Mortgage Rates Report

Wachovia Bank CEO, Ken Thompson, played the pass the buck game last week at a shareholders’ meeting.  Rather than admit he got blindsided (like all banks did by the housing decline), he played the typical corporate game; he blamed Golden West, the parent of World Savings.

Morgan Brown thinks World Savings imploded Wachovia’s earnings but I think differently.  I’ve worked with World Savings for 14 years.  I haven’t seen a better underwriting department in my career.  Their common sense approach to evaluating borrowers combined with their conservative valuations allowed for the lowest loan losses in the industry.  World Savings was one of the original innovators in lending with their negative amortization product.

That was before neg-am was cool.  In the early part of this decade, originators abused that product and sold it to borrowers without fully disclosing the risks.  Still, World Savings managed their risk well.

I still recommend negative amortization loans to the suitable client.  They are simply the best financial product available for  responsible borrowers who understand the benefits of arbitrage.  If you’re looking to build up your liquidity, this product is hard to beat.  I know, I know…it’s not “fashionable’ to recommend negative amortization loans now.  It’s almost politically incorrect to say you recommended a negative amortization loan.

Well, I funded two last week.  One to an investment adviser and the other to a real estate broker- I used World Savings Wachovia, also.  Sometimes, you have to adnit that fashionable doesn’t always equal appropriate. Pick a mortgage adviser who isn’t afraid to teach you something about finance and investments (assuming you find one who knows something about it)

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Canadian investors have been flocking to the California coastline and Arizona desert to buy prime American real estate at a bargain.  The strong Canadian dollar, while inopportune for Canadian manufacturing firms, is giving Canadian investors built in downside protection when they buy American real estate.  I explain that here:

In January of 2007, a Canadian investor, buying a $300,000 (US)  property in Long Beach, CA, , would have to pay $352,600 (Canadian).  That was based on an exchange rate of $1.17553 Canadian to $1.00000 (US).  Today, the exchange rate has dropped to $.98188 Canadian for one US dollar.  That means that the same property in Long Beach, would costs $294,300.

The vacuum, however, lies in the mortgage financing for Canadian investors.  Mortgage companies require as much as 35% down payment for Canadian citizens buying a vacation home in America.  In some areas (California, Arizona, Nevada, and Florida), that financing is about to be suspended.  The leading bank suspended its loan programs, for Canadian investors, in those four states, as of April 1, 2008.

Canadian investors are also learning that all American mortgage brokers are not created equal.  Rates for foreign nationals (which is what the American banks call Canadian citizens) are traditionally 1% higher than American residents receive.  That means that today, the mortgage rate for Canadians is between 7-7.5%; quotes from mortgage brokers, promising materially lower rates, generally don't pan out.  The result?  Frustrated Canadian investors are left at the altar like the husband in "The Runaway Bride".

The American mortgage crisis is causing banks and lenders to scrutinize every single loan application with a watchful eye; Canadian investors are losing out.    We advise foreign nationals to find an American mortgage broker, with a proven track record, rather than to jump at the "lowest" rate quote. 

Brian Brady finances investors from all over the globe.  References here.  Loan applications, for foreign investors, can be made online.

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Mortgage origination is not a creative endeavor; mortgage advisory should be.

Creativity comes from a knowledgeable practitioner, with a disciplined understanding of how to apply financial planning techniques, to an individual's needs, wants, and goals.  Like a talented wardrobe designer, the recommendation should be a balance of propriety, "fashion" and daring; all tailored to highlight the user's strengths while downplaying their weaknesses.

A mortgage should be functional as well as stylish.  It's a little black dress or blue blazer, accessorized properly, to make the user comfortable and confident about their  choices. 

It starts with the expected hold time of the mortgage, not the house.  Life events like college for the children, potential promotions, remodeling, major purchases, and anticipated appreciation, all play into the hold time for a mortgage.  While homeowners may expect to live in a home for 20 years, economic and life-style events dictate that the loans can change as often as color choices.  Just like "pink is the new black", fixed rate loans may be the new risk.  Erring towards the "staples" rather than the "latest fashions" is always preferential.  Blue blazers, however, change with the times.  While a suit always seems appropriate, it CAN signify a staid and lazy approach; much like a 30-year fixed rate mortgage.  The ramifications are similar.  Like a nebbish at a dance, the 30 year fixed rate loan can blend into the backdrop and result in missed opportunities.

Flair then, comes in the proper tailoring of the mortgage.  Interest-only and negative amortization loans, attract opportunity (like investment opportunities) like a plunging neckline attracts the admiring glances at a healthy decolletage.  Employment of "exotic" loan choices must be used to accentuate those assets while minimizing unwanted attention.  Intent then, is the driving factor.  We want to attract the "proper" opportunities while avoiding those unwelcome advances.

Enter the professional mortgage planner.  She assesses the environment, like a wardrobe designer would ask about the event.  Environment, economic or social, will dictate what is and isn't appropriate.  She understands the user's tolerance for "risk".  While wardrobe designer would understand that a middle-aged accountant might be uncomfortable in a lemon yellow blazer, the professional mortgage planner understands that a certain loan solution, while stunning for a young bombshell, would make some matrons feel self-conscious.  The creativity lies within the ability to make the right choices for the age, personality, and comfort level of the user.

Mortgage borrowers should not shop on price alone.  While certain financial decisions are akin to "picking up a pair of jeans", a mortgage solution should be approached with the diligence applied to a wardrobe purchase for a gala event.  Quality, experience, and execution applies when selecting the proper mortgage planner; sometimes shopping on price alone can result in a costly mistake.

Creativity, in mortgage solutions, is much like a perfect outfit.  Certainly, some users can make fashionable and appropriate  wardrobe decisions, unaided- the same could be said for mortgages.  The wise individual leaves little to chance,  For a few extra bucks, a knowledgeable fashion adviser can outfit you properly...just like a professional mortgage planner.

The cheapest outfit can often cost you the most money- just like the cheapest mortgage.

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Subprime mortgages have now been credited for bankrupting well over 110 lenders and seriously damaging operations at many major mortgage firms. They've reportedly wiped out 5 hedge funds, tens of thousands of jobs, and have led to millions of foreclosures with millions more on the way. And, as if that weren't enough, subprime mortgages are also blamed for massive volatility in the stock, bond, credit, futures, and real estate markets here in the US and around the globe. Some say losses in the mortgage securities market alone could reach hundreds of billions of dollars this year.

This means that, for any Americans looking to buy, sell, or refinance a home, they are confronting a very different market from the one that existed just 6-12 months ago.

How did this happen?

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I wrote an article about the California Governor's brokered deal with loan servicers:

Is this measure politically motivated? You betchya. The Governator is taking care of his own, regardless of the inequities it levies on the rest of the country. The lenders are in a bind so they’ll appreciate this artificial market stabilization until the rest of the country catches up. This is Nixonian economics, plain and simple. THAT interventionist policy exacerbated rather than solved the problem of inflation.

 

What I’m about to say will be unpopular in the Golden State; housing prices are artificially inflated and need to come down meet rational economic models. Borrowers who make $90,000 annually can’t afford $700,000 homes. You can intervene in markets but the price of Amsterdam tulips will naturally gravitate towards its real economic value.

 

While I don't like the idea of reckless borrowers getting a free ride, Robert Kerr exposed the insidious nature of the lenders' motivation in this comment:

This CA proposal has to rank right up there with the most well-disguised scams of all time. The Governor is busy patting himself on the back, the press is fawning over the lenders’ benevolence …and the lenders are laughing all the way to the bank.

 

This isn’t a bailout, it’s Loan Sharking 101. When your borrower starts drowning under the vig, you cut back the vig, roll it over onto the principal and keep bleeding, at a slower rate.

 

Did Arnold’s advisors get this great idea from watching Richie Aprile run his shy on The Sopranos?

 

An upside-down borrower with a $400K mortgage on a $300K home isn’t helped with temporarily frozen payments. If the lenders really wanted to help, they would reappraise and write off some or all of the overvaluation.

 

Did he really just say that?  He compared the loan servicers to organized crime?  Yes, he did.  I liked his analogy so much that I've been using it in comments today.

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