Negative amortization was always controversial. Option ARMS (Pick-a-pay) always have had a negative amortization feature. In fact this loan has always been World Savings bread and butter. For the financially savvy person this loan makes complete sense. It has features which allows you to lower your taxable income, decrease your cost of funds over the long term and if used with a carefully calibrated investment strategy allows you to maximize returns to the max. Within this context negative amortization is a well accounted for risk and balanced by high returns. Even if on a short term basis you ended up with some negative amortization, over the long term, you would come out ahead.

The problem is the average consumer is not tremendously financially savvy. And therein lies the problem. When option arms were marketed to the average Joe as a financial vehicle, loan originators who themselves are not tremendously financially savvy saw an opportunity to sell more house for lower monthly payment. I’m not trying to put the onus solely on the originator here either. I am of the opinion that the head of every bank in the United States fully knew what they were selling to the average borrower.

I remember a borrower a few years ago who insisted beyond any reasonable persuasion that he wanted to be in such a loan. He said that the payment on the 5/1 ARM I was proposing was to high and he wouldn’t’ be able to afford the house after a few years. However, with the option ARM a different lender had proposed he would be “comfortable”, so if I didn’t give him a similar option he was going to go with the other lender.

This borrower had no business being in an option ARM. Not only was he relatively financially unstable, he was trying to live way beyond his means, counting on future income and future equity to compensate for the short term loss. This was never the market for the option ARM and these types of borrower had no business being in this type of loan. In fact I wrote a post back in 2005 warning borrowers about the dangers of the option ARM. I wanted to remind folks that despite how things were being advertised as a borrower you are still obligated to pay back the full loan amount with any accumulated interest.

And it is because of stories of such borrowers over the past few years that today we sit where we are. Today, Wachovia, one of the largest underwriters of option ARM’s pulled the plug on these negative amortization loans. Here is the news clip from Fortune magazine:

Wachovia (nyse: WB - news - people ) announced Monday that it is pulling the plug on it’s Pick-a-Pay program. The pay-what-you-will exotic loan offerings weren’t exactly subprime –the borrowers were a bit better-heeled Alt-A types– but the default rates on the loans have been much higher than expected and have been driving the lender’s losses.

The loans gave borrowers the option of paying several amounts each month, including low payments that led to an increase in the principal amount of the loans.

Not only did they stop the program they also have said they’ll waive the prepayment penalties on these loans as well. Most option ARM included three year hard pre-payment penalties. So whether you sold or refinanced the loan within the first three years you had to pay a prepayment penalty. With the fall in home prices adding to negative amortization more than they had figured things are not looking good that the banks can make money on these. So, Wachovoia took a long hard look and decided to cut their losses. According to Housing Wire:

Wachovia also said it will waive all prepayment fees for borrowers looking to refinance out of an option ARM, a clear indication of the stress borrowers in such loans are now facing; the bank recently hired Goldman Sachs Group Inc. (GS: 174.90, +0.19%) in an effort to help it figure out what it should do with the Option ARM loans on its books.

As you can tell it’s not just the consumer who is in pain here, Wachovia is hurting too.

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Categories: Arizona, Congress and Government, Humor and Fun, Interest Rate, Mortgage Roundup, Mortgages, Real Estate
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The good news is most US Senators have disclosed the circumstances of how they obtained their home mortgage. The bad news is 23 have not. Should we be suspicious? I think we should. The story this morning:

Amid a brewing scandal over special mortgage deals given to two U.S. senators, Politico last week asked the offices of all 100 senators to describe the circumstances under which they obtained their own home loans. Seventy-seven senators have complied so far. Twenty-three have not.

Senators are not required to report in their disclosure forms any financial information about their homes unless they draw rental income from the home. But in the wake of questions regarding mortgages obtained by Sens. Chris Dodd (D-Conn.) and Kent Conrad (D-N.D.) — loans they received through a VIP program run by Countrywide Financial Corp. — Senate Majority Leader Harry Reid (D-Nev.) has said that the disclosure rules should be changed so that senators’ mortgage details are made public.

Full story (Senators’ mortgages under microscope).

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Tags: Mortgages, scandal, senators
Categories: Congress and Government, Mortgages, Real Estate
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A few weeks ago it was widely reported that a Congresswoman from California was having mortgage trouble. Today we find out that Ed McMahon is talking about foreclosing on his house. This from Yahoo! News:

Ed McMahon talks about possible home foreclosure

Ed McMahon on home foreclosure: `If you spend more money than you make, you know what happens’

LOS ANGELES (AP) — Ed McMahon blames the possible foreclosure of his multimillion-dollar Beverly Hills house on a set of problems all too familiar to many Americans: a foundering economy, health problems and poor planning.

“If you spend more money than you make, you know what happens,” McMahon said Thursday night on CNN’s “Larry King Live.” “You know, a couple of divorces thrown in, a few things like that. And, you know, things happen.”

McMahon, 85, appeared with his wife, Pamela. The couple said they are $644,000 behind on their mortgage payments and are in negotiations with lender Countrywide Home Loans Inc. to set a foreclosure date.

McMahon, in a neck brace, said he had stopped working since he broke his neck in a fall 18 months ago. He didn’t elaborate.

McMahon, who was Johnny Carson’s sidekick on the “Tonight” show, said the house had been on the market for two years and that although 50 organizations or individuals had looked at it, no one had made an offer. Documents show McMahon has a $4.8 million mortgage on the home.

“It’s like a perfect storm,” he said. “Economy problems. Selling the house right now is a tremendous operation.”

If you know of any other famous folks on the brink of foreclosing on their home I’d like to hear.

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Tags: ed mcmahon, foreclosure, Real Estate
Categories: Debt, Mortgages, Real Estate
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Over the past month or so Fannie Mae and Freddie Mac have made a few announcements regarding maximum loan levels. For some odd reason I didn’t post these changes as they were announced. Perhaps I was distracted by other things going on. So, I want to share with you some of the major changes which have been announced recently and how it could affect your situation for obtaining a home mortgage loan.

The really major change is regarding declining markets. As you may or may not be aware the term declining markets entered our lexicon late last year. In fact I even wrote a post suggesting that while “subprime” may have been the word of the year for 2007, “declining markets” has a good chance of being the word of the year for 2008. The reason being that because Fannie and Freddie (along with mortgage insurance companies) announced that they would be automatically cutting 5% off the the maximum loan to value on any property determined to be in a declining market. Now Arizona has been deemed a declining market, so it affects all loans in this great state of ours.

What does this mean to you? Well all Fannie and Freddie loans cap out at 95% which means the borrower needs to put 5% down from his/her own funds. This maximum loan amount was cut back to 90% in declining markets. Which meant the borrower no had to put 10% down for the same loan.

Recently Fannie and Freddie have made some changes stating that they would allow 95% loans again. The problem is finding mortgage insurance companies willing to insure mortgages up to that high of a loan to value. We have developed a relationship with such a mortgage insurance company. Hence, moving forward we are able to do loans upto 95% under the following conditions:

• Fixed rate programs only (fully amortizing)
• $417K max loan size
• Primary residence only
• Purchase or rate and term refinance (no cash out refinances allowed)
• 680 minimum credit score

This is only part of the full set of guidelines, therefore it is important to review this completely with your lender. So I will forewarn you that not all will qualify for this new higher loan to value. Additionally this is a lender specific policy, different lenders have different risk tolerance and relationships with different mortgage insurance providers. Do not take this as an industry wide guideline.

The other changes announced are regarding loan to value for investment properties and cash out transactions. But due to the fact that the Phoenix market is designated a declining market, the changes do not really affect anything for loans here. Meaning our terms are already more strict and we are required to follow the more stringent guidelines when making an underwriting decision.

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Tags: declining markets, fannie mae, freddie mac, Mortgages
Categories: Arizona, Mortgages, Phoenix, Real Estate
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The East Vally Tribune reports that existing home sales increased compared to last year. According to the morning news, this is the first time since 2005 that the year over year (YOY) sales numbers have been positive. For Gilbert, there were 360 sales in April of 2008 compared to 330 in the same month last year, a 9% increase. The news is mixed though since median home prices have come down a bit over the same period.

Now, what I just said is just a paraphrase of what is being reported across newspapers and T.V. news. But in a Web 2.0 world, I’m also interested in what local real estate bloggers have to say with the same numbers. This is because most of the time local area agents have a better understanding of the market and can shed better light on these numbers than the so called “experts”. Below is a sampling of what I found in some prominent local real estate blogs discussing the good news.

The Phoenix Real Estate Guy (Jay Thompson) says:

Beginning of a recovery? One time blip? Who knows. One YOY data point does not a trend make. But sales seem to be picking up steam, foreclosures are creating affordability, and absorption rates are falling. All of this seems to indicate we may be bottoming.

AllPhoenixRealEstate.Com (Jonathan Dalton):

Lower prices can be expected since it is the bank owned home sector fueling the current real estate market. And as I’ve said at least a half-dozen times, that’s not necessarily a bad thing.

The biggest gem though comes from North Phoenix Agent (Heather Barr) who in the middle of April posted anecdotal evidence asking if the market was improving, some of her nuggets (which is being validated through improved numbers):

• I’ve also got 3 new buyers, money in hand, FICO score safely in the mid- to high-700’s, ready to buy this month
• My A/C guy is busier than he can keep up with, with new work based on home inspection findings
• His friend who does truss work for area builders, says he’s busy again after a 1-1/2 year lull
• A friend of mine who works for Pulte says their sales office is slammed; she’s working Saturdays again

So what does it all mean? It seems we’re getting our usual spring inventory increase. With an already bloated market full of too many under-improved and over-priced houses, this should be bad. But the good news it we seem to be selling it.

Way to go Heather. You nailed this one a month in advance.

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Tags: bloggers, phoenix, Real Estate
Categories: Bloggers, Phoenix, Real Estate
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With all the press FHA loans has garnered recently we have received quite a bit of inquiry on this government insured mortgage. We have been able to qualify most who have contacted us, however, we’ve had to disappoint a few. The crazy thing is the reason for denial wasn’t even something related to the borrower. It was entirely based on the property they were seeking to mortgage. While there are relatively few property related hurdles for single family homes, when it comes to condominiums and FHA it’s a different story entirely.

Basically, it boils down to the condo itself being FHA approved. So, if you are thinking of purchasing a condo or refinancing a mortgage on a condo, and would like to use the FHA loan program, the first thing you need to do is make sure it is FHA approved. The loan goes nowhere if the condo in question is not on the FHA approved list. To help you the HUD maintains a master list on its website, but to be double sure, I suggest contacting a FHA approved lender.

If you are curious about what qualifies a condo for FHA approval, the Mortgage Porter has written a fantastic post on this topic. Here are some of the requirements she highlights from the FHA guideline:

1. At least 51% of the total units in the project must be owner occupied.
2. At least 90% of the total units in the project have been sold.
3. No single entity owns more than 10% of the total units in the project.
4. The project, including common areas, is complete with no special assessments and no legal actions pending.
5. The owners association has a reserve plan and a reserve fund , separate from the operating account that is adequate to prevent deferred maintenance

Feel free to contact me if you have a particular property in mind and want to find out if it is FHA approved.

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Tags: Condo approved, FHA, Mortgages
Categories: FHA, Mortgages, Real Estate
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Warning: it’s kind of cheesy, but it’s different and novel. That’s what I like about it. It was featured on Fox News last night!

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Tags: listing, phoenix, Real Estate
Categories: Arizona, Phoenix, Real Estate
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Zillow published some stunning numbers yesterday regarding the US housing market. According to their analysis they believe “one out of two homeowners who purchased during the national market peak in 2006 are currently “underwater” on their mortgage”. This is a lot of people, and it does not appear to let up too much in 2007 either, because they claim “45% of homeowners who purchased last year (2007) are already underwater on their mortgages”.

This is not good news. However, is this a reason to walk away from your home, like so many are doing? In my opinion - NO! In order to put things in perspective I ran a hypothetical scenario to see how long it would take to recoup the equity. If you bought in 2006 with no down on a mortgage of $200,000 and experienced a 25% decline since. Then your home would be valued at $150,000 today. Now at the historically average appreciate rate of 6%, it would take you five years (from today) to be back at 2006 home price levels. (Side note: I sincerely believe we’ve hit bottom.)

Certainly not something you may have hoped for, but it’s not as dire as you may think. Five years isn’t too long of a time, it goes by pretty fast. Even if you purchased on a five year ARM - you’re almost covered. Also, remember ARM’s can reset lower too - if the index is falling. Even if rates go up when it adjusts, I’ve run situations for clients where the saving they received against a 30-year mortgage pretty much covers the increased payment for about a year or so (assuming its a five year ARM of course). More importantly you have five years to figure something out -maybe you make extra payment so increase your equity? Maybe you save some more. What ever the case you have five years to make a plan. The situation is completely different of course if you are in any kind of negative equity loan program.

Now, that I may have assured you a bit, let me share the rest of the bad news. Phoenix is cited in Zillow’s report as one of the hardest hit markets. I share with you some of the charts they have for Phoenix. To read the full report head on over to the ZillowBlog.

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Tags: market analysis, phoenix, zillow report
Categories: Arizona, Phoenix, Real Estate
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A few weeks ago I started a weekly series on the mortgage market attempting to cover important elements from news items to blog posts. Regular readers know I slacked off on this promise after week one. However, I must say I did have good intentions. Inertia is the main issue here and converting potential energy into kinetic energy is difficult. However, I have not forgotten my desire to keep a weekly mortgage round up alive and kicking.

In that spirit, today I want to bring to your attention a brilliant post by the North Phoenix Agent, Heather Barr. She has proposed a very practical way to fix the foreclosure mess. Since she doesn’t trust any of the “big three” presidential candidates to offer anything that would work (she does admire the Obama overall theme though). So in the spirit of citizen government Heather proposes her own “real world” solution. This is a great post and a wonderful read. If only our leaders could think like her!

If you haven’t read it already, then head on over to the North Phoenix Agent Blog. We’d all love to hear from you on what you thought about her plan - so leave your comments. If you like the plan then maybe we can convince one of the candidates to select Heather as their running mate? I’ve already made a campaign sticker!

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Tags: foreclosure, Mortgages, Real Estate, subprime
Categories: Economics, Real Estate, Subprime Mortgages
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I want to make clear to everyone that I don’t agree with everything in this video. Not everyone who took at a sub-prime loan was like Bob (as shown in the video). However, the video does make a point and demonstrates that while the greater focus is on helping those in distress, those who do things “right” should not be asked to pay the bill. There is a balance and in this election season its important to be reminded of this. As the website points out renters represent 32% of the population and they should not be asked to help the 2% who made a poor financial decision.

Your thoughts?

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Tags: bailouts, government, renters
Categories: Congress and Government, Real Estate, Subprime Mortgages
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