Archive for the ‘Politics’ Category

Today is August 16th.  If you are in the market to buy a home, you have approximately 45 days to find a home and get it under contract if you want to ensure you can take advantage of the first time home buyer tax credit.

Why 45 days?  Because in forty five days, it will be around October 1st which is the latest you can get a home under contract to purchase and still reasonably close  on the transaction by the November 30th.   Remember, it takes about 45 to 60 days to get to the closing table from the time the seller accepts your offer.  Thefore, if you expect to finalize your transaction by the November 30th deadline, you need to have found a property and come to terms with a seller by October 1st.

So get out there and find a home; $8000 is a lot of money to pass up.   Time waits for no one…


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I knew it wouldn’t be long before some bottom feeding lawyers started filing lawsuits against mortgage lenders. Here in Chicago, we have some ambulance chaser advertising all over the airways looking for people who are on the brink of foreclosure to file a lawsuit against the lender. The City of Cleveland, OH has decided to take it a step further and has filed a class action lawsuit against 21 major lenders – pretty much a who’s who of mortgage banking. Bank of America, Wells Fargo, Chase, and any other bank they figure has some deep pockets.

In case, you haven’t figured it out. Cleveland is pretty high up on the list of a foreclosures. There were some 7000 foreclosures in the city in 2007. That is a lot of foreclosures for a fairly small city. The Mayor is essentially blaming the lenders for leaving the city in a mass of foreclosures and Katrina like neighborhoods of boarded up crack houses. On the surface, this sounds like a typical left leaning, tug at your heart strings issue. The big bad greedy banks sucking the equity out of poor old Cleveland.

But let’s put our emotions aside and really examine why Cleveland is fast becoming the foreclosure capital. The last time I checked, no one was running to move to Cleveland. Some folks might even call Cleveland a hell hole. The city is in the heart of the Midwest and quite frankly is getting the smelly end of the stick when it comes to dying manufacturing economy that is in the toilet. The bottomline is that it is hard to pay your mortgage when you don’t have a job! Of course, instead of the Mayor figuring out how to spur the Cleveland economy and bring employment back to the city, it is a lot easier to blame the lenders. Does he really think lenders want to foreclosure on some outhouse in a Cleveland ghetto worth $100,000 with a $125,000 mortgage on it? I didn’t think so.

Let us not forget the same people crying about the big bad lenders were slamming them and filing lawsuits years ago because they wouldn’t lend to poor people. Now that poor people can’t pay their mortgages, they are crying and filing lawsuits that the big bad lenders shouldn’t have lent them money. Good lord.

Here is the article.

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One of the things that always bugs me about the main stream media is that they often leave out key facts or make statements that often makes things seem worse than they really are.   I think there really needs some perspective on foreclosures and sub-prime mortgage lending. 

Now before someone goes all ballistic and on some rampage about predatory lending, evil mortgage brokers, and how it is all George Bush’s fault, let me just state for the record that foreclosures are bad.  Foreclosures suck for lenders.  They suck for borrowers.  And they also suck for neighborhoods. Foreclosures are in no ones best interest except maybe for a hand full of investors looking for properties on the cheap.

So let’s exam some of the numbers.  Now I don’t have a full data set, but I found enough doing a quick Google search to make my point.  According to Realtytrac, in 2006 there were some 1.2 million homes in foreclosure nationwide, a 42% increase over 2005.   Most newspapers ran with that as the headline and sold tons of newspapers.  Sounds bad doesn’t it? How about if we say 1 out of 92 homes are in foreclosure nationwide? Doesn’t sound so bad this way.  Better yet, how about if we say 1.1% of all households go into foreclosure?  Really doesn’t sound bad now.  Of course, the media doesn’t put things in perspective and all we keep hearing about is rising foreclosures, but no one stops to say that 99% of homeowners are still paying their mortgage on time.

While subprime mortgages account for a large percentage of foreclosures, the numbers still aren’t that bad. According to the Mortgage Bankers Associaton only about 5% of subprime mortgage are in some stage of foreclosure.  Remember, 95% of these people are still able to pay their mortgage on time and keep skyfalling.jpgtheir homes.  By definition, subprime lending is risky. These borrowers aren’t exactly stalwarts of financial responsibility or solvency so even 5% isn’t too bad.  The media keeps forgetting that these loans also have allowed millions of people who would have been laughed out of a traditional bank to now take part in the American dream of homeownership.  And you know what? The vast majority are doing so without problems.

What we are seeing is that foreclosures were probably held artificially low over the past couple of years due to the booming housing market. In other words, home appreciation allowed many people who would have been going into foreclosure to escape it or delay it.  Now that values aren’t rising nearly as fast, these borrowers are stuck.  Rising interest rates, sagging home values, and an inability to sell have these borrowers trapped.  It is unfortunate, but the music had to stop at some point.  However, the level of foreclosures relative to the number of loans originated is within the historical norm.

Despite all of the handwringing by politicians and consumer groups, not a single one of them is able to produce a conclusive study that shows predatory lending as a significant cause of foreclosures. Sure, reporters can find some elderly person who gets hoodwinked by a shiester, but this is hardly a common occurence. Most foreclosures are still caused by job loss, medical problems, and plain ‘ole financial mismanagement. No amount of legislation, bail out programs, congressional hearings and broker bashing would prevent these foreclosures.

In fact, I bet as we start digging through the numbers, we will see that a lot of the so foreclosures are really just flippers and Donald Trump wannabes losing their ass on bad deals as well. Every loan officer who got fat over the past couple of years knows exactly what I am talking about. The bag boy who owns five “primary residences” whiles using stated income loans to acquire more properties so they can flip them. Should many of these loans have been made? No. But acting like these folks are victims is ludicrous. Maybe victims of their own greed, but nothing more. There are plenty of Casey Serins in those foreclosure statistics.  In fact, much of the subprime meltdown was brought on by early payment defaults where the homeowner doesn’t make a single payment on the mortgage which is usually a sign of fraud or flippers. 

In summary, the market is correcting. Lenders are going back to the basics and we are all realizing that everyone doesn’t deserve to be homeowner, but it certainly isn’t the end of the world.  All that is needed is a little perspective.

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scavengers1.jpgLast week I told you about the Supreme Court ruling in Watters versus Wachovia that pretty much solidified the mega mortgage bankers and their subsidiaries skirting of state regulations and their attempts to drive mortgage brokers out of business by unfair legislative tactics.  

An email I received this evening from a recruiter should further prove my point.  Notice that the recruiting pitch has nothing to do with the company being a great place to work, but how by working at a federally chartered mortgage bank you can skirt state laws such as Illinois’ House Bill 4050 to your advantage.

Click here to view the email.

What is unfortunate is that the media and politicians keep slamming mortgage brokers while ignoring the mega banks’ ability to hide behind federal laws.  Who would you trust more?  The mortgage broker who has to 1) disclose profit margins or yield spread premiums and 2) hire loan officers that must be licensed, pass background checks, pass competency exams, and show continuing education or the big name mega bank who doesn’t have to follow local laws, disclose mark ups, or hire licensed and trained originators? 

I think it is pretty clear that the predatory lending laws that are being passed are only hurting small local businesses and consumers.   Nevertheless, a situation like this is what you get when we allow politicians to tug at our emotions to garner votes and pander instead of basing legislation on facts and common sense.

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TaxesAfter much lobbying, private mortgage insurance (PMI) is now tax deductible for refinance and purchase loans taken out after January 1, 2007.  This benefit was buried deep in the Tax Relief and Healthcare Act of 2006.  This is great news for millions of homeowners making owning a home more affordable.   For decades, lenders have required homeowners who do not have a 20% down payment or at least 20% equity in their homes to pay PMI.  PMI is an insurance policy the lender takes out on you to insure that if you were to default on the mortgage, the lender would recoup their money.  Put another way, it is an insurance policy you pay for but provides no benefit to you.  It doesn’t help you if you default, it helps the lender.   There used to be absolutely no financial reason to ever elect to pay PMI and it was to be avoided at all cost if possible.  PMI can be several hundred dollars per month depending on your credit profile.

While this is great news, do not mistake this bill passing as something being done as an act of kindness.  PMI companies have seen their policy revenue fall dramatically over the past several years with the development of piggyback mortgages.  A piggyback mortgage is where the loan officer breaks your mortgage up into two pieces.  They give you a first mortgage of 80% of the purchase price and a smaller second mortgage for the remaining balance.  For instance, if you only had five percent as a down payment you would get an 80% first mortgage and a second mortgage for 15% and you would put five percent down.  By structuring the loan this way, you do not have to pay the PMI charges.  The combined payment with the two mortgages is lower than one mortgage with PMI.   Piggyback mortgages have saved homeowners thousands of dollars.  In fact, I probably only close a handful of transactions annually with PMI because there are plenty of ways to avoid it for most borrowers.  Typically, if PMI is required it is because there are no other options.

This bill is the result of lobbying by PMI companies so they wouldn’t find themselves out of business.  Nevertheless, it is still a good thing.  However, even with PMI being tax deductible it still probably won’t be better than avoiding it altogether.

The main points of the bill are:

  • Homeowners making less than $100,000 per year may deduct the full cost of the annual mortgage insurance premiums
  • If adjusted gross income is above $100,000, the deductible portion of the premium is reduced by 10% for each $1000 or fraction thereof.  Now in english: this means if you make $101,000, you can deduct 90% of the mortgage insurance premiums paid.  This also means the maximum income allowed for the deduction is $110,000.
  • Mortgage loan (purchase or refinance) must have been closed in 2007.  This means you won’t be able to deduct the premiums on your taxes this April.  You have to wait until next year.   PMI premiums paid in 2006 are not deductible.
  • Only primary and second homes are eligible.  Rental income disqualifies the second home deduction.

If you obtain a mortgage this year with PMI, make sure you talk with your tax professional about this new benefit to fully take advantage of it.  Mortgage insurance company, MGIC, has a good presentation on the bill.

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