Current State of Mortgage Financing...What's Going On?

Anyone watching or reading the financial news over the last few days and weeks has seen a lot of angst and consternation over the state of the mortgage industry. In fact, one of the larger lenders in the US, American Home Mortgage, was forced to shut down operations last week. But why? What is happening, and most importantly, what does all this mean to you? Let's unpack the definitions and details, so that you really understand the truth behind the headlines.

Over the past several years, many loans were made to homeowners with somewhat non-traditional or "non-conforming" situations, be it a poor credit history, inability to document income, or any number of factors that do not fit within the traditional "box" for home loans. These loans are often called "Sub-Prime", or "Alt-A", meaning that they were somewhat riskier in nature than A credit, prime, or traditional loans. Another type of "non-conforming" home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417K, which is the current maximum loan that can be done using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done - it's called a "jumbo loan" - but the end money comes from private institutions, not from the large government sponsored entities of Fannie and Freddie.
Most non-conforming loan product rates popped significantly higher in the last week. Here's the scoop.

The end investor for Subprime or Alt-A loans will charge a premium for taking on a pool of these loans, because they know that traditionally, they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure has been on the rise - partly due to the fact that with credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell in order to get out of trouble. So now, these end institutions are demanding a much higher "risk premium" for taking on these pools of loans, as they see the rates of default are climbing higher.

But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101K for a $100K loan that will bear interest, they may only be willing to pay $95K for that $100K mortgage to account for the risk. Multiply that times thousands upon thousands of loans...and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a "liquidity crisis", and is exactly what happened to American Home Mortgage - there was no mismanagement, but they simply got caught holding too many "hot potato" loans, forced to sell them at massive losses...and eventually they had to make the decision to close the doors and stop the bleeding.

Further, even when a lender is able to take some losses, they may be subject to a "margin call". This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset that they are secured on is now diminished. This is exactly like margin calls in the Stock market. If you have a loan against a Stock that is losing value, you will get a "margin call" and need to pay down the loan, as the underlying Stock is losing too much value to be considered adequate collateral any longer. So for the big lenders, as their portfolio is losing value due to increased risk premiums and losses...the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, which then exacerbates the problem.

In response to seeing this situation play out in the demise of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared - and likely over-prepared - for increased risk premiums down the road. Even though loans above $417K are not presently suffering from increased delinquencies like the Subprime and Alt-A loans are, these rates popped higher as well, because they are being purchased by smaller private entities that can't afford to take on any margin of risk.

What happens next, and what should you do now?

The present situation will likely settle out over the coming year, and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize. But here are a few important things to do right now.

Webinar Tonight: Bulk Pre-Construction Luxury Homes, Guaranteed builder buy-back

http://www.axiomrealtycapital.com/pages/beaconhill.html

Beacon Hill's Wholesale Purchase Opportunity

Join us for a Webinar on August 9

Space is limited.Reserve your Webinar seat now

at:https://www.gotomeeting.com/register/234958601

In this informative webinar learn:

How to earn an average of $330,000 built-in equity
Why Utah property is appreciating so quickly
Why this is one of the best exit strategies we have ever seen
How to be in and out of this real estate investment in only 14 months
Strategies to keep your money secure

The Chateaus of Beacon Hill

The Chateaus of Beacon Hill - nestled in the mountains of Highland, Utah - is home to one of the fastest appreciating real estate markets in the United States. A report issued by the OFHEO in June of 2007 showed that Utah County’s home prices have grown 19.7% over the last 12 months.

The Chateaus of Beacon Hill are just minutes away from Timpanogas Cave National Monument and Robert Redford’s Sundance Resort.

Mountain LuxuryThere are 16 home designs ranging from 6900 to 9089 square feet, all of which feature granite counter tops, stone and brick accents, glazed walls, vaulted ceilings, and extensive crown moldings.

Wholesale Real Estate OpportunityAxiom is offering buyers a purchase opportunity of 28 luxury homes and lots in the Highland, Utah area. These homes are at the highest point in the project with the best views.

Through Axiom you can acquire a preconstruction luxury home and lot at a discount of 15%
Expected resale timeline: 13 months

Developer agrees to re-purchase property for 15% more than your purchase price if it is not re-sold during the twelve month construction period.

Substantial built-in equity ($315,000 - $345,000)

Only 10% deposit required ($178K to $195K)

How much money do you need to retire?

Great question huh?

Check out MSN Money for a nice little calculator. It takes into account your life expectancy (based on medical hisotry & lifestyle), current savings, return on investments, savings at retirement, and draw down during retirement.

http://moneycentral.msn.com/retire/planner.aspx

I was encouraged to see that the amount I need is not as much as I thought it would be! Plug in your numbers today! Click the picture below for example scenario:

Fun Website: Second Life -- Choose your New Life

http://secondlife.com/

Second Life is a 3-D virtual world entirely built and owned by its Residents. Since opening to the public in 2003, it has grown explosively and today is inhabited by a total of 8,674,840 Residents from around the globe.

From the moment you enter the World you'll discover a vast digital continent, teeming with people, entertainment, experiences and opportunity. Once you've explored a bit, perhaps you'll find a perfect parcel of land to build your house or business.

You'll also be surrounded by the Creations of your fellow Residents. Because Residents retain the rights to their digital creations, they can buy, sell and trade with other Residents.

The Marketplace currently supports millions of US dollars in monthly transactions. This commerce is handled with the in-world unit-of-trade, the Linden dollar, which can be converted to US dollars at several thriving online Linden Dollar exchanges.

Welcome to Second Life. We look forward to seeing you in-world.

SVIClub August 8th & 9th Meetings: How to Make Money in Commercial Real Estate

Certain markets in residential real estate are facing a bubble in valuation and supply. Is this the same for the Commercial Real Estate Market? Apparently not. Commercial real estate, for the most part, is driven by cash flow.

Mr. Paul Olson is the CEO of Commercial Cashflow Advisors of San Jose. Mr. Olson's firm assists its clients by helping them generate more cash flow from the commercial properties they own. CCA's clients include Fortune 500 Companies to owners of one to two properties. Mr. Olson and his staff have been in the commercial industry for over 30 years.

At this meeting Mr. Olson will educate our Investor on:

Why invest in commercial real estate

How to invest in commercial real estate

Types of commerical real estate: pros and cons

Making money in commercial real estate: the time value of money, leverage, cash flow

The four key ways to leverage your commercial real estate investment

Spreadsheets: run the numbers, understand the numbers, live by the numbers

Lights, Camera, Action!

Wow - spent the weekend installing new lighting and electical fixtures! I had a nice home to work on -- I changed out 3 light fixtures (2 ceiling), fixed builder errors (wrong boxes in dry wall), and even installed a new range hood! Repaired ceiling fan lighting. It was fun and all new for me. I learned what CFM means for range hoods! I can now add this to my list of ever-growing talents, lol :)

Real Estate Finance Class at DeAnza College, Fall 2007

I'm looking forward to this timely class in the fall at DeAnza college. Hopefully see you there? :)

http://deanza.edu/schedule/classes/

I'm sure this sub-prime shock wave will provide plenty of interesting fodder for a class like this!

By the way, even though the class lists a pre-requisite, they are not strict about this. I took the RE economics class last quarter without it.

Course Description: Regulations and procedures for financing real estate: types of lenders; primary and secondary investors; methods and guidelines for qualifying for real property loans.

Department: Real Estate (new window)
REST 53: Real Estate Finance (Lecture)
4 Units
Hours: Four hours lecture.
Call Number
Schedule ID
Location
2201
REST-053.-61
FOR1
Time
Days
Instructor
6:00PM- 9:40
Tuesday
CASAS
Prerequisites:
Prerequisite: Real Estate 50.