Insanely low mortgage rates=insanely low mortgage payments. Buying vs. Renting revisited

Mortgage rates are the lowest they have been since I began in this industry in 2003. Incredible market volatility and a global financial system teetering on the edge of disaster have made institutional money flow into the relative safety of mortgage lending. With more money supply the demand naturally decreases and the rates are so low its silly.

Today a 30 year fixed could be had at 4.000% at par (no points paid for the rate).

Mortgage payments by loan size at that interest rate:

$300,000 = $1432

$400,000 = $1909

$500,000 = $2387

$650,000 = $3103

If you want to pay the property off in 15 years the mortgage rates are stupid low. 3.25% is par. Payments as follows:

$300,000 = $2108

$400,000 = $2810

$500,000 = $3513

$650,000 = $4567

This means that in LA, the costs of buying vs. renting are becoming close to even in many neighborhoods. Check out this slick NY times calculator for detailed info about that equation. This is the perfect storm for the savvy real estate buyer. A very soft real estate market coupled with all time low interest rates.

Borrowing down payment money from 401k?

Being a fierce advocate of frugality, I caution against anyone tapping into their retirement funds. The only time I can see it making sense would be for a down payment on a home that will be lived in for a long time. If the situation arises and buyers need funds to close escrow and buy their home, it is good to know the available options.

The cost of using funds in a 401K as down payment should be compared with the cost of mortgage insurance and the cost of a second mortgage, with allowance for the risks associated with each option. The best choice can vary from case to case. Whether you take funds from a 401K to make a down payment should depend on whether it costs more or less than the alternatives, which are to pay for mortgage insurance or for a higher interest second mortgage. Income tax regulations should also be taken of the risks inherent in these different options, because mortgages are most people's biggest tax break.

As an illustration, you want to buy a house in Eagle Rock for $500,000 but have enough cash to pay only $50,000 down. Lenders will advance only $400,000 on a first mortgage without mortgage insurance (MI). You need to come up with another $50,000 to close escrow. One source for the additional capital you need is your 401K account. A second source is your first mortgage lender, who will add another $50,000 to your first mortgage, provided you purchase mortgage insurance on the total loan of $450,000. A third option is to borrow $50,000 on a second mortgage, from the same lender or from a different lender. 2nd mortgages have become rare after the credit crunch because they are a risky investment for lenders. If you were lucky enough to find a 2nd mortgage in this market, it would be at a double digit interest rate.

The general rule is that money in 401K plans stays there until the holder retires, but the IRS allows "hardship withdrawals". One acceptable hardship is making a down payment in connection with purchase of your primary residence.

A withdrawal is very costly, however. The cost is the earnings you forgo on the money withdrawn, plus taxes and penalties on the amount withdrawn, which must be paid in the year of withdrawal. The taxes and penalties are a crusher, so avoid withdrawals if at all possible.

A far better approach is to borrow against your account, assuming your employer permits this. You pay interest on the loan, but the interest goes back into your account, as an offset to the earnings you forgo. The money you receive is not taxable, so long as you pay it back.

The cost of borrowing against your 401K is only the earnings foregone. (The interest rate you pay the 401K account is irrelevant, since that goes from one pocket to another). If your fund has been earning 6%, for example, that is the cost of the loan to you. You will no longer be earning 6% on the money you take out as a loan. If you are a long way from retirement, you can ignore taxes because they are deferred until you retire.

The major risk in borrowing against your 401K is that if you lose your job, or change employers, you must pay back the loan in full within a short period, often 60 days. If you don’t, it is treated as a withdrawal and subjected to the same taxes and penalties. 401K accounts can usually be rolled over into 401K accounts at a new employer, or into an IRA, without triggering tax payments or penalties, but loans from a 401K cannot be rolled over.

Borrowing from your 401K should not prevent you from continuing to contribute the maximum amount that can be shielded from current taxes. If it does, the cost gets high.

Mortgage Insurance (MI)

You can borrow the additional $50,000 you need from the first mortgage lender by paying for mortgage insurance. FHA loans, which are the most popular in low down payment situations like this currently charge .8-.99 for monthly mortgage insurance premiums. That is approximately $200 extra per month added to the payment or $2400 per year for MI premiums.

Mortgage insurance has income tax considerations also. The cost of mortgage insurance is roughly 5% above the after-tax mortgage rate.
For example, if your mortgage rate is 6% and you are in the 35% tax bracket, your after-tax mortgage rate is 6(1-.35) = 3.90%, and the mortgage insurance cost would be about 8.90%.

Second Mortgages As An Alternative

2nd mortgages have become very rare and difficult to find. The interest rates on 2nd mortgages are always higher than 1st mortgages, because in the event of default the 1st mortgage gets paid back before the 2nd mortgage gets a dime. Naturally, in a declining real estate market 2nd mortgages are very tough to come by.

Seller financing is an option, although the 1st mortgage lender may restrict this. Using seller carry backs is a great way to close escrow, but when dealing with bank-owned foreclosures it is never done.

The cost of a second mortgage is the interest rate adjusted for taxes. If the rate is 9% and you are in the 35% tax bracket, the cost is 9(1 -.35) = 5.85%.


To 401k or not to 401k?

While borrowing from a 401K account involves risk associated with changing jobs, the mortgage insurance and second mortgage options entail risk associated with changing houses. These options reduce equity in your house, increasing the possibility that a decline in real estate prices will leave you with negative equity. This could make it impossible to pay off the mortgages in the event you want to sell the house and move somewhere else.

In most cases, however, the risks involved in reducing your equity in the house are smaller than the risks associated with borrowing from your 401K. If the costs are close to being the same, leave your 401K alone.

For specific mortgage questions, contact Sky Minor at 310-709-8283 or www.realestatesilverlake.com

Mortgage lenders being held back from foreclosing because of missing paperwork.

Much hubbub this month in the Mortgage/Foreclosure world about banks having to halt foreclosures in many states because they do not have all of the legally required paperwork. This Foreclosure Freeze has hundreds of thousands of homeowners hopeful. In most states, to bring about foreclosure the lender must furnish the signed note. During the peak of the run and gun mortgage backed securities days the loans were getting transferred many times and some of the notes were lost. It has long been a foreclosure prevention tactic for distressed borrowers to make their lenders show the note. If the lender cannot, some judges around the country are postponing foreclosure until they can. This impressive loophole has caught on like wildfire across our default-laden country. While I am certainly all for homeowners avoiding foreclosure, I can see that this is not a good thing for the market at large.

Yes, foreclosures are a bad thing, but delaying them is even worse. I have two points to justify that statement. The first is the money tied up in the house that can't be recovered or re-lent to anyone else. Those servicing companies who have put a moratorium on foreclosing on the property often times still owe the ultimate investor the scheduled monthly interest, based on their contract. And if the loan is possibly subject to a buyback situation, the originator of the loan (whoever sold it to Chase, for example) is certainly going to argue that it is not "on the hook" for interest charges that Chase voluntarily stopped making and thus owed. No one will pay and the note will be in limbo awaiting some legal verdict from a judge who is also dealing with thousands of other distressed mortgage cases. The legal system will draw out these cases and whatever money is left from these mortgages will take longer to recirculate into the lending pool. In a word, there will be less liquidity. The current foreclosure issues increase uncertainty - and markets don't like uncertainty. Bank stocks are down, and they continue to hold on to trillions of "lendable" money because of nervousness about the future. Chase announced that it would now be reviewing 115,000 foreclosure cases in 41 states. PHH's president and CEO stated, "PHH Mortgage is actively cooperating with its regulators, is responding to such inquiries and has completed a comprehensive review of its foreclosure procedures. Based on this review, PHH Mortgage has not halted foreclosures in any states and has no plans to initiate a foreclosure moratorium." When push comes to shove, the courts will tie up the process between lenders and homeowners and only the lawyers will win.

The second problem with delaying foreclosures is that it will create unnatural demand for the properties on the market because there will be less supply. Prices will be driven up in the short term, as with all bubbles but then once the bottleneck eases and the huge numbers of bank-owned foreclosures hits the market, the opposite will be true. At that point you could see a rash of new foreclosures from recent buyers who are now underwater because of price softening due to the "normal" amount of foreclosures being on the market. In Los Angeles the competition is fierce to buy properties right now. This is causing overbidding and tremendous buyer frustration when buyers have to write 25 offers to get one accepted. Stopping foreclosures is an indirect manipulation of the real estate market and will ultimately slow a true recovery by causing peaks and valleys. A natural and balanced market can only exist if all of the foreclosures are purged from the system and all the bad debt is finally settled so the banks know how much money they have.

New sites and videos

Hi all, I'm excited about having some new web projects out. First is the freshly polished site for Silver Lake Real Estate. We are making moves (pun intended) on both sides of the hill, in zip codes 90039, 90027, 90065, 90042 and 90041. Silver Lake in particular is an area we are focusing on because of it's large number of unique and architecturally significant properties and it's new (unofficial) status as the hub of LA's East Side. Silver Lake home values were the least effected out of all the East Side neighborhoods in the 2007 real estate downturn. That is attributable to heavy gentrification and real wealth moving into the area, the kind of money that can afford to hold on through downturns. Silver Lake will be the powerhouse market for years to come, and Preferred Realty and Loan will be well positioned to service the market.

Secondly, Roger has debuted my first Youtube commercial. It's quite a little production, I must say I am quite happy with how it turned out. Check it out here. We are debating running it during the Super Bowl, the jury is still out.

That's all for now. Thank you for your continued support.

Sky Minor

Bad jokes about the bad economy.

The economy is so bad, I bought a toaster oven and my free gift with purchase was a bank... If the bank returns your check marked "Insufficient Funds," you call them and ask if they meant you or them...Angelina Jolie adopted a child from America...My cousin had an exorcism but couldn't afford to pay for it, and they re-possessed her..When Bill and Hillary travel together, they now have to share a room.

OIY GEVALT!

Transactional Funding

There has been much talk lately announcing the return of profitable flipping conditions in LA. California and Los Angeles County has been among the highest in the nation in foreclosures since the real estate bubble burst approximately three years ago, and we have seen our home prices plummet by as much as 50% in some areas. Simultaneously, this wave of foreclosures has created a demand for rental properties as former home owners become home renters. This has resulted in rents that have remained relatively stable as the prices of homes have steadily dropped. This unique set of circumstances has generated bargain investment property prices for investor buyers that haven't existed in LA since the mid 90's Northridge earthquake. It has also created a niche for those looking to flip properties once again. Purchase demand is still very strong in most areas despite a large backlog of inventory held by the banks.

Most of the foreclosures that are being sold at auction and through bank owned REO listings need only minor, cosmetic repairs to bring them up to rental or FHA financing standards. Investors willing to purchase these properties, can put $5K-$10K into them and then turn around and sell them to investors for a reasonable profit. These investors are still able to purchase the property at a price that makes it possible for the property to generate strong positive cash flow at prevailing market rents.

The catch in this process is that, in order to acquire a property at the Trustees' Auction, the prospective buyer has to come with cash. Many flippers lack the personal cash reserves to tie up more than one or two properties at a time. This is where transactional funders enter the picture. My transactional funders loan money on a very short term basis for investors to purchase properties at the auction or through the banks. They require that the end buyer (the person who the investor is selling to), must have loan approval and be under contract on the property. Once that happens the transactional lender will fund the loan to the investor and the investor will enter escrow with the buyer. The investor is coming up with little or none of their own money for the deal and making a hefty profit.

These transactional funds are always protected by a first position lien on the property. Once the properties have been successfully rehabbed or otherwise turned over,(Max 30 days holding time), they are resold and the transactional funders are repaid in full. The transactional funders usually see their money tied up for no more than 30 days and they are paid 3-6% on their investment. This equates to 50%-125% annualized returns on the average transaction for them, which is phenomonal. Everyone wins.

If you are seeking transactional funding, contact me here or call/sms 310-709-8283.

Stated income loans axed by new Obama bill.

Stated income loans were mortgage loans made to borrowers without proving their income sources. They were largely removed from circulation after the 2007 mortgage meltdown. After that, loans made without income and sometimes without assets became extremely rare and coveted. Several intrepid portfolio lenders getting their money from alternative sources like hedge funds and local pension funds would offer the loans and be completely swamped by eager borrowers. Their $500m portfolios would fill in a matter of months and they would stop funding new loans. For borrowers and brokers it became a hunt for a slot with the next lender before they filled up. The market for stated income loans (also called no-doc, SIVA, Low-doc, etc.) was on its last legs.

Today that dying market was given it's Coup De Grace. The reform bill signed in by Obama outlaws stated income and no doc loans. The market already did not want these loans and now the government has finished them, albeit with some degree of nebulous wording.

Part 1074 (b) of the bill reads:

“No creditor may make a loan secured by real property [i.e., a mortgage loan] unless the creditor, based on verified and documented information, determines that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan … and all applicable taxes, insurance, and assessments.”

The bill also outlines the steps mortgage lenders must take to verify a person’s ability to repay. As is the typical practice now they must review the borrower’s credit history, current income, current financial obligations, and debt-to-income ratio. To verify the borrower’s income, the lender must review IRS W2+1040 statements, tax returns, bank records, and payroll receipts / pay stubs. This means underwriter. Loan officers at banks or mortgage brokers cannot issue a pre-qualification without seeing all this documentation. This is already effectively in place now so it's not too big a shock.

I personally think that the lenders will find way to circumvent this regulation once the market will return. When prices+inventory+employment stabilize then support will be found for loans as risky as stated income. I am a believer in the market always finding ways to do what it will naturally despite outside influences. There have been quite a lot of outside influences in the mortgage market lately and the industry itself is in a state of flux. It is reinventing itself and rewriting its rules in the midst of the best interest rate environment in recent history. When the dust settles I think that stated income loans will return but until then, get those W2s and 1040s ready.