 trillion in mortgage debt. So far in the current mortgage meltdown, $1.8 trillion or more of that debt is for mortgages that are underwater – loans that are higher than the value of the property. Much like my friend's.
In the 1980s, residential property values plunged in Texas. Since then, abundant land and loads of builders have resulted in enough houses on the San Antonio market to slow home appreciation. When considering buying, selling or re-financing a home, you chould consider the long-term implications of your decision in our uncertain economic climate.
Because the soon-to-be-batechelor's job requires frequent travel, it was decided that my friend (the wife) would continue to occupy the home, and assume all liabilities for the purchase price. These liabilities included a six figure mortgage loan (including a home equity loan used to buy furniture and take a vacation) that she and her husband had taken out together. The couple's agreement was soon reduced to writing and incorporated into the Final Decree of Divorce entered by the Bexar County District Court. As is frequently the case, the Court ORDERED that the wife re-finance the home so that a new mortgage loan would issue in her name, and the husband would be free of any liability associated with the home.
Because her credit is good, and she maintains a good job as in-house counsel at a large San Antonio company, my friend assumed she'd have no problem obtaining financing on the home. She couldn't have been more wrong!
My friend quickly contacted a mortgage broker, and was directed to several lending institutions offering mortgage loans in today's tough credit market. She found a lender offering acceptable terms, and was promptly approved for a mortgage loan. All she'd have to do was provide a survey, title poicly and appraisal. That's where the problems began.
When she contacted the appraiser, and told him that the home was in one of Stone Oak's many hidden, hard-to-find, gated communities, he advised that he knew just how to get to the home because he'd performed several appraisals "in that subdivision where every house is on the market." Because my friend wasn't actually selling her home, she didn't immediately realize the implications of that statement. After all, she had noticed that FIVE homes on her street had FOR SALE signs in the lawn, with three more around the corener, but what did that have to do with her? Turns out, it had plenty to do with her ability to re-finance.
The availability (supply) of homes in the neighborhood had caused a curious effect on the price (value) of homes located there. That is, supply far exceeded demand, which resulted in a significant decrease in price. Basic economics resulted in desperate Sellers in the neighborhood selling their homes for far less than what they had paid for them. For example, a 2,000 square foot home which had been purchased for $141.00/square foot ($282,000.00) five years ago had recently sold for $89.00/square foot ($178,000.00). Desperate times call for desparate measures, and San Antonio's loss of AT&T, Washington Mutual and the jobs those firms offered have sent shockwaves of desparation coursing through Stone Oak. This creates a climate of decreased values and surprisingly low appraisals. Wall Street and the stock market are not the only losers when economic times turn tough.
Because the average sales price for a home in her neighborhood during the past 18 months had been $102.00/square foot, the appraisal for my friend's home was based upon that unit value. At the end of the day, the appraiser certified a fair market value of $229,500.00 (2250 square feet x $102/sq. ft.). Too bad the total outstanding amount she and her husband owed on the mortgage and home equity loans they had taken out was $263,000.00!!!!! They weren't nearly so concerned about that amount when they thought the home was worth $310,500.00 (or $138.00/square foot).
In the end, the mortgage company DENIED the re-finance. Turns out my friend and her ex-husband traded blows over who would keep an asset which is today worth NEGATIVE $33,500.00 to them. That is, if the home were sold today according to market trends, she would walk away with a deficiency to the mortgage lenders in the amount of $33,500!
She's looking for another solution, but the picture isn't a rosy one. Americans hold $10.6 trillion in mortgage debt. So far in the current mortgage meltdown, $1.8 trillion or more of that debt is for mortgages that are underwater – loans that are higher than the value of the property. Much like my friend's.
In the 1980s, residential property values plunged in Texas. Since then, abundant land and loads of builders have resulted in enough houses on the San Antonio market to slow home appreciation. When considering buying, selling or re-financing a home, you chould consider the long-term implications of your decision in our uncertain economic climate.
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Trey Wilson --Named By Scene in SA Magazine As One of San Antonio's Best Real Estate Litigation Attorneys -- September 2008 -- As voted on by peers