The Top 10 Reasons

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Archives for September 2008

The Top 10 Reasons Why Congress Should Not Pass The $700 Billion Bailout Plan

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1. If Congress passes the $700 billion bailout plan this would be one of the biggest mistakes ever in the history of the United States. It blows my mind to think about how we even got into this situation but its probably why I write about the mortgage industry so much. If this stupid bill gets passed it could ultimately lead to the end of the United States as we know it. What’s that you say, the United States can’t fail? I understand what you are saying. Hey, do you think you could go over to Europe and talk to somebody from the Roman Empire for me? I want you to ask them how the most powerful civilization in the history of the world is doing. Just one person, that’s it. What’s that? There is no Roman Empire anymore? How could this be?

2. I am not sure on the exact numbers but right now China holds some ridiculous amount of the United States debt. When we did not have enough money to lend to from within we called up China and they sent us over a bunch of money. We have been paying interest on that money for quite some time now. The tricky part of this is that China can “call” on that debt to be paid back at any time. This puts us in quite a predicament because if we couldn’t just print up the money in the first place for ourselves how the hell are we going to come up with the money to write a one time lump sum check. We can’t. If this stupid bill gets passed, the U.S Government will now have to figure out some way to run the USA on 19% of the income it gets from income taxes. Yup, that’s right. If this bill gets passed, this bill plus the other expenditures (Defense Department, Department of Education, Border Patrol, Some War Going On In Iraq, You Get The Picture) will now assume 81% of the revenue the IRS collects from taxes. If this does not get you thinking that we are screwed because we are already trillions of dollars in debt than I do not know what will.

3. Worst phone call of all time happens the day after the $700 billion economic dummy plan gets passed from Chinese President Hu Jintao. It goes like this. “Hey George, its Hu,” says Hu. “What up Hu,” says W. “I want my money,” says Hu. “We don’t have your money,” says W. “You bankrupt now,” says Hu. “Crap,” says W. “This better than launching nuclear weapons at you,” says Hu. “…,” says W. Its really that simple. If this bill gets passed, China can call us up and say they want all of their money paid back the very next day. Of course we can’t pay them, because we are already broke, and now we are even more broke. Picture the movie “Pretty Woman” where Richard Gere buys failing businesses and sells the pieces individually and makes a profit. We would have to start doing something like that. Maybe we could sell (give) them Alaska or Hawaii to wipe the slate clean.

4. The only people that win with this bailout is the executives of the mortgage companies and banks that are failing. They have already made a crap ton of money and now they do not even get a slap on the wrist. WTF? Sure, they get fired, but after making $20 million in one year of so called work is not to shabby. There is no need to ever go back to work.

5. The tax payers are not going to get any kind of reward from this. I kept looking at this plan on the NYTimes site and I could not think of how we earn our money back. The problem is that the system is not going to change at all. All that happens is that the U.S Government now owns a bunch of crappy mortgage notes that nobody wanted in the first place.

6. Here is how I believe the U.S Government thinks its going to work in favor for the citizens it cares for. They buy a mortgage note on a property that has been foreclosed on. They are telling us that they are going to charge interest on that loan and get paid back that way. Wait a second. If nobody was paying that mortgage to begin with how are you going to get paid back now? You can’t keep charging interest to nobody. Nobody lives in the home. The bank does not own the home, the U.S Government now owns the home. How does the loan get paid back + interest? I do not see how this happens.

7. The only way I see any part of the loan getting paid back is when the property is sold. Again, how does the U.S Government and the tax payers get paid back and make money? They don’t is the answer. If nobody wanted to buy the home at a discounted value in the first place, then what makes you think somebody is going to step up and buy this home at what is left on the mortgage. Here’s an example. Somebody bought the home in 2004 for $250k and did 100% financing. Times got tough for this couple and they had to foreclose in 2007 because of a loss of job. They still owe $248k on the home but all of the homes around them are also dropping in value and those homes are all now selling for $175k. The home could not of been sold before foreclosure because the balance was to high. Now the Government is going to step in and assume that mortgage note for $248k. They cannot sell the home for $248k. The only offers they are getting are for $165k. In the mean time, somebody needs to be cutting the grass (costs money) checking the pipes (costs money) and maintaining the house (costs money). To keep the house from being fined the U.S Government will need to send somebody to do those things so it does not get fined by the local government where the house is. That is funny. The “Local Man” is sticking it to the “Federal Man.” Anyways, the U.S Government knows they cannot sell the home for what is owed on the house so they sell it for $170k. This comes out to a $248k – $170k = $78k loss. The $170k gets paid back to the $700 Billion dollar loan but with a huge loss, that did not collect any interest at all.

8. I do not see how the scenario above does not happen across the board. People are not going to over pay for a house and if people were smart they would wait until 2010 to buy a home. At that time most of the damage will be done with foreclosures and property values will probably have leveled off. Going back to the $700 billion dollar dummy loan. If the U.S Government is going to take a loss on all of these properties and bad mortgages how are they going to make any money. The $700 billion out lie of money will ( if we are lucky) probably get paid back by 50% over the next 30 years. This means that we lost $350 billion plus the interest that the U.S Government could have earned in bank accounts of their own over 30 years. It probably comes out to some ridiculous number like a $1 trillion or more. I think the math looks pretty simple to me, I hope I am missing something. The housing market is not going to change because of this bill. The credit markets are going to get tighter. Less money is going to be lent. The mortgage companies that are remaining are not going to lend money to people with bad credit. They know that they are not going to be able to sell that loan on the secondary mortgage market. So they change all of their underwriting guidelines to make it harder for people to get approved on a mortgage. By harder, I mean the way it was done for 80 years before 2001. There is still plenty of money floating around for people to get a 30 year fixed mortgage. You just need to have credit scores over 720, no mortgage lates, money in the bank, and a solid job history. Its that simple. Banks will fight over you to do business with you and that’s the way it should be. Their will be more mortgage companies going bankrupt even if this $700 billion bailout goes through. There are less first time home buyers in the market. Many are going to just wait it out as long as the market keeps going down. There are less people that can qualify when trying to refinance their home. Many owe more than what their house is worth and no mortgage company will go near that home loan. Those two examples alone are the bread and butter of the mortgage industry. No people buying homes and no people refinancing their homes means less business, which means more layoffs, which means more bankrupt mortgage companies. So, $700 Billion does nothing to save the mortgage industry or to keep it going. All it does is put the U.S Government on the hook for a bunch of crappy loans.

9. I understand that the whole goal of this is to “calm the markets.” I told myself I was not going to do this but I went and checked out my 401k statement this morning and it is down 27% for the year. It was shocking to say the least. I was tempted to take it all out of the stocks that I have and put it into the money market that is earning 2%. Maybe I’ll do that and maybe not. I do not plan on cashing any of that money out for another 30 years (hopefully there will still be something there) so it will probably stay. What worries me is the people that are like my parents age. In their late 50’s and are living off of the dividends in their 401k’s and IRA’s. I am sure they are not happy that 27% of the money they had invested is now gone. Hopefully they moved it all into a mutual fund when they retired so they are not affected by this change in the market. The market will always have its ups and downs. Yesterday the market had its biggest one day loss in its history. Everybody was assuming that the $700 billion dummy plan was going to get passed so investors were assuming what was a safe bet to make on stocks. The market had already planned for it to go through so value was still there. When it did not get passed in afternoon trading people started jumping ship. It was not expected. This morning, the market is up over 2% from its 7% loss yesterday. What is happening is people know if they start buying today they are going to get a big discount on stock prices. Its simple “Buy Low, Sell High.” The market will correct itself but it does not need the U.S Government doing anything.

10. I really hope that this $700 billion economic bailout does not get passed. It would mean that my generation would be paying on it until I am retired. If you look at the wording in the bill, at year 5 there is this statement that baffles me. It says something like “If this bill is not working in the tax payers favor we can make changes to benefit them.” That statement scares the crap out of me. Throw in the towel now before it gets even worse. The U.S Government is working our country to being bankrupt. Do not think it can’t happen. I wonder what Barack Obama and John McCain are thinking right now. It sure would be an accomplishment to be the President that was able to work us out of one of the toughest times in U.S History. Its sad that it is tough because all of this we put on ourselves. The Iraq War, Housing Crisis, all from the U.S Government. Every time I start thinking about this election year and what is going to happen after it I wish there was something more I could do to spread the message about Ron Paul. He was our only shot and the average American did not take the time to educate themselves about the important issues. I hope that this $700 billion economic bailout does not go through for the future of all American citizens.

The Top 10 Reasons You Should Buy A Home With A Home Equity Line Of Credit (HELOC)

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1. Buying a home with a home equity line of credit might be tricky nowadays but if you can do it I would suggest to look into it. It is probably not the first home loan that you are going to look at buying a piece of property with, but it is very advantageous in many financial kind of ways.

2. Most people start the mortgage shopping process by comparing different mortgage companies interest rates on the 30 year fixed rate mortgage. This is a safe bet and 9 out 10 times should be the way that most people go about picking the right mortgage for them. Its a way that people will know exactly what their payment will be until the day they pay it off. No surprises with that one. It usually comes down to picking the right bank or getting referred to somebody that your friends went with.

3. What makes the home equity loan so appealing is first off, the closing costs are very low. The average closing costs on a 30 year fixed mortgage not including state tax fees or lawyer fees is in the $2k-$3k range. This usually covers the appraisal, title insurance, and any underwriting costs. This will usually be the same across the board regardless of what mortgage company you go with. These are all third party fees and its hard to get around those.

4. The normal closing costs on a home equity line of credit are usually less than $1k. There is something about the wording that is involved in the paperwork when doing a home equity loan that considers it more of a lien on the property than an actual mortgage. I will say though that it differs from state to state but I saw times when I was a mortgage banker that we had a system called an “automatic value module” that searched a database of recent home prices in the area you were looking to buy or refinance. If the value of the home came back at what we needed to make the loan work, we would not even have to do an appraisal on the home. This would save the cost of an appraisal (about $350) plus the week it took for the appraisal to go out and get it back. This did not happen all of the time, but since it was considered a second lien on the property it was considered a little bit riskier. Whatever mortgage company held the mortgage note on that property would get paid second in the case of a foreclosure on the property. There was less title work that had to be done since the property was already under the property owners name.

5. With closing costs being about $1k-$2k less than a normal fixed rate mortgage you are already starting to save money. The only trick to this scenario is trying to find a mortgage company that will do a first lien home equity loan. ( Find some at:) Most mortgage companies stopped doing second mortgages all together because they are losing their butts of trying to sell these loans on the secondary market. This is because of falling real estate values across the country and with people owing more than what their house is worth.

6. Let’s say that you can find a mortgage company that will do a home equity loan as a first lien for you. You are going to save money on the closing costs already. The only downside that I can think of is that a HELOC is considered a adjustable rate mortgage. The interest rate is never fixed on the loan. While this might make some people nervous a bout the whole concept of not knowing what your mortgage payment will be from month to month it is no need to get anxious.

7. As of September 2008, interest rates on Home Equity Loans are around 5.25%. Interest rates on 30 year fixed rate mortgages are around 6.25% with no points. Its easy to see that you are already saving about 1% on the rate alone.

8. What is a neat feature of the home equity loan is that it gives you a lot of flexibility with your monthly payments. Your HELOC’s payment would be based off of a interest only payment. Let’s say you took a 30 year mortgage of $100k at 6.25%. Your payment would be $615.72. A HELOC at 6.25% on $100k would be $520. The difference between the two is about $95. This means that only $95 of your fixed payment would be going to the mortgage every month for probably the first 3 years of the loan. You might as well just consider it a interest only loan in the first place. This extra $95 could come in handy for extra bills, rising fuel prices, or to start a savings account. If you do not need the extra money then put it back towards the loan and pay it down.

9. What also is cool about a HELOC is that if you do put extra money towards the loan your payment the very next month will go down accordingly. Many people think that if they make a one time larger payment towards their 30 year mortgage that their payment will go down. This is not true. Your payment stays the same until the day its paid off with a 30 year fixed loan. On a HELOC your payment will go lower even if you put $1 more towards your interest only payment. This is great because you can see you hard work and determination going to paying off your mortgage. By doing this you also leave your self an option to borrow back against the loan in the future. On a 30 year fixed you can never re-borrow witout having to go through the whole refinance process again. You will have to pay closing costs all over again. The HELOC will let you borrow up to whatever space you have available with a quick call to your bank saving you thousands of dollars in closing costs all over again.

10. The benefits of buying a home with a Home Equity Loan are lower closing costs. Lower interest rates. Greater flexibility with your monthly payments. The option to pay more towards the loan and see you monthly payment slowly go down. If you pay down some of the balance you can always borrow it back saving your self a lot of money in future closing costs. It might be hard finding this first lien home equity line of  credit. Many mortgage companies stopped doing second mortgage type loans because they are hard to sell on the secondary mortgage market. If you can find one you will probably have to put down at least a 10% down payment and have credit scores over 720. You will not have to pay any PMI (private mortgage insurance) which will also save you more money on your mortgage payment if you cannot come up with a 20% down payment.

The Top 10 Reasons Why Your Mortgage Has Made You House Poor

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1. Many people over the past 5 years who bought homes thought they were getting rich by buying bigger homes. Many were told that homes always went up in value and that they needed to get into the market as soon as possible before prices went up more. With history on your side, buying a home was the safe bet because they were going up in value across the U.S at an alarming rate. Little did the home buyer know, that they were about to become house poor.

2. House poor is a relatively new term. You never really heard any terms like negative amortization mortgage, option arm loans, or adjustable rate mortgage before the refi boom. They became common place during the refi boom and were supposed to be good home loans. Unfortunately they were some of the worst loans ever. Nothing can ever beat the 30 year fixed interest rate mortgage.

3. So what is house poor? House poor is a combination of factors. The biggest factor is for people who are either first time home buyers or people looking to upgrade and move to a bigger home. When looking at all of their options they are told from their realtor and their mortgage banker to get approved for the biggest loan amount that they can. When you buy a bigger home you bring on more debt and expenses. Bigger home loan, bigger utility bills, more costs for upkeep,etc. House poor is when you make enough money to make the payments on your things like your house, cars, boats, student loans, and credit cards but cannot save any money for retirement, a trip, kids college funds, money to go out for dinner, or money to see a ball game. Everything looks good on the outside. You have a big house, nice cars, boat (maybe) but you are one missed check away from total financial disaster. If you were let go from your job tomorrow you would be screwed. Smart financial people would rather take a smaller house with a smaller mortgage payment and have money left over to play with.

4. As most of us know, realtors work on straight commission. So when you hear a realtor say “buy the bigger home” or “the one with all of the upgrades” you really need to step back. Of course they are going to say that. The difference on a $100k or $200k house is $6k more in commission for them. That is a ton of money. On the mortgage banker side, they also get paid a percentage of the loan amount. The bigger the loan amount, the bigger the commission check for them. Most of the times the mortgage banker will love to see you buy the bigger house but does not really care. What most of them do is tell you what you can be approved up to and then its up to you to work your way down from that number. The realtors for the most part are trying to find a home for you regardless of the price because they also want a sale. Do not fall for the “you’ll probably be making more money as your progress in your career” or “now you will never have to move.” Those are both ways to make you comfortable with buying a bigger house. Last time I checked homes were foreclosing all over the country and there are layoffs going on in every single industry. Might be hard trying to make payments on that larger house or even trying to sell it.

5. Going into your home search you kind of have an idea of what you can afford. Most people who are first time home buyers want to keep their first mortgage payment around what they pay for their rent payment. This is a good practice but what most home buyers forget is that all of those things like a hot water heater going out, cutting the grass, fixing the roof, and all other repairs add up. All of those things are just one call away to the apartment manager and they call a guy to come and fix it. Nothing comes out of your pocket for those expenses. When it happens in your home you have to pay for all of those out of pocket and still pay your mortgage payment. Expect to double your mortgage payment just in monthly maintenance and up keep to your house. I hope your starting to see why you do not own the home, it owns you.

6. When you buy a house that is at the maximum amount that you are approved for you have already began to handcuff yourself to this house. During the height of the refi boom, some people could get approved for mortgages with a debt to income ratio of 55% depending on their credit score. This means 55% of what is showing on your credit report is going to pay your new mortgage payment plus any car and credit card payments. This does not take into account things like car insurance, gas for your car, maintenance for your car, gas for your lawn mower, heating bills, water bills, cable bill, phone bills, etc. These are probably the largest of the bills that are not on your credit report. I bet if you added all of those up on top of your mortgage payment you will start to kick yourself because now you probably do not have anything left over for anything. You are now working for your house.

7. Here is a quick example. You and your spouse have a combined income of $125k a year. You pay $700 a month for car payments and $300 a month for pesky student loans. You do not carry any credit card debt at all and you have outstanding credit. You have saved up $30k in a savings account to be used for a down payment and have about $25k between 401k’s and retirement accounts. You currently pay $950 a month in rent. You are a first time home buyer and want to find something with a similar monthly payment. You call up your mortgage broker and tell him what your looking for. He says what you are looking for would be a home worth $125k. You can put 20% down of $25k and have $5k left over for closing costs. You decided to pay your property taxes and home owners insurance separately so you do not need to have anything for an escrow account. Your loan would be for $100k and lets say interest rates are 7% and if you were paying an escrow it would be $400 a month. Your principal and interest is $665 plus escrow of $400= $1065. This is still about a $100 more a month than what you were looking for but not bad since you get to write your taxes, insurance, and interest off on your taxes. Your debt to income ratio is calculated by adding all of your out going bills on your credit report $1065 + $700 + $300 =$2065 then dividing by your monthly income of $125k/12 months= $10,416. You get $2065/$10,416=19.8%. This is great. You will have more than enough money to save, make your payments and have enough money for repairs and upkeep.

8. But you really like that bigger, newer house the next street over. It has all of the upgrades you could ever want. You decide its the home of your dreams. Your realtor starts to smile because they know that you have sold yourself on the bigger house which means a bigger commission for them. You call your mortgage broker back up and ask them what the maximum amount you could get qualified on would be. Using the example above you could get approved for a home roughly in the $350k range. You could put your entire $30k down payment into the house and negotiate sellers concessions so they cover your closing costs. Your $30k only covers about 8% of the down payment which gives you a loan to value of 95%. You decide to only put down 5% and use the extra for closing costs. Your new monthly mortgage payment on $332,500 at 7% now includes private mortgage insurance (PMI). This will probably be another $200 or more (probably $400) a month and it is because you did not put 20% down payment. Your new payment is $2,212 + $200 (PMI) + escrow of $400 (it will probably be $700 because of the house value)= $2,812. To figure your DTI you have the $2,728 + $700 (cars) + $300 (student loans) = $3728. Your new DTI is $3728/$10416= 35%. As you can see this still sounds pretty good. I was saying how mortgage companies were approving people up to 55% DTI.

9. The thing of it is that the mortgage company has a way of making you think your approved for the loan. What they look at is your income before taxes to get you approved on a mortgage. They need all the income they can get to get you approved and this is why they do it. They need to close loans to stay in business. So those DTI numbers above really do you no good. What you need to do is take your combined family income of $125k and take out at least 15% which is probably what your income tax bracket is, i.e $18,750. Then use $125k-$18,750 = $106,250 to figure what your after tax income ratio. Now you have $106,250/12 months= $8,854. Using our first example of $2065 you get $2065/$8854=23.32% DTI. Still not bad. On the second one you get $3728/$8854=42%. Big difference. What you need to ask yourself is that if you are okay knowing that almost 40% of what you make in your family only gets you the keys to the house and your cars. This does not include operating them, just the keys. When you add up all the other costs like I did above you will see that by getting the bigger house you are probably going to have 5% of your monthly income laying around for saving and entertainment purposes.

10. Americans were very greedy during the housing boom. Homes were being sold at inflated prices. People assumed that home prices would keep going up and decided it was the time to buy bigger because they would never be able to afford the house later. The sad thing is that they could not afford the house at the time they closed on it. Underwriting guidelines were to relaxed. Everybody was getting approved on loans. Not only were they buying homes, they were taking advantage of 0% car loans and other things they did not need. I always get a kick out of the people that have a big house, nice ,cars, and lots of things they do not need and complain about HAVING to work 60-70 hours a week. I smile and wonder if they would be happier without the bigger house. They probably would but nobody will admit it. As long as we can show off to one another what we have this “house poor” phenomenon will continue.