If anyone is interested in HOW this works and WHY this is a bad idea, please leave a comment here. Many mortgage companies have no idea how finances work, only how to market and get the phones ringing. These people are doing Sacramento area consumers a disservice incessantly blasting this message all day, every day. But hey, they just want to sell you a loan. It doesn’t matter if it’s the right loan for you or not.

Sure a no-cost refinance sounds great, but it simply isn’t. It’s one of the worst financial decisions any of us can make.

A HomePath home may offer the best financing possible today. The loan only requires a 3.0% down payment, instead of a 3.5% down payment as required by FHA. There is also no PMI or mortgage insurance required, a huge savings to the new homeowner. Better yet there is no appraisal so the buyer saves even more in closing costs and the escrow can close faster. Given this 3.5% closing cost assistance buyers can get their new home with only 3.0% down, no appraisal fee, and have the seller – Fannie Mae - pay 100% of the closing costs (if you’re paying more than 3.5% in closing costs it might be a good idea to call another lender)! Even if there was PMI required it would still be a great deal.

 To be eligible for this incentive:

• Initial offers must be accepted on or after September 23, 2010;
• Property sales must close on or before December 31, 2010, and close within 60 days of offer acceptance; &
• Buyers must be owner-occupants and confirm that the property will be used as their primary residence by completing a certification form (investors are excluded)

Fannie Mae says that this incentive reinforces their commitment to stabilizing communities and assisting buyers. For more information about the incentive read the press release, or give me call/e-mail…

~Greg

Forget for a moment the vast legal and moral reasons to keep your home and make the payments you agreed to when you bought (or refinanced) it in the first place, even though those reasons have become easier to dismiss in today’s world, and realize there are some very real consequences to defaulting on your mortgage, not limited to killing your credit score and making it so you can not buy a home (and lose all of the REAL benefits of being a homeowner) for at least 2 to 3 years. In the short-term it seems obvious, why keep making payments on something that isn’t even worth the debt that is carries? One big piece of the American financial system is how much leverage is built into the housing market and being a homeowner. People who wouldn’t consider borrowing money to invest in anything else gladly pile on the leverage when it comes to Real Estate, often borrowing close to the full purchase price of the home (a great financial strategy if used correctly). Of course that is because most of us don’t have the cash to buy a home outright – and if we did it would be the worst financial decision we could make, but that is another story for another day - but however our homes are an asset like any other. Like all assets, values go up and down and leverage magnifies both losses and gains.

Lets look at a home that sold in Roseville during the height of the market in 2005 or 2006, it sold for $450,000 and the family put 10% down when escrow closed obtaining a conforming mortgage of about $405,000. Lets assume all homes in Roseville have dropped about 25% in value since, and the home is worth now $337,500. If this homeowner stops making payments and “walks away” from the home they automatically lose their $45,000 down payment, all interest paid, and principal payments as well. A huge financial loss. People looking at this option sometimes still seem to think walking away from their home and the mortgage is the right move, capping the losses there. The Sacramento real estate market is not good for sellers and probably wont be for a while and they can probably rent the nicer house next door for less than their current mortgage payment. In a simple world this makes sense, but our world is not that simple.

This decision assumes a static housing market where home prices are fixed at their current low values (real estate always appreciates when viewed over the longer-term period and we’re already seeing prices stabilize and start to rise since last Summer). Everyone knows the ABC’s of investing, buy low sell high, but just like the stock market people do it backwards. Selling on the bad news and buying when prices have come back up, in this case it’s no different with Real Estate. People are essentially “selling” low, the exact opposite of what they should. Assuming prices continue to stabilize and appreciate at a modest annual rate of 5% (the National Association of Realtors data shows average appreciation of 6% historically, even taking into account the huge drop in home prices of the last 2-3 years) until the loan is paid off in 2035, this Roseville home will be worth approximately $1,200,000. Of course this homeowner might not want to wait 25 more years, they may want to sell 10 years from now, when this home will be worth $549,750, a decent gain of more than $200,000 more than today’s value, and still $100,000 more than the original purchase price. Which we’ll remember was purchased at the height of the market back in 2005. In my opinion that doesn’t seem too long to realize a $200,000 gain compared to almost a $100,000 loss by walking away today. Especially considering this investment is your home, the place you live, where you keep your stuff, raise you kids, etc. There’s a real good chance you’d been keeping it for 10 years anyways.

Then there is the opportunity cost of walking away with home prices at the bottom of the market and likely to go up. By the time those walking away today are again credit-worthy enough to obtain financing for a new home they’ll have missed years of appreciation, low interest rates, and today’s rental rates will have gone up. Possibly stuck as a renter forever because they can’t afford the current home prices at current rates five years from now. Before long their rent will assuredly be more than they original mortgage payment was and there will be nothing they can do about it.

In the end I hope you see the case for staying in many situations, and that that case is far more compelling that first it seems. Not to mention fulfilling one’s obligations is just the right thing to do. So there is more than just financial reasons for doing so (and we didn’t even take into consideration all of the lost tax benefits of not owning a home, higher interest rates paid on all other credit and other accounts, such as utilities, chance of not getting a job, a deficiency judgment levied by the current lender, massive IRS fees, etc that we won’t have to face/lose if we make the decision not to “walk away”). If anything I recommend homeowners look into one of the government’s new refinance programs to take advantage of tofaday’s low rates, or talk to their lenders to try and get a loan modification or modified payment plan. In reality it’s the monthly payment that matters most right now, and that payment was just fine when your home was worth more, if you can get a lower payment it’s just the obvious and right thing to do.

~ Greg

While I believe a short sale is a much better situation for our local economy as a whole it is not a guarantee that the seller can run out and buy another home today. In fact it’s quite the opposite: IF you were not forced from your existing home due to a job transfer or dramatic illness and therefore proceeded with a short sale, you are probably not going to get a new home loan for a MINIMUM of 24 months and more realistically 36 months.

Why am I harping on this issue so much? There is a lot of bad information being thrown around in the local real estate and mortgage world, especially in marketing (suprise suprise). Those of us that are “teachers” in the Sacramento real estate and mortgage land need to regain the trust of the home buying/borrowing community. Over the last few years, many in the general public feel they have been taken advantage of by lenders, realtors and just about everyone else. Now is a time to give good, honest advice to people: Even if it is not exactly what they want to hear and it does not meet their immediate goals.

I’m confident that as time rolls on, we will see a softening of these rules. Please feel free to call me with any questions.

Of course Fannie does not control everything and this will only apply to foreclosed homes that are currently in the agency’s possession but that is a big chunk of the foreclosure market and this program may make a difference. As many of you may know it’s been difficult for many people trying to buy their first home to have as they continue to lose bidding wars with cash investors. The program will also help buyers in this part of the market by accepting offers with as little as $500 in earnest money deposits, and making the process of renegotiating after a low appraisal easier.

The other GSE, Freddie Mac, says they have plans for a similar program but have not announced any detials so far.

Of course all things are relative… Prices are not up much, in some areas it’s hard to tell they are even up at all, but they are up and it’s a trend that has been proven since early Summer. Giving a real sign of stability and, most likely, the signal that the future will have more “normal” growth (1-5% a year, averaging about 3% a year) in home values over the comming years. As far as I’m concerned that is more than good enough. Some normalcy is what is needed in these times! We’re looking at what would be considered a normal income-to-home-price ratio for the first time in many years, one of the most important signals of a healthy, but normal, real estate market.

~Greg.

Well, those 4′s may be gone for good. But to anyone in Sacramento still in the market and haven’t decided to lock in or not yet, it’s time to ask your professional (hopefully you’re working with a real pro that knows how to read the MBS market) for some guidance. All my clients in position to lock did so last week, and they are all happy about it! Some people are finally realizing what they hear on the news might not be as it sounds in the real world. They are also coming back to reality to realize that rates are still historically very low.

- No longer allowing creditors to charge interest on the “double cycle billing” method.

- Putting a stop to interest rate increases during the first year after opening a credit card account.

- Ensuring promotion or “teaser” rates stay in place for at least six months.

- Making sure any increase in interest rate is only applied to new balances. Any previous balance on the card will be charged at the same interest rate it was prior to the rate going up.

- Issuers of the cards must now disclose at least 45 days in advance of any rate increases, three times the 15 day minimum currently in place.

- Should a cardholder’s rate increase due to late or missed payments they banks will no longer be allowed to keep the high rate in place should the user establish a stable payment history. In this case the new law requires the interest rate to go back to the lower rate being paid by everyone else.

That is the basics when it comes to interest rates. Over-the-limit and other fees have also been reduced greatly in the amount and frequency they can be charged. They are also major changes to billing and payment processing aimed at making sure certain credit card companies and banks (hello Criminal One, errr Capital One) can no longer hold on to payments on purpose to make them late in order to levy more fees and increase interest rates on their card holders…

All in all this seems like a very good thing. And over time it should help bring some of the predatory practices into line and make the credit card industry work like it should. But what will be the immediate impact? We shall see but already some of these companies are ramping up rates and fees on their best customers to prepare for the loss of income coming when the law goes into effect. A byproduct of bringing a generally unregulated industry back into line I guess???

`Greg :: Roseville Loan Expert