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Real estate article from the Denver Post:

An index that forecasts near-term home sales fell in August to a record low as would- be homebuyers had difficulty getting mortgages.

Read the full article: Pending-home-sales index at record low

Bait and switch is a sales tactic that seems to infiltrate every segment of industry. The words “sorry, that’s no longer available, but we have this ___(fill in the blank) available” could fit the car, computer, electronic, et. al. industries.

When your dealing with your homes financing, the last thing you really want to hear is that your mortgage term and rate are no longer available. However, in today’s mortgage world, the mortgage program that you were offered probably was available yesterday but may not be available today.

Home buyers and owners refinancing mortgages are increasingly finding at the closings that their lender isn’t honoring the deal they thought they had locked up.

Read the full story: Tough words on mortgage fraud

Yahoo is one of the best websites when it comes to consolidating articles. Want news of Lindsay Lohan’s rehab, they’ve got it. Want news on Kobe Bryant desire to be traded, they’ve got it. Want news on real estate, they’ve got it.

Today there was an article entitled: Mortgage Brokers: Friends or Foes?

The article discusses the fiduciary (a person who occupies a position of special trust and confidence) responsibility of mortgage brokers.

According to the article:

Borrowers often see mortgage brokers as their allies, searching far and wide for just the right home loan at an attractively low price.

Yet the article discusses the inherent flaw of the mortgage broker:

Often the broker’s incentives run counter to the borrower’s interests. Lenders pay YSP to the broker when the borrower is paying a higher interest rate than the best he or she could qualify for, which makes the loan more profitable for the lender. The higher the rate, the higher the payment to the broker. (Some lenders put a ceiling on YSP.) Lenders may also pay brokers a bonus for loans with prepayment penalties, which make it expensive for borrowers to refinance within the first few years.

To counter this flaw, the article advocates shopping:

To protect yourself, one strategy is to shop for a home loan directly at a few lenders and then see whether a broker can find a better deal. When choosing a broker, borrowers should ask tough questions first. Among them: In searching for loans, do you feel obliged to put my interests ahead of yours? Exactly how much will you earn on this loan? And how many lenders do you check regularly for rates and terms?

Are Mortgage Brokers the Enemy? The answer is NO.

There are no enemies in the game of life. People will only take advantage of you if you let them. The only true way to protect yourself is through knowledge. Learn as much as you can about getting a mortgage. It’s a pretty simple process but it’s cluttered with confusing terms and complex arithmetic. Where can you learn about getting a mortgage? For $12 you can get Mortgages for Dummies. It’s the book I got when I bought my first place 10 years ago.

Chances are you’ll need a mortgage broker if your loan doesn’t meet Fannie Mac or Freddie Mac guidelines. In other words, if you’re loan is somewhat unorthodox, you need a broker.

On Sunday mornings I usually enjoy a cup of coffee, read the paper, eat a pastry (usually a blueberry or lemon poppy seed muffin) and watch Sunday Morning on CBS. As a news program, they always seem to have interesting stories. This past weekend they had a commentary on the subprime meltdown by Ben Stein:

The U.S. mortgage market is immensely large, spectacularly large. Total foreclosures are a large amount in dollar terms, but a tiny amount in percentage terms. Foreclosures are now about 1 percent of loans. The lenders will sell the houses and recover at least fifty per cent of the value. That means the total loss may be about ½ of one percent of the mortgages made and probably less, and a lot of it is insured. This is an absolutely trivial number in the context of a $14 trillion economy with net wealth in the realm of $60 trillion.

This whole subprime mortgage mess is just an excuse for the gunslingers and river boat gamblers on Wall Street to use their tricks to move markets and make money. The economy is still very strong. The most cagey players on Wall Street like Goldman Sachs are now trying to buy — not sell — as much distressed merchandise in the mortgage area as they can. This is a good clue about where the smart money is going.

As long as people want to buy homes, real estate will always be in demand even the foreclosed homes and eventually mortgage companies will find a way to recapture the subprime market.

Atlanta Foreclosure Homes - ForeclosureConnections.com

I get this question more than any other: What exactly do you do?

A mortgage broker acts as an intermediary who sources mortgages on behalf of individuals or businesses.

My role as a mortgage professional is to “broker” a home loan for a home purchase, home refinance or a home equity loan/line. I interface with borrowers (clients) and companies that buy mortgages.

Before I got into the mortgage business I worked as a systems analyst. I never thought of it this way but my previous life in the software field and my current life as a mortgage professional are one and the same. This clip from Office Space best sums up my previous life.

Yesterday, ZERO DOWN LENDERS FOLDING was emblazoned on the front page of the Denver Post.

The article discusses in detail how subprime lenders are going out of business. The model suprime lenders use is usually the same across the board. Typically they offer 2 or 3 year adjustable rate mortgages. Once the borrower has a two year history of paying a mortgage they usually refinance to another loan. Hence the term band aid loans or band aid lenders. These lenders are going broke and now it’s front page news.

About two dozen of the largest subprime mortgage lenders across the country - some with offices and customers in Denver - have gone under or stopped making loans since December….

Subprime lenders are typically viewed as lending options to poor credit borrowers as well as borrowers with collections, bankruptcy, or foreclosures. However, they cater to more than that:

1. If a borrower has great credit but no assets, they may be a subprime borrower.
2. If a borrower has poor credit and a multitude of assets, they may be a subprime borrower.
3. If a borrower is buying their first home but doesn’t have the income necessary to qualify for a FHA loan, they may be a subprime borrower.
4. If a borrower has more than one late payment on a mortgage, they may be a subprime borrower.
5. If a borrower is buying a home and renting a room to a friend, they may be a subprime borrower.
6. If a borrower… well you get the point. The scenarios are endless.

During my senior year in college, I took a high level English class devoted entirely to Shakespeare’s plays. We studied several including Hamlet. While everyone always remembers the classic line “To be or not to be,” I always liked “Something is rotten in the state of Denmark.”

I didn’t think the line was useful until now…

Recently I came across an article entitled A look at how home mortgages operate around the globe. According to the article the Danish has a similar system as ours. If their mortgage system is anything like ours then something is rotten in the state of Denmark.

Their (the Danish) mortgage system, like ours, relies heavily on the capital markets. Consequently, it is the only country to have home loans with most of the key features of those found in the United States. But there are limitations.

For one thing, lending criteria are extremely rigid, much more so than in the U.S. For another, Danish borrowers must come up with far larger down payments. In the United States, borrowers who make a 20% down payment tend to get the best terms available. But in Denmark, to achieve an 80% loan-to-value ratio, borrowers must take out a variable-rate second mortgage to cover the difference.

Danish mortgages are also “portable,” meaning that when owners sell their homes, they can carry their mortgages over to the new house.

Let’s hope that Danish mortgages aren’t brokered by dirty “rotten” scoundrels.

Countries covered in the article include the aforementioned Denmark, Great Britain, Italy, Japan, Germany, and our neighbor’s to the north, Canada. The general consensus among these countries is to require substantial down payments.

I’d like to think that my blog is unique, I don’t just blog about mortgages cause quite frankly mortgages isn’t the most exiting subject on the planet. Most mortgage brokers don’t blog (do they even know what a blog is?) so I thought blogging would separate me from the pack. Most of my traffic is derived via Google searches. When I started blogging I sent my url to my past clients, friends, etc. and over the past couple of months I’ve received links from other blogs and sites, but I still get more traffic from google than any other medium. It’s not even close.

Here are some of the search terms (in UPPER CASE) that were used to find my site:

• NY PIZZA in DENVER: If there’s something I know, it’s NY Pizza. The site for Original New York Pizza is www.originalpizza.us and it’s located here: 1300 W Midway Blvd in Broomfield, CO 80020 to order a pie call (303) 469-9117. Pantaleone’s is another good NY Pizza joint despite the owners being from Soprano country (NJ) here’s their address: 2120 S Holly St # 6 Denver, CO 80222 and number (303) 757-3456.
• My DENVER BLOG covers Denver real estate, Denver trends, Denver mortgages, and just about anything the gooey substance above my medulla oblongata comes up with.
• TEDY BRUSCHI of the New England Patriots is one of my favorite NFL players because he plays the way the game should be played and yes, he’s HALF-FILIPINO and HALF-ITALIAN. DEAN CAIN and WILL FERRELL are not Filipino.
• You can buy STARBURY SNEAKERS in DENVER, Colorado, you can go to Steve and Barry’s located at 8501 West Bowles Avenue in Littleton, CO 80123 call them at 303-904-7513 for directions.
• FORECLOSURE is a hot topic in COLORADO and DENVER. Fellow Colorado bloggers have tried to minimize the problem. When 90% of the leads that I get from my websites is from Colorado Home Owners facing foreclosure, I’d say foreclosure is a problem. Any way you cut it, people don’t want to lose their homes and saying “sorry, I can’t help you” really sucks!
• KOSI 101 plays CHRISTMAS MUSIC. Tune to 101.1 on your FM dial.
• DENVER is not going through a HOUSING BUBBLE BURST. Denver may have flat lined in terms of property value over the past 4 to 5 years but Denver’s real estate hasn’t popped. Who in their right mind would want to move to a booming city that features 300 days of sunshine a year, skiing in our backyard, hiking, biking, great sports, light rail, international airport, great restaurants, and affordable housing? (sarcasm)
• THE NEXT WASHINGTON PARK could very well be Stapleton, Lowry, Riverfront or anywhere near the Pedestrian Bridge. A realtor would probably be a better person to ask (now there’s an idea for a blog post) so if you need a realtor, just ask. I only work with realtors that won’t waste your time or mine.
• The DIFFERENCE between a MORTGAGE PLANNER and a MORTGAGE BROKER: a mortgage planner actually gives a rats ass about you as a human being and your long term future. For the record, I consider myself a MORTGAGE PLANNER.
• HGTV is scouting for new home buyers in the DENVER metro area for their show, MY FIRST PLACE. However, I think this train came and left.
• REAL WORLD DENVER takes place in LoDo (Lower Downtown) and no I won’t be making any cameos on the show. I believe they filmed the show on Market Street a stone throw away from Coors Field. I’d actually like to see MTV show music videos like they did when I was a kid.
• CASEY SERIN is facing FORECLOSURE and blogging (www.iamfacingforeclosure.com) about it. The guy is going through hell.
• DENVER FIX and FLIP and FLIPPING HOUSES in DENVER, please refer to Casey Serin’s blog before you call me about a loan.
• Yes, there are NY JETS FANS IN DENVER. I’m a die hard NY Jets fan but I don’t know what bar the NY Jets fans congregate. A few years ago it was the Sports Column but when I showed up in my Vinny Testaverde Jersey, there were more Pats fans in the house. Old Chicago on 14th and Market is always a good bet, they show all the games.
• ALTUS HOME LOANS is not the most reputable mortgage company in Colorado. Their DECEIVING ADS are what they are that’s why they’re in trouble. What’s more concerning is that we want politicians to clean up the mortgage mess. What’s the difference between politicians and a mortgage company? They too make just about any promise necessary to get the deal (elected), then fall short of expectations time and time again.
• You really need TITLE INSURANCE in Colorado it’s necessary and not a JUNK FEE.
• WHAT IS WRONG WITH THE DENVER BRONCOS? I don’t have that line anywhere on any of my posts but here’s my answer is “Jake the Snake is not John Elway and neither is Jay Cutler!”

Recently I found out that I’m on Pittsburgh Homes Daily “500 real estate blogs to watch.” It’s quite flattering to make it on any list. While I do write about real estate and mortgages, I’ve noticed that most of my visitors both new and returning seem to enjoy my Top Five Fridays more than any category/posts. Moreover, “Tedy Bruschi” and “amerasian” tend to be the top terms used in search engines to find my site.

As long as people continue to read, I’ll continue to post!

I get a lot of email. Some are linking requests. Some are spam that somehow get through GMAIL’s spam filter. Some are mortgage requests. Some are mortgage questions. Some are mortgage vendors trying to sell me something.

On Sunday, I received a well written argument from a reader who asked me to post his response to the Denver Post article NO MONEY DOWN: A HIGH RISK GAMBLE.

Phil,

I enjoy frequenting your blog, and wanted to be sure to share this with you. I am an independent Mortgage Broker with my own company Source Financial LLC, and I wrote an extended response to The Sunday Denver Post’s lead article from September 17, 2006 entitled “No Money Down: A High-Risk Gamble” [www.denverpost.com/ci_4347686].

I found the Denver Post article to be riddled with misrepresentations, one-sided accountings, and dangerous misinformation, all supporting a traditionalist approach to mortgages that has put two-thirds of all families into home ownership, but yet has led to a situation where the average fifty year-old American is worth negative $7000, only 5% of Americans retire at age 65 in financial dignity, and 9 out of 10 Americans die in debt.

In reference to my 2000 word response, Denver Post Business Editor Stephen Keating indicated that “I will take the time to read it and digest your observations, and discuss it with the rest of the reporting/editing team here.” Article author and Denver Post Business Writer Greg Grifffin wrote “This is a well-reasoned and well-supported argument. I don’t agree with everything you’ve said, but you’ve managed to get me thinking.” Unfortunately, checking today’s (September 24) Sunday Denver Post and www.denverpost.com, my response remained unpublished…

A Response to “No Money Down: A High-Risk Gamble” – The Sunday Denver Post, September 17, 2006 lead article [www.denverpost.com/ci_4347686]

As an independent Mortgage Broker that owns my own company, Source Financial LLC, in addition to being affiliated with a larger mortgage company that handles the processing and servicing of my loans, Lion Financial Corporation, I read the lead article “No Money Down: A High-Risk Gamble” with great interest. Knowing that a lot of folks along the Front Range turn to the Denver Post as an objective source for information, I was shocked and dismayed by much of the information and conclusions that were put forth on a topic that already invokes a fight or flight response among many home owners.

100% financing loans have been an amazing tool that has greatly contributed to the 5% increase over the last twenty years in percentage of homes occupied by the owner. But it is not the lack of equity that is putting these borrowers into jeopardy, it is a lack of a flexible asset base to deal with changes that has been increasing the risk of these folks defaulting. In general, people that utilize 100% financing for home purchases usually are lacking the liquid assets, emergency funds, and overall wiggle room to deal with financial hardship.

Of course lenders usually have guidelines concerning liquid asset reserves that must be held by the borrower in order to qualify for a loan, but often they only require enough to cover two to four months of mortgage payments. When people do face catastrophic events rightfully referenced by the Denver Post, “job loss, medical problems and divorce,” those reserves can often quickly disappear.

But having equity in one’s home when faced with these situations does not “give homeowners options when they face financial problems,” because it is precisely when folks are facing such dilemmas that they are quite often unable to qualify for refinancing, as at that point in time they are too high risk of a borrower for lenders to work with. As a Mortgage Broker I am deeply disturbed by this fact, but unfortunately it is a reality that we all must face when dealing with banks and lenders.

And probably the most misunderstood aspect of homeownership is the fact that equity is a ZERO PERCENT RETURN INVESTMENT. Yet two-thirds of Americans hold the majority of their wealth in home equity, which is a non-liquid asset that gives them absolutely zero return. Many people confuse appreciation, which is the increase in home value due to market trends, with getting some kind of return on their equity, but that is a common misconception. That is why it is so important for homeowners to separate their equity from their home via refinancing, and put those “cashed out” funds into investment vehicles that offer an actual rate of return. In doing so, homeowners increase their overall liquidity, improve their capacity to face emergencies, reduce their financial risk, increase their rate of return, improve their tax deductions, and diversify their investment portfolio.

Instead of spending their liquid asset base (savings) to finish their basement and send money to their parents, such as in the case of Jose Garcia and Maria Vanderhorst, borrowers with 100% financing have to exercise greater financial discipline. And putting money down and getting into a 30-year fixed would not have improved their situation, as then their down payment would be tied up as equity, which is a non-liquid asset, money that can only be accessed through refinancing or by selling their home.

100% finanacing loans are not dangerous, what is dangerous is borrowers not having a liquid asset base to deal with life’s contingencies. Unfortunately, these are the type of borrowers that tend towards 100% financing, as it really is their only option for home ownership. And tying up their wealth in the straightjacket known as equity is not part of the solution, it is part of the problem. An incredible means to access equity for the purpose of greater fiscal flexbility and all the other goods mentioned above, or “cashing out equity as one goes,” is the Option-ARM loan, which received quite a misguided slamming in the Denver Post article.

The Payment Option Loan gives the borrower four different payment options each and every month: they can make an Interest Only, 30-Year amortized, or 15-Year amortized payment based upon the fully indexed interest rate, or they can make the minimum payment that is based upon a very low “start rate” (usually between 1% and 4%), which involves deferring interest (a.k.a. negative amortization), or adding the difference between the Interest Only payment and the minimum payment onto the principal of the loan. Now while most lenders offer the Payment Option Loan with an adjustable fully indexed rate, one that starts adjusting as early as the first month, some lenders offer the Payment Option Loan with a fixed interest rate for the first five years.

The Payment Option Loan has proven to be a favorite of Real Estate Investors and Real Estate Agents, as it frees up extra cash flow on a monthly basis for much greater investment opportunities. Knowing that equity is a zero percent return investment is some powerful information to have.

The annecdote concerning Louis and India Harts conflated the fixed “start rate” with the adjustable “fully indexed rate”, such that readers were left with the impression that the Harts’ interest rate went from 2.6% to 8.1%. The start rate, which determines how much the minimum payment will be, is not a “teaser rate” that “quickly shoots up”. Some lenders do gradually increase the minimum payment itself (not its determining start rate) on an annual basis, usually somwhere in the range of 7.5% per year, to keep the borrower from deferring too much interest. But the start rates is always otherwise a fixed rate. It is the fully indexed rate, upon which the Interest Only, 30-Year amortized, or 15-Year amortized payments are based, that is adjustable is this case. And this fact is consistent with the numbers quoted in the article: the minimum payment of $919 the Harts are making would be the combination of $721 (2.6% start rate on a $180,000 loan) and $198 of escrowed Property Taxes and Hazard Insurance, which is approximately what they would be for such a home.

In the Harts’ particular case, they are going to have plenty of time to refinance before their loan starts to recast when the principal hits 115% (which would be $207,000 in their situation), as they will be well below that total when their three year prepayment penalty period is up. So the answer to Louis’ “I don’t know how we’re going to do it,” is that when those three years are up, they’ll refinance and get themselves into a loan that they feel more comfortable with and educated about. Though given their situation, if properly understood the Payment Option Loan really is their best option.

My question is how can mortgage products themselves be blamed for foreclosures? At best the article points towards a correlation, but demonstrating causation surely requires more than offhanded references to what some unnamed experts stated the next wave of defaults “may” come from. Beyond unpredictable catastrophic occurences like job loss and overwhelming medical bills, foreclosures occur because borrowers are getting into loans that they do not understand, and often they do not know that they do not understand the mortgage product. It is the responsibility of the Mortgage Broker to completely explain all the details of any mortgage product to the borrower. But it is also the responsibility of the borrower to be certain that they understand the terms of loan before signing off on it at closing. Vehicles and guns both kill in the range of 35,000 Americans each year, but it is the human misuse due to lack of education, ignorance or simple negligance that creates this reality, much like in the mortgage scenario.

Every different mortgage product serves its purpose, and what works for one borrower will not work for another given the specifics of their situation. To label certain categories of loans as “high-risk gambles” or as leaving “no room for slips” ignores the millions of families that are in these loans and find that they very much work for them. It is also a disservice to consumers to mislead them with such one-sided representations.

The true irony of the lead piece in September 17th Sunday Denver Post is that the conclusion that “Option-ARMs… could fuel a surge in foreclosures in the next few years” is the opposite of what we find is actually going on in the mortgage industry, as Payment Option Loans have proven to have the lowest foreclosure rate of any mortgage product currently on the market. World Savings is a bank that specializes in this product, which they refer to as the Pick-A-Pay Loan, as more than 90% of the loans they outfit borrowers with are of the Option-ARM variety. As a lender they have less than a 1% percent foreclosure rate! But World Savings, along with the independent Mortage Brokers like myself that they work with, take on the responsibility of educating the borrowers as to how to properly and smartly manage this incredibly powerful mortgage product.

A lot of mortgage brokers I know will not touch Payment Option loans, but I believe that is primarily because they are not all that interested in educating the consumer. Why not just throw them into a 30-year fixed APR mortgage? Everyone pretty much knows how that works. But that is also how banks make of the most money off of borrowers! The “list of higher-risk, alternative mortgages” the article refers to are not only not necessarily higher risk (Payment Option loan has the lowest risk, as discussed above), but they also provide the borrower the opportunity to increase their monthly cash flow by lowering their monthly mortgage payments by as much as 40%. In this way consumers are empowered to “become the bank” and grow their own investment portfolio, rather than falling into the trap of handing over their hard earned capital to the banks in the form of a large down payment or paying down principal so that they can have more of a zero percent return investment, equity.

Affiliates of Lion Financial Corporation, like myself through my company Source Financial LLC, do not shy away from the privilege or responsibility of educating our clients how to properly utilize alternative mortgage packages. And why is this? Because when families are taught smart mortgage product and equity management, they learn to utilize their mortgage as a financial tool for building wealth, which easily makes a $500,000 to $1,000,000 difference for the borrower over the next fifteen to twenty years. The affluent have always understood how to leverage their mortgage, pay as little down as possible, and keep very low monthly payments in order to increase cash flow for investment purposes. The American middle class is being transformed by engaging in these very same concepts and increasing their fiscal discipline, and I absolutely would not have it any other way.

Brent Ritzel
President/CEO, Source Financial LLC
Denver, Colorado, USA
An affiliate of Lion Financial Corporation
303-590-8999
Brent.Ritzel@lionfinance.com

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