By ANNE TERGESEN
A reverse mortgage has long been considered a loan of last resort because of its high fees. Now, a new type of reverse mortgage is attracting the attention of more-affluent borrowers eager to extract cash from their homes. But older homeowners—and the adult children who advise them—need to be aware of the new trade-offs.
Reverse mortgages allow people age 62 or older to convert their home equity into cash. The homeowner can elect to receive a lump sum, a line of credit or monthly payments. The loan is due, with interest, when the borrower dies, moves, sells the house or fails to pay property taxes or homeowner’s insurance. (With a conventional loan, such as a home-equity line of credit, a borrower can tap into a home’s equity but must make monthly repayments.)
One of the biggest criticisms of reverse mortgages is their upfront fees, which can total as much as 5% of a home’s value. Last fall, the Federal Housing Administration, which insures virtually all reverse mortgages, introduced the “Saver,” which reduces these fees by about 40%. Lenders such as MetLife Bank, Bank of America and Wells Fargo have since begun marketing them.
To cover its potential losses on a reverse mortgage—which can occur when a home isn’t worth enough to repay the loan—the FHA traditionally pockets as much as 2% of the value of the property. This “mortgage insurance premium” is typically the largest upfront charge in a regular reverse mortgage.
With the Saver, the FHA has cut this insurance premium to 0.01%. That is because homeowners who apply for a Saver are typically limited to borrowing about 80% to 90% of what they could get with a regular reverse mortgage, says Peter Bell, president of the National Reverse Mortgage Lenders Association. On a $500,000 home, for example, a 75-year-old New York resident would receive about $262,000 with a Saver, versus $331,500 with a traditional reverse mortgage, according to MetLife Bank.
The lower lending limits mean the FHA is less likely to incur a loss—allowing for a smaller insurance premium.
Waiving Fees
At the same time, many lenders are reducing or waiving other fees on all reverse mortgages, including servicing fees and the upfront “origination fee,” which is generally 2% of the first $200,000 of a home’s value, plus 1% of the balance up to a maximum of $6,000. (Because of projected losses on reverse mortgages issued in its current fiscal year, though, the FHA recently raised a separate mortgage-insurance premium it levies to 1.25% from 0.5%.)
One caveat: While fee reductions can be especially attractive these days on fixed-rate reverse mortgages, these generally require borrowers to take out a lump sum and pay interest on the full amount over the loan’s life.
Whether a Saver makes sense for you or your parents depends on how much money you need and the amount of time your loan will remain outstanding, among other factors.
Typically, reverse mortgages are used for long-term needs, such as medical expenses. But the Saver “increases the ways in which older homeowners might use a reverse mortgage,” says Barbara Stucki, vice president for home-equity initiatives at the nonprofit National Council on Aging.
For instance, a borrower paying high upfront fees “may need to stay in the home a long time before the benefits of a reverse mortgage exceed the costs,” Ms. Stucki says. But with the Saver, that calculation could be different.
Matthew Gregory, an Atlanta-based reverse-mortgage consultant at Generation Mortgage, says a 68-year-old client with a $635,000 home near Dallas recently opted for a $300,000 Saver to avoid tapping his savings for a few years. “He thinks his investments are likely to appreciate by more than the housing market,” Mr. Gregory says.
Lower ‘Effective’ Rates
The client, a retired management consultant, could do better with a Saver than a home-equity line of credit, Mr. Gregory says. The Saver’s 4.01% “effective” rate—consisting of a 2.76% variable interest rate, plus a 1.25% annual fee—”compares favorably” with the 4.78% variable rate the client would pay for a home-equity line of credit, he says.
Although closing costs on the Saver are higher, the client plans to hold the reverse mortgage long enough to come out ahead thanks to the lower interest payments, Mr. Gregory says. The client also didn’t want to worry about his wife being saddled with monthly loan payments if something were to happen to him.
So far, lenders say, Saver loans appear to be attracting a more-affluent borrower who likes the idea of a smaller reverse mortgage and lower fees. At MetLife Bank, for example, customers with a Saver have an average home value of about $350,000, versus $250,000 for those with regular reverse mortgages.
Still, there are downsides to Saver loans. The loan amount is smaller than that of a traditional reverse mortgage. And some lenders charge slightly higher interest rates on Savers, in part because of uncertainty over investors’ interest in buying them. MetLife Bank, for example, charges 5.25% for a fixed-rate Saver, versus 5% for a standard reverse mortgage.
While “it may be appropriate to pay a higher interest rate to get a lower upfront fee,” Ms. Stucki says, such a move could backfire if a borrower plans to keep the loan for a long time.
Before talking to lenders, homeowners should consult a reverse-mortgage counselor approved by the U.S. Department of Housing and Urban Development, which oversees the federally insured reverse mortgages that account for some 99% of the market. For more information, call 800-569-4287 or go to www.hud.gov.
—Email: familyvalue@wsj.com
The appeal of buying before selling is that you know where you’ll be living next and you may avoid having to move to an interim rental, which is frequently the case if you sell your home before buying a new one.
An often insurmountable hurdle to buying your next home before selling the current one is today’s rigorous mortgage qualification requirements. Most homeowners can’t qualify.
However, if you’re an all-cash buyer and don’t need to jump through hoops for a mortgage lender, buying first makes sense, particularly if you have no intention of selling your current home. Some buyers in this position keep the current home as an investment and rent it out.
It is a good time for some homeowners to make a trade-up move, if they can manage it financially and are buying for the long run. Interest rates and home prices are low. Due to economic uncertainty, some buyers are taking a wait-and-see attitude. This can mean less competition in desirable areas where it’s often hard to buy without a lot of competition.
To get approved for a mortgage on the new home, you will need to qualify to carry two mortgage payments as well as pay property taxes and homeowners insurance — called PITI (principal, interest, taxes and insurance) — for both properties. The ratio of all your overall debt to PITI on homes you own, credit cards, car payments, etc., can’t exceed 45 percent of your gross income. This is referred to as your back-end ratio. You must have excellent credit.
Some lenders — for instance, Freddie Mac lenders loan up to $729,750 — will give you credit from income earned on your current home if you rent it to a tenant. You must have at least 30 percent equity in your current home based on an appraisal that will include a rent survey. You’ll need to provide the lender with a copy of a signed lease agreement and a copy of a cleared deposit check or check for the first month’s rent payment. If you meet these criteria, you can use 75 percent of the rental income to qualify for the mortgage on the new home.
HOUSE HUNTING TIP: Homeowners who have the wherewithal to qualify to buy before selling should consider if it’s prudent to own two homes rather than one. Let’s say your goal is to sell your current home and use the proceeds from the sale to pay down the mortgage balance on the new home. You won’t know how much you’ll net from that sale until it closes. If prices dip between the time you buy the new home and sell the current one, you could end up netting less than anticipated. Be conservative in assessing the market value of your current home.
Rents have declined and vacancies increased in recent years. The rental market appears to be stabilizing in some areas. However, if you decide to rent rather than sell your current home, you could be faced with unexpected vacancies if tenants lose their jobs. If the rental market is soft, you may have to lower the rent to attract a tenant. The income stream could drop below your carrying costs.
Many buyers who can qualify to buy before selling aren’t able to make a large down payment on the new home without tapping the equity in their current home. Some buyers will use an equity line of credit to access more cash for a down payment. If you’re trying to buy in a high-demand, low-inventory market where multiple offers are common, you may not be competitive with a 10 or 20 percent cash down payment.
THE CLOSING: Cash is king. Most sellers will go with a buyer with who is putting more than 30 percent down even if it means accepting a slightly lower price.
Dian Hymer, a real estate broker with more than 30 years’ experience, is a nationally syndicated real estate columnist and author of “House Hunting: The Take-Along Workbook for Home Buyers” and “Starting Out, The Complete Home Buyer’s Guide.”
In purchasing a residential property, the assistance of an expert mortgage broker and the proper lending institution can help you reach the best decision for your housing needs. But to say that the process will not be any complicated is an overstatement. In fact, even in the presence of a seasoned professional that can present to you the appropriate options and the lucrative financing alternatives, something can go wrong. What you can do is to start from the basics and make sure that you have the right qualifications to make your undertaking smooth sailing and properly taken care of.
In this accord, you have to consider the basic qualities that can provide you with a better chance of getting approved by the financing company.
1. Credit history. Obtaining a residential mortgage facility involves collateral which means that the lender needs to have a fallback in case of nonpayment. Because the sum of money involved in these transactions is higher compared to other facilities, the lender will delve deep into your credit history to make sure that you can afford the monthly payments and ensure that you can handle your finances well. Because your credit history is an aspect that will surely be looked into by the financing companies, you have to keep it within the acceptable level in order that you will be considered properly.
2. Capacity to pay. Your source of income is also a determinant that will affect your transaction with a lending institution. You need to provide a verifiable proof of income to these financing companies to determine that you will get the most advantageous deal when it comes to a residential mortgage facility.
3. Collateral. Because part of the standard practice in a home loan is the offering of valuable collateral, you have to identify that the property you will be choosing is within your payment capabilities.
Because there are also a variety of reasons why you are trying to avail a residential mortgage facility, you have to disclose a description as to where the proceeds will be allotted in the processing of your application.
An extensive examination of the basic factors as well as the use of the amount to be borrowed can provide you with higher chances of approval from a financing company.
Deciding on the right mortgage lender for you is a major decision. You can’t just immediately accept negotiations from the first lender who offers you a loan of money. Several things and factors should be given your utmost consideration before signing a mortgage agreement drawn to you. Being assertive and resourceful has its own advantages when it comes to mortgage. It will save you the hassles of legal complications in the future.
In selecting a lender that will surely give you the right kind of service, try these steps:
1. Look for references. Start asking about mortgage lenders. The most trusted people to whom you can obtain reliable information regarding these matters are your friends and relatives who just bought their homes just recently. Make a survey regarding the mortgage companies that they have connections with. When you have created your lists of lenders from the information provided to you, you can start to contact those on the list. You can also research online so you will be able to compare if some better deals are apparent.
2. Compute costs. Gather information from lenders in your references regarding the rate of interests, points and an enumeration of charges and fees associated with the loan. Ask lenders similar questions so you will be able to make comparisons.
3. Research. Even if you have already found the mortgage lender with the most potential, be sure to research more about it first. Make sure that the institution is reputable and legitimate enough to offer you services.
4. Be prepared to make negotiations. Once you found the right lender, following strictly all the necessary actions to ensure your safety in the agreement, you are now ready to negotiate. Talk to the lender in a professional way and try to negotiate a better deal. Ask for concessions regarding lowering of various mortgaging fees and costs.
It is only natural that you are looking for a financial alternative that can provide you with better options when it comes to your residential loan. This is probably the reason why you are thinking of considering refinancing your residential mortgage. A refinancing mortgage loan is a facility that promises low interest rates, low monthly payments, and low processing fees. Before you decide towards getting a refinancing program, you need to know first the reality behind these opportunities.
In refinancing your residential mortgage, you will always encounter agents offering the most appealing bargains in the market. The idea of getting a discount sounds nice, doesn’t it? While this can be very lucrative to you because of the affordability of the option, do not easily jump on the opportunity. The smartest move that you can make is to assess the program first before diving into the trap and waking up from a nightmare. You may not know it but companies and agents who are giving you a good deal are actually maneuvering you to accept higher interest rates and unrealistic fees.
The low payments that you will get from a refinancing loan apply to the processing fees related to the new mortgage. This can cost you several dollars in the least which can be lower compared to an original mortgage. The routine, however, will require you to pay these fees upfront and in cash. Because the fees related to refinancing is not exactly that low, you have to properly examine a deal before engaging into it.
In the case of low interest rates, it is true that a refinancing facility can provide you with lower charges. You have to be aware though that the requirements asked for by the lenders in these cases are stricter and should be complied with. Without the necessary qualifications, obtaining a refinancing facility is more likely to be declined so take the extra step to complete your documentation and keep a good credit score.
Once you decide towards refinancing your residential mortgage, you have to review each deal carefully and make sure that you will not be on the losing end of the transaction. While refinancing offers can be extremely impressive on one side, avoiding the risks involved in the process will surely make it more appealing and substantial for your cause.
It is quite common to feel anxious and worried when deciding whether to buy a new home or not. Almost all homebuyers share these feelings and they are all keen on gathering helpful real estate information. True enough, you will benefit from being well-informed on the whole process of buying a home.
Before you grab that dream home of yours, you have to establish how much monthly payment you can afford to pay. You also have to determine whether you qualify for a certain home loan or not. Get the status of your credit report to know what kind of home loan you are qualified to apply. Make sure that you straighten out any snags before approaching a mortgage lender. This is very important since an impressive credit rating can earn you a lower interest rate.
Secure a mortgage pre-approval from a broker with an understanding that the company is going to fund your mortgage. Make sure that you get that in writing, too. Study all payment and prepayment options that could shave off some years from your mortgage. Most importantly, choose mortgage monthly payments that are affordable and easy to manage. Once you have your pre-approval, you will learn of your loan capability and you can then start choosing a real estate.
You should only choose a real estate that is just right for your needs and financial capability. Create a wish list of all the things that you want to be featured in a home. Rank them according to the most essential to the least wanted. Should the need to compromise occur make sure that you specifically know the things that you are willing to sacrifice.
Lastly, hire a dependable and reputable real estate agent to help you out in finding a prime property in a pleasant neighborhood. Real estate agents are very knowledgeable in this field and if you want to get hold of a desirable piece of property, then they are the right people to get in touch with. They will also consider your preferences and financial situation while trying to give you the best property they can find.
Home refinancing is very popular these days because of a number of reasons. There are many advantages a homeowner can reap in refinancing. This includes being able to decrease the monthly payment he has to pay when he is able to secure a cheaper fixed rate. He can also opt to modify his adjustable rate mortgage to the more affordable fixed rate loan. Another benefit is that, he can choose to lower his interest rate in case he has originally secured a high-cost mortgage and by refinancing his home, he would also be able to gain extra money from his investment.
Last year, mortgage rates had dropped significantly to a record low. So if you are considering refinancing your home, now is a good time to lock-in your rate. It is good to remember that mortgage refinance rates have bigger chances of escalating rather than declining. So make sure that you have weighed all angles carefully before you postpone a rate lock, especially if you have already been approved for a pre-qualification for a refinancing loan that would enable you to save valuable money in the end.
Since mortgage refinancing rates have demonstrated a major decline, there’s no better time than now to think about switching to fixed-rate mortgage especially if the rate of your mortgage is adjustable. An ARM or adjustable mortgage rate has all the possibilities of increasing in the future than the existing fixed rate mortgages. But before doing any move to refinance your home, think about how long you are going to stay in your home. If you are going to live there for seven more years, then it would be advisable to switch to a fixed-rate mortgage.
Another option open to homeowners is to take out a cash-out refinancing. This allows them to acquire a new financing by applying for a second mortgage for more than the original amount secured. This is especially useful when you have build-up enough equity to pay off your current home loan. You will also be able to use your equity for other expenses such as making home renovation, debt consolidation, or spending on a vacation that is long overdue.
Everywhere you turn you can read about the fact that Portland mortgage rates are at historic lows and that now is a great time to refinance. And considering some of the new programs being implemented to help homeowners with their mortgages and mortgage payments, it would be worth talking to your mortgage lender even if you think you might not be in a position for a Portland refinance right now. You never know, one of these programs might be just the thing for your existing situation.
Once you’ve established that you can do a Portland refinance, and that it makes sense for you to do so right now, the next question will be; what to do with the savings you’ll be getting. While that might sound ridiculous, if you don’t make a plan for what to do with that extra cash, it will just ‘disappear’ into your day to day expenses and will never have the kind of impact on your life that it could.
A couple of different suggestions as to how you might apply that money to your ‘big picture’ were made in previous articles. In each situation we used the same hypothetical savings of $175 per month from your new refinanced Portland home loan. That is a decent amount of money to be sure, but probably not something to get overly excited about at first. However, with a bit of disciplined effort applied to that money, we showed how it could turn into something that you can excited about.
In our first example applied the money to pay off existing credit card debts. In that example we used two credit cards; one with a $4000 balance at 16% and the other at 12% with an $8000 balance. We applied the extra $175 to the minimum required payment to show that we could pay them off in about 4 years as opposed to the twenty-three years it would take paying just over minimum monthly payments.
In the next example we illustrated how you could pay off your Portland mortgage faster by applying the extra money to the principle each month. We used a loan amount of $225,000 at 5%. By applying our extra cash to the principle each month, we reduced the time to pay off the mortgage by over 7 years. Those 7 years of not paying on the mortgage equates to a savings of over $58,000.
The last option we will talk about is putting that money to work by investing it. It could be for your retirement, or for a child’s college education. No matter what your motivation is behind your investing, we just want you to be aware of what potential exists for you with this ‘small’ amount of extra cash you now have.
In trying to predict what kind of return you might get from an investment, we have to make some guesses. We’ll use conservative numbers to be safe.
Let’s say that for the next 18 years you’re going to add $175 to an account that already has $2000 in it (working on a college fund for a new baby). To remain conservative, we’re going to use an annual rate of return over those 18 years of only 7%.
So what does baby have waiting when they turn 18? A bit over $83,000! That’s a pretty good start for college, I would say.
Let’s say that instead of college for a child, you’re a 30 year old looking to retire at age 65. We’re also going to say that this account is starting off with a balance of ZERO, but it gets the $175 savings added to it each and every month. Doing nothing else for this account or your retirement, by the time you were 65 this account would be worth more than $300,000. Once again, this is a pretty impressive sum considering we’re using conservative numbers.
You need to remember of course that these figures are all hypothetical. However, if they whet your appetite at all, you should definitely consider sitting down with not only a professional mortgage advisor to see about refinancing your Portland home loan, but also with a financial planner and/or an accountant.
The main point that we hope you get here is that while some savings may appear to be rather insignificant at first, if you apply yourself properly, you can have a dramatic positive effect on your long term financial well being. The mortgage on your Portland home loan is really just a part of your bigger, overall long term financial plan.
There’s no doubt that you’re aware of today’s low Portland mortgage rates and considered refinancing your home loan to save yourself some money. The tendency of course, is to look at how much you’ll save every month and simply be happy with that. The problem with this approach is that very often, this extra savings and extra cash each month never really seems to effect your life in any meaningful way. It’s simply way too easy for your new found money to simply get absorbed into your everyday expenses and before you know it, it’s like it wasn’t even there. The intent of this article is to point out what the true potential is in these otherwise seemingly small savings. It will involve some discipline on your part, however, hopefully when you realize what the long term effect can be, that it will inspire you to make the necessary effort.
For the sake of argument, and because it was used in a previous example, we’re going to make the assumption that you have decided to refinance your Portland home onto a new, fixed rate 30 year mortgage. Whatever it was you were paying before, now you’re paying $175 per month less. This is a reasonable amount of money, but it’s no ‘lotto’ right? Well what are you going to do with that money?
One option that we discussed in a previous example was paying off other debts, such as those on existing credit cards. As a reminder, in that example we said there were two cards, one with an $8,000 balance at 12% and the other at $4,000 balance at 16%. We also assumed that you were making just above the minimum necessary monthly payments and that by doing so it would take you TWENTY THREE YEARS to pay them off…. However, if you were to use a disciplined approach and used your new found savings to systematically pay them down, you could reduce those 23 years to just over 4 years, saving a TON of interest on them.
Another smart application of that money would be to apply it towards your existing Portland mortgage to help pay down the principle faster. If you were to do this you could dramatically shorten the amount of time it takes you to pay off your mortgage and again, save you an awful lot of money. How much could you save? Let’s take a look at some numbers.
We’ll need some specific figures to look at, so let’s set up a hypothetical scenario. Let’s say you have a fixed rate of 5% on a 30 year mortgage for $225,000. Now let’s imagine that you applied that $175 every month towards the principle on the loan (above and beyond your regularly scheduled mortgage payment), the time it would take you to pay off the loan would be reduced by more than SEVEN YEARS, which would save you over $58,000 in interest on the loan! That’s not chump change…
So, the idea of refinancing to a lower rate is very appealing for many people. The thing that often gets overlooked in favor of short-term rewards is the significant impact a small change to your Portland mortgage rates can make on your long term financial situation. And considering the economic situation we’re in right now, doing a little long-term planning might not be such a bad thing.
No matter whether you’re looking at a Portland refinance or if you’re considering getting a purchase money loan, do your best to look at the power of small but consistent efforts and how it can impact your overall financial picture.
Refinancing your Portland mortgage is a great way to save money on your monthly housing expenses. Paying less means you have more money in your pocket at the end of the month. If you’re not careful, this extra cash can easily just get absorbed into your day-to-day expenses. On the other hand, if you are careful and disciplined, this extra money can go a long way towards helping your overall financial situation. We’ll outline a few of those possibilities here.
It doesn’t take a huge amount of monthly savings to have a big impact on your long term future. There are typically 3 areas that can be addressed when someone wants to take advantage of these new found savings from a mortgage refinance to improve their net worth.
1. Paying down other high-cost debt, such as credit cards and possibly auto loans
2. Apply it towards paying down the principle on your mortgage
3. Using the money to invest in future goals such as retirement or a college savings
If you do have other debts (like most people) such as several credit cards or maybe a car loan, it’s important that you compare their balances, interest rates and minimum required payments. Making the assumption that you can currently make the minimum payment, you should organize and prioritize these debts by the most expensive first (highest interest rate, not highest balance), and then start applying the extra money towards that to pay it off as soon as possible.
To illustrate, we’re going to use the following hypothetical debts: First Credit Card with $4,000 balance at 16%, Credit Card 2 with a balance of $8,000 at 12%, and finally a car payment on a loan of $21,000 at 4%. Also for this purpose we’ll assume you got an additional $175 per month after your mortgage refinance.
Let’s say you’ve been making the minimum payments plus a little extra towards the balance; it would take you 23 years to pay them both off completely (and you would have to refrain from adding anything to the balance during that time, or else it would just take longer). If you were to decide to use that $175 to regularly apply towards these existing debts in an effort to pay them off, this is how we would recommend you approach it:
First, pay off the highest interest card while maintaining your regular minimum payments on the lower card. When you’ve paid off the first card, start applying the $175 to the second, plus the minimum payment you had been making on the first. If you were to follow this plan, you could pay off BOTH cards in just over 4 years. Much better than 23 years! Plus, just imagine the amount of money you’ll be saving in interest payments…
As you can see, a Portland mortgage refinance can help you a lot in the short term, but now you can see how much it can have an impact on your long-term financial health as well.
If you have been watching the news at all lately (and it’s probably safe to assume that most people with a Portland home loan have been), you have probably heard a lot of discussion (bickering) about the concept “Mark to Market” and if changes need to be made.
What exactly is Mark to Market and what does it mean? Is this going to have any affect on the housing market, and more importantly, how might it directly affect your Portland home mortgage?
We are going to attempt to give an explanation of it below so you can better understand what it is, and more significantly, comprehend how it has played such a important role in our existing economic crisis, which includes the Portland mortgage market. It may come as a surprise to you to find that this accounting rule (i.e. law) has much more to do with the economic down turn than possibly anything else.
Before we even begin to look at how Portland mortgage rates get affected, we’re first going to discuss why Mark to Market exists at all
To understand Congress’ inspiration behind the creation of this accounting requirement, we need to go back and look at the stock market crash of 2000 – 2002.
At the time, before this rule was devised, companies such as Arthur Anderson, Enron and others found methods for ‘cooking their books’ so as to make their balance sheets appear significantly healthier than they truly were. This, in turn, made their stock values to be artificially high, contributing to the ‘bubble’ that, as we all know, eventually popped. When that occurred,many, many people lost tons of money. To insinuate that they were unhappy is a huge understatement. Something had to be done.
The concept of “Mark to Market” accounting was created in an effort to make things more transparent and to ensure fair valuation of companies as well as all their assets. To summarize, what it means is that all assets are required to be valued as if they were sold on a daily basis. For those who opted not to do this conservatively, they put themselves at risk for potential jail time.
Let’s now look at how this regulation can cause a problem affecting the whole economy, including Portland mortgages.
When you consider the huge amounts of money handled by banks – and the wide (and odd) variations of financial instruments they use, – it’s difficult to try to get one’s mind around exactly what it is they do. It will be much easier to illustrate how this accounting strategy works using an analogy more realistic to the rest of us.
We’re going to pretend you live in a neighborhood where all the homes are similarly worth right around $200,000. Let’s also imagine your neighbor owns his house outright.
All of a sudden you neighbor has some serious, major medical expenses and needs to sell his house to pay forit. He needs his money right now and doesn’t have the luxury to shop for a Portland refinance, and he isn’t in any position to wait for the best offer he can get. Instead of waiting, he sells his home for $150,000 to get the money right away, even though it is clear that the property is worth quite a bit more than that.
If you happened to live two houses down in an identical house, does the fact that your neighbor’s house sold for $150,000 indicate your house just lost 25% of its value? Of course it doesn’t. If you decided you were going to sell your house, you would be able to take your time and get a fair price for it; you would not be forced into a “fire sale” situation.
On the other hand, if you were a public company and were forced by law to go by the Mark to Market accounting rules, you, and all your neighbors too, would now be forced to claim that the house you live in was now only worth $150,000 and not the $200,000 everyone knows to be the true value.
Now we are going to see how this applies to a bank.
Allow me to stretch the hypotheticals a bit further.
Let’s pretend you decided to start a new bank, we’re going to call it YOUR BANK. You get started with a $2 million initial investment to get Your Bank started. Your plan to make money as a bank is to take in people’s money as deposits, paying them a low but safe rate of return, and then use that money to create other loans, such as Portland home loans, that pay you a higher rate of return. The difference between the two is the profit you get to keep.
Let’s say that from our $2 million of deposits, we create $30 million of loans. Our Capital Ratio (the ratio of loans to capital on hand) is at a respectable 15:1 ($15 million in loans for every $1 million in deposits). This ratio is completely acceptable by banking standards.
We are going to say that you run an extremely conservative bank, and the Portland loans Your Bank agrees to make are limited to those of only the very highest standards. For example, you require a 30% down-payment (normal is 20%, or sometimes even less), a credit score over 800 (this would be a VERY high credit score), you demand full documentation of all income and assets and will only tolerate a DTI(debt-to-income) ratio of ten percent (industry norm is 40%).
It’s clear, Your Bank will only make a superior quality Portland loan. And it shows. All your borrowers pay on schedule, no one is unhappy and Your Bank is making plenty of money. This causes Your Bank stock to continue to climb.
All of a sudden, the Portland real estate market begins to slow down and go soft, and Portland home values begin dropping (however, your borrowers still make all their payments on time, no problem).
The problem is, with the systemic drop in home values, you have to re-assess the value of your loan portfolio. Now, rather than the loans being 70% of the value of the home, they are at 90% (your equity position in the home went down considerably). This means these loans are considerably riskier than when you had more equity, and because they are more risky investments, investors are less interested in buying them than they were before and because of that they have less value.
In comes your accounting team to tell you that, according to law, you must “Mark to Market” if you don’t want to risk a serious penalty (such as jail time!) In their Mark to Market analysis, the estimated value is now at $1,000,000; it has been reduced by 50%!
Do not forget, nothing has changed regarding your borrowers or your loans (everyone continues to pay on time so the funds are still coming in as it always has). Now however you now must reflect the fact that Your Bank’s ‘value’ has been cut by 50% to only $1,000,000.
The problem is, you still have $30 million in loans outstanding, and with a valuation of $1,000,000, your capital ratio is now at at 30:1 which is a LOT different than 15:1.
Red flags begin to go off everywhere because it’s a concern that with just a couple of bad loans that you would be required to cover, you might quickly run out of funds. This would place depositorsin danger of losing their deposits.
So now suddenly the FDIC is starting to look into Your Bank and then the SEC (Securities and Exchange Commission) starts asking all sorts of questions. Your Bank stock begins to to fall hard. All the financial news networks hear of the story and just add fuel to the fire.
Your Bank is in deep trouble.
The trouble is, Your Bank is ‘over leveraged’, and to compensate for that you are forced to start selling some assets. (You could try raising capital, but when you think about the way the situation appears and your capital ratios totally out of whack, no one in their right mind is going to be willing to lend you the $1,000,000 you need).
Since you need to get that money as soon as possible, you find yourself in a similar situation to that of your neighbor who was forced to ‘dump’ his house very quickly at a a lower than market price. As you sell off your assets to raise capital as fast as possible, at the same time you are reducing the value (i.e. quantity) of your remaining assets, further skewing your capital ratios even further.
This is a kind of death spiral that is nearly impossible to stop once it gets started. The thing is, the problem doesn’t end with just Your Bank.
Now let’s say that my Portland mortgage company (called “My Bank”) purchased those assets from you. You were selling at such a great price that My Bank got the feeling we were getting such a great deal that we could not resist, so we bought a whole bunch of them.
The trouble is, with the Mark to Market regulations, the loans My Bank just acquired from Your Bank at such a good price must be used as comparables that all other financial institutions also use to value their assets. So every $200,000 Portland mortgage loan that My Bank was holding (not just the ones I purchased from Your Bank) now only are worth $150,000 each despite the fact that they were loans that were performing perfectly.
So now we have a situation where the value of My Bank goes down. As this happens it disrupts My Bank’s capital ratios and makes me to sell assets as quickly as possible in order to generate money… and so the cycle continues.
It’s not hard to see how fast and wide spread the problem gets, despite the fact that there weren’t necessarily any ‘bad business decisions’ made. It’s all caused by a well intentioned, but over reaching, accounting regulation.
When considering the scenario above, you might ask, “Why don’t they have everyone just quit buying the discounted assets from the other guy and simply stop the cycle?” This is a good question.
If the cycle is stopped, not only do some financial institutions fold, but the whole flow of money just stops. This is the ‘credit freeze’. When there is no credit available at all, mortgage lending comes to a crawl, car and truck sales all but stop, jobs are lost and the whole economy slips into a recession.
We’ve been in, and gotten ourselves out of a recession before. Why don’t we do the same thing we did to get out the last time?
Our ‘mini’ recession of 2001 recovered pretty quickly because the Fed lowered interest rates and mortgage lending standards were considerably more relaxed, which led to roughly $3 trillion worth of cash being withdrawn in the form of equity from homes and put right back into the economy.
In today’s world, mortgage loan guidelines everywhere (not just the ones Portland mortgage brokers are dealing with) are far more restrictive, home values are way lower (and they have been heading in the wrong direction for a while). And as was mentioned above, the truth of the matter is that there is simply not very much money available out there for Portland mortgage companies to access for either home purchase loans or for a Portland mortgage refinance.
However…
Some good news for a change!
04/02/09 – The Financial Accounting Standards Board (FASB) voted favorably regarding relaxing the Mark to Market standard. They are going to allow financial companies to use alternatives such as cash-flow analysis in valuing assets. This change will significantly reduce the write downs banks have been forced to take on assets and investments like mortgages. This could very well mean more options will soon be available to your local Portland mortgage companies. We’ll hope so.
No matter whether you are purchasing your first Portland home or are an experienced homeowner, you may probably need a mortgage to make such a large purchase. Irrespective of where you live in the area, there’ll be multiple Portland mortgage banks who you could use to make purchasing your house possible. How are you able to select the best Portland mortgage lender for your budget? Here are some tips for doing just that:
Shop for the lowest Portland mortgage rates.
When it comes to getting a Portland home loan, finding the best Portland mortgage rates is important. Some may say that it is really the most significant part of choosing a bank. Don’t stop looking after just two or 3 lenders; get as many quotes as you can. Always remember, your complete cost doesn’t just include the interest you will pay. When you talk to a loan officer for the 1st time, they will give you a GFE (Good Faith Estimate) which includes information a bout your rate as well as the closing costs you will incur. You should prepare for to spend at least $2K to $5K in closing costs and more if you are purchasing a million-dollar (or more) house.
With some Portland mortgage banks, closing costs could be on the lower end of the spectrum, whilst with other mortgage lenders, you could be paying quite a bit more. These are out of pocket fees, so you should be ready to be readyto pay them upfront, just like you do with your deposit.
Be organized with your credit report that bankers can review. When choosing a mortgage bank, a really good tip to ensure that you find the most qualified one is to be ready with your credit history and FICO . Most mortgage lenders will review this information if you’re able to get to the point at which you would like pre-approval, but you will likely have to pay a fee to get your credit score thru them, and too many checks can essentially lower your score if they are spread out over several months. You can take a look at your own credit score for free once a year, so before you start looking for a bank, print your credit report and have a conversation with them based on that information.
Now, when you have basically selected a bank, you’re going to have to pay for the official credit check, (but there’s no need to pay for that ’til you have chosen a final lender.) In the in the meantime, generate ideas about what the expenses could doubtless be using the unofficial credit report you have. Avoid any pre-approval that has an extremely high interest rate. Some mortgage companies will attempt to have you choose them by pre-qualifying you at high rates. Do not forget, only you know how much you are able to truly afford every month. When you only have enough income for a monthly payment of $1000, getting pre-qualified for a million-dollar home is just looking for problems.
The highest quality mortgage lenders in Portland will always have your best interests in the back of their minds. Pre approving you for a higher amount than you can afford is a red-flag this company does not really care about your and your financial situation.
Ask questions about your potential Portland mortgage loan.
Finding the best Portland mortgage bank is all about asking questions, and the more you ask the better off you are. Do not be afraid of the answers, because it is much better to know now rather than in a number of months when you wish to buy the perfect home you found and only then realize that there are issues. Ask questions not just about cost, but also about what to expect it terms of timescale, trends, and reliability. of your lender.
If it’s possible, speak one-on-one with the person that is going to work with you on the deal, rather than just speaking to a processor or receptionist. One of the very good ways to ensure that you are receiving the answers you want is to literally write down your questions beforehand. In doing this, before you get off the telephone or leave the office, you can look over your all your questions and be certain that all your queries have been answered.
Lastly, when you are looking for Portland mortgage lenders, remember that there are two different places you can look.
Internet banks can sometimes be a great option. At many on-line sites for example, you can see their rates and the rates of other corporations. However, other people find that the best option is to employ a mortgage company in their own local neighborhood. When you first get started with your investigation, don’t limit yourself to just search for online firms or only offline corporations; consider all the firms you can. Even if you are not happy with working with a company based on-line, you can still use info such as rates from these corporations for comparison purposes. The thing not to forget is to always keep comparing as much as possible until you find a Portland mortgage bank that is a perfect fit for what you need.