Co-op & Condo Financing: 3 Weeks is the New 10 Days

Christine Toes here!

We used to tell buyers and sellers that "it takes 10 days to 2 weeks to close" after co-op / condo approval or after a 30 day notice in a new condo had been issued.

After my last four sales took what seemed like forever to close, I took a survey of Corcoran agents to try to figure out if it was the banks I was recommending, if I needed to take a closer look at the mortgage bankers I work with, or if it was an industry-wide problem.

The consensus from my colleagues is that it now takes 3 weeks to close. "Its like pulling teeth" and "I'm tearing my hair out" were common statements about clearing deals to close.

Bank of America and Wells Fargo received the most votes for being "the worst." The problem is that they often give the best rates, so a lot of us recommend them all of the time and therefore the results are definitely skewed. One of the mortgage bankers I work with left Wells Fargo because they had laid off so many people that it was frustrating to get deals done. But he went to Bank of America which seems to be just as slow.

One comment was that "Chase was bad for a while but they're catching up. Citibank is fine. HSBC too." But another agent said Chase was slow also. Chase/Citibank's rates seem to be higher than Wells and B of A, so I don't usually refer them, but if they're faster getting deals to close, I might have to start!

One great comment came from my colleague, Gene Keyser:

"Delays are because of multiple iterative approval and re-approval processes stemming from a new rule where any loan that a bank floats into the secondary market must be bought back by the issuing bank in the event of a foreclosure. They have a lot of skin in the game now." (And hense are being a lot more cautious).

Doug Heddings over at TrueGotham.com also recently blogged about the longer timeline to close in today's market:

"...it is imperative to mention that banks are also slowing the process considerably these days with tighter lending standards.

So realistically, one should expect a closing of a Manhattan co-op to take approximately 2-4 months from the time a contract is sent out. Having said that, things like holidays, vacations of Board members and other pressing business that a Board may have to address are all factors that can lead to further delays."

In the last year, I have seen banks asking for more and more information and underwriter after underwriter is reviewing and re-reviewing the mortgage file. A new HVCC change also isn't helping as regulators try to separate the appraisal process from the lending institution - now you are seeing out of towners commuting to Manhattan from all over to conduct appraisals. For a more detailed explanation on this, I refer to Andrew Goodman, owner of Gotham Valuation:

The HVCC is a new code adopted by Fannie Mae, that has been in full effect as of May 1st, 2009. The objective of the HVCC is to change the way which appraisers are engaged by lenders originating most loans. Whereas appraisers were previously engaged by loan originators (mortgage brokers), the HVCC mandates that appraisers now be hired by third party appraisal management companies which have no vested interest in the outcome of the appraisal.

The effect of this legislation has not all been positive. In many instances appraisal management companies are engaging appraisers who lack required Manhattan specific market knowledge. In these instances it is not uncommon for properties to be either under or overvalued.

Banks have also lost co-op stock certificates or UCC forms and instead of taking 2 weeks, it is taking up to a month to find them. In the last few months, clearing to close seems to be taking longer and longer.

Now that I know that 3 weeks is the new 10 days, I can prepare my buyers and sellers accordingly! When they've identified the property and are shopping around for the best rate, I can send them a list of representatives from the four most frequently used NYC lenders, plus one mortgage broker who can shop smaller banks for them. Buyers may have to choose between a speedier transaction and lower rates.

One word of caution here is that you don't want too many banks to run your credit report because it will lower your credit score! Usually we recommend that people go to a max of three lenders within a short time span, which generally will not lower your FICO score.

Since I know that this isn't just a problem that I am facing with my own deals, I can stop tearing my hair out. What I am hearing from mortgage bankers is that in the next six months, depending on transaction and refinancing volume, banks should start ramping up the number of employees they have, which should help transactions move more quickly. Additionally, if the pendulum starts swinging back the other way to make getting financing easier, the process should be less frustrating for everyone involved.

Keeping my fingers crossed (but not holding my breath!)

Tips for getting your closings done as quickly as possible:

Toes says: if you paid cash for your apartment or paid off the mortgage on your co-op, put your stock certificate and proprietary lease in a safe place! Make sure your attorney knows where these documents are. If you lose them, it can slow down the transaction.

Toes says: if you are selling your apartment and you have a mortgage on the property, make sure your attorney contacts your bank as soon as possible to locate the stock certificate/proprietary lease. Some banks will "search" for these items for four weeks before they will declare these documents "lost" and issue new ones.

Toes says: If you purchased an apartment in one name, and you are now using a different name, ie, your married name, you must notify your attorney! Title / lien searches may need to be done in BOTH names. It is frustrating when everyone thinks you are cleared to close and it turns out that the title or lien search was done in a different name than what is on the stock certificate / proprietary lease or deed. New title / lien searches will have to be ordered, delaying the closing.

Toes says: Keep your condo/co-op offering plan, HUD settlement statement, stock certificate / proprietary lease / deed (depending whether it is a co-op or condo) in a safe place. Also keep any amendments to the offering plan as well as the past two years of building financial statements that are given to you in that same "safe place." If you lose your offering plan, it can be around $150 to replace. If you lose your copies of the building's financial statements, a management company will charge between $25 and $200 (!) for each year of financials that you need. When selling your apartment, the buyer's attorney will need at least two years of financial statements as well as the offering plan and any amendments.

Although closings are taking longer these days than they used to, being organized can make a big difference in the time it takes to close.

(PS - Special thanks to my attorney, George Kontogiannis, for assisting with this post!)

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Raised Limit Conforming Loan Explained

A: A great topic that is often misunderstood! With the new jumbo loan limit being raised from $417,000 to $729,750, expanding what counts as conforming and therefore a lower rate, cheers are being hollered that this will save the markets, yay! Not so fast. Now that the plan has recently took effect, some buyers who fit into the subset of this plan and can take advantage of the conforming raised loan limit, are finding that the rate is higher than normal conforming loans? What gives? The answer lies in a little 2 point fee that the GSE's are charging for this raised limit product and is being priced into the rate; therefore making the raised jumbo loan limit having a raised rate as well!

From one of my anonymous mortgage insiders that I know, trust, and works as a loan officer at a major bank:

Rates for the new limits vary depending on product. In this example, I will use a 30 Year Jumbo Mortgage vs. a 30 Year Raised Limit-Conforming Mortgage, in Manhattan with a loan amount of $700,000 - on a Purchase transaction.

30 Year Raised Limit - Conforming: 6.875% @ 0 points
30 Year Jumbo: 7.375% @ 0 points

Keep in mind that, under the new limits, CO-OP's are not allowed any financing; They have to be financed under traditional loan limits. For example, on a co-op purchase with a $417,000 loan amount, a conforming mortgage currently yields a rate of 5.875% @ 0 points.

The fee for doing a loan under the new limits is 2 points, but that fee gets built into the pricing of the rate.

No matter what the loan limits or products are, strict underwriting is a standard in the current mortgage environment. There is very little margin for error, and overall banks are taking a very conservative approach when it comes to lending money.

**Also please note that the rates quoted above are as of today, Tuesday April 8th, 2008, and are subject to change.

The key phrase is: The fee for doing a loan under the new limits is 2 points, but that fee gets built into the pricing of the rate. Take a look at the conforming rate of 5.875% compared to the raised conforming loan rate of 6.875%! In this case, for a loan of $700,000 and zero up front points, the two point fee translates to a 1% HIGHER RATE!

The new raised limit rate is better than the jumbo rate, but still misleading given the announcement of the stimulus plan back in January. This explains why the rate is higher for any buyer who tried to take advantage of the jumbo limit being raised! There is no such thing as a free lunch! Two points is in essence 2% of your loan amount that will be built into the interest rate (not sure of exactly how) over the course of the loan.

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Inflation + Credit Crunch Means Higher Mortgage Rates

A: A hot CPI number wakes everybody up to the FACT that commodity inflation is hitting consumer prices! Even those that say inflation is under control won't be able to continue that argument with a straight face. This inflation trend will continue as long as commodity prices remain at these elevate levels; and that will last as long as our fed attempts to re-inflate our economy out of this credit mess. Meanwhile, this credit storm is now a full blown category 5 hurricane on so many levels and is hitting land at numerous points; analogy --> credit crisis is spreading! Put both these FACTS together and you will understand why lending rates are rising.

First, the inflation news. According to the WSJ.com:

U.S. consumer prices accelerated across the board last month, a worrisome sign for Federal Reserve officials who must balance a sharp slowdown in economic activity with stubbornly elevated price pressures. Still, the inflation data likely won't deter Fed officials from lowering official interest rates again next month, as guarding against recessionary risks remains their top priority.

As far as the credit crisis, things are just bubbling under the surface; I feel like a big event is brewing. Here is what is going on as a result of the dysfunctional credit markets and the effect it is having on willingness to lend:

a) Corporate Bond Risk Soars To Record On CDO Losses Speculation
b) California City Nears Bankruptcy
c) Credit Suisse Write-Downs + Lehman Brothers Commerical MBS Exposure
d) Auction Yield Chaos For Bonds & Auction Rate Turmoil Hits Pittsburgh Medical Center
e) Capital Sparse In Some US Student Loan Markets
f) Massachusetts May Raise Road Tolls Amid Auction Rate Woes
g) Corporate Spreads: Credit Market Bottom Nowhere In Sight
h) Those With Money In Short-Term Securities Can't Get It Out (CNBC Video)

...and on and on. It is sickening, its nauseating, its real, and it trickles down to the consumer as banks tighten lending standards and raise rates for mortgage loans that are considered riskier in times like this! You guys MUST understand something. I don't want all of this to happen! It makes me sick to see this credit cycle unravel & spread the way it has, but I don't control that. I will continue to discuss this because it eventually hits the consumer and real estate investments. Trust me, I cant wait for the day when the credit markets return to normal and will publicly discuss this when it happens. But mark my words, even when the leading credit market indicators normalize, we will have to deal with the pain that was inflicted for a while longer. For now, credit markets are still in pain and this cycle is not close to done.

As a result of everything that was mention above, lenders are forced to raise interest rates even as the 10-YR bond yield falls and the fed cuts rates to counter the looming economic slowdown. I discussed the disconnect between the bond market and mortgages rates back in December in my post, "Bond Yields & Mortgage Rates No Longer Related", once I disclosed to you guys back in August 2007 that "Its A Risky New World: Credit Spreads". In this new world, credit quality means a lot and underwriting standards have tightened significantly as the environment that produced a 5 year housing boom is long gone! The chart to the right shows you 30-YR Jumbo Fixed + 5/1 Jumbo ARM rates for New York over the past 3 months; NOTE THE TREND OVER THE PAST 1-3 WEEKS! It should be clear that as bond yields fell (red line), both lending rates have risen! A sign of the riskier world we live in.

One thing is for sure, as the credit markets lead the equity markets, and we see how bad it really is to balance sheets and how far it spreads, the availability of capital will get tighter & tighter!! That means higher rates for you guys until this credit storm passes. And when it does, the fed will have to hike rates to curb inflation that they helped fuel as they focused on slowing growth due to falling housing prices and the credit turmoil that resulted.

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Bond Yields & Mortgage Rates No Longer Related

A: I want to touch on this topic as I have been asked recently why mortgage rates are not falling as much as 10YR Bond yields have? In the past there was a much closer relationship between 10YR bond yields and lending rates, but something changed. Risk joined the party. As a result, investors deemed mortgage related security products much riskier than in the past and would only be interested if the yield that came with this riskier bet was increased. For main street, any debt that is related to the current fear of delinquency & default risk, comes with a higher borrowing cost. In this new world where risk has been re-priced, that is the key term here, bond yields are no longer a reliable indicator to the future direction of lending rates. Instead, lending rates will be more closely tied to the evolving credit crunch and will act more on credit history than ever before!

Lets see what I mean. The simplest way to get statistical evidence of what I just said, we must look at how 10YR bond yields & NY 30 YR Jumbo mortgage rates have performed over the past month or so! Lets no forget that things have changed significantly over the past 30 days as the credit crunch worsened, stocks sold off, bond yields plunged, and yet lending rates went higher. Here are my sources:

BANKRATE.COM: showing the trend of NY 30YR Fixed Jumbo mortgage rates; 1 month
MARKETWATCH.COM: showing the trend of 10YR Treasury Yield; 1 month

I merged the two line charts onto one graph that shows:

a) the downward trend of 10YR bond yields
b) the upward trend of 30 YR Fixed Jumbo rates

I don't know how much more clear this point can get! During times of credit distress, your credit rating will be more important than ever in deciding how low of a rate you can get on a loan as lenders try to clean up their books, tighten lending & underwriting standards, and assign a higher rate to riskier borrowers!

My friend and fellow blogger Dan Green will support this theory now, but argued with me a number of times in the past before the credit crunch invaded; where I often showed you charts relating the 10YR bond yields to mortgage rates.

Dan discussed recently, "Where Mortgage Rates Come From", and stated:

Mortgage rates are "made" from the price of mortgage bonds using a mathematical bond formula. This is fact. And by exclusion, this also means that mortgage rates do not come from the price of the 10-year treasury note.

So, let's hammer the point home. As of 2:00 P.M. ET yesterday (Nov. 20th), the U.S. treasury market was rallying. The bond market looked good from 30,000 feet. A check into the mortgage bond market, though, showed that mortgage prices were getting killed, off 25 basis points.
This is about the same time that my inbox starting dinging with new mortgage rate sheets reflecting higher rates from our nation's lenders. I wasn't surprised by the reprice for the worse because I had been watching the market slowly slip away on my MBS ticker all day. I had ample time to contact a few clients and get them locked in at lower rates before the reprice.

So, at least there is one agreeable point here: 10 YR TREASURY YIELDS ARE NO LONGER RELATED TO LENDING RATES; ESPECIALLY JUMBO RATES! At least Dan provides an actual answer to where rates are linked to, the fixed rate mortgage backed securities (via The Mortgage Market Guide). Does your loan officer have this tool for real-time reporting? I'd certainly be surprised if they did.

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Why LIBOR Won't Hurt That Much

A: Great post by my friend Dan Green over at The Mortgage Reports about why the rising LIBOR rate won't hurt as much as the news media makes it out to be! The short answer is ADJUSTMENT CAPS that are tied to all adjustable rate mortgage holders. Lets discuss.

Mortgage Reports: Why LIBOR Will Not Impact Your Adjustable Rate Mortgage This Year

I have discussed the LIBOR rate here on UrbanDigs because so many resetting ARM's and credit debt is tied to this London rate! So, when that rate starts rising to 8 YR highs, it's hard not to notice and think ahead at the problems that may arise when debtors feel the pain of higher monthly payments! After all, this is what led to the current credit / liquidity squeeze in the mortgage markets and brought about tighter lending standards, higher rates, and fewer loan options (once subprime borrowers starting defaulting it hit the holders of the mortgage backed securities and wall street) in the first place. There is a reason I discuss this stuff!

Take a look at Dan's chart (for a buyer who took out a 3YR ARM in September of 2004 that is now resetting) that shows you what the all-important LIBOR rate has done since 2002, and note the 2.00% CAP that will kick in to protect holders of resetting ARM's and the zone above that which won't effect the debtor; assumes a 2% first year adjustment cap of course!

As Dan Green states:

The press is talking a lot about LIBOR right now and you may be getting nervous. There's no need to because most articles are leaving out the most important condition of an ARM's adjustment calculation -- the Adjustment Cap.

The Adjustment Cap defines the rate by which your mortgage can move up or down when annual (or semi-annual) adjustment is calculated.

Stated differently: Your mortgage rate doesn't just change willy-nilly -- it follows very clearly defined rules. Your rate cannot adjust too high too fast, or move too low too fast.

Question I have for the consumers out there is, what does it say in the fine print of your loan agreement about how much the cap is for both the first year adjustment and subsequent adjustments? Lets not forget that 2008 should be referred to as THE YEAR THE ARM's RESET! As I discussed previously, some $355B+ worth of home loans are set to adjust next year alone putting higher payments in the lap of many homeowners! Now, that certainly can't help us can it. But at least Dan brings up a great point, which is, it won't hurt as much as the media makes it out to be!

Which brings me to credit card holders of debt that is tied to LIBOR? These guys probably already noticed an increase and as far as I know, there is NO CAP on this! Lets be frank, America does have a debt problem and both mortgage debt and credit debt has been getting more costly to the holder of late! That means more money out of the pocket of the consumer that could be going towards spending, that is now going towards living.

If there just isn't enough money to pay this off, well then, the debtor becomes insolvent! An insolvency crisis has been brewing for some time and now that risk is causing the rates on loans and other debts to cost more, I worry that the game may end in a rough way down the road. What happens when these debts can't be paid off? What happens when the corporation can't raise enough money to pay its creditors? What happens when assets no longer exceed liabilities?

Who am I kidding? This is America! I'm sure someone will come up with an innovative way to keep the game going for a few more years!! And stocks will always go up and never ever ever go down! Ahhh what a dream it is!

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That Pesky Libor Rate Hits 8-YR High

A: It's a misperception out there that borrower's lending rates and adjusted mortgage rates are based on fed funds target of 5.25%; not so as I have pointed out before here on urbandigs.com. Instead, lending rates are based more on the bond market while all those adjustable ARM loans are based on the LIBOR rate, which is now at 8 1/2 year highs. That means if you have an adjustable rate mortgage and the fed cuts the target rate, you MAY NOT feel any relief! If LIBOR continues to stay at these heightened levels, resetting ARM's will face significantly higher monthly payments when the lock in expires. Lets discuss.

This is important because many resetting adjustable rate mortgages are based on the LIBOR rate. I discussed LIBOR previously in my post titled, "Global Feds, LIBOR Rate, & Fear Continues" back on AUG 10th where I stated:

It's an index that is used to set the cost of various variable-rate loans, including credit cards and adjustable-rate mortgages.

Recently, this LIBOR rate has been moving higher; a bad sign for all those with adjustable rate mortgages that are resetting to current LIBOR rates. If you are a resetting ARM holder, you may see your monthly payments jump even higher.

According to an article today in Forbes.com:

The costs for banks of borrowing money over a three-month period hit another eight-and-a-half year high today as the credit crisis sparked by losses from US sub-prime mortgage investments made banks increasingly unwilling to lend money.

The London interbank offered rate (Libor) fixing for three-month sterling deposits -- the rate at which banks lend to each other -- jumped to 6.79750 pct, the highest level since late 1998 following the collapse of the hedge fund Long Term Capital Management.

That is the 3-Month UK sterling LIBOR Rate. The overnight dollar LIBOR fixing rate rose to 5.65%, while the overnight Euro LIBOR rate were fixed at 4.14%. Let's see how any future fed action or gov't action may help to relieve the rising LIBOR rates for the estimated $355B worth of home loans set to reset in 2008 alone! And from what I am hearing, that is a conservative estimate. I recall reading in another source that the expected value of home loans set to reset in 2008 was closer to $600B, but for the life of me I can't remember where I read that.

Something to keep an eye on as more distressed homeowners who can't afford their payments means more defaults, more foreclosures, more risk in mortgages, less interest in secondary mortgage markets, even tighter lending standards, etc..The trickle effect is a long one and I think it is safe to now say that 2008 poses the most important test for housing in the past 15 years or so.

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How Mortgage Backed Securities Work

A: Getting way too many emails and questions from clients asking me to explain why we are having these liquidity problems. In a nutshell, the secondary mortgage markets are not functioning properly; there is no liquidity and a lack of buyers for mortgage backed securities. Here is a quick 4-step guide that hopefully will break it down for you.

The problem we are currently seeing is in the secondary mortgage markets, which was created in the first place to provide more liquidity in the mortgage markets and allow banks and lenders to provide more financing and more loan options to YOU, the consumer. Now that liquidity has completely dried up in these secondary markets, banks and lenders are left holding assets that are virtually worthless and that no one wants to buy. We still don't know WHO HOLDS WHAT or what the market value of these holdings are! This is what we are working through right now.

Let me try to explain by first defining for you what the secondary mortgage markets are.

Secondary Mortgage Markets - The secondary mortgage market allows banks to sell mortgages, giving them new funds to offer more mortgages to new borrowers. If banks had to keep these mortgages the full 15 or 30 years, they would soon use up all their funds, and potential homebuyers would have a more difficult time to find mortgage lenders. Many of the mortgages on the secondary market are bought by Fannie Mae. Other are packaged into mortgage-backed securities, and sold to investors.

Lets talk about that last part, where mortgages are packaged up into mortgage backed securities and then resold to investors. That is where we got into trouble and is what led to a re-pricing of risk on the street!

STEP 1 - A pool of mortgages are owned by a bank or lender. They are grouped into categories by credit risk including subprime, alt-a (between subprime and prime), and prime.

STEP 2 - The pool of mortgages are packaged into a mortgage backed security.

STEP 3 - The mortgage backed security is then sliced and diced into different classes with varying maturities (called tranches). Each tranche offers varying degrees of risk to the investor. The first loan to default will be placed into the Junk tranche while the strongest loans receive the highest credit rating of 'AAA' and are placed at the top of the tranche division. As with any asset associated with risk, the highest risk tranche receives the highest rate of return or yield while the lowest risk (AAA rated) will receive the lowest yield.

STEP 4 - The tranches are then resold to investors who are willing to take on the varying degrees of risk and maturities.

*refer to the following chart for a visual of the above defined steps

There are many fees embedded in this process for the lender, brokerage, hedge fund or investor that I did not go into. This is not an in depth analysis of how MBS work but the easiest way for me to explain the basics of how mortgages are packaged into mortgage backed securities, sliced and diced up, and then resold to investors. It's interesting because if you take a pool of subprime mortgages and go through this process, in the end you can come out with AAA rated paper. Turning subprime into AAA; hmm, I wonder why we are in trouble.

Right now, holders of these securities are having trouble finding investors to buy them as the secondary mortgage markets basically freezed up. There is no liquidity. As a result, those that hold these assets and who took out financing to do so, may have margin calls due that force them to liquidate assets at market value which is not desired. The market value of these assets fell substantially as subprime loans started to default leading us to where we are today.

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Beware The COSI Loan...Next Subprime?

A: I had a conversation with an ex-New Century Financial employee (a now defunct sub prime lender) last week who is now working for a new mortgage lender and specializing in still sub prime and alt-a loans. While the sub prime mess wasn't news to me or him, I was concerned when he mentioned the words COSI & COFI. Word on the street is, mortgage companies are instructing their employees to promote these types of loans with rates as low as 1.75%; and which offer four options to the consumer. I myself once considered this type of loan product UNTIL I researched it on my own. Turned out, the mortgage lender was flat out lying to me on the phone when answering my questions. So, once again, buyer beware!

Before I go into defining what these two loan types are, you MUST understand that the COSI & COFI loans were designed for troubled lenders and offer options in how to pay monthly bills. Given the nature of the situation, lenders know that most homeowners will choose the MINIMUM PAYMENT OPTION which costs the lowest amount! By choosing this option, the loan will negatively amortize, deferring interest to the principal of the loan. In a nutshell, you will end up owing way more than the original loan when you go and resell your home!

Now, lets define what the COSI & COFI loans are.

COSI Loan - The Pick a Payment / Options Loan based on the Cost of Saving Index (COSI) is designed to give the borrower significant cash flow savings for the fist five years of homeownership. The Cost of Savings Index is the hardest to track but arguably the least volatile. The COSI index is the weighted average of the rates of interest paid on depository accounts held with World Savings. The index is calculated at the end of every month and then averaged with the previous 12 months creating a very stable index.

COFI Loan - The 11th District Cost of Funds Index reflects the average interest rate paid by the member banks and savings institutions located in Arizona, California and Nevada. The largest part of this index is based on savings accounts so it will move more slowly to market swings. The COFI has long been considered the most stable and popular of indices associated with the Options ARM.

I found a great article from a mortgage lender dissing this type of loan because of the dangers and abusive nature of the product. According to Mortgageforum.com:

The COSI loan described is a NEG AM or NEGATIVELY AMORTIZED LOAN. If you as a borrower decide to make the minimum or first payment option, your mortgage loan will NEGATIVELY AMORTIZE. This means your payment was low for a very scary reason. The payment was not enough to cover the interest charged on the loan and the difference gets added back to your mortgage loan balance.

Now the tricky part. The first deferred interest payment of the MIN PAYMENT OPTION of the COSI loan is usually very low; adding not too much to your principal! However, this is what lenders want you to believe as the worst case scenario. Back to the article and this example.

Example: 300,000 COSI Loan

Minimum payment option (1.95%) - $1101.37
Interest Only Option - $1162.50
30 year fixed option - $1546.91
15 year fixed option - $2318.04

*By the nature of this loan and the targeted consumer it was designed for, most will choose the minimum payment option giving them the lowest monthly payments to be responsible for.

In the above example, $61.13 was added back to your 300,000.00 loan. True, for the first month payment, this isn't very much, but the misleading part of a NEG AM LOAN is that the lender wants you to think this is the worse case scenario every month. NOTHING COULD BE FURTHER FROM THE TRUTH! As your loan balance begins to inflate, YOU START PAYING INTEREST UPON INTEREST! This is a nice thing your credit card companies like to take advantage of!?! Also, as you see later in this post, THE INTEREST RATE IS VERY ADJUSTABLE. As the rate goes up, the 3 payment options go up. And that means more money added to the back of your loan!

Confused? This is why you stay AWAY from this loan product and don't fall into the trap! As Mark from this article states, "...The problem is that COSI LOANS are marketed without a little hidden part". Problem is there are alot of little hidden parts. These types of loan products are tricky and dangerous because:

Most buyers of this loan are troubled to begin with and looking for the lowest monthly payment

MIN PAYMENT OPTION means your loan is negatively amortized as interest is ADDED to your principal increasing what you will owe the lender when you sell! If you take out a $300,000 loan with this payment option, you could very well owe significantly more than that when you sell!

Large pre-payment penalties associated with these loan types

Complicated loan product preys on uneducated consumers

Lenders marketing this product often avoid discussing the negative truths of this loan product, falsely comforting the consumer

According to the guy I had that conversation with last week, his company is selling hundreds of COSI & COFI loans every day! And that is just one company's office! He clearly stated to me that the powers that be at his office are promoting this product now that subprime is in the mass media and ARM's & I/O ARM's have been targeted by the regulators and marked by the consumers. Few know about COSI or COFI loans making them an easy sell!

Trouble on the horizon if this trend turns out to be true nationwide and not just around our neck of the woods! Expect uneducated homeowners to wake up to a grim realty in the years to come that their home loans are much higher than they anticipated and may even be higher than what the home is worth. Rising principal and shrinking home values are NOT a good combo!

If it sounds too good to be true, it probably is! Time will tell how this scenario plays out!

I would love if any mortgage brokers out there could comment on this post and whether COSI loans are being sold at your lending institution!

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The Rex Agreement... Is It Worth It?

A: I want to discuss the article in yesterdays NY Times titled, "A New Way To Tap Home Equity". Right away I thought, "perfect...another abusive lending tactic targeted for the uneducated that will result in tons of money lost before the product's truly understood." But then I wondered and thought more deeply about it; here is a loan product that claims to take on 50% of either the gain or LOSS on the property (based on the time of the transaction) as a term of giving you a loan right now? Is it worth it? The short answer is YES if you are bearish on housing and disciplined with investing and represents a sort of hedge against falling home values.

First lets understand the REX AGREEMENT and that it is only acceptable for single-family detached houses & average-higher credit scores. So, right now this is not an option for most Manhattan real estate owners; but it could be some day if the public sees a benefit in the product.

REX AGREEMENT -

The REX Agreement is not a loan, but a real estate investment agreement in the form of a purchase option. It gives homeowners a portion of their home’s equity in cash today -- in exchange for the right of REX & Co. to share in a specified percentage of the future increase or decrease in the home’s value.

For the right to share in an agreed upon percentage of the future change in value of the home, REX & Co. pays the homeowner what is called an Option Exercise Price -- equal to the current value of the home multiplied by the percentage of the future change in value granted to REX & Co. If the home increases in value, REX & Co. shares in the gain. If the home declines in value, REX & Co. shares in the loss.

Confusing enough. The key is in this statement, "...If the home declines in value, REX & Co. shares in the loss."! Of course it applies to the gain side as well. So, if your property falls in value by $50,000 from the time the agreement is entered into, and you take out a $100,000 line, you'll only have to repay $75,000 when you sell since the Rex lender splits the $50,000 depreciation with you! In meantime, you could invest that $100,000 and earn X%!

Lets move onto the math and see if this loan may work for you. Your probably thinking, "OK, take the loan, go on a vacation, pay off some credit card debt, and buy that car I always wanted...." aren't you!

I'm thinking, "...what if you take that loan amount and invest it at 7-8% and then sell your house at a LOSS?" (interest earned on rex loan not compounding since I cant do that math yet in excel and I have a spreadsheet below to analyze this loan and whether it works). Hmmmm. Now that certainly is interesting. If you borrow $100,000 and then sell the house at a loss of $75,000 five years later, would you make more money at the end of the day if you did the loan & invested the money or not?

Lets run some numbers and make some assumptions. If you are going to do this agreement, you should understand what you are getting involved in. This spreadsheet should simplify the decision by taking into account your personal situation and your expectations. Use only as a guide.

DOWNLOAD REX LOAN TEST NOW (fill in yellow boxes - the rest will automatically compute)

Fact is, this product seems beneficial for anyone who thinks the property of their home will fall or remain flat from the time the Rex Agreement is entered into and ultimate sale. The reason is you are earning investment income on the money provided to you. Rex lenders take a 50% gain or loss with you, making the loan product very attractive if there is a loss! The only situation I see this agreement not being beneficial is if the property value JUMPS from the time the agreement is entered into and ultimate resale.

When there is a gain, the Rex lender comes out the winner and you get LESS MONEY than if you didn't do the loan! But what about the earnings you made with the money you got from the Rex lender? Remember, you pay NO interest or monthly payments on that money.

The actual COST of the loan product varies so be sure to go directly to REX & CO. to save any transaction fees if you are interested. The fine print:

"Homeowners who arrange for their Rex Agreements directly from the company pay no fees, but financial advisers, mortgage brokers, and real estate agents licensed by Rex to sell the product can charge fees up to $2,000."

I urge you to talk to your financial adviser about a play like this before doing it. While it seems a very interesting product, I did not read the terms and conditions of this type of agreement and therefore I don't know what other payments or penalties there might be associated with this product. I already found this via RealEstateJournal.com:

People who sell the home in less than five years face an "early exit" fee ranging from 5% to 25% of Rex's initial payment.

The Pitfall - Using the Rex agreement money for luxury items. This entire analysis is based on the assumption that you are investing the money provided to you via this agreement. The argument for using this type of product strengthens if you are disciplined to invest the money wisely and at the same time feel the housing market is heading lower. If you will not use the money wisely OR feel the housing market has tremendous upside potential, this is not the loan product for you.

Also, using the money for renovations on the property means you will get more money at eventual resale that is not 100% yours! You split that gain with the Rex lender 50/50 now remember! So, money used for major contracting won't return as much profit to you as you may think.

The Appraisal - The Rex agreement's benefits will stem greatly depending upon the appraisal of your property at the time the agreement is entered into. It will be to the Rex Lender's advantage to be very conservative with this appraisal of your property! No doubt the homeowner will think their property is worth more. But because the Rex lender shares in the profits and/or loss on the property at ultimate re-sale, it is to the lender's advantage to appraise the property as low as possible so as to ensure a 50% cut of the profit down the road. If you do decide to take on a product like this, only do it if the current property valuation is acceptable to you given current market conditions.

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Loan Choice: 15YR vs 30YR

A: Extending the mortgage posts a bit longer here, I want to discuss the possible advantage towards choosing a 15YR Jumbo mortgage over a 30YR one. If feasible based on your income and liquid assets after closing, a 15YR Jumbo loan might be a wise investment option.

No one knows where rates are going in the near future let alone 7-15 years from now. If anything, the environment right now is filled with so much uncertainty that the fed really could go either way based on incoming data. But people want security. They want little risk. So, to keep your investment decisions clear and to avoid making things more complicated, lets forget the adjustable rate mortgages (ARM) for now and take a look into whether or not a 15YR Jumbo loan might be a better choice than a 30YR one!

According to Bankrate.com, the rates on both the 15YR & 30YR Jumbo loan & their 1-Year charts are:

15 YR JUMBO LOAN - 5.69%

30 YR JUMBO LOAN - 6.03%

Now lets do some math. Lets assume that you are buying a $650,000 condo with 10% down and are doing an analysis on what the advantages of a 585,000 loan would be for a 15YR loan over the 30YR option in terms of monthly payments and interest saved.

While statistics show that most homeowners wind up selling or refinancing in less than 7 years, take a look at the incentive in interest savings if you live in or rent your home 15 years! Of course, this is entirely dependent on whether or not it is economically feasible for you to pay that extra $1,300 a month.

But if you can pull it off through the decision of buying a property that is well in your budget rather than at the top end, you will end up saving a bit less than $400,000 in total interest paid to the lender over the life of the loan.

But wait, there's more to look into.

What about the higher expense that you pay monthly to get that advantage? Lets do some more math:

180 months (15 years) X $1,300 in extra monthly payments = $234,000 over the life of the loan

So, thats $234,000 more money that you are paying out of pocket over the life of the 15 year loan in order to save about $395,000 in total interest paid to the lender. In reality, that $234,000 more money is a bit less because in this example I didn't take into account tax benefits offered to homeowners!

UrbanDigs Says: For all those who have high salaries and are buying a property well within your budget, I say to consider the 15YR loan option with your lender and see if it is both economically feasible and consistent with your timeline to own! If you plan to grow into this new home, than it becomes a very attractive loan option. To determine if its economically feasible, check your debt/income ratio and see whether or not the higher loan payment will keep this ratio below 33% or so; and if the board will allow that. You might want to make up that expense by cutting down your costs somehow if you are closer to 33% to rationalize the decision. In the end, you could save some big bucks in total interest paid to your lender even after calculating in the total extra money you need out of pocket to carry the loan! You can quickly build wealth by using a combination of live in / rent out investment strategy over a 15YR term and at the end of the day have a great debt-free asset in your portfolio!

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Do You Know About Your Loan?

A: Gosh, I can't even remember the last time I did a mortgage do's or don'ts post here on the site. I realize that I have been discussing the fundamentals about the sub prime mess more than about tips to understanding what loan may be right for you. So, when I read this article on Yahoo Finance by bankrate.com's Elizabeth Razzi, I certainly was surprised. Most homeowners don't have a clue about their loan, when the rate expires, and what they might do when this occurs! Ahh, the American Dream!

"34 Percent of homeowners are clueless about their mortgage"

According to the article on Yahoo Finance:

In the survey conducted by Gfk Roper, homeowners with mortgages were asked what type of mortgage they had. A stunning 34 percent of the homeowners had no idea.

"That's a symptom of the complexity of the mortgage market today," says Ken Wade, chief executive officer of NeighborWorks America, a nonprofit organization that provides financing and training to neighborhood-based housing organizations.

Younger borrowers, and those with less experience as investors, can find the array of loan choices particularly confusing. Anthony LaGiglia, managing director of J.J. Burns & Co., a financial advisory firm in Melville, N.Y., says such borrowers have fewer benchmarks against which they can judge loan products. "They don't know what the market can be paying them in interest, and they don't know how much they should be paying on loans, either. That's a situation ripe for abuse by unscrupulous mortgage people."

Check out the pie chart showing this surveys results; its quite amazing:

OK, so 34% of homeowners in this survey just have no clue about the biggest loan they have taken out in their lifetime. I don't see any major problem with that, do you? So, what happens when the loan resets, if its an ARM? Well, lucky for us there was a question on the survey asking that as well.

Well that certainly doesn't help! Again, 34% of homeowners have no idea what they will do. Talk about thinking ahead!

The problem with this country is that too many people get involved with big investments without understanding all the aspects/costs/penalty's of their decision making. Hence the goal of urbandigs.com!

YOU MUST BE EDUCATED ABOUT YOUR INVESTMENT DECISIONS, ESPECIALLY ABOUT THE BIG ONES LIKE BUYING A HOME!

That means not only knowing product knowledge, finding value, what to pay for, and what you can afford, but also knowing what type of loan to take out and the characteristics of that loan!

For example, when I first bought my property on E 93rd street I did NOT take into account that my real estate taxes might increase as the housing market appreciates. Well it did! My real estate taxes went from $450/mth to $800/mth because the increase caused a shortage spread and I had to make up the shortage of payments from the previous year! After a year of making up those payments, my real estate taxes were $8100/annually or $675/mth. So, now I keep in mind that some things I think will not change just might.

Have you considered what might happen to your monthly costs if:

your building has a major renovation in need and maintenance assessment is put in place

if real estate appreciates and taxes are raised again in the years to come

if your loan resets at a higher rate and your payments shoot higher

Just be educated about all contingencies that might arise that will affect your monthly payments! Especially in your loans! If you don't know about your loan, what rate you have, or when it might reset, then call your lender today and find out some answers!

Here are some of my previous posts on Mortgage Do's & Dont's:

When an ARM is a Good Idea?

Interest Only Loans: Are They For Me?

Lay Off The ARM's

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Lenders Starting To Tighten..!

A: Wow! It's starting earlier than I thought. Check out this corporate email from an insider at Fremont Investment & Loan, a division of Fremont General Corporation (NYSE: FMT), published on Calculated Risk today.

Here is the corporate email published on Calculated Risks post titled, "Fremont lending Changes":

Sent: Monday, February 12, 2007 1:54 PM
Subject: PLEASE READ - IMPORTANT PROGRAM CHANGES at FREMONT
Importance: High

Due to general negative Industry sentiment, due to recent articles in the media, and the ripple effect to the secondary market, Fremont has made the difficult decision to speed up some changes that were set to take place later in the year. PLS READ BELOW.

2nd MORTGAGES ELIMINATED effective TODAY!!!!!

Any Prequals out there that are 80/20 or combo loans, pls contact me by email asap for new pricing, with an outside second if available from IBC or other lender, or as a 100% or straight one loan

AA CUT BACKS AND HUGE CHANGES – any files that have been priced on the AA program need to be looked at ASAP, pls email me and attach a copy of the prequal with 1003 and Credit

Note: Fremont is typically at the forefront when making changes to programs, I would urge you to expect our competitors to be making similar changes in the next few weeks. Fremont ’s goal is to be here for the long term, thankfully we are self funded with tons of capital and reserves….We will be here to close your loans.

Thank you for your patience and understanding in these tough times in the industry.

More Details will be communicated later today ... I apologize for the barrage of emails, but I wanted to make sure that everyone is aware of what is going on ...

Thank you.

Fremont Investment & Loan

UrbanDigs Says: If this email turns out to be the real deal, it takes blogging to a new level of providing true insights to readers about the changing funamentals of real estate investing. I love blogging and I love reading Calculated Risk. It adds so much transparency to real estate and gives readers an inside look at what is happening NOW in real estate across the country! These lending changes are inevitable and will ripple through to the bigger banks in time. For now, expect the smaller banks and sub prime lenders to start out with these tighter standards which ultimately restrict purchasing power. And if you forgot, read my post I wrote, "Credit Crunch: Tighter Loan Standards?", that was publised 2 weeks ago containing my thoughts on this very issue.

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Lay Off The ARM's

A: I don't link to David's site BubbleMeter too much as I think his bias towards the housing bubble clouds the content a bit on the site; although I do think it is a very good read! Today, he has a post concerning ARM's, or Adjustable Rate Mortgages, as the federal reserve just issued a 37-page brochure in an attempt to educate homebuyers of the pitfalls of using an ARM loan product; especially if you choose an ARM to rationalize buying a house that is OVER YOUR BUDGET!

What is an ARM (Adjustable Rate Mortgage): An adjustable-rate mortgage differs from a fixed-rate mortgage in many ways. With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. With an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.

Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. At first, this makes the ARM easier on your pocketbook than a fixed-rate mortgage for the same loan amount. Moreover, your ARM could be less expensive over a long period than a fixed-rate mortgage--for example, if interest rates remain steady or move lower.

Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off--you get a lower initial rate with an ARM in exchange for assuming more risk over the long run.

Federal Reserve Consumer Handbook on ARM's

Some important points of this handbook include:

Your Monthly Payments Could Change

Your Payments May Not Go Down Much, If At All

You Could End Up Owing More Than You Borrowed

You Might Have A Penalty If You Want To Pay Off Your Loan Early

UrbanDigs Says: NEVER, EVER, EVER consider taking out a ARM product because you need the lower monthly payment to afford the home you are thinking about buying. If you do, that means you are buying a house you can NOT afford and rationalizing the purchase by taking out a riskier loan product. Not a good way to go about a generally wise investment.

Rather, if you are 100% certain you will be selling your home within a short period of time than a ARM product makes sense. And even in this case, you should take out an extra 2 years on the ARM product just to cover yourself in case plans change over time. For example, if you know you will be selling in 3 years or less, take out a 5 YEAR ARM; if its 5 years or less take out a 7 YEAR ARM! Otherwise, the small difference in monthly payments makes a 30 YR fixed product a wiser choice. If you are considering an interest only loan, reconsider your entire budget and reason for buying in the first place! One of the best aspects of owning your own home is that you are forced to save by paying down a little bit of principal each month, giving you more equity in your home.

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Finance Contingency: Not For Me?

Let me first start by stating that I am not a real estate attorney and that you should always discuss with your attorney topics of this nature. Before considering removing the mortgage contingency in the sales contract it is best to consult your attorney to assess the amount of risk for your current situation.

With almost every sale the question of the buyers willingess to remove the mortgage contingency comes into play. From my experience, people who have purchased multiple properties generally are not concerned with removing the contingency while the first or second time buyer may be terrified by the idea. Let's take a look why.

According to Freeadvice.com: A "mortgage contingency clause" is a provision in the home purchase contract that says that if the prospective buyer can't get a mortgage within a fixed period of time, s/he can call the whole deal off. In other words, the agreement is conditional on the buyer being able to obtain a mortgage on the property.

Below are some common reasons why someone could run into problems obtaining financing:

1. Low Credit Score
2. Lack of Income
3. Lack of Assets
4. Apartment does not appraise for the contract price and the bank will not cover the gap. (was a common situation in Manhattan Condo's where the purchasers were obtaining 90% financing or more)
5. Building may have a low owner occupancy rate, pending lawsuits or another situation that the bank may consider problematic.
6. Loss of Employment

You know your financial situation better than anyone and with the help of a trustworthy mortgage broker should easily be able to anticipate any problems with the bank. However, it has been my experience that in the last few years banks would pretty much loan to anyone with a pulse.

Number 4 listed above (Apartment Does Not Appraise For Contract Price) is particularly interesting because in the past coulple of years low appraisals were very common. The recently sold comparable sales that appraisers and brokers use to evaluate a property's price could not keep up with the fast paced market. Many apartments were flipped for absurd profits within months of closings even after the original appraisals had come in under the sale price. Bottom line: If you are a seller who is considering removing the finance contingency you better be sure the apartment is selling at or under market value or make sure the buyer is putting at least 20% down. Ask your broker what has recently sold in the apartment as well as the neighborhood.

Number 5 listed above (Building Has Low Owner/Occupancy Rate) should not be a concern if you trust your attoney to be thorough with their due dilligence and your lending bank has approved the loan on the building. Upon reviewing the building's financial statements, the offering plan, and the board minutes your attorney should be able to anticipate any potential problems.

I have seen someone lose a $100,000 downpayment because they lost their job prior to closing. Banks will double check your employment status within 3 days of the closing date. In this particular situation the purchaser was laid off 2 weeks prior to closing. When the bank contacted the employer and learned that the purchaser was laid off, they refused to commit to the loan and allow the deal to close. The developer saw an opportunity to make a quick buck and took it.

Long story short; If you are a buyer and have financial stability, good credit and a team of professionals that you can trust to protect you, you can rest much easier removing the financing contingency and using that as a negotiation tactic. Be very cautions and best of luck.

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Prosper.com: A New Lending Model?

A: I saw this one on Inman Blog the other day and just thought it was a very interesting idea created by the former E-Loan founder. Think of a 'Citibank-Meets-Ebay' business model and you get to Prosper.com.

Prosper.com is a online marketplace for people-to-people lending and was launched to make consumer lending more financially and socially rewarding for everyone. According to the website:

The way Prosper works is intuitive to people who have used eBay. Instead of listing and bidding on items, people list and bid on loans using Prosper's online auction platform.

People who want to lend set the minimum interest rate they are willing to earn and bid in increments of $50 to $25,000 on loan listings they select. People who lend can easily diversify using "standing orders", which automatically make many small loans to different borrowers.

Borrowers create loan listings for up to $25,000 and set the maximum rate they are willing to pay a lender. Then the auction begins as people who lend bid down the interest rate. Once the auction ends, Prosper takes the bids with the lowest rates and combines them into one simple loan. Prosper handles all on-going loan administration tasks including loan repayment and collections on behalf of the matched borrower and lenders.

Visually, the online lending platform works like this:

UrbanDigs Says: It's just such a new idea (lending from people online through a bidding model rather than from a bank) that personally I would feel a little nervous about it. That's not to say its a bad idea or that you won't find a great rate through a service such as this, its just that its so new and I'm not sure exactly how it works or the background of who you are lending from or to. I would love to hear some feedback from anyone that has used this new site so that I can hear concrete evidence of its quality of service.

~ E-Loan cofounder starts new Internet lending site

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When an ARM is a Good Idea?

A: Taking out a short term ARM mortgage product can be a great option if you know for sure that interest rates are going lower and/or you will be selling/refinancing before the ARM expires.

NOTE: You should NEVER take out a short term ARM product to rationalize buying a property in order to get your monthly payments into the range of your own affordability. If you are thinking about doing this you should realize that you are buying a property you CANNOT AFFORD, and taking out a ARM loan to make the payments lower. Its a short term fix that leads to a longer term problem!

Check out The Money Store's ARM vs FIXED RATE Calculator and see what the difference will be between these two mortgage products! If you intend to live in your new home for the next 7-10 years, it would be wise to go with the 30 YR Fixed loan product and buy a property that fits in with your financial budget.

Something to keep in mind: An ARM product is a good idea if you know that interest rates are declining and will be lower when the ARM expires. Right now, we have 1-2 rate hikes ahead of us and then a pause. How long the pause will last is too early to tell right now. In addition, the bond markets did experience a brief inverted yield curve recently which historically speaking is an indicator of a looming recession. Should this actually occur down the road (say 1-2 years from now), the Fed will be forced to LOWER RATES to help stimulate the economy. A short term ARM would be a good option in this scenario as interest rates will most likely be lower when the ARM expires putting you in a better position to refinance!

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Expect More Rate Hikes & Lending Regulation

A: As the economy continues to show signs of strength the general consensus right now continues to favor another 1/4 point rate hike at the next Fed meeting; the first for new chief Ben Bernanke. In fact, from what I'm hearing from old trader friends is that the rumors at the Chicago Board of Trade bond pits are already pricing in a 1/4 point rate hike for the next meeting, and leading to a final 1/4 point rate for the meeting after that. This would bring the Fed Funds Rate to 5.0% and definitely have an affect on housing as money gets more expensive to borrow.

How does this affect you? Well if you have been putting off buying for the past several months waiting for a slowdown, you may want to apply some time pressure to yourself as you might be faced with a double-edged sword.

On one hand, as rates rise housing prices should be flat to down to compensate. On the other hand, as rates rise it gets more expensive to borrow money when you can lock in a lower rate right now.

Its a tough call because anything can happen between now and the next fed meeting, but this consensus usually is pretty accurate as the new fed chief Bernanke is NOT going to want to mess around with 'The Street' and create an environment of uncertainty which nobody likes. One sign that may convince Bernanke to only raise rates 1 more time is that inflation indicators Oil & Natural Gas have corrected; especially Natural Gas which is now at a 1 year low! Wow, I wouldn't want to be on the wrong side of a trade in that pit at NYMEX!

The Low Down: Expect a 1/4 rate hike at the next meeting and possibly one more after that! Plan accordingly!

Part II of this story is about future regulation (read my previous post) the federal government is working to put in place on lenders in an attempt to protect homeowners from ill-guided and very riskly loan products; such as a COSI loan or other Negative Amortization loans (this is where unpaid interest gets added onto the principal increasing your total loan balance; NOT a good thing!). Past CNN Story.

While Im not sure what regulation will be be enforced or when it will be introduced, I do know that it's immediate effect will be a negative one on housing strictly due to the limiting of lending options that will now be available to homebuyers. However, in the end it sets a more stable housing environment that will be healthier in terms of long term growth!

~ Fed's Bies warns on mortgage, real estate lending

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To Rent or Not To Rent?

A: Read this post I saw on Matrix today about whether you should write your check to a mortgage lender or a landlord.

Its always a tough question and one that should be answered based upon your OWN financial situation. Lets go over the facts and then the figures of owning your own home first before trying to answer the RENT or BUY question.

FACTS IN OWNING:

1. There are Tax benefits to owning a home.
2. You are building wealth for yourself in real property value (condo) or equity value (co-op).
3. You will have something to sell in hard times.
4. Owning is NOT for you if you plan to move in the near future.

FIGURES IN OWNING:

1. Its expensive to own your own home when the housing market has boomed for the past 4 years; Monthly Payment will include MORTGAGE + maintenance + TAXES!
2. Property taxes may RISE raising your monthly payment.
3. Money is MORE expensive to borrow today than it was over the past few years.
4. There is a 'shrinking' difference between the total cost of owning and the rental price of like apartments in NYC. Owning is still more expensive than renting but when you calculate in the tax savings of owning, the gap is closing.

If stocks have a P/E ratio to evaluate value than housing should have a owning/renting ratio to evaluate owning a home vs. renting.

Lets look at a 1BR in Murray Hill that is about 750 sq. ft..

132 East 35th Street: Listed By Richard Silver of Corcoran

TO OWN: At 25% Down and a interest rate of 5.875%, this apartment will come to about $2,968/Month.

TO RENT: To rent a similar unit in Murray Hill my sources say it would cost about $2500 or so; give or take a few hundred for better location and building. Here is a Craigslist Listing.

My thoughts:

It seems to me that the combination of the slowing housing market combined with rising rents is leading to a better BUYING market when you crunch the numbers and take into account tax benefits. Therefore, the formula for whether you should BUY or RENT falls onto the answer to these 2 questions?

1. Do you have a secure job making enough money to put aside 1/3 your monthly income to housing payments?

2. Do you have enough liquid assets to cover the down payment + closing costs, and still have some money left over to cover 6-8 months of housing payments?

If you answered YES to both of these 2 questions then you should BUY now.

If you answered NO to any one of these questions, then you should RENT now.

~ Build Them & They Will Go Rental

~ $2,495 1BR in Murray Hill on Craigslist

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Regulations on Lending? You bet ya!

A: Whenever an industry feeds off of the stupidty of the general public it seems the federal government needs to step in and put regulations in place to protect people from making big mistakes. The mortgage banking industry is no different. Expect regulation soon.

I've already written a post, Interest Only Loans: Are They For Me?, in the desperate attempt to educate future homebuyers NOT to rationalize buying a property they can't afford by using a creative loan product. I see it happening less now than this time a year ago, but it still happens.
I'll say it again:

If your budget is $600K and you find a property you like for $700K, DO NOT buy it using a creative loan product because chances are you will get burned down the road; either with higher monthly payments or by paying off none of the principal.

A recent CNN Money article titled, "Risky Home Loan Standards Tightening", does a very good job in explaining the worry of the federal government and the possible side-effects of any future regulation. The article goes on to point out:

Regulators worry that the popularity of these exotic mortgages may result in consumers defaulting on their loans once the typical three to five-year honeymoon period is over for borrowers, and mortgage payments can double to reflect a rise in interest rates.

If regulation is enacted on the lending industry I think the biggest side effect will be less options for potential homebuyers. While this is a good thing in protecting uneducated buyers, it will be 1 of many ingredients that will prolong a slowdown in the housing market. Quoting the CNN Money article once again, it states:

Laperriere said over 40 percent of the homes purchased in 2005 were financed by either option ARMs or interest-only loans as an increasing number of homebuyers found themselves priced out of the marketplace. If banks can't lend to as many people as they now do analysts expect this will contribute to a slowdown in the housing market.

More information on the extent of any regulation on the lending industry should be known in the coming months. However, the effect of the past few years and all the people that did use this creative loan products is still yet to be known. As rates are much higher now than they were a few years ago, I would expect homeowners who took out 3YR ARM's to face tough times when the locked in rate expires. Combine that with a cooling housing market and a dynamic shift of control from sellers to buyers, and desperation might cause the homeowner to sell at a loss.

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5/1 ARM A Good Idea?

A: According to The Money Store, the current rate on a Jumbo 5/1 ARM is 5.25%. Not bad. If you do not see yourself in the same apartment 5 years from now, I think it is a great idea to take out this mortgage product which might expire at a time when interest rates are actually lower than today's quote!

Taking out a ARM mortgage product can be a very wise move if used correctly and in the right environment. When I say 'used correctly' I am reffering to the notion that you know for sure that you will be moving come time the ARM expires. That way if rates have increased dramatically from the time you took out the loan, you will not be affected. When I say 'in the right environment' I am reffering to the notion that interest rates are expected to FALL come time when your ARM expires. This way, come expiration rates will actual be LOWER than when you first took out the loan.

The only problem with this idea is the unknown. No one knows what will happen over the course of the next 3-5 years that might affect interest rates. The economy could all of a sudden heat up, the stock market could get too high, a natural disaster might slow the economy, or worse, an un-natural disaster might occur unexpectedly. You should always be aware that interest rates and how the Fed controls them is a constantly changing dynamic.

When analyzing the data now, it seems very possible that interest rates will hover around levels slightly higher than we are today for a few years. Then, a cooling economy (which is debated but predicted by the bond markets) would cause the Fed to start a new rate-easing campaign whose aggressiveness or life is yet to be known.

I wouldnt lock in a 30YR Fixed rate if you think you will upgrade or move out in 5 years or so. Go for a 5YR or 7YR ARM product (add on 1-2 years to the loan product if you are not sure) and that should put you in a good position to re-finance when the loan expires.

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Interest Only Loans: Are they For Me?

A: ONLY If you are are NOT taking this type of mortgage product so that you can afford the purchase price of the apartment you are about to buy. Read that last senetence again if this applies to you, and then read the post for more detailed opinion.

INTEREST ONLY LOAN: a loan where the principal is paid back at the end of the term and only interest is paid during the term. The payment covers only the interest and the actual loan balance remains unchanged.

There are 3 things that scare me in this world: Diets, Turbulence, & Interest Only Loans!

It amazes me that even after the collapse of the greatest Stock Market Bull Run ever, that people havent learned their lesson about living a financially sound lifestyle. Let me be clear when I say this...

IF YOU PLAN ON BUYING AN APARTMENT, WHEREBY YOU NEED TO TAKE A INTEREST ONLY LOAN PRODUCT TO BE ABLE TO AFFORD THE MONTHLY PAYMENTS, THEN YOU ARE BUYING A HOME THAT YOU CANNOT AFFORD!

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