Making a Way

Getting to Loan Approval: Your Tax Returns

2012-02-13T22:34:00.000-08:00

Several years ago, banks were derided if they had the audacity to ask a borrower with perfect credit for his/her tax returns. Today, as they did for decades prior to the bubble, lenders ask for two or three years of your tax returns, plus K1s, W2s, and sometimes more. Next, they also cross-check directly with the IRS by using a now-common Form 4506T. This ensures the provided returns match what was filed, and reduces the chances of fraud in the mortgage system. This is one of many steps that take time and can’t be rushed. It’s one of the prices we’re paying today for the too-loose mortgage lending approach of the past.

Keepin' it real...
If your last mortgage experience was in 2003 +/- 3 years, then you're in for a rude awakening. But that's not to say today's lending practices are rude. What lenders are asking for today is about the same as what they required 20 or 30 years ago. It's intended to be enough for them to make a wise lending decision. And that return to sanity is good for all of us.

A few tips to ensure successful loan approval:

1. Provide your complete income documentation as requested at the time of application. If you’re missing something requested, talk with your loan officer…there are ways to find the documentation you need, like a quick call to the HR or payroll department where you work can easily produce copies of lost W2s or long-shredded paystubs.

2. Email your CPA or tax preparer (and CC your your loan officer) with permission to provide information as needed for the purpose of loan processing. Your tax pro usually will have copies of your filed returns, amendments, W2s, and more readily available in a PDF file they can email to us. Easy.

3. Be sure your loan officer reviews your documented sources of income/loss (i.e. tax returns and other docs) before issuing a loan approval or “preapproval”. Don’t rely on a preapproval when income documentation hasn’t been reviewed fully. The devil truly IS in the details, and you'll save yourself a bunch of heartache if you don't blow this one off.

4. Avoid red tape delays by reviewing your 4506T when you sign it, to ensure your name, address, and SSN exactly match what shows on your tax returns as filed. If there's a digit, initial, or address out of place, it can cause a late closing. Something you can easily avoid with a touch of prevention.

5. Allow extra time for processing your loan around tax-heavy seasons: primarily April, June, and October. That's when processing of 4506T requests can slow down at the IRS. Just tweak your expectations a tiny bit...

Today, regulators require mortgage lenders to scrutinize sometimes even absurd details. That’s just the way it is. Now here’s the good news…to a large part, YOU are in control of how this will go. If you provide super-detailed documentation, and do it promptly, the chances of a late-game upset are minimal. Do yourself a favor and ask us lenders early and often… “Is there anything else you need?” That’s a game we can all win.

Tax Tips: The Seventh Wonder of the World…Property Taxes

2012-02-13T22:15:00.000-08:00

Curiously, two comparable homes can have vastly different tax bills. Why? And if taxes may be billed one, two, or three installments a year…then what’s the best way to pay? And then there’s the sometime-debated “escrow account”… is it right in your case? The tax man cometh. It’s just too bad he doesn’t come with a sense of humor and a user-manual. But never fear…while I can’t make him go away, I can make it all clear!

Why the diff?
If you want to know the intricacies of how a home’s tax bill is calculated…you need to know two things: the tax assessed value and the tax rate. Multiply the two and voila…you have your annual tax bill! If you look carefully, you'll find that similar homes don't always have the same tax bill. There are usually only a few reasons why this may be the case. One has to do with the tax rate, which is simply the lawful taxes levied against that parcel of land, for government provision of services like roads, sewers, schools, and so on. Another reason has to do with the property's assessed value. It's possible for two identical homes to be assessed differently, which happens over time with improvements to individual homes and infrastructure over the years. If taxes seem very low or very high, it may be due to being under or over-assessed. Low taxes may also be due to a special deferment of taxes. Be extra careful here...the deferment may not be permanent, or may have strings attached, so you should research it carefully.

Check it out!
When home-seeking, make it a top priority to find out the taxes on any home you’re interested in. Get familiar with the neighborhood’s typical tax amounts so you can plan accordingly for the monthly or annual cost. You may be lucky to find the taxes are low…or not. But it’s a key for budgeting. If they're low, find out why. When I preview real estate online, I ALWAYS look for the annual tax amount. It tells a story. I budget high and then hope to get lucky.

The Escrow Account: Man's Best Friend?
If you put less than 20% down, on almost all loans, an escrow account is mandatory. This is a fund you seed at closing and then add to with each monthly mortgage payment. If you put 20% or more down, it’s usually optional. The option does carry a price, though. In most cases, banks charge a .25 point fee (0.25% of the loan amount at closing) if you opt to forego the escrow account. Partly for this reason, I recommend setting up an escrow account for most folks. The other big factor is that the escrow account lets you pay as you go and have no big annual bill to face. For most folks, the peace of mind here is compelling. If there's any controversy here, it's because some folks validly and adamantly want to manage their own dollars and pay the bill only when it's due. They are often passionate about their preference, nevermind that their average balance in the escrow account may only be $2000, and the interest they'd be losing at 1% might only amount to $20/year. The valid argument they make is that they can earn 10% on that money...or they have cash flow needs that change over time...or for whatever reason they sleep better with it that way. OK by me.

Getting the discount
In some locales, there’s a discount for paying taxes in lump sum when they're due or early. If true where you are, try to do so. Having an escrow account should guarantee you get that discount, since the funds are all saved up ready to go when the bill comes. The lender/servicer receives the bill, and pays it for you, on time to get the discount. That's the design, and you should review the tax and escrow account statements annually to make sure it happens. If you don't have an escrow account per se, set up your own, informally! Budget and set aside funds for when the bill comes due.

Taxes too much?
Yes, it's your duty to pay your taxes. But no more. Examine your tax bill every year, particularly the tax-assessed value noted by the tax assessor. If it’s significantly more than your home’s current value, then contact your county assessor and find out about making an appeal. The process usually entails getting a current appraisal, which can be a significant cost...so weigh the possible benefit of a slightly lower tax bill against that sure cost. Talk by phone in person to the assessor's office to anticipate the likelihood of success before you embark.

New Lingo in the Mortgage World

2012-01-18T13:47:00.000-08:00

Closing costs are hard enough to understand without lenders adding to the confusion. There are many different terms thrown about, and I find daily that clients are confused by disclosures and terms that sound similar but have different meanings. Here comes help...

First off, two super-useful, old-school terms that will be most helpful:

Closing costs: These are the one-time, transactional costs or fees associated with getting the loan. It should be all inclusive, and may or may not include “discount points” or “points”, which are related to the interest rate. In many cases, your costs and points are not dictated, but a matter of your choice.

Prepaid expenses: These “prepaids” are prorated/recurring charges that are NOT a cost of getting the loan, but ongoing expenses. Primarily property taxes, homeowners’ insurance premium and/or dues, and some prorated daily interest for the odd days at the month-end when you close.

Plus a few new ones added by recent regulation, just to add to the excitement:
NOTE: Added or highlighted in 2010, when HUD (the Department of Housing and Urban Development) changed the old one-page Good Faith Estimate into a new unrecognizable 3 page document, and added new terms. You may or may not find them useful.

Total Settlement Charges: total of all closing costs and prepaid expenses

Origination Charge: subtotal of only the fees that the lender receives, without other third party fees/costs or prepaids

Adjusted Origination Charges: subtotal of “Origination Charge, plus or minus “Points” (see below). It is much clearer to look at “Closing Costs”, since that’s more inclusive.

And a few more to be super clear:

Interest rate: the rate at which interest accrues day by day on your loan…the true rate.

APR: “Annual Percentage Rate”, a less useful figure, promoted as a shopping tool for consumers, but one that has major problems. Attempts to show the total annualized rate (cost as a percentage) of borrowing. Like: “if you do exactly such and such, and finish in so many years, the annual cost was X.” Not the same as interest rate.

Points or “Discount Points”: One "point" = 1% of the loan amount. Either positive or negative…a fee you either pay or finance at closing for a lower rate, “positive points”; or what I call “negative points”, a lender credit to reduce your closing costs. Either one is possible with most loans, and it’s partly a matter of your choice.

“Prepaid Finance Charge”: A subtotal of only SOME of the closing costs specified by the law to calculate APR.

“Amount Financed”: This is the loan amount LESS the prepaid finance charge, used only to calculate APR.

P&I: “Principal and Interest” payment. This is the monthly payment for just the mortgage, without taxes, insurance, etc. This is what pays the interest as it accrues, plus a portion to reduce loan balance over time.

PITI: “Principal, Interest, Taxes and Insurance” payment. This is the total payment (sometimes shown to include homeowner’s dues, and mortgage insurance if applicable). Used by underwriters in qualifying you. You’ll see this on many disclosures whether you pay your taxes and insurance in the monthly payment or not.

Is Mortgage Qualifying Too Tight???

2011-05-21T10:22:00.000-07:00

It feels like a very twisty road to closing loans these days, and there's a notion out there that "banks aren't lending", but it's far from true. Some kinds of transactions are much harder to finance, but money is flowing. You might be surprised to hear me say that standards are arguably still "loose". No doubt, banks have found some sanity again, and refuse to lend to Jane who is without verifiable income, or Joe who has years of spotty credit. But reasonably-well-qualified Jack, who has decent credit and income can get a loan. And he can still get away with a high debt to income ratio (DTI), by historical standards.

The way it was
Years ago, the maximum DTI was in the range of 33 to 36%. That means about a third of your gross monthly pay could go to servicing the house payment (and any other debt service like car, student loan, credit card payments). From the late 1970s until 2005, DTI standards continued to get looser and looser. Eventually, even those with sketchy credit records could get a mortgage regardless of DTI. Today banks hold the line around 45% DTI. That's an improvement, but think about it...

That's 45% of your gross monthly pay. Once you have had withholdings for taxes (30% or so), health insurance (5-15%), etc., and you have 45% going to debt service, there is very little left to live on. If that's not immediately clear, try it with your own gross household monthly income... how do you feel about a house payment that's 45% of gross? Make you crazy? A bank might still approve it today.

Sure, there are cases where the DTI can be high because of extenuating circumstances, but the average household with stable income at 45%? Not so much. It would barely leave room for paying the bills, let alone saving for a rainy day or retirement.

High Hurdles
Now, to distinguish qualifying standards from regulatory hurdles. Regulatory hurdles aren't about what it takes to qualify, but the required process to get to funding. Today, those hurdles and our processes are beyond insane. We have to deal with pointless but mandated timeframes to adhere to, checkboxes ad nauseum, and even more disclosures than a seasoned borrower can imagine. The process is more expensive and slower, and no more consumer-friendly, 180 degrees opposite to what the regulators intended. In that sense, lending is stupid-tight today.

The Future
Going forward, two things must change, although the change may come slowly.

Near term, we're seeing even more regulation (a la the 2300 page Dodd-Frank monstrosity, for example) and then a prolonged fight to lessen the regulatory hurdles back to something more reasonable...and make them truly serve borrowers and lenders, rather than impede smart lending and smart borrowing. There's no other way.
We'll also see debt ratio guidelines tighten further, back toward the historical standards of 25/33 or 28/36. They must as well.

NOAA's Ark Revisited

2011-05-18T07:26:00.000-07:00

Your humble correspondent following up for far flung friends wondering, "What's it really like in Oregon?". And continuing my mild and brief rant over NOAA's brilliant graphics people who bring us dark, dark images on http://www.weather.com/. (See the inspiring graphic in my prior post, An Ark in Every Driveway?)

Anyway, here's the real deal while we wait impatiently for our first flirt with a sunburn...

Contrary to the NOAA graphic, last week western Oregon didn't wash away in a deluge. Yes, we had sprinkles, showers, a foggy morning, and a warm afternoon (with actual sun, requiring actual AC in the car). The short and sweet... we had gray punctuated with sun and shadows, color in the garden, and lots of green things growing. Otherwise, I'll let the pictures speak for themselves... and yes, it'll be 90 soon.

"Free" is a Great Price...But You Can Do Better.

2011-05-16T14:58:00.000-07:00

A "free" credit report is often worth exactly what you pay for it. Not much. A new client called me today, aware that she had some credit issues, and wanting to set a game plan to buy a home in the next year or so. She had a variety of questions, one of which was how to get a free credit report. But as one question turned into 5 or 10 questions, she quickly realized it wasn't so much the report that she needed, as the advice that would (or wouldn't) come with it. So it's not just a matter of signing up for something or ordering something and that's it.

Caution

There's some heavy lifting involved in managing your credit, and yes, you can injure yourself doing it. This is true whether you have stellar credit and you're trying for small incremental improvement, or you're recovering from major trouble. I've seen people harm their scores by pulling their own credit and then taking certain action at the wrong time. This means opening accounts, closing accounts, disputing accounts, paying something off, charging something up, transferring balances, consolidating balances, and moving to a "no interest" deal. Much of the trouble is surprising and counterintuitive. Here's my most fundamental and most valuable advice. Do NOTHING with your credit, until you get good advice from a seasoned mortgage pro.

You can really get "Free"...if you know how
One of my other bits of advice to this new client was not to use some online outfit that advertises on TV and screams "free" or has it in their name. Instead, I recommended she use the officially sanctioned site from the Federal Trade Commission.

There are other options, but this is the safest way to really get your reports for free. If you stagger them (each bureau annually but not all at once...one three times a yearin say January, May and September), then you get a peek at your credit every 4 months. Just understand the three main limitations of these reports:

You can have just one free report per year per bureau.
You will NOT get your scores...just the underlying data, one bureau at a time.
You will not get any interpretation about what it all means and advice about what steps to take...you'll have to get that separately. A good loan officer...ahem...can provide that...ahem...if you know one. ;)

Or if you like brain damage, risk and uncertainty, skip the interpretation and advice.

An Ark in Every Driveway?

2011-05-11T07:58:00.000-07:00

Everything said, is said by someone. The kernel in that saying is that everyone has their own perspective, and it can't ever be completely removed from the equation of human communication. Like the weather forecast from this morning...

That's from http://www.weather.gov/, the "official" weather site for this great country, courtesy of NOAA or the National Oceanic and Atmospheric Administration. What I want to say is "Please come to where we live and see what the weather really looks like."

But I won't say that. Instead I'll say, trying to mask my devious smile,"Yep, that's Oregon". Admittedly this has been a tough winter/spring...but isn't it nice when people who live elsewhere have the impression that we live under a dark, dark cloud. And that there's an Ark in every driveway. NOAA's Ark perhaps? One thing's certain. It's nice that we don't have 10 or 20 million people living here. I'm afraid that would be the case if the word got out that it's not all gloom. Sure it rains, but...does NOAA represent what it's like to live here? Hmmm...

How about a bit of live theater, then? From now 'til Sunday, I'll take a series of pix, day and evening in my front yard and you can compare them with what you see above. Maybe my little weather observation station will wash away in the dark deluge...and maybe not. Stay tuned. :)

Marvel #4: Worthy of Anyone's Bucket List

2011-05-07T08:48:00.000-07:00

Awesome Trees

Friends and clients from other parts of the country or world often remark about our majestic big trees, and of course Oregon's state tree is the Douglas Fir, which grows to massive size. But if you really want to put something worthy on your bucket list, go lie down on your back on a soft bed of redwood duff and gaze upward at a 300 foot tall giant swaying, moving, living and reaching to the sky. It's truly unforgettable, even for a jaded and fortunate Oregonian.

These trees simply define "big". Not counting the fascinating fungus that grow hundreds of acres large under a forest floor, Sequoia Gigantia grow to be the largest living thing on earth by volume, and Coastal Redwoods grow to be the tallest.

So...I highly recommend that you and your family pick one of these and put a visit in your summer calendar...

This summer!

Big Basin State Park near San Jose/Santa Cruz
The largest tree by volume in the world, the General Sherman Tree in Sequoia National Park
The famous and oddly shaped Grizzly Giant tree in Yosemite National Park
or within a shorter day's drive, in the northwestern corner of California, off Highway 101...a special place known as the Avenue of the Giants where yes, you really can see a road built through a tree.

For real tree lovers, I know you'll also enjoy this great photoessay by a couple trekking through redwood forest country.

I've been called worse things...

2011-05-03T23:25:00.000-07:00

Discussing a rate lock, I often hear from clients, "You watch the markets more than I do." Hmmm. It is true. I confess daily monitoring rates, the Fed, and graphs like this one of Fannie Mae mortgage backed securities or MBS (think "bonds"), even if it makes me a little...nerdy.

A green tide carries a message

This 90 day chart shows the past twelve consecutive days are all up-days in MBS/bond prices (meaning = toward lower rates). Twelve green days or red days a row is like rolling a 7 on the dice twelve times in a row...tough. The green "candlesticks" are up in price (and down in rate) for the day. Down days are in red. Such graphs let us watch the technicals for short term trends. Right now, the "techs" say we're due for a correction. The coming days should be more red and downward in price, moving toward higher rates.

In addition to current techs saying that we're due for some red, today's fundamentals also say the same, and that rates will move higher. The fundamentals are what drives the market in bigger, longer term trends, like the tide going in or out. The tide's been out for a long time (years now) and there's growing pressure for it turn because Treasury borrowing and dollar weakness are creating inflationary pressure. That will weaken bonds and drive rates higher. It's the fundamental (red) tide returning.

Every case is different, but for most borrowers, I believe the message is that it's time to lock if you can. Time to buy. Time to refinance if you haven't already.

No need to be a nerd

When clients call me for help with a mortgage, I do lots of things. It's not just about taking an application or "selling" something. One of my roles is to watch and assess the market for trends and anomalies, and find opportunities to lock at an advantageous time. Yes, it's a little nerdy, but I have the tools and do it pretty well. I'm happy to be the nerd...so you don't have to!

Sun, Stars and Sounds in the Woods

2011-05-03T14:14:00.000-07:00

Last weekend I enjoyed a spectacularly good campout with Jacob, my 16 year old. A Scout Camporee actually. That's what we call our annual weekend of competition, camping, and shared Scout spirit among local troops. Something like 400-500 participated. There were contests with map and compass, plant identification, first aid (don't kill the patient), fire-starting, tower building (poles and lashings), and more. We saw and heard many creatures, including frogs, owls and osprey, plus the beautiful Clackamas River.

I'm glad and proud to report that Jacob's patrol won first place in fire-starting and so earned their second consecutive "Burning Man" award. They also won a first place ribbon for the best and most stable tower built. There was also a big trail repair service project for the state park so that visitors can enjoy the trails for another year. We did a good turn and left (hopefully) no trace other than footprints.

Usually Camporee means signing up for either mist or a microburst, but daytime temps hit 70 for the first time this year, which is unheard of. We were treated to nighttime stars and temps near freezing. Whatever the skies, I often think of our native brothers and sisters who lived on this beautiful land for millenia, with a deep respect. The Boy Scouts seek to honor and preserve some of the spirit, skills and traditions of Native Americans in ceremonies, prayers, and in our calling to get close to, appreciate, and take care of the earth. We camp, we use and care for the resources we find there, we listen for and share our time with creatures in the woods.

Scouting isn't living off the land by any stretch of the imagination...but it definitely lets each new generation appreciate the land, and our walk on the earth in a way that most of modern life does not. I love that.

More Tax Savings: MCCs for First Time Buyers

2011-04-26T07:53:00.000-07:00

Every "first time buyer", defined as someone who hasn't owned a home in the past 3 years, needs to know about the MCC program. A Mortgage Credit Certificate entitles a home owner to some significant added tax savings on their federal tax return. The MCC is not a loan program but a tax benefit that works in conjunction with most loan programs (conventional, FHA, VA, USDA).

Either bear with me for this very readable, oversimplified paragraph about how the program works...or press the delete button now. OK: Everyone understands that a mortgage interest tax deduction is a good thing. A deduction means that if you pay $10,000 in annual mortgage interest, you get to deduct $10,000 from your taxable income for that year. For example, if you make $60,000 and claim that deduction, it reduces taxable income to $50,000. If you're in a 30% tax bracket, you save the tax on that $10,000...or $3000. That's the tax you would have paid on the $10k of income. Now... The MCC is like a deduction on steroids. It's actually a tax credit...not just a deduction. With an MCC, and paying that same $10,000 interest, you first get 20% of interest paid as a bottom line tax credit of $2000, plus you get to deduct the other 80% or $8,000 from your taxable income. You again save the 30% tax on that income, (.30 x $8000 = $2400) ...plus you save the $2000. That's $4200 total, rather than a normal $3000 tax savings. Whew. Now you know the basics. To earn your propeller hat, read the IRS publication on mortgage interest, and search that document for "MCC". And I'll be extra impressed if you check out the roots and spirit of the MCC program.

Great deal for those who qualify.

In addition to being exclusively for "first timers", there's an income limit depending on household size ($71,200 to 81,880 per year). The property you buy must be inside Portland city limits and you must meet a test of tax benefit and suitability. We analyze your situation simultaneously for both the MCC and the similarly intentioned Oregon Bond Program, and do the one that benefits you most.

Exclusive access

I am one of a small group of loan officers in Oregon who can offer the program. (Only about 70 MCC certified and only about 20 active loan officers in the state today.)

We can do a preliminary check of your eligibility at the same time we prequalify you for a loan. We should do this before you begin looking at prospective homes to buy. If you appear eligible, you then do the home buyer education, and begin seriously looking at homes in your price range. Once you find a home and sign a contract to buy it, we make your MCC a formality by getting a reservation of funds through the Portland Housing Bureau.

Parts Undiscovered

2011-04-18T22:00:00.000-07:00

You're looking at a snapshot from my collection of old maps.  To me, one of the most captivating things about this 1769 map of North America is the notation "Parts Undiscovered" over our modern day Pacific Northwest region.

For 18th century explorers, the Pacific Northwest coastline and interior were unmapped and unknown. But even today, "Parts Undiscovered" is a mighty notion. For me, it conjures Crater Lake, a jewel I've miraculously never been to, but finally have on this summer's plan. It also suggests "parts" I've never traveled to intellectually and emotionally, like letting our teenagers make more and more of their own choices (as is the case these days for me and Suzanne).

Life is short, and we'll never see it all. That's a wonderful thing. There's also beauty in the fact that no matter where you go, there's always someone around who does know the place. How to visit it, how to "do" the trip and get the most out of it. What you should leave at home, and what to absolutely not forget, the best fishin' holes, the bad restaurants, the washed out roads, the dangerous places...  Sure, some of the locals are clueless, rude, or outright abusive. But finding one of the good locals is priceless, is it not???

On a trip, a good local guide is priceless

Good guides charge a fee, but beware thinking of guides as costly.  If a guide cost you $500, but reminded you about sunscreen, preventing a sunburn that would have ruined 3 days of your trip, helped you connect for a lifetime with people along the way, then saved you from losing your $500 camera... How do you see the guide's $500 fee then? Maybe your best-spent dollars.

You don't pay the guide for the boat ticket, the meal, or the fish you caught. You pay them for their knowledge of the land, the water, the people, the language. You pay them for keeping you out of trouble, stacking the deck in your favor, improving your odds for a great result.

True, no? Really...if you're going out for dinner and you make a mistake (other than food poisoning), the consequences are small. It's no biggie if you blow a few bucks on a disappointing meal. But not so if you're planning a month in the Amazon, where the investment and consequences are huge. In that case, you'd better get some good local help. And the same is true when you're undertaking the other rare journeys in life...

"Parts Undiscovered" is also a place on the map of mortgage lending. Even if you've done it a dozen times, I assure you that the path gets overgrown in time, changed and unrecognizable. With every trip, the path is changed and new obstacles are present...even for the guide!  And like the Amazon, the stakes of this journey are high. It's time to hire a guide, the best local you can find...and trust them to make a difference.

When the trip is done, we look back and ask, was that guide costly, or a bargain? Could we have known at the outset specifically how they'd make a difference? Nope. Maybe we just have to know that great guides are always worth it, and commit to make our life's journey a guided trip.

Eleven Acres of Heartburn

2011-04-17T16:00:00.000-07:00

I recently had an opportunity to finance a very unique property on the outskirts of the Portland metro area. It had a charming little 1920's farmhouse, a good quality steel shop building, and a greenhouse that would win awards, if some were given for phenomenal greenhouses. The buyer came to me stressed and on a very short timeframe, because his bank (with whom he keeps a LOT of cash), had monkeyed around with his application for over a month and then turned him down. Because of the greenhouse. It was too nice. Seriously. With so many smaller "hobby farms" like this in the Pacific Northwest, it seems confouding that they can be tough to finance. Which begs the question...

You love your little farm...why doesn't your bank?

Banks care a whole lot about collateral. Not just the "quality" of it, which can be very subjective...but the marketability of it. In a nutshell, that just means if they need to foreclose someday, they want to know that the collateral is not only sufficient to cover their investment, but sufficiently appealing in the market that they can liquidate it. Banks don't want to be landlords...they just want their cash back.

Your little farm* is perfect for you. It has the space, the amenities, the potential. It has the location, the lay of the land, and without question is valuable. Still, because it's got some rural/acreage/agricultural flavor, it's not as broadly appealing and marketable as a cookie cutter house in the 'burbs.

You may rail at the thought that a house in the 'burbs is better collateral...but that's the mainstream thinking among banks, and it's reflected in their lending policies. No matter how nice your farm is, they may simply not EVER want it as collateral. Depending on the bank, it's common to find specific policies against:

Over 10 acres
Barns, shops, and other outbuildings
Equestrian or other livestock facilities
Timber under management
Ground leases (for grazing or farming, to third parties)
Christmas trees, vineyards, berries, or other crops
Farm or forest deferral (of property taxes)

If you've experienced a challenge because of one of these issues, don't despair. No matter how many acres of heartburn you may be feeling, I have the perfectly soothing Rx for you:

We don't just tolerate hobby farms ...We LOVE hobby farms!

Our exclusive relationship with a small farm lender here in Oregon and Washington means that we approve such properties regularly. A decent home on acreage with moderate agricultural/farm elements*, or even the potential for farming are usually perfect for this program. Rates are great, and options for both short and long term financing exist. I look forward to any questions you may have about this!

*True large scale working farms that are commercial in nature need something other than the "Hobby Farm" program, but I can talk with you about those as well.

As always..."subject to underwriter approval!"

FHA Loses Grip; First Time Buyers Looking to Conventional Options

2011-04-14T23:00:00.000-07:00

Historically, HUD's FHA program has owned the low down payment niche, particularly in combination with marginal qualifying scenarios like higher debt ratios, lower credit scores, absence of "own funds" for down payment, and scenarios with little or no income, requiring a co-signer. Those niches still are the domain of the FHA program. Fannie Mae, Freddie Mac, and other sources simply won't go where FHA will. But the straightforward low-down payment borrower going forward will be well served to consider other conventional options.

On Monday, the FHA monthly mortgage insurance factor will increase by .25%. On a typical $200,000 home purchase, this will mean another $40 or so per month. Loans already underway with FHA case numbers by Friday April 15th will avoid the bump.

This bump is part of a trend that shows no sign of letting up. Last year, the monthly MIP rate went from .55% to .90% on most loans. Simultaneously, the up-front MIP which is usually financed into the loan amount was reduced, but the net effect was still an increase to the consumer, and Monday, the rate goes to 1.15%

FHA struggles to remain in existence and solvent, having had a relatively high rate of delinquencies in recent years. There's good reason for the delinquencies, since the program has tended to attract less qualified borrowers, at the highest possible market LTV (loan to value). Translation: low down + marginal qualifying = higher risk + continued problems. One of the few ways HUD has to combat these challenges (assuming they aren't willing to tighten standards) is to offset the risk with higher fees/premiums. Voilà! That's what you're seeing here.

Good news however...the private mortgage insurance (PMI) industry looks relatively healthy at the moment, and is insuring high-LTV transactions...to 95% or more of value, at premiums that are considerably better than the FHA's. For a relatively small additional down payment (5% vs. 3.5% for FHA), a conventional borrower can have a mortgage insurance premium of just .78%, and NO up front premium rolled into their loan balance.

This and other options exist and deserve careful consideration in every borrower's unique situation. If you or anyone you know needs good counsel about these options, be sure to get in touch with me...

Marvel #3: A Sense of Scale...How Small is Small?

2011-04-09T22:44:00.000-07:00

This very cool demonstration from the University of Utah shows relative scale of everything from a coffee bean, down to the cellular level. It's amazing to know that we can study things so tiny. Go to the demo and drag the bar (below the coffee bean image) over to the right. You'll see just how small "small" really is. Enjoy!

Act Three: There is Light!

2011-04-05T09:04:00.000-07:00

There is indeed a light, not just at the end of the tunnel, but right here and now.

A strong case exists for home ownership, in spite of the gloom and what will certainly be a prolonged recovery. I've already laid out the negatives in prior posts "Act One" and "Act Two". If you're already bummed about something or have SAD and are waiting for the winter gray to break, you might want to wait and read those earlier posts sometime in July.

Anyway, I promised to share what I say is a strong case for buying and owning real estate today. Let's start by saying that not everyone should buy or own. Not folks who are transient and likely to move any time soon for career or other sake. Not the folks who would buy believing values are about to head North. Maybe not the folks who are so un-handyman-ish that the weekend-consuming nature of home ownership will be a drag. And certainly not the folks who can't handle the obligation of owning. I'll cover "why today" in a moment...but first...

Who should buy and own today?

First group: those who want to quit renting and stay put for a while

If you want to fire your landlord and be in control of your castle... If you want to avoid the cost and disruption of multiple moves over the years... If you need particular features of a home and can't remodel a rental to get what you need... If you want to avoid traditional limitations of renting like restrictions on pets, and such... Then you can see that owning a home is more than an economic matter. It's really about LIFE, not just money. That's always been true and is still true today.

Buy a home if you can muster a down payment, still have at least 3 months of reserves in the bank when you're done, qualify conservatively for a mortgage, end up with a debt load of 36% or less, and have a strong likelihood of continued or rising employment/income. In many places, owning now is cheaper than the cost to rent a comparable home. That is compelling, is unlikely to change any time soon, and is putting upward pressure on rents. Owning will lock in most of your housing cost over time, hedging against inflation, protecting you from rising rents.

Second group: Those owning a home already but in a season of life change

Some folks think "now's not a good time to sell, so we should stay put." Not necessarily so. Yes, you could say you're disadvantaged selling in today's market. But if you're both a buyer and a seller, then the shoe is also on the other foot: as a buyer you have the advantage. They should roughly wash each other out. In fact, a potential upside is that if you have a skilled Realtor representing you, you may negotiate well on both sides and come out in great shape.

Life is a rich journey with growth and change. Interests, hobbies, social networks, and careers all have their respective seasons. When lives and needs change, and your life's next chapter emerges, it could mean:

needing an in-home office, quarters for aging parents, or room for a hobby
needing a bigger house for a growing family
needing to move geographically
needing a smaller or more retirement-suitable home

Again, if that new chapter looks like a relatively stable one, (you're likely to put down roots for 8-10+ years) then selling your current home and buying again is smart...even today.

Third group: real estate investors

As was said for the first group above, the rental market today is strong, and may get stronger. With record foreclosures and short sales, millions of people have damaged credit and are unable to finance another home for years to come, but still need somewhere to live. This is making the rental market very tight for renters, but is a major reason investors should consider investment property. It will limit vacancies, keep rents moving upward, and provide surplus prospective tenants for landlords to choose from.

Real returns from well managed rental real estate can be impressive, on the order of 10% ROI. That's a stellar return for anything other than a highly speculative investment. Good alternatives are few and far between.

Part of the reason that rental properties (apartment buildings and small "plexes" in particular) are enjoying relative stability in a down market is because such properties are valued in the marketplace by a cash flow analysis. As long as rents stay up, values will remain firm. Because it takes months or years for developers to bring new housing units to completion, the tight rental market is not about to change any time soon.

In addition to great cash flow potential...and unlike many other investment vehicles, real estate investment can provide very favorable tax treatment including deductions for expenses and depreciation. There's also an ability to do tax-deferred (so called "1031") exchanges and defer tax when you have gains, and if/when you do take a loss, you may be able to write it off. This very good article, although dated, sheds more light on how rental real estate can have big financial and tax advantages. Talk with your CPA.

OK then... Why now?

The current combination of home price and interest rate affordability is compelling, and is not likely to get any better.

While waiting to buy may enable you to buy at a lower price point, it's almost certain to also mean less favorable mortgage terms. Rates have already begun an up-trend, and in years of economic transition, it's common for rates to rise or fall 2-3% in 12 months. The monthly payment for a lower loan amount at a higher rate may be no better than with a higher amount and lower rate. It may be a wash, or worse...so today is probably better than tomorrow in terms of rates.

Beyond rates, a regulatory juggernaut will restrict lending even beyond what we see today. Attempts at implementation of sections of the unwieldy 2300-page Dodd–Frank Wall Street Reform and Consumer Protection Act, are under debate today, and include a proposal to define a safe mortgage for banks to make, or a "qualified residential mortgage" (QRM). The QRM limits would discourage banks from making most kinds of low down payment mortgages, push rates higher, increase mortgage insurance premiums, and force banks to issue fewer fixed rate loans and more ARMs. Generally, QRM would tighten qualifying standards further. Today is probably better than tomorrow in terms of mortgage availability and qualifying.

It's about more than just money.

"But it just seems wrong", you may say, "to buy something whose value is falling." Well, consider that we all buy things that depreciate. One large case might be owning a $30,000 car that will depreciate by 75% or more within several years. We might even own two such cars at once. Yet it's a reasonable move that we make for the utility of owning. Owning lets us do many things we couldn't do without owning. The same can apply to other things in life, including our homes.

Finally, when the market tone looks like it's on the upswing, buyers will lose the negotiating advantage they currently have. It will become more difficult to get sellers to agree to all kinds of accommodation... long closings, possession dates, contingencies, seller credits, negotiated repairs, and such.

While you could make a good purely economic argument that one should not buy while values are still falling, it would miss the big picture.

Finale...

That's it. We've covered a lot of ground in Acts One, Two and Three. Thanks for sticking with me through it. I thought this key issue deserved it. Next up, something FUN!

Marvel #2: Cuban tree frog

2011-03-31T11:11:00.000-07:00

Beautiful, funny, unusual. Is that heartburn I see? National Geographic does have some awesome images.

http://www.stumbleupon.com/su/1dO7IJ/photography.nationalgeographic.com/wallpaper/photography/photos/best-pod-august-09/cuban-tree-frog

Act Two: When will it be over?

2011-03-31T10:24:00.000-07:00

When we left off, we'd just reviewed our path from post-war boom to the bubble burst and the financial pains we're enduring today. I said we’d tackle the question of "When will it be over?", so let's do that...

First a heads-up...

This post lays out some harsh realities. But I promise, there’s light at the end of the tunnel. After this post is done, I will make a strong case for real estate ownership going forward. Let's finish getting the ugly out of the way…

What is the real problem?

Our recent troubles have commonly been called the “housing bubble”. Economists more broadly call it an "asset bubble", properly giving the notion that many asset classes, not just real estate, got unrealistically price-inflated. Easy money from the Fed was largely to blame, but the problem is even bigger.

It is not just a soft real estate market, a tsunami of foreclosures, or inflated assets that we must get over. It's bigger still. It’s in our heads, and no, it’s not a lack of confidence in the market. Quite the opposite, and here's the toughest news: The problem that we need to get over is ourselves. It's you and me. It’s our own entitlement. We’ve been fooled to think in the past several decades that we can and should have it all. The TV (king among the media) tells us so. We all believe it, and politicians pander to it. More on this later.

"OK", you insist, "but when will it be over?" You want me to give you a date, or at least a Q1, 2, 3, or 4 of some year...and better sooner than later, right? But a timeline is not possible. I will, however tell you several things that must happen in order for a turnaround to begin. A turnaround really means a return to something stable and sustainable. Let’s try and figure out what that means. Look at how the price curve below is accelerating around 1970, 1978, 1985 and 2000.

Home values need to stabilize

Home prices will fall further before stabilizing. Arguably, prices should fall back to some price level either circa 1970 (the beginning of the up-slope), 1978 (when CRA was being instituted), or 1985 (when loose loans and home-price speculation really began to take off), plus an adjustment for a the broad annual inflation rate, about 3.5%. By the way, around 2000 lending guidelines got really loose, and the curve shows it, but the horse was out of the barn two decades earlier. I don't consider 1999 a stable point. Depending on what year we take as the stable point, this means that median U.S. home price today should really be about $99,000, 166,000, or $205,000. It’s currently around $160,000 (NAR), so the case can be made that we're already "there". In fact, this is supported by an affordability calculation. The median household (Census) earning $52,000 and modest other debts should be able to support a $160,000 home price. However, I believe we still have pain ahead, for several reasons: 1) not all households today have only "modest" other debts, 2) we're not done digesting foreclosures, 3) income/employment uncertainty, 4) rising federal tax burden, and 4) a continuing drift toward tighter loan standards (more on this in future posts). Bottom line: We're not done yet.

Institutions must change

Government must allow banks to return to lending to only those who meet tighter qualifying standards. We must abandon the notion that legislators and bureaucrats are in any position to dictate what makes a sound loan. Banks themselves know best, and they should be driving that bus.

We may have to go back to the old days where Jimmy Stewart made loans at the private little Bailey Building and Loan Association in It's a Wonderful Life. But that’s unnecessary, is a less efficient and more costly model, and would raise rates significantly from where they could be with prudent securitization.

A better solution is to rebuild our loan securitization system (See my earlier post "...Act One") into something simpler. A new system must have clear standards, more transparency, and less complexity within investment pools or instruments than in the past. The average 401k investor (not just the Wall Street wonk) must be able to understand and trust what they’re buying. This transition is being debated already at the national level by our elected representatives. We should be calling on them #1 to make it simple (no unreadable 2000-page laws or regulatory books on the topic), and #2, hurry up about it…like get a design done and a transition underway this year.

Personal change

Consumption must be replaced with conservation. We need a new/old way of measuring success other than by “getting”. We must collectively learn to be satisfied with what we have, and personally re-learn how save and invest and most important, we need to re-learn how to say the words "I can't afford that". We have to do that in our households…and at the government level too.

We must learn that a 50" TV is a vicious mugger in the night coming to get you, first attacking your wallet at the cash register, and then your sensibilities when you plug it in. Marketers are screaming with their hair on fire when I say this: they’re all liars. The best and really humorous examples are drug commercials. In 30 seconds, the before-and-after contrast always shows that the drug makes colors brilliant, sunny days, smiling spouses, and successful children. We don’t readily notice the lies any longer because they're ever-present. Two notions, first that the marketer will produce a sunny day, and second that we’re all entitled to it are equally foolish.

Simply put... to find a solid footing, we (and our children) must don our skeptical anti-marketing goggles, and we must kill the entitlement mentality. R.I.P.

I told you it would be harsh. Now for some optimism and light. There still is a strong case for buying and owning a home, and that’s what we’ll tackle next. To be continued…

Just a quick roadmap of where we're going...

2011-03-30T13:48:00.000-07:00

For anyone wondering where this new blog is headed, here's the big picture...

First, I'm starting off with a short 3 part series about the state of the real estate and mortgage market as I see it. Each one is pretty dense, but I feel worth reading and worth saying. The point of my doing these first is to lay the foundation of my blog...so that later on, readers can reach back into these early archives and get a frame of reference. I promise that every post won't be so heavy!!!

The first three will be titled something like...

When will it end, you ask? Act One
Act Two: Getting at some answers.
Finale: The strong case for owning a home today

I plan to punctuate along the way with interesting and entertaining bits as I find them, like my previous post. As they say "life's too short..." Since I love nature and marveling at it, I think at least for now, that nature will be the theme of most interludes. We'll see how it goes.

Cheers, and thanks for reading!

Mike

Marvels at nature along our Way...

2011-03-30T13:21:00.000-07:00

We all work so hard at what we do. You do, I do, my team does. I suspect, though I can't tell for sure, that my kids do at school. Let's give them the benefit of the doubt. And let's not work so hard that we forget to take a breath and enjoy the journey, and this beautiful world around us.

One of my favorite things in life is to just marvel at nature. I'd like to include little slices of that joy with you from time to time, here in my blog. It's just part of Making a Way through life. I hope you enjoy this 1 minute video...Amazing Fox Snow Dive

When will it end, you ask? Act One...

2011-03-28T23:52:00.000-07:00

Although we're living in an economic nightmare right now, I'm confident we'll resolve our financial troubles in time. A key question clients and friends are asking almost every day is "When?" I confess, it's an unanswerable question, but one worth asking, and at least attempting to answer...so let's give it a whirl.

To know when it will be over, we have to first ask what "it" is.

Let's make a few observations about the past.  Traditionally, lenders made their own decisions about how they'd lend, and for the most part, the decisions were sound. Home ownership has been widely regarded as beneficial...almost a sacred feature of the American dream. Regular folks used to live simply...according to the time-honored notion of pay-as-you-go, or even "lay-away". If you're in the under 40 crowd, you may need to Google that term.  Bottom line, people only borrowed what they could repay, and lenders only loaned what they were comfortable lending. The system worked pretty well.

But the world changed massively in the 1950s with a potent mix of newfound post-war productivity, TV and the advertising culture. Consumerism and the advent of the credit card together began to kill modesty and restraint. The underlying message that Madison Avenue has sold us and we've culturally bought into is that everybody is entitled to have whatever they want...have it now...and have it for free.

At the risk of oversimplifying things, three critical factors since then brought us to an unsustainable climax:

First, in 1977, the Community Reinvestment Act, in the ostensible and honorable quest to end racial discrimination in lending, kicked off three decades of political and economic drive to progressively loosen credit. The loosening of credit artificially brought an excess of buyers into the marketplace earlier than they naturally would have arrived.  Borrowers could borrow without meeting traditional standards of credit, income, down payment, and debt ratio. Relaxed standards that previously could only be gained by making a massive down payment (like 50% down) were eventually available to just about anyone with a pulse. Poor credit (580 FICO) borrowers could buy with zero down. This caused an imbalance with surplus buyers. The combination of surplus buyers and loose credit meant a bidding up of home values that ran mostly in full gear for a quarter century, from the late 70's through 2005. Strike one.

Along the way, loan securitization (for the really curious) was adopted as a means of keeping our system liquid, spreading risk, and increasing returns, all laudible goals. In practice, securitization became so complex that I now describe it as a Rube Goldberg sausage factory...where first some nice clean loans were ground into bits and sold as a nice clean sausage. Buyers of that sausage ground up the nice links and mashed them together with piles of other not-so-nice ground up sausage. A kind of tainted sausage of sausages was made and called a CDO or collateralized debt obligation. It might include little slices of debt from thousands of sources (mortgages, car loans, student loans, credit cards, and more), all of varying grades. The toxic taint came from loosely underwritten loans that were not always identitified as such. Sausage kept getting stamped "approved" and sold down the line, with unwitting buyers believing they had secure A+ rated bonds in their portfolio, when in fact they had time bombs, "secured" by unreal real estate value. It wasn't secure at all. Strike two.

Finally, the element of time came to bear as the market just played out.  Both Main Street and Wall Street got drunk seeking ever-higher returns. Home prices spiraled upward under a loose underwriting model, and far outpaced affordability as incomes stagnated. Meanwhile enough of the loosely underwritten low-downpayment loans began to default causing the entire system to go into a toxic shock.  When the defaults began, the entire system came into question, including values. Holders of the debt began to take huge losses, magnified by technicalities of counterparty risk: how debts are held, insured, and speculated on. The whole sausage wasn't bad, but eating just a tiny portion of really bad meat can literally kill you. The losses on a relatively small portion of loans began a chain reaction which is still going today. Strike three.

Because of all the pain being felt today, it may sound perverse, but this unfolding is natural and essential to regain some collective balance and sanity. To be continued... (and yes, Act Two will answer When it will end...)

Making a Way, my new blog...

2011-03-28T18:41:00.000-07:00

Borrowing can be done smartly in order to own a home and live your life well. Lending can be done in an ethical and financially sound way, with attention to how the financing structure impacts other parts of a client's financial and personal life. That's what I'm all about. This new page will be a resource for articles, blog posts and other resources to bring light to all kinds of real estate and financing topics. Follow me and enjoy the journey.