Category: Housing & Real Estate

Short-term treasuries move to negative return

Posted on by Evan in Credit Crisis, Economics & Interest Rates

In probably the most telling sign that the financial markets are a mess yields on short-term treasuries actually turned negative yesterday.  WSJ.com reported on this phenomenon in this article.

* “The desperation was especially striking in the market for U.S. government debt, long considered the safest of investments. At one point during the day, investors were willing to pay more for one-month Treasurys than they could expect to get back when the bonds matured. Some investors, in essence, had decided that a small but known loss was better than the uncertainty connected to any other type of investment.

That’s never happened before. In a special government auction on Wednesday, demand ran so high that the Treasury Department sold $40 billion in bills, far beyond what it needed to cover the government’s obligations.”

WSJ.com-Worst crisis since Great Depression

Posted on by Evan in Credit Crisis, Economics & Interest Rates, Housing & Real Estate

WSJ.com featured a great article summarizing the problems we find ourselves in.  You may access the article by clicking this link.

Among the points that I found interesting-

* “This has been the worst financial crisis since the Great Depression. There is no question about it,” said Mark Gertler, a New York University economist who worked with fellow academic Ben Bernanke, now the Federal Reserve chairman, to explain how financial turmoil can infect the overall economy. “But at the same time we have the policy mechanisms in place fighting it, which is something we didn’t have during the Great Depression.”

* Fed and Treasury officials have identified the disease. It’s called deleveraging, or the unwinding of debt. During the credit boom, financial institutions and American households took on too much debt. Between 2002 and 2006, household borrowing grew at an average annual rate of 11%, far outpacing overall economic growth. Borrowing by financial institutions grew by a 10% annualized rate. Now many of those borrowers can’t pay back the loans, a problem that is exacerbated by the collapse in housing prices. They need to reduce their dependence on borrowed money, a painful and drawn-out process that can choke off credit and economic growth.

* At least three things need to happen to bring the deleveraging process to an end, and they’re hard to do at once. Financial institutions and others need to fess up to their mistakes by selling or writing down the value of distressed assets they bought with borrowed money. They need to pay off debt. Finally, they need to rebuild their capital cushions, which have been eroded by losses on those distressed assets.

* Today, Mr. Bernanke is taking out his playbook, said NYU economist Mr. Gertler, “and rewriting it as we go.”

* The latest trouble spot is an area called credit-default swaps, which are private contracts that let firms trade bets on whether a borrower is going to default. When a default occurs, one party pays off the other. The value of the swaps rise and fall as the market reassesses the risk that a company won’t be able to honor its obligations. Firms use these instruments both as insurance — to hedge their exposures to risk — and to wager on the health of other companies. There are now credit-default swaps on more than $62 trillion in debt, up from about $144 billion a decade ago.

Relationship-based business is my focus

Posted on by Evan in For Professionals, Miscellaneous

I came across this article in the Huffington Post today and the message resonated with me.

Although the article is directed towards the advertising & media industry the underlying message is fundamental to all businesses.

The author describes what I see as a dichotomy in many industries today.  At one extreme is a push towards “efficiency”, automation, and a “one-size fits all mentality”.

At the other end is a push towards customized solutions, relationships, and individual focus.

If you know anything about my business philosophy then you know that I lean towards the latter.  I am most interested in getting to know my clients needs and educating my clients on how to customize their mortgage so that it fits their financial objectives and philosophy.

Unfortunately I see too many homebuyers and homeowners opt for the former by working with so called “low-cost” mortgage providers who promise to provide loans with the “lowest rates and fees”.  I am reminded of a quote from one financial guru who said, “sometimes the loan with the lowest rate is not the loan which will bring your clients greater wealth over time.”

I am left thinking of ways that I can deepen my relationships with my clients, better educate them to make sound decisions, and be an adviser for them over time.

Any suggestions for me?  Please comment below…..

Kudos to Barron’s part II

Posted on by Evan in Credit Crisis, Economics & Interest Rates, General Mortgage Info., Housing & Real Estate

After reading and blogging about one article in Barron’s this weekend I came to another outstading one.  Here is a link.  Nice work Barron’s.

Among the points that I found interesting:

* If Fannie Mae [ticker: FNM] and Freddie Mac [FRE] stopped all of their activity — for a moment, forget about shutting them down and being insolvent — in order to sell off mortgages as normal loans without this guarantee, the interest rate would have to be around 9% or 10%.

* Q: What other negatives do you see?

A: Inflation risk down the line. [The federal government is] going to probably overstimulate and over support in an attempt to stem these deflationary forces. We are looking at a longer-term inflationary force that is pretty substantial. This has been my view for a long time. Interest rates went into a very long decline from the late ’70s and early ’80s until earlier this decade, when first we saw rates bottom out. Then rates went up a couple of times.

Basically, we are getting back down toward those low levels again. The multiyear bottom in interest rates that started around 2002 will probably last into 2009. Then we are going to see the inflationary aftermath of these government policies, and you might be surprised at how high interest rates go.

* Q: How much more pain are we going to feel in the housing market before things start to stabilize?

A: I think we are about half way through. There is high momentum in terms of home-price declines, so it is pretty clear they are going lower. It always looks a lot like the hills on a roller coaster. It starts out with a flattish period. Then it starts to go down, and then it really starts to drop, and we are clearly in that period. That period is going to be with us for about another year before it flattens out and bumps along in 2010.

The S&P/Case-Shiller Index is down a little more than 15% from its peak in 2006, and I’ve believed for some time that the index will have dropped 30% from its peak. That means some markets are going to drop by 50%. That includes Miami, Las Vegas and Phoenix, all of which were fueled by subprime lending. The foreclosure overhang is so big in those areas.

Barron’s speculates on future of mortgage market

Posted on by Evan in Credit Crisis, General Mortgage Info., Housing & Real Estate

Kudos to Barron’s for being the most pro-active in reporting on the Fannie Mae and Freddie Mac saga.

It was Barron’s that posed the question on their March 10, 1008 cover, “Is Fannie Mae Toast?”.  Then back on August 17th they published an article questioning the solvency of these two institutions (here’s a link to my blog posting about this article).  As we all know the government assumed control of these two entities last week because of concerns over their solvency.
This time around Barron’s is being pro-active once again and taking the lead on predicting what the future will look like for the mortgage market in this article which is featured in this week’s edition.

Although the author does not make any specific predictions on the outcome of Fannie Mae and Freddie Mac he does reference the “covered bond” model which I blogged about back on July 30, 2008.

The covered bond model is similar to the current structure in that under this model banks would securitize the mortgages they make and sell them to investors (which is the role that Fannie Mae and Freddie Mac play now).  This would provide them with fresh capital to make another mortgage (thus providing liquidity) but would also eliminate interest rate risk from their balance sheet.

However, this model is different in that the banks that made the mortgage would also assume the guarantee of the future interest payments on the mortgage-backed bonds.  Currently banks are able to assign that guarantee to Fannie Mae and Freddie Mac.  We can assume then that banks would likely be more conservative about their underwriting of loans.

In real estate downturn demand grows for Green building

Posted on by Evan in For Professionals, Housing & Real Estate, Miscellaneous

The Economist had a great article in their Technology Quarterly section of the latest issue which talked about green homes.  Much of article talks about some of the technological innovations which are occurring specifically with windows. If you’d like to read the article yourself you may download by clicking here.

Especially in the Pacific NW I have to believe that more and more consumers will concern themselves with green principles.

If you have any other thoughts or resources that you can share regarding this subject I’d love it if you could comment on them below.

What the bailout means for you

Posted on by Evan in Credit Crisis, General Mortgage Info., Housing & Real Estate

Unless you live in a cave you are probably very familiar with the fact that the federal government recently announced that they would assume control of mortgage industry behemoths Fannie Mae & Freddie Mac. The move has created overwhelming media coverage and speculation with mixed messages on the potential outcomes.

However, very little of the media’s coverage has focused its message on educating the reader on why these two entities are so crucial to the US economy and what practical implications the move will have on the general public.

For more information on why these two institutions play such an important role in our economy please visit this link which I wrote back on July 15th.

The bottom line is that government intervention of this magnitude into the financial markets is unprecedented and therefore accurately predicting the potential ramifications is next to impossible. However, there are 4 main points which I think the general public should be aware of.

→ Mortgage Rates: By stepping in and assuming the guarantees and obligations of Fannie Mae & Freddie Mac the federal government has provided additional confidence into the mortgage-backed bonds which ultimately determine mortgage rates. Furthermore, as a part of the plan the federal government announced that they would invest $5 billion into the mortgage-backed bond market.

These two measures have caused mortgage rates to drop and some analysts believe that mortgage rates will continue to drop into the near future (For a more detailed explanation of this impact please visit my blog posting on September 8, 2008 @ http://www.swansonhomeloans.com/?p=698).

→ Future Underwriting Standards: What is not commonly understood by the general public is that Fannie Mae & Freddie Mac ultimately set or heavily influence the guidelines to determine what loans will be approved and not approved for virtually all loans in the mortgage industry.

Some have speculated that the federal government may begin to loosen underwriting standards in the near term to help prop up the housing market. However, in the long-term underwriting standards may become influenced by who sits in the oval office & Capitol Hill.

→ Loan modifications: For those who find themselves in trouble with their existing mortgages this move may prove to make a loan modification easier to negotiate. This is because most analysts agree that the government will be more willing to work with troubled homeowners than public corporations who have to answer to stockholders.

→ Future taxes/ inflation: Unfortunately whether you do or don’t stand to benefit from any of the previous three points everyone you will get stuck with the bill in the form of higher taxes and/ or higher inflation.

By assuming control of Fannie Mae & Freddie Mac the government is now guaranteeing the interest payments on the $5 trillion that each of these entities has in their combined loan portfolios. If 5% of these loans go bad then the US taxpayers are on the hook for $250 billion.  Although it should be noted that the alternative of not bailing these institutions would likely cost our economy a lot more in terms of financial disaster.

The bottom line is that the government takeover of Fannie Mae & Freddie Mac will impact different people in different ways. For now the only sure thing is that mortgage rates have dipped lower on the news. If you’d like to discuss how this could impact your individual situation we’re always happy to review it with you. Please call or email us!

If you found this posting informative and useful please feel free to leave a comment below and pass it along to others who can enjoy it!

Fannie Mae continues to tighten qualifying standards

Posted on by Evan in For Professionals, General Mortgage Info., Housing & Real Estate, Low Down-Payment, Mortgage Qualification

This morning Fannie Mae released updated guideline changes for conforming mortgages.  This is a sign that we can continue to expect tightening in the area of loan approval guidelines which will make it more difficult for borrowers to qualify for loans in the future. I don’t think these changes will drastically impact most real estate & mortgage professionals core business but for those who tend work with investors and borrwers with less than favorable credit this is not good news.

Here is a summary of the most important changes in my opinion:

-Loan-to-value restrictions for cash-out: Fannie Mae is limiting cash-out refinances on owner-occupied homes to 85% (currently is 90%, FHA still allows borrowers to go to 95%).

-Loan-to-value restrictions for purchase and refinance of investment property: Fannie Mae is restricting maximum financing for purchase of an investment property to 75% (currently 90%).

-Investment property interest rates to increase: Fannie Mae is increasing the margin on investment property loans compared to owner-occupied interest rates.  The margin gets increasingly larger with the loan-to-value but currently investment property purchases carry a rate that is approximately .375%-.625% higher and it looks like the new margins will be closer to .75%-1.50%.

-Maximum number of properties financed: Currently Fannie Mae will allow a borrower to own only 10 financed properties if they want to take out a new mortgage to buy a 2nd home or investment property.  Moving forward this will be restricted to 4.  If the borrower is buying a primary residence then this guideline doesn’t apply although many banks have overriding guidelines that supersede this change.

-Higher minimum credit scores: In the announcement Fannie Mae also said they would be raising the minimum credit scores required to qualify for various loan scenarios.  There are too many to go into detail here but the bottom line is borrowers will have to have better credit in order to qualify for higher loan-to-value loans, investment property loans, & 2nd home loans than before.

Click this link to review the entire announcement.  The timing in which these changes will take affect have yet to be determined but we know it will be no later than December 1, 2008 and probably even sooner depending on the lender.

Rate Update September 8, 2008/ Fannie Mae & Freddie Mac bail out

Posted on by Evan in Credit Crisis, Housing & Real Estate, Rate Update


The big news this morning is the government take-over of mortgage giants Fannie Mae & Freddie Mac. The announcement which was leaked on Saturday and made yesterday is likely to become the largest government intervention into the financial markets in US History.

Because of the unprecedented nature of the event it is very difficult to predict the practical implications. However, in the near term watch this morning’s you tube video to understand why the announcement will help mortgage rates in the near term.

Expect a more detailed summary of this announcement in the coming days. For a detailed review of why Fannie Mae and Freddie Mac are so integral into our economy please visit this link.

Current Outlook: neutral

4 Pillars of Cash-Flow Management

Posted on by Evan in Debt, For Professionals, Home Purchase, Investing, Personal Finance

The following model is the basis for successful long-term financial management.  In our view, the following four pillars represent, in order of importance, the key to incorporating financial responsibility into a person’s life.  It is our goal to introduce and educate our clients on how the decisions they make surrounding the house that they buy and the mortgage they select will ultimately affect their financial well-being.

 

Pillar 1: Creating a cushion

 

The first pillar in the 4 pillar system involves creating a financial cushion. It is important to have money on hand that is readily accessible for life’s little (or large) unbudgeted emergencies.  The purpose of this account is to allow a person to pay for these emergencies with cash instead of falling into the all too common habit of using credit.

 

In calculating how much a person needs to satisfy this first pillar we recommend that a person first estimate their “survival number”.  Their survival number is the amount that they spend each month on essential items in their budget such as housing payments, food, utilities, and minimum payments on credit obligations.  This amount would allow them to “get by” without spending money on discretionary items such as Starbucks, eating out, and other purchases which could be eliminated if need be.

 

Once this amount has been established a person can calculate how many months worth of survival reserves they’d like to have.  Most financial planners recommend that a salaried person have 3-5 months worth of survival reserves in a safe liquid savings account whereas a self-employed or commissioned earner keeps 5-7 months in reserve.

 

Pillar 2: Get Debt Free

 

Once a financial cushion has been established a person can now focus on the second pillar of cash management.  Reaching the second pillar involves eliminating all “non-preferred debt”.  Non-preferred debt is all debt which does not meet most, if not all, of the following criteria:

            → carries a reasonable interest rate

            → has tax benefits

            → is secured by an asset which is appreciating

            → has affordable payments

 

In general, non-preferred debt includes all debt that isn’t a mortgage (some exceptions apply).  That said, our focus is to develop a strategy that will help our client pay-off their non-preferred debt as quickly as possible. 

 

By eliminating these miscellaneous monthly obligations a person is able to free-up additional monthly cash-flow that can then be directed to savings & investment accounts.  The key to financial independence is for a person to have control of their money and then conserve it, instead of consuming it.

 

Pillar 3: Liquidity

 

True financial security comes with having liquid funds available at any time.  This next pillar is about having 1 year’s worth of a person’s income or more available to them for either good or bad reasons.

 

A good reason why a person may want this type of money available to them is to take advantage of a business or investment opportunity.  Most of the time when a person is presented with an investment opportunity a significant amount of capital is required upfront.  If a person has the money to be able to participate then they can do so, but most people are not in a financial position to take advantage of these opportunities when they come along.  

 

An example of a bad reason to use liquidity is in the case of a major interruption to a person’s income.  This may be due to an illness, sudden disability, job lay-off, or economic down-turn outside of a person’s control.  In this instance liquidity can help fulfill a gap of income and still maintain a comfortable life.  By the way, the number one cause of foreclosure in the United States is disability. 

 

Pillar 4: Pay-off your house

 

This is the point where it can really get exciting.  For most people, having their mortgage paid off is a far-off dream that may never come to fruition.  But, by focusing on strategies to effectively achieve the first three pillars of this system it can become a very realistic target. 

 

Most people define “having their mortgage paid off” as not having a mortgage on their house.  But, wouldn’t it also be true if a person had a $300,000 mortgage secured against their home and also had $300,000 in liquid assets?  After all, their personal balance sheet would show a $300,000 liability on one side and a $300,000 asset on the other. 

 

This topic raises some very interesting questions and opens up some powerful opportunities.  But, if a person has not yet addressed pillars 1 through 3 then does it even make sense to focus on down payments, principal payments, and home equity?  The bottom line is that an effective financial plan and strategy will do more for a person’s long-term financial well-being than most anything else. 

 

Would you like to share this model with others?  You may download this documents by clicking this link-evans-4-pillars-cash-flow-management-model-mti.

 

As always, I invite you to share comments below!