The National Association of Realtors reported sales of previously owned homes fell 0.3% in May to the lowest in almost four years. In addition to slowing sales the supply of unsold homes jumped 5%, representing supply that will last 8.9 months at the current sales rate, the highest in almost 15 years. If you are not yet depressed, the report also told us the median price of an existing home fell 2.1% last to $223,700, the 10th consecutive month of year over year declines. Apparently the slowing housing and mortgage markets are taking their toll in California, as increased job losses have pushed the unemployment rate to 5.2%. This negative economic news has had a positive effect on the bond market, with the yield on the 10 year note dropping to 5.10%. Interestingly, the equity markets are also rallying after their steep decline on Friday.

[tags]Housing, Real Estate, Economics, Economy[/tags]

For most borrowers with good to excellent credit (above a 620 FICO), there has not been too much shake-up with regards to what loan programs are available to them. However, there has been a big change in what people with sub-620 FICO scores now qualify for and have available to them. 6 months to a year ago, it was possible for just about anyone with a heartbeat and a FICO score north of 500 to get a bank loan that was not really that bad when you factored in the true credit risk of these borrowers. Clearly, this was a product of excess liquidity chasing mortgage backed securities. Well, times have changed a bit and the default rate on sub-prime loans in the very early stages has actually exceeded forecasts according to a Bloomberg article I read the other day. This means that more stingent rules for sub-prime borrowers will be coming down the pike shortly, making fewer programs available.

My best advice to people is to improve your credit scores…no matter who you are or what your scores are. There are always benefits to improving your FICO scores no matter what they currently are. I have seen lenders that give pricing benefits and options to borrowers when they hit the 820 FICO mark. FYI, the maximum FICO score is 850 and the worst is 300. Retaining your good credit and improving it is just as important as brushing your teeth every day. It is something that we all need to be dilligent about, not try for the quick-fix when we need a loan. Be pro-active not reactionary. We will be putting together a credit improvement system at Aventine that will be published on our website shortly.

[tags]Credit, FICO, Sub Prime, Loans, Financing, Bad Credit[/tags]

I get a great market update from SCME bank every morning that gives me about a 5 sentence update on major market events and reports and how they affect interest rates on mortgage loans. At this point, there is a lot of uncertainty in the markets due to a number of factors. First, we have oil prices that are sky high compared to what we are accustomed to here in this great country. This affects every industry and every person that does not live in a 100 square foot shack in the hills on Montana. For a number of reasons, this giant increase in prices has not thrown the economy into a tailspin. We have started to see a pretty major shake-up with the big and small sub-prime mortgage lenders which have become the poster child for the media and Congress. Nobody seemed to care how people, who had no business getting loans, were able to buy houses with no money down when the real estate market was appreciating at high double-digit rates. Now that most markets have come back to reality, we are starting to see the effects of these insane lending practices. Each day, Wall Street investors (those who make the funds available for the vast majority of home loans in the US) have been shrinking their appetite for non-traditional loans. This has translated into less ability for people with not-so-great credit, questionable income, and little to no equity to find a loan. Since many of these people cannot afford the mortgages they put into place, they are now in a world of hurt. Trust me, I talk to them every day.

At the end of the day, people like to point the finger and blame someone. It seems that this has become the American way, find the blame and single the person responsible out. The bottom line is, when you borrow money from a bank or individual, YOU are the one that is responsible for making sure you understand all of the terms of the agreement between you and the lender on how the loan is to be re-paid. If you are so dense and incapable of understanding the terms of the loan, then you have no business entering into such an agreement. People need to take responsibility for the things they do and move on. It is not about Congress having people like Jessie Jackson testify in front of congress saying how the lenders and mortgage brokers of the world are to blame. I am pretty sure that the esteemed Reverend cannot find one person who was forced or coerced to sign the loan documents for their home.

I wish that everyone could own a home. That everyone could afford to make their payments. Unfortunately, things happen. People do things they shouldn’t. You live and you learn. It is up to each one of us to take responsibility for the things we do, good or bad, and not try and pass the buck.

[tags]Sub-Prime, Loans, Lending, Mortgage[/tags]

For the record, I have never really bought into supply-side economics or been anything but a relatively big advocate for conservatism when it comes to leverage and home ownership. But, after quite a bit of reading and more thought, I am coming to the conclusion that the fully amortized loan is nothing more than a brilliant sales pitch by the banking industry that they positioned well enough to give the common man a warm and fuzzy feeling inside. Over the next week or two, my plan is to show everyone who cares, that there are much better strategies to either pay down their principal balance on their home (or other real estate loans), fund their retirement better and / or fund their children’s retirement or educational funds better. The fully amortized loan is the worst type of loan anyone can use to achieve a better financial position in any scenario I can think of. Please stay tuned as I am confident you will re-think many of the ideas and virtues that you hold today.

[tags]Real Estate Loans, Amortization, Interest Only, Retirement, IRAs, Investing[/tags]

Let’s face it, nobody has all of the answers. While we can make educated guesses about where interest rates and real estate markets are going to go in the next year or two years, we really have no idea what is going to really happen. One thing that is very likely is that many real estate markets around the country that do not have the jobs and disposable income that they had 2 years ago are going to see prices correct more over the next year or two. Some people in these areas (most places in the country) just don’t seem to want to understand what drives real estate prices in our economy. In short, it is primarily the strength of jobs in that market. Obviously access to and the cost of money, aka interest rates, plays an important role as well as we have seen over the past 3 or 4 years.

But, access to money has changed dramatically over the past few months. What many people know is that there is something called the sub-prime market and it has been greatly affected by something. Basically, sub-prime lending focuses on borrowers with less than ideal credit. Typically, this means anyone with a sub 620-660 FICO score. Rates and terms are obviously worse for these types of loans. But, over the past few years, there has been so much liquidity, aka money available to lend, that the rates on sub-prime mortgages were quite low and the terms available were really unheard of. 100% LTV loans were available or very high LTV loans were available to just about anyone with a heartbeat. In short, that is no longer the case today and that is part of what is causing so many problems for many people today. My advice to anyone who is not able to refinance out of one of these loans right now because of lack of credit/equity…sell your property(s) now while you still can get out with what is left of your credit intact and maybe even some cash. Most of these people are scared out of their minds but, for whatever reason, will not entertain the idea of selling their house. It is a house, sell it, move on. Get your financial house in order, fix your credit and plan out your financial future.

Now for everyone else, it is time to re-evaluate where you are at in your financial timeline. You do know where you are planning on being in the next year, two years, five years and ten years down the road right? You have a plan for your children’s college and education, your retirement and living day to day, right? The bottom line is that a mortgage on a house is probably the biggest financial decision that most people will make in their lifetimes and most treat it like buying an apple in the store. The myriad of loan programs that are available today is pretty incredible and the only ones that can really be compared apples to apples is a conventional 30 year fixed-rate mortgage. Most people understand that this is probably not the loan they should be using to get the most out of a debt instrument as large as their home mortgage, but many do not.

If you have been floating for the past few years, refinancing in and out of short-term fixed rate loans or even using some kind of ARM or pay-option hybrid, now may be the right time to lock into something a little more permanent. The bond markets have been selling off a bit in the past couple of days and the outlook from the FOMC is not looking good with regards to inflation. Look, you have to be crazy if you don’t think the price of everything from chicken to beef to gas to homes has gone up dramatically in recent years, yet inflation has not been a front page news story for reasons unknown to me. At this point, my advice woulud be to re-evaluate your financial situation and goals and see how the tax-deductable debt you have on your home or investment property(s) is structured. Maybe you want a little more cash right now to pay for an addition, education, taxes or more importantly to pay off consumer debt (not tax deductable interest). Maybe you have a short term fixed rate loan that is going to come due in the next year and you would like to lock in for 3 to 10 years at today’s rates (good idea in my book). Whatever the case may be, you need to be mindful to what is going on in your financial world and how to best take advantage of the tools that are available to you today.

[tags]Loans, Mortgages, Financing, Debt, Interest Rates[/tags]