This first one deals with foreclosure buses, a tour arranged outside of Cleveland that takes prospective buyers on tours of foreclosures. Immediately following this is a story of “Foreclosure Behind Las Vegas Gates” on one of the hardest hit cities, and how it effects gated communities.

This was sent to me a from Kelly Dent a lender at Wachovia. Her contact info is below, if you have further questions.

Mortgage Rates

To understand why mortgage rates change we must first ask the more general question, “Why do interest rates change?” It is important to realize that there is not one interest rate, but many interest rates!

Prime rate: The rate offered to a bank’s best customers.
Treasury bill rates: Treasury bills are short-term debt instruments used by the U.S. Government to finance their debt. Commonly called T-bills they come in denominations of 3 months, 6 months and 1 year. Each treasury bill has a corresponding interest rate (i.e. 3-month T-bill rate, 1-year T-bill rate).
Treasury Notes: Intermediate-term debt instruments used by the U.S. Government to finance their debt. They come in denominations of 2 years, 5 years and 10 years.
Treasury Bonds: Long-debt instruments used by the U.S. Government to finance its debt. Treasury bonds come in 30-year denominations.
Federal Funds Rate: Rates banks charge each other for overnight loans.
Federal Discount Rate: Rate New York Fed charges to member banks.
Libor: London Interbank Offered Rates. Average London Eurodollar rates.
6 month CD rate: The average rate that you get when you invest in a 6-month CD.
11th District Cost of Funds: Rate determined by averaging a composite of other rates.
Fannie Mae-Backed Security rates: Fannie Mae pools large quantities of mortgages, creates securities with them, and sells them as Fannie Mae-backed securities. The rates on these securities influence mortgage rates very strongly.
Ginnie Mae-Backed Security rates: Ginnie Mae pools large quantities of mortgages, secures them and sells them as Ginnie Mae-backed securities. The rates on these securities influence mortgage rates on FHA and VA loans.
Interest-rate movements are based on the simple concept of supply and demand. If the demand for credit (loans) increases, so do interest rates. This is because there are more buyers, so sellers can command a better price, i.e. higher rates. If the demand for credit reduces, then so do interest rates. This is because there are more sellers than buyers, so buyers can command a lower better price, i.e. lower rates. When the economy is expanding there is a higher demand for credit, so rates move higher, whereas when the economy is slowing the demand for credit decreases and so do interest rates.

This leads to a fundamental concept:

Bad news (i.e. a slowing economy) is good news for interest rates (i.e. lower rates).
Good news (i.e. a growing economy) is bad news for interest rates (i.e. higher rates).
A major factor driving interest rates is inflation. Higher inflation is associated with a growing economy. When the economy grows too strongly, the Federal Reserve increases interest rates to slow the economy down and reduce inflation. Inflation results from prices of goods and services increasing. When the economy is strong, there is more demand for goods and services, so the producers of those goods and services can increase prices. A strong economy therefore results in higher real-estate prices, higher rents on apartments and higher mortgage rates.

Mortgage rates tend to move in the same direction as interest rates. However, actual mortgage rates are also based on supply and demand for mortgages. The supply/demand equation for mortgage rates may be different from the supply/demand equation for interest rates. This might sometimes result in mortgage rates moving differently from other rates. For example, one lender may be forced to close additional mortgages to meet a commitment they have made. This results in them offering lower rates even though interest rates may have moved up!

There is an inverse relationship between bond prices and bond rates. This can be confusing. When bond prices move up, interest rates move down and vice versa. This is because bonds tend to have a fixed price at maturity––typically $1000. If the price of the bond is currently at $900 and there are 10 years left on the bond and if interest rates start moving higher, the price of the bond starts dropping. The higher interest rates will cause increased accumulation of interest over the next 5 years, such that a lower price (e.g. $880) will result in the same maturity price, i.e. $1000.

Kelly Dent
9717 Landmark Parkway, Suite 101
St. Louis, Mo. 63127
314.729.3904 Direct
314.729.3952 Fax
314.954.7735 Cell

This article was on the Business Journal website this morning. Apparently Bank of America will purchase Countrywide for “roughly 31 percent of the company’s common stock book value.” Since the announcement Bank of America’s stock has dropped nearly 1%. Probably in anticipation of the upcoming hurdles given the current condition of the housing and mortgage markets.However, the article states, as a long term investment Bank of America just bought a lot of assets for a very discounted price. Bank of America will operate its new acquisition under the Countrywide brand but will no longer be offering subprime mortgages.

A lender that I work with just sent this info in an email to me yesterday.

Just an FYI - rates took a .250% drop on Friday so if you have anybody on the fence now is the time. A 30 year fixed with no points should come in right around 5.875% on loan amounts above $125,000.00. If you have any questions about anything else let me know. I will be available all week.

What does that look like in terms of a monthly payment?

$200,000 sale price

3% down

30 year fixed

5.875% interest rate

—————————-

$1147.58 would be the monthly principle and interest payment. Then add taxes and insurance which are different for every home.

To perform other calculations click here.

To view 5 active listings under 200K click here.

30 Year Fixed Rate Rate= 6.625% Apr= 7.131%

My Community Mortgage Rate= 6.625% Apr= 7.106%

30 Year Fixed - Flex 9 Rate= 6.875% Apr= 6.873%

20 Year Fixed Rate Rate= 6.500% Apr= 6.904%

15 Year Fixed Rate Rate= 6.375% Apr= 6.633%

10 Year Fixed Rate Rate= 6.250% Apr= 6.464%

Below is an excerpt from an email sent by one of the Wachovia lenders that I work with. Click here or here to read more about lending issues.

As most of you are aware, the lending industry is going through a major transformation. Many of our partners are closing their sub prime departments (for example Wells Fargo closed their Alt A / Subprime department just last week; they closed their retail store fronts here in St. Louis this year).

Every day it seems that we get notification that loan programs are no longer available—mainly 100 percent loans for borrowers stating their income and/or with FICO scores 640 or below. Chase also removed their Stated Income 80/20 loan.

Washington Mutual’s Long Beach sent notification July 20, 2007 that they were eliminating all of their Stated Income and Limited Doc programs, along with their 2/28 and 3/27 hybrid loans. Their max CLTV is 90 percent now.

Some of our competitors are closing their doors—others are tightening up on their underwriting guidelines.

Wachovia is here to stay. We still have 100 percent loan programs and competitive rates, but please be aware what is happening in the lending industry. As you know, it is important as real estate professionals to know the challenges your buyers may face in the upcoming months.

Jaw-dropping. I am in shock. I know that this happens. I know that people go into foreclosure. I bought a property that was foreclosed on and I have countless people contact me to help them find foreclosures. But I always wonder/worry about the person who owned the property before. Casey Serin’s story gives a little insight.

Here are his 10 mistakes (Read the entire article here, please!)

Used Stated Income Loans

Over paid

Rented out a house for less than his monthly mortgage

Quit His Day Job

Hired and Unlicensed Contractor

Bought Properties Sight-Unseen

Bought in a Market He Didn’t Understand

Bought Too Many Too Fast

Underestimated Renovation Costs

Had No Exit Strategy
There are many different reasons that people go into foreclosure and most are lamentable. Loss of a job, sickness, death of the primary borrower, poor money management skills. But Casey is in foreclosure because he was trying to get rich quick. He is a self-proclaimed Would-Be Real Estate Mogul (read another article about Casey) and he committed some serious bank fraud.

Reading Casey’s blog is painful and frightening, but educational (so do it) and it makes me feel bad for him. But after almost every paragraph, I find myself asking out loud, “How did that happen?” Did no one check this kid’s credit. How does an umempleyed 24 year old graphic designer get 8 loans pushed through in less than a year? And how is he walking away from a closing with thousands in his pocket?

He found a Sacramento couple who’d twice cut the price on their home and were asking $360,000. Aware that the market was softening, Serin successfully bid $330,000, including his closing costs. But he also wanted to pay off his credit cards. So he took out a $360,000 mortgage and asked the sellers to give him $30,000 in cash once the deal closed.

Oh, yeah–He isn’t supposed to do that. It’s illegal! So I waiver. I feel bad for Casey, but he knew what he was doing and he knew it was wrong.

WASHINGTON - Rates on 30-year mortgages were unchanged this week as a flood of new economic data did not change the general views of financial markets about inflation.

Freddie Mac, the mortgage company, reported Thursday that 30-year fixed-rate mortgages averaged 6.73 percent this week, the same as last week. That left the rate close to its high-point of the year, which was 6.74 percent set the week of June 14.

Sounds scary, but check out the monthly averages of rates in 1983.

View the monthly averages of mortgage rates between 1983 and 2007 here. 

Massachusetts Homeowners Rally Against Foreclosures

In Massachusetts, foreclosure filings have nearly doubled over the past year due to mortgage payments becoming too high for homeowners. Those who face foreclosure rallied at the Massachusetts State House on Thursday. They’re asking Gov. Deval Patrick for a moratorium on foreclosures. Patrick is a former director of Ameriquest, one of the nation’s largest subprime lenders.

This was a the story I heard this morning on NPR’s Morning Edition. It got me thinking about a foreclosure property in my neighborhood; I can walk there in less than 5 minutes. It’s a really a good deal right now for a homebuyer….

But I can’t help wondering about the former owners. How did they end up in foreclosure? How were they approved for a mortgage that in less than 3 years they would be unable to afford? Did they over estimate their ability to handle it all? Did someone lose a job? Did they use an ARM for the original mortgage and were then unable to afford the rate adjustment? Or were they ill-advised in the beginning? Did they work with a mortgage broker who directed to them higher-interest loan? Was there actual fraud?

Since the early 2000’s home prices have been escalating and with rising prices, lenders have been more comfortable lending to buyer’s who historically might not have qualified which was great as that increased the home-ownership rate to 69% by 2004. But the fall out of that is many buyers paid full market value and sometimes more (borrowing up to 103% of value to cover closing costs and down payments) and are now unable to maintain the payments along with rising energy costs. According to the article on the NPR website nationwide the foreclosure rate increased by 47% in March 07 compared to March 06.

Because I stay in contact with my past clients, I know that none of them have gone into foreclosure.However, most of my clients have been first time buyers and few of them have had a down payment. Without looking through all my records I would bet that over 75% of my buyer clients financed 100% of their mortgages. I am not a lender and do not pretend to know all there is to know about financing but I do try to help my buyers through this process by sitting down with them in the beginning and going over my Buyer’s Packet. I suggest that they interview several lenders and I give them a list of 14 questions to ask their lenders. I also caution them that in my experience if they have good credit and good credit history a lender will qualify them for much more than they can truly afford. I caution them to really think about what they are going to be comfortable paying out each month for their living expenses and tell them to stick to their budget and I only show them houses over their range if I believe I can bridge that gap in the initial negotiation. So in this respect I hope I help them find a situation that will be truly beneficial rather than finding themselves struggling to make their payments.

There are many ways to fund a renovation project. Mr. White, a man who renovates smaller projects around South City, said to me a while ago when I asked his secret, “CASH.”

Well, not everybody has CASH and for those who have never even owned a home, there isn’t even equity. Never fear… there is always a way to finance your dream home even if you are a first time buyer or rehabber. In the case that you have never owned a home and have no experience doing any sort of renovation, there is still a way to buy a building that needs a considerable amount of work and not get in over your head.

The loan product is called an FHA 203K and the beauty of it is that while the property is under construction you don’t have to the pay the mortgage (although like anything else you will end up paying) and it is designed for a person without any renovation experience. There are many checks and balances to make sure that the borrower is doing the necessary planning and is working with reputable contractors. Before any money is lent the project undergoes a full review including inspection, appraisal of after-improved value and renovation plan. But don’t take my word for it. Below is a copy of a Q & A I had with a former client.

Kirsten is web designer with a passion for letterpress design. She needed a very unique space for her studio and she found that in an old brick building that was originally used as a horse stable for a St. Louis Police Station.

Before:

After:

How did you know this was the building for you?

Because I have a lot of heavy equipment that would fit perfectly on the first floor of the space.

Did you have any $ for down payment?

Yes

Did you have any experience in renovation?

No

How did you finance the project?

The best thing about it was not having to pay on the loan for the first 6 months. I suppose the con would be that you have to borrow a bit extra, but other than that I didn’t really see any downfalls, as it allowed us to get the project done.

Can you explain the 203K process?

HA! I would have to look through my paperwork again.. But basically an inspector has to come out and verify that the property will be worth the amount that they are lending to you once you are done before they will lend the $ that you need for the renovation.

In retrospect do you think you could have accomplished the project without the 203K?

NO!

How did you find contractors?

Word of mouth.

What were some of the biggest hurdles in the process?

Communication with the contractor was pretty tough, and a lot of times they dont show when they say they will, etc… There were some hurdles to work through with the subcontractors as well, and disputes between the subcontractors and the contractor at times.

Is it finished or still a work in progress?

Very much a work in progress.

What did you splurge on?

The bathroom

What did you skimp on?

The kitchen.

Did you do any of the work yourself?

Yes, we did some custom ceiling work, installed fancy trim, tiled the kitchen counter, and some of the work on the deck and all the demolition. If you can take on the demolition on your own, it’s great because it saved us about 7,000$ to do it ourselves. It’s dirty and not fun, but you can’t really screw it up.

Any advice to other other first time rehabbers?

Find a good contractor!!!! And don’t be wimpy when dealing with them. I think I was too easy-going, and didn’t communicate a sense of urgency enough to the contractor. It seems with those guys the squeaky wheels get the most attention, as with most things, and I always tried to be pretty nice about stuff, but it ended up that a lot didn’t get done until the 9th hour.