An eye-opening exercise for how good your plan is for retirement

I attended a real estate investment workshop last week offered by Paul Conrow and Steve Swanson of www.conferwithus.com. A simple spreadsheet tool was an eye-opener for the audience. It enables a person or couple to input assumptions on current savings, future savings planned, future after tax income desired in today’s dollars, planned rate of appreciation of your retirement investments before and after retirement, and so on. The bottom line is a figure that is either a shortfall or an overage. Either you are falling short of your goal and need to increase your savings/investment rate or you are in good shape and can dial it back an still achieve your goals. For anyone juggling the expense of raising and educating kids, paying a mortgage and taxes, setting some funds aside for 401K and other retirement savings the eye opener was that it was possible to use the next 10-15 years and some additional capital to achieve higher returns than just relying on the stock market. I have highlighted the approach in a previous post on this blog. Just search the blog for investment real estate.

 Here’s a sample scenario of the use of their income estimator tool. Check it out. Makes you want to attend one of their seminars, which are all free, by the way.

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The more rates come down the more rates stay the same

On the front page of The Wall Street Journal, Wednesday, Feb 27, 2008 is a great graph of lowered short term Fed-funds target (to 3%) and the sideways or slightly increasing mortgage rates for conforming loans (up to $417,000) and non-conforming Jumbo loans (over $417,000). Of course the conforming loan limit will go up in selected high priced areas of the country as soon as the government and the lending industry can figure out the pricing of Jumbo-Lite loans. But the Wednesday graph clearly shows that just because the FED lowers short term overnight bank to bank lending rates, the long term 30 year mortgage rates do not necessarily follow suit. Fixed rates on Jumbo and conforming loan amounts are cycling around 7.0% and 6.0% respectively. The longer term mortgage rates are affected more by the confidence of the banking system in risks associated with committing money to borrowers for 30 years. If perceived risks are high, then rates charged on mortgages will be high. If the banking system is leery of inflation coming back as a factor that will make future dollars worth much less the banking system will charge more for long term loans. If the FED continues to lower short term rates as it is hinting it will, then cheaper short term money will worsen inflationary pressures, so the FED is caught between a rock and a hard place. One monetary policy tool of setting short term interest rates may not be enough to combat both potential recession and potential inflation. It sure would be nice to have the cost of owning a home more in line with the cost of renting a home since that is more of a sustainable situation for the economy. But for that to happen average prices need to come down still further and rents will have to come up. I’ll find some charts on those topics and make a future post on this blog.

Here is the link to the article: http://online.wsj.com/article/SB120403496764693703.html written by Kelly Evans, Serena Ng and Ruth Simon

My takeaway from this ongoing soap opera situation is that a large part of the home buying market will continue to be “stuck” waiting for prices to drop further and then to stabilize. In desirable areas the demand for housing is building and at some point the dam will break and desirable areas will see multiple offer syndrome again. Sellers will get uppity again and buyers will compete for houses. So in my opinion buyers with good credit and cash flow should do their homework in 2008 and target their next move so they can act to get a very good deal. Don’t let the great deal get in the way of a very good deal. Over the long haul prices will recover and even if you purchase at a price that seesaws a bit before resuming appreciation over the long haul you’ll benefit from having bought in a very good location at a very good price. If you’re forced to try to time the market because you need every penny of price and every hundredth of a percent of interest rate to qualify to make the deal then you’ll be acting with the masses and you’ll end up paying more anyway because of supply and demand. When everybody is trying to buy you’ll pay more. 2008 is the year of the qualified buyer.

Oh, also the rate chart also suggests that if you are approached by a loan broker who says the FED is lowering rates now and it is time to refinance, be careful, be very, very careful. Your current loan may actually be pretty good since variable interest loans actually do benefit from the FED funds rate drops.  Libor doesn’t have to, but once again Libor has belatedly tracked the Fed Funds Rate on the way down. This means that your payments on current ARM loans may be going down, not up. And  since current fixed rates have not dropped by that much, refinancing every year or so is simply not always an economical move. Make sure that your banker or broker quotes you the number of years to payback the costs of refinance. See one of my prior posts on getting Good Faith Estimates from multiple lenders just to make sure that you are not being manipulated. At the same time don’t drag discussions on and on with multiple lenders and jerk them around. The banks are letting the brokers know that locking loans with multiple banks and then walking away from all but one of them is not a good practice. It’s costly for the lenders to commit funds for 30 days. So do make sure you are getting a fair quote and do comparison shop, but be a good consumer and do your homework ahead of time by reading blogs, for example. Then you’ll be able to make a good mortgage decision and be in control of the process.

When will new conforming loan limits be reflected in loan products? Who will benefit?

Waiting for increased conforming loan limits to cut your interest rate? Patience required! Now that Congress and President Bush have put into law the stimulus bill to temporarily raises the loan limits for Fannie Mae, Freddie Mac and the Federal Housing Administration, the hard work begins.  (As a reminder: The bill raises Fannie Mae, Freddie Mac and FHA loan limits up to 125% of median homes prices with a cap of $729,750.) Deciding who will benefit Original estimates by the National Association of Home Builders that 3 million homeowners could benefit from the new “Jumbo Conforming” or “Jumbo Light” loans have been lowered to half that already as Fannie, Freddie and FHA work over which U.S. counties have median home prices high enough to qualify for a higher limit. “The NAHB had hoped that as many as 29 metropolitan areas would qualify for the maximum $729,725 ceiling,” said columnist Lew Sichelman. “It now appears that less than 10 will make it.” The good news? Most of those counties are in California.  When Will the Limits Rise? Good question. This is where your patience comes in. The Securities Industry and Financial Markets Association (SIFMA) warned that lower interest rates on these new Jumbo Light loans may be months or years off because the market will have to learn how to price the new loans before they buy them as part of mortgage-backed securities (MBSs). Confused? Frustrated? Call me! I will put you on my list of clients who want to be notified when we know what the new interest rates will be.

March 1-2 Investment Conference in Burlingame, CA

As mentioned in a prior post on this blog, here is registration information for the ICGRE.com conference this coming weekend. Deadline for discounted registration is tomorrow, Feb 26.

Check our website for more events and updates

ICG Superstar Event in San FranciscoSaturday March 1st, 2008 10:00AM – 6:30PMSunday March 2nd, 2008 10:00AM – 3:00PMSheraton Gateway Hotel, 600 Airport Boulevard, Burlingame, CA 94010  IN THIS EVENT: 5 Expert lectures. REO’s: big discounts and positive cash flow. Land deals. Builder’s discounts.  DAY ONE: Saturday, March 1st 10:00AM-6:30PM:Educational Presentations: EXPERT SUBJECT Lucian Ioja, Insight Financial Strategic Finance – Coordinate and integrate your financial strategies to maximize financial potential over your lifetime. More. Marc Weissman, Weiss & Weissman Death & Taxes – Taxes Can Be Delayed, Eliminated, And Minimized With Proper Planning Matt Allen How To Get Non-Recourse Loans To Buy Properties With Your Ira- Director of IRA Lending, NASB: The advantages of using debt financing to buy Real Estate within an IRA . More. Jessica Behrman, Chattel Professionals Increase Your Cash Flow With Residential Cost Segregation Reports- Learn how to reduce taxes and increase cash flow, turning a property that is cash flow negative into a positive. More Cindy Hately, WR Starkey Special Mortgages Ideal For RE Investors in 2008 Adiel Gorel, CEO, ICG GO-ZONE: 2008 is the last year in most markets. How to use it effectively  ALSO: Markets and investment opportunity presentations. Markets Update. Special Deals, Builders’ Discounts. Special ICG discounts. REO’s w/ positive Cash Flow. Realtors, networking, and a lot more info. DAY TWO: Sunday, March 2nd 10:00AM – 3:00PM Getting Started Workshop – details on how to begin, Step-By-Step instructions Personal one-on-one meetings between realtors and investors Inner Circle meeting with Adiel Gorel and the ICG staff Extended Information Presentations $20 OFF Single Ticket Promotional Code: SFSNG $35 OFF Couple Ticket Promotional Code: SFCPLEnter code on the “view cart” page when purchasing your ticket(s) online at:w w w. i c g s t o r e . c om* Offer expires 2/26** This offer cannot be combined with any other offer  DON’T MISS THIS INCREDIBLY INFORMATIVE EVENT! WhereSheraton Gateway Hotel600 Airport Boulevard, Burlingame, CA 94010 WhenSaturday March 1st, 2008 10:00AM – 6:30PMSunday March 2nd, 2008 10:00AM – 3:00PM RegistrationPre-register NOW! SEATING IS LIMITED:Lunch on Saturday is included. Purchase TicketsTickets after 2/26/08: single ticket $105, couple $185ICG SUPER-SAVER up to 2/26/08: single ticket $65, couple $105 *This offer cannot be combined with any other offers.Inner Circle Members – Special pricing. Please call the office and pay by phone. Two ways to pre-register1. Online: ICG Store: www.icgstore.com2. Call us at 800-324-3983 or 415-927-7504 to register by phone with a credit card (only VISA or MASTERCARD). Cancellation policy: Ticket reimbursement can be obtained if request for cancellation is submitted up to 10 days before the event.

If only I’d invested with Warren Buffett in 1965…

 

I just read an advertisement for a book, “The Tao of Warren Buffett”, written by Mary Buffett, a former daughter-in-law according to the ad and author with David Clark of “Buffetology”, an internationally acclaimed investment book.  What really struck me in the advertisement is the statement that:Had you invested just $10,000 in Buffett’s holding company Berkshire Hathaway in 1965, your investment would be worth nearly $30 million today. In contrast, $10,000 in the S&P 500 would have risen to roughly $500,000.

The ad goes on to pose the question: Do you need to be a genius to accumulate wealth like Buffett?

In “The Tao of Warren Buffett” you’ll discover the answer is a resounding “no.”

Buffett believes that anyone with common sense and a sound investing philosophy can make a fortune investing.

I’ve got to read this book.  The compound annual growth rate over 42 years with Buffett was 21%, with S&P stocks almost 10%, a factor of two.

This gap between the results of Buffet decision making and the results of S&P index management decision making  is not due to buy/sell strategies as Buffett buys and holds companies and lets management of his invested companies alone. Buffett buys according to his philosophy. Having a “sound investment philosophy” is one of those fundamentals that people usually don’t think enough about. They “just do it”. They just invest, give money to someone with lots of trust and hope. That’s pretty much the process of investing in mutual funds as part of a 401K program. It’s investing on autopilot. Pe0ple who are basically very busy with careers and family don’t even pay much attention to how the investment is doing, except to feel a sense of disappointment at year end when taxes need to be filed and statements are actually perused.  “Shouldn’t the fund have increased in value MORE?”   ”How much is being taken out for fund management?” “Is the fund manager earning more than I am?”

 So there’s a sense of “I’m not sure if what I am doing with investments is going to get me anywhere I want to go.”

I believe there are a lot of successful, career-minded and family-minded  people who would like to feel more confident that regardless of what and how they have done financially to-date, they can still make a plan happen in the next 10-15 years.

I’ll be blogging in more detail on some investment groups mentioned previously in this blog since I’m convinced that the need to figure out how to get from $1 Million net worth to $3 Million net worth is more important than ever since pensions have gone away for most employees and employees are on their own to prepare for retirement.  The direct returns may not be quite as high as Warren Buffet has been able to achieve by favorably buying and holding solid companies that perform and grow in a global economy. But, real estate is a highly leveraged investment. So an investor can purchase a $200,000 property for only $40,000, or even $20,000 down. Also real estate can be leased out so a mortgage loan can be paid by tenants. And interest expense and maintenance of real estate is tax deductible. And real estate as income property is depreciable over 27.5 years. We’ll develop an understanding of the return on investment calculation for real estate.  It may be surprising what can be done in 10-15 years. 

Households in the Silicon Valley are on the path to $1 Million net worth, but that’s not enough

Households in the Bay Area’s Silicon Valley are on the path to $1Million net worth. All they have to do is stop using their home equity as an ATM to support a lifestyle that exceeds income, start making contributions to employer supported 401K retirement funds, and pay off their mortgage.

They can pay off their mortgage various ways, either by putting money into the mortgage by regular payments and prepayments or by setting up a “side fund”, an investment fund that earns more than the interest rate of the mortgage. This side fund approach is popularized by Dave Andrews, author of Missed Fortune 101″. If the side fund does well at some point in the future the homeowner will cash out the side fund and use the proceeds to pay off the mortgage in a lump sum.  Some homeowners may feel that side fund investing is too risky and they prefer to avoid more aggressive investments that may lose money as well as make money.  For these homeowners, I have mentioned in other posts on this blog a “side fund” alternative that is secured by the value of their home. That approach is the Home Ownership Accelerator product that essentially pays the same amount as the mortgage on the “side fund”. In this case the side fund is actually the interest earned on the bank account that is built into the HOA product. The bottom line of the HOA approach is that the homeowner accumulates the dollars that would have gone into the side fund into the HOA bank account. These dollars will always be available to the homeowner if needed for emergencies or to pay bills, but while they are in the HOA account they reduce the amount of principal owed on the home loan. The interest expense is thus much less than what would have been paid into a 30 year fixed mortgage or an ARM product, because the homeowner is essentially borrowing less. It’s a smart and risk free approach to paying off the home loan using the float on the household’s cash flow that is earning little interest in most bank accounts today. 

So once the mortgage is paid off and with accumulation of 401K retirement funds, the Silicon Valley homeowners will most likely have $1M in net worth.   But, $1M is not enough of a nest egg to live on for very long. Tomorrow’s retirees should live long lives after retirement and $1M is only ten years of $100,000 in living expenses. The financial planner rule of thumb would be to only live on 5% of your nest egg, since the nest egg should be able to grow by 5% a year theough returns on the invested assets. 5% of $1M is $50,000 per year.

 So if the retiree wants to stay in the Bay Area the nest egg should be $3M. That would produce  $150,000 annual living expenses without depleting principal.

The big question is how to get to a $3M nestegg? It will require smarter saving and investing than most people know about. There are various ways to jump the GAP from $1M to $3M. I have written about real estate investment groups in other posts on this blog and this coming week I will highlight some tools that homeowners should become familiar with in order to assess the state of their path to $1M and then also to assess the possibilities for making the jump to the path to $3M. The path to $3M takes about 10-15 years, so anybody with that much more time to work can plan on “catching up” to a financial plan that will enable them to enjoy a worryfree lifestyle in retirement. Even if a person is 60, if that person will work for 10-15 more years amazing things can happen.

Small business tax advisory workshops in San Jose

Last year I attended these workshops sponsored by the City of San Jose’s Work2Future program in conjunction with numerous local business support groups such as SCORE and the Filipino-American Chamber. Last year the format was individual consulting on tax matters with IRS enrolled agents and on other relevant topics such as business structure, incorporation, etc… This year, in addition, there will be educational workshops from experts representing the 24 partner organizations that help support the mission of the center– to help small business owners succeed.

I found the information very helpful for small business owners and prospective small business owners. There are two available sessions, March 8 and March 15, 10AM-2PM, 1290 Parkmoor Ave, San Jose 95126. I highly recommend these for individuals looking to get specific questions answered at no cost and for those interested in networking and interviewing professionals who may be able to offer follow on services. Here’s the link to the website of Business Owner’s Space, www.businessownerspace.com

I’ll be attending the March 8 session and look forward to seeing you there. I’ll also blog about the event afterwards, but if you can make it you will be glad you attended.

Hot mortgage rates advertised by email or web ad ask for Social Security Number???!!

My wife received an email from someone, a stranger, who claimed that we had a pending approval of a lower cost mortgage payment and all we needed to do was to click on a link in the email message. Wow! Normally I just delete these kinds of emails since I know that they come from someone’s prospecting database. Somehow that person got or bought my wife’s email address and they even knew what city we live in. The email could easily be transporting a virus. But I was curious, and it was my wife’s computer, not mine, so I clicked on the link! [I'm not thoughtless. Since I'm her IT support person anyway, if it had been a virus I would have had to deal with it.] The link led me to a website that asked for personal information. I was amazed that the website asked for Social Security Number, among other things! Wow! I never input SSN into an unknown website! That was a huge red flag! So I went further and looked at the privacy agreement. Of course, the vendor promised not to give or sell our information to any unrelated party. But, get this. The privacy policy clearly indicated that the vendor could not control how the other parties involved with the website would deal with the information submitted, including the web hosting company and the four (or more) mortgage lenders to whom our information would be sent. This is a pretty huge caveat! 

People wonder how private information gets out into the public domain. This is how. If a social security number gets entered into a website like this all bets are off and you’re a big time candidate for identity theft.  My message is to never provide personal information like this to a website. Work directly with a professional.

Make sure to read the fine print!

I was on my way to a Starbucks yesterday afternoon when a large sign at a nearby bank caught my eye. It read HELOC, Prime-1.01%. Now since we all know that the FED Funds rate has been lowered to 3% and the Prime rate is about 3% above the FFR, that puts prime at 6%. So 6%-1.01% means a HELOC at 4.99%. That’s pretty good since I have always  thought of HELOCs as PRIME Plus second mortgages. I was intrigued. I spoke with the branch manager who was very professional and helpful.  I concluded that the market for HELOCs is getting more and more competitive and that is good for the consumer. I took a flyer with me and only later did I have a chance to actually study it. The fine print is hard to read, but it is absolutely necessary that you read the fine print before making a decision on any loan.

In the fine print I saw that the rate varies from 4.99% to 9.99%, presumably depending on the creditworthiness of the borrower. That’s normal. But then it stated that the rate will not vary above 25% nor below 4.99%. Now 25% is a pretty high ceiling cap . I doubt if the FED would let rates get that high these days, so I wasn’t worried about the high end. But  what struck me was that the loan would not go BELOW its starting rate of 4.99%. So the loan is structured to give the borrower a good start rate, Prime MINUS, but that was all.  If the Prime rate goes down in the future below 6%, which I expect it will during 2008, the borrower on this HELOC will not benefit from the lower rate. Admittedly not all HELOCs necessarily give the borrower the benefit of the lower rate, but some do. So the borrower does need to read the fine print and moreover the borrower should be savvy enough to know what is possible in a loan. It’s NOT just about the rate! It’s about the terms as well.

So if fine print is a potential “gotcha” shouldn’t borrowers read the fine print? But, really, how many borrowers actually take the time to read the fine print when they are sitting at the title company office or at the lawyer’s office or when they are sitting at home with a mobile notary? It’s rude, isn’t it, to make people wait so you can actually read what you are signing. And it’s hard to understand what questions to ask sometimes. The forms are not always clear and most consumers do not purchase or refinance so often that they become knowledgeable of the paperwork. So I would venture to say that 99% of loan papers are signed mechanically without much comprehension. And how many times is the loan broker or banker even at the signing? I am, but that’s very uncommon.

I recommend that consumers request from the title/escrow company or the attorney an emailed copy of the documents ahead of time. It’s easily done these days to receive a pdf file with all the papers a day ahead of the signing so some actual reading of the papers and calling the loan broker or banker can take place. Then the signing meeting can be handled with the usual organized mobile notary handling the paperwork, but the borrowers can sign with speed and confidence, instead of with blind trust.

   

Investment group workshops in San Ramon

In a previous post I mentioned some investment groups for which I have great respect. I have attended the information sessions and met the founders and I have helped some club members with financing of investment properties all over the country. I will continue to seek out such groups and let you know about them.

Here’s a list of upcoming workshops for an investment group called www.conferwithus.com located in San Ramon, CA. Founders Paul Conrow and Steve Swanson are from the business side of corporate America, retired senior executives from Visa and PacBell. They are very relatable and  common sense oriented. Their investment network emphasizes education on investing and proper use of financial planning and investment management tools and good information about the investment regions and individual properties. I highly recommend their approach to investing in rental properties outside of California. 

I’ll be attending the Feb 19th workshop and encourage you to attend. Of course, I’ll blog on the key points as well.

Paul and Steve have graciously allowed me to invite readers of this blog to atend these workshops and so I’ve posted their flyer with my contact information on it so you can contact me if you’d like to attend.

Prime Plus Lines of Credit vs Prime Minus Lines of Credit

Conventional banking lines of credit are Prime Plus Margin. A sample of an unsecured line of credit would be the Business Equity Line from B of A with no closing costs, just a $145 fee. Payments are 1% of balance. With Prime at 6% the LOC ranges from 6.99% to 15.99% depending on the creditworthiness of the business borrower. An innovative first position HELOC line of credit is secured by a primary residence or second vacation home and is Prime Minus Margin. Prime Minus Margin is actually the same as 1mo Libor plus Margin. As you can see from the historical data chart below Prime is always about 3 points above the FED Funds rate and 1 mo Libor is just a few basis points above the FED Funds Rate since the European Central Bank (ECB) tends to lag the Federal Reserve Board (FED) in moving interest rates. So, today’s 1 mo Libor plus margin of 2.25% is 5.51%, or a rate that is “below” Prime, hence I have named this line of credit Prime Minus Margin. It is lower than the unsecured line of credit from Bank of America because it is secured by a real estate property. This HOA line of credit does require a refinance procedure to apply the real estate lien and hence an appraisal and closing costs are involved. But this is an investment that has a high return since the HOA is much more than just a refinanced mortgage loan.  It is a financial power tool for the homeowner since it combines a high interest earning bank account linked to the line of credit. This means that as the homeowner deposits short term floating funds waiting to pay bills and any surplus funds (CD’s, etc…) in the HOA that were not earning comparable interest, these funds will be available for daily compounding. The funds are always available to be withdrawn from the bank account to pay bills or to make other investments. And the rate earned is the same rate as the homeowner’s line of credit. So the HOA effectively enables the homeowner to lower principal by floating and accumulating surplus funds in the bank account. This results in lower interest owed and much faster payoff of the home loan.

For home loans it is a common practice to enable the borrower to “buy down” the interest rate with upfront funds. Instad of paying a higher interest rate, pay the bank an upfront fee and pay lower rates. That is essentially what the HOA enables the borrower to do compared with the unsecured line of credit. The rate would be 5.51% instead of 6.99% to 16.99%. As an added bonus, the HOA allows the borrower to further “buy down” the interest rate from 5.51% to 4.01%, another 1.5 points! This buydown will cost almost 3 points, but the return on investment if the loan is held to the point of payoff is huge and the payback is only two years. Virtually every homeowner chooses to buy down the margin to 4.01%.

For a business owner/homeowner with household equity that can be tapped for a line of credit the HOA is extremely valuable. With good credit and an ample salary that generates a monthly household surplus of, say 10%, net pay the HOA loan will be a very beneficial financial power tool. The businessowner’s cost of capital can get down to 4.01%!

See the historical interest rates in the chart below and see the projected interest rates of the lines of credit based on Prime and based on Libor. Note how the range of interest rates for the Prime PLUS Line of Credit (Green) is much higher than the range of interest rates for the Prime Minus Line of Credit (Blue).

  

Effect of FED lowering interest rates on small business owners

A friend asked me about the effect of the FED lowering short term rates on small business owners. Here are a couple of video clips that summarize some comparisons I just did on the Internet. Interest rates of lines of credit based on Prime rate will be going down and the short term capital will be more affordable for small business owners. Small business owners should consider expanding lines of credit during 2008 if needed to grow their businesses. There are new sources of capital available to qualified small business owners that may be even more economical than conventional bank lines of credit.

Segment 1: Bank lines of credit at Prime Plus
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Segment 2: Bank/mortgage line of credit at Prime Minus

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For well qualified homeowners with a savings habit, there are options to refinancing to a lower fixed rate loan

In other posts on this blog I have mentioned a new product called the Home Ownership Accelerator. It is hugely popular among homeowners with good credit and enough income to have a savings habit. By refinancing to the HOA and accumulating, say 10% of net pay per month in the bank account, it is amazing how much interest expemse can be saved in a short time. Unlike prepaying a conventional 30 year mortgage, the accumulated savings is always available to the account holder to pay bills, but while the funds are in the account the owed principle is reduced and the interest owed is also reduced. It’s a two way payment adjustable loan that professors at Columbia and NYU in a previous post considered among the three optimal loan product structures available to savvy consumers. See post of Feb 4, 2008.

Here’s a video screen capture of how to use the HOA simulator at www.cmghome.com.

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1 mo Libor Rate vs FED Funds Rate vs 30 Year Fixed Rate as of Feb 2008

There was a period in December where the Libor rate was going up and the FED Funds rate was going down. This reflected a difference in how the respective central banks chose to tweak their banking systems to influence the health of their economies. The FED lowered the short term overnight rate for member banks to borrow funds and the European Centtral Bank raised rates. Some articles in the Wall Street Journal over Dec and Jan shed light on the thinking of the ECB.

http://online.wsj.com/search?KEYWORDS=ECB%20Libor

As of Feb 2008 the 1 mo Libor and the FED Funds Rate are close to each other again on the way down. So payments on variable interest rate loans like Option ARMs based on the 1 mo Libor will be lower.

(Click on chart for expanded view)

OK, so conforming loan limits can go up to $729,750 from $417,000, temporarily and only in parts of the country where 125% of median price exceeds $417,000

Congress is specifying a higher limit on the loan amounts that Fannie Mae and Freddie Mac will be able to purchase. For the consumer in high priced areas like California that means that lenders will be able to offer loan amounts that “conform” to the new higher limit and be able to sell the loan to these private agencies and the loan will eventually be able to be packaged for investors. And with the funds from the sale of the loans, the lenders will be able to turn around and originate another loan to another consumer. The insurance of the conforming loan by the Federal Housing Administration (FHA) makes the investment package more secure to investors and so the long term mortgage monies in the economy flow more readily and this means that lenders should be able to charge less for a jumbo loan than before when the limit was $417,000.  

The actual metric is limited to 125% of median price in a given area. By mid-March the government will have to figure out the median prices to use and then lenders will have to figure out the pricing of these “Jumbo-lite” loans.

We will see what impact this new conforming limit has on the interest rates that lenders offer for “conforming”  and for “jumbo-lite” loans. If there is a significant savings then homeowners with loans that are at 70-80% Loan to Value (have plenty of equity) will be tempted to refinance to lock in low rates on larger loan amounts. This will help generate new business for the mortgage industry and give some consumers a more long term benefit from the economic stimulus moves that the FED and the government are planning. It’s one thing to get a one time refund check in the mail. It’s another to be able to secure a new loan that could conceivably save tens of thousands of dollars of interest expense. Even with the favorable IRS tax treatment of interest expense people still prefer not to have to pay interest expense if they don’t have to.  Lowering monthly housing expenses while still paying off the loan is a win-win deal. And while consumers who have more money in their pockets should probably save it, they’ll most likely continue past trends and spend it. Since some 70% of the US economy is driven by consumer spending, the health of the economy will be ever so slightly improved by the effects of this new non-conforming limit. So it’ll be considered patriotic to refinance!

And what’s with the notion that the new limit will be temporary? We’ll see.

I’ll keep you posted on the rates.

Video message from Chosen Cheng introducing this mortgage blog

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Hi, Welcome to my blog. It’s been about a month now and not only am I sure that I can do this, I am excited to do this. There are so many questions and issues that people have about the mortgage industry and the real estate industry in general especially in 2008  as interest rates are being driven down. I have been speaking to friends who are knowledgeable homeowners and investors and their experience is that people have gotten into financial trouble in the past few years because they made assumptions about the real estate market price appreciation that did not pan out and the strategy of frequent refinancing to keep payments low ran out of steam as appraisals did not continue to go up and up. These folks are facing foreclosure and short sales, selling below the amount of the loan. While the government may offer some kind of temporary mortgage relief, it is likely not going to be available to all homeowners.  It’s hard to help someone in this situation. The best advice I have encountered is to talk to your lender about renegotiating your loan. This has worked in some situations.

So there also are many folks out there who are hoping that lower interest rates will help them be able to refinance their loans at a lower rate and save them money as they continue to pay off their mortgage. If their loan is for less than 70-80% of the value of their home, even if the home price is declining there will be room to refinance to a lower rate. The question is what will rates do in 2008? Will rates drop more than they already have? When is the best time to refinance? Is this an opportunity to leave an ARM loan with variable intererst rate and move to a low fixed rate? Does my homeownership situation suggest that an ARM is a better solution than a fixed rate loan? Are there other loans that are even better solutions for my needs? What about the early payoff options that I have been hearing about?

This blog has been discussing these and other topics and will continue to provide information so the homeowner or future homeowner can do his homework and know what questions to ask of the realtors and loan brokers or bankers.

Watch my video to get a feel for who I am and what I hope to be able to do as an innovative and creative player in the mortgage industry.

Message to young couples looking to buy that first home: buy investment property first

This evening I attended a two hour “take notes” seminar given by Adiel Gorel, President of International Capital Group, www.icgre.com  at the Claremont Hotel in Berkeley. For me this was a “hit-forehead-with-butt-of-hand, could have had a V-8″ experience. Why didn’t I run across him earlier in life? We actually both worked at HP in California during the same time frame in the early 80’s when, as a young engineer,  he started buying rental homes outside of California, actually in Las Vegas. He became successful enough with an organic, common sense approach that other engineers asked to join him in taking advantage of his research and his network of realtors and property managers. That led to the creation of ICG. 

During that time I recall taking a Robert Allen “Nothing Down” seminar, but doing nothing with it, due to “lack of time” being so caught up in launching new computer products to the market. I got married and fell into the routine of buy a home, fix it up and then sell the home to buy a bigger home in a better neighborhood in a better school district. I bought a truck! My dream was to have a daughter that would bring me lemonade on hot summer days as I was working on the rental properties and a son to drive with me to the dump on weekends!  We did well with real estate, but with more properties we could have done so much better.  And affordable hand’s off property management would have been a dream.

This evening when I sat down in the audience I mentioned to the person sitting next to me that I came to learn how to buy more houses and never sell. 

In my mind, the value proposition of what ICG is offering is a streamlined means of making good investment decisions in rental properties of new single family homes from builders eager to move inventory in affordable parts of the country. It’s a strategy that makes good sense, especially in this 2008 buyer’s market when sellers are motivated to offer good deals and interest rates are trending low. For investors who are planning long term ownership, the prospect of waiting for prices to decline further before buying is less important than just getting into the market with renters and near break even cash flow. In addition, the IRS tax treatment of rentals and even a modest price annual inflation over 10-20 years of price cycles make the investment decision a no-brainer when the purchase is affordable as these rentals are today.

Having said this, the message I am passing on to my daughter and future husband and my son and his significant other and to other young California couples is to seriously consider renting in California and then purchasing affordable income property in other parts of the country. Get over the emotional compulsion to “own your own home”. The financially strategic move is really to “own your own investments” and it will be easier to get into property ownership using ICG methods to purchase $200,000 brand new homes than saving up for a $500,000 or $750,000 starter home.  

When your investment properties appreciate in a few years you will be able to arrange to buy your own home in the right neighborhood with ample finances. Remember, while owning your own home may be considered by the general public to be an investment, it’s not as good an investment as rental property and in fact from a tax perspective your home is actually a consumption item since you are living in it. You get the interest expense deduction, but no depreciation deduction or maintenance deduction. And no one is helping you make the payments, except you!  The general public is actually making life decisions on the basis of conventional wisdom, and conventional wisdom is OK, but not optimal. Learn more and make better decisions. 

There is an ICG  conference March 1-2 in Burlingame, CA. Check out the website www.icgre.com for information. I highly recommend it.

How have interest rates changed since the FED’s rate changes?

It is a simple matter to do a search of interest rates and get current information on average loan rates and indexes.  Just check any search engine or go to a financial journal.

It is also simple to get historical tables of interest rate indexes. Just search on the desired mortgage rate history.

But, getting historical information of daily rate changes from lenders is not easy to get for a consumer who is not keeping track of daily rates. So, this post will be a daily table of rates of various representative loan products from different vendors. The purpose of the post will be to help the consumer know what to expect in rates when talking with bankers or mortgage brokers. The actual rate that will apply to the consumer’s situation may differ from the rates quoted in the tables, but the loan agent should be able to explain the details of the good faith estimate that he or she offers and how it relates to the rates in the table. The table will contain the rates at or close to the par rate. The par rate means that the rate does not have a yield spread premium, positive or negative, associated with it. 

A positive yield spread premium is an additional fee of a certain number of points that a borrower may choose to pay at closing in order to “discount” the interest rate to a lower rate. This is called a discount fee in the Good Faith Estimate and HUD1 form at final closing.

A negative yield spread premium is a fee intended to be paid back to the borrower to pay for closing costs, for example. If the borrower is willing to pay a higher interest rate than the par rate he or she should be able to receive an up front payment from the lender that can be applied to payment of closing costs.

So therefore a loan rate sheet will include a range of rates and yield spread premiums and the borrower should be prepared to make an appropriate decision on the rate that best meets his or her needs. Make sure that you ask your loan broker or banker for the par rate of the loan being recommended.

See the tables below. Even though I do not have the rates for every weekday of the last two weeks you can see how much variation there is from day to day. The varying rates represent the changing cost of money available to the various lenders.

To view these charts in greater detail, click on the charts to expand to full size.

“Toxic” Mortgages Are the Best; A new study from professors at Columbia and NYU finds that the “optimal” mortgage in a perfect world is an option ARM

This headline comes from an excellent article in Business Week Online, Sept 24, 2007, written by economics editor Peter Coy. He describes an academic paper, “Optimal Mortgage Design”, written by Professors Tomasz Piskorski of Columbia Business School and Alexei Tchistyi of New Your University’s Stern School of Business. They describe a model for evaluating a borrower’s expected payoff of acting optimally according to the terms of the contract with the lender. The model considers varying interest rates, the borrower consuming ”necessary”items like groceries, medicine, transportation and other essential household goods and services and then making choices to consume “luxury” items, save and repay debt.

They conclude that there is an optimal allocation between benefits to the borrower and to the lender and that it can be achieved in different ways using combinations of existing residential mortgage products.  Optional allocation can be implemented by:

1. Using an option ARM with a preferential temporary ‘teaser’ interest rate.

This option offers innovative freedom for the borrower to make different levels of monthly payments for varying periods of 3,5,7,10 years. This is pretty fantastic and according to the authors, “the gains from using the optimal contract relative to simpler mortgages are substantial and the biggest for those who buy pricey houses given their income level or make little or no downpayment”

But option ARMs require judgement on the part of the borrower to make appropriate payments and to prepare for the higher payments that are a part of the loan contract. It is interesting that option ARMs have been blamed as the cause of borrower distress and foreclosures. But if you think about what is happening , it is obvious that it is not the option ARM that is the root cause of the distress and foreclosures. It is the borrower who signs up for the option ARM who has unrealistic expectations of being able to make the future higher payments. One poor assumption  would be a naive optimism of a future job raise that does not materialize. Another poor assumption would be expecting to be in a position to captialize on appreciation of the value of the property through refinancing the loan before the higher payments kick in. When the US real estate market appreciation trend peaked in 2005 this assumption became more and more of a cause of mortgage distress for mortgages that depend on refinancing to stay affordable. 

So, in reality an option ARM is an excellent financial tool for a homeowner who knows what he or she is doing financially and acts on that knowledge. It’s actually a matter of becoming an educated consumer, of understanding fully what it is that you are signing. People tend to place too much reliance on a broker or banker to make decisions for them. They do not do their homework and learn what questions to ask when buying money! Perhaps that is because math is involved and may be intimidating to people. Perhaps it is human nature to just pick a person who is a broker or banker, who may be a friend or someone of the same ethnicity and place all your trust in that person to do well by you. The reality is that that person cannot read your mind and even if that person is honest and ethical, communication problems can always enter into the transaction.  The answer is to make an effort to become a knowledgable consumer and to take control of the mortgage decision. This blog is dedicated to helping clarify mortgage facts and figures, to present mortgages in a transparent manner. This blog takes an additional step and that is to pursue consumer advocacy, to reach out to educate the consumer. So if you are interested in staying in touch with future materials, please subscribe to the RSS feed that will be added to this blog soon.

According to the paper, there are second and third options to achieve optimal allocation between borrower and lender:

2. Using an interest only mortgage with a preferential temporary ‘teaser’ rate, HELOC and one way balance adjustment (prepayments). 

3. Using an interest only mortgage with HELOC and two way balance adjustment.

A future post will discuss these two options in more detail. Option 2 is the solution popularized by the use of a software product to manually monitor the homeowner’s spending patterns and monitor the accumulation of the homeowner’s surplus cash that the homeowner is instructed to accumulate in the HELOC. The software instructs the homeowner to make prepayments on the primary mortgage. Groups like Freedom Equity Group, a multi-level marketing organization helps to inform and educate the consumer about this software product solution delveoped by United First Financial. Jack Guttentag, former Wharton finance professor and newpaper columnist of The Mortgage Professor has written about UFF. Incidentally in this article he mentions the HOA product described below in a derogatory fashion. But in 2008 he wrote another more thoughtful article that compliments the HOA as being a powerful financial tool. Read the article at the link below.

Option 3 is the solution represented by the Home Ownership Accelerator product from CMG and GMAC bank, discussed in prior posts on this blog. The HOA is an extremely powerful, automated financial tool for homeowners. Jack Guttentag, former Wharton finance professor and newpaper columnist of The Mortgage Professor has written about the HOA.