1. First off, I really do not think anybody should be buying a home for any reason until 2010. There is nothing stopping home values dropping around the country. What needs to happen first is we need to have a leveling out period.

2. Home prices are expected to drop in the greater Detroit, MI area another 8% by May 2009. CNN wrote an article analyzing data and what home prices should be doing. In there you will see Detroit, MI going down 8.6% and Farmington Hills going down 5.9%. This is one of the first charts I have seen that I agree with. Its probably because it was not written by the National Realtors Association. Realtors will always tell you its a great time to buy…mainly because its how they get paid.

3. Shouldn’t this be the time that you want to buy? Prices are dropping at a alarming rate and you have endless choices of where to live. This is the time that you really need to think about why you want to move or buy a house instead of “I can get a great deal.”

4. So why would you want to buy a home in Michigan in 2008 or 2009? There are only a couple instances where it makes sense. Let’s say you just got married and you need a place together now. You need to live somewhere. If both of you were living in a 1 bedroom apartment then you need more space. Another reason would be that you plan on living in this next home for the rest of your life. When you commit to this then it does not matter what is happening in the economy. That house is now your home. Maybe you want to make a lateral move. This is one where you are buying a home worth the same as your current but maybe its in a better school district or nicer community.

5. What about the people who want to upgrade their style of living and already own a home? This is what you have to ask yourself. If you plan on living in that home for the next 15 years (everybody does) then buy it. Do you really need the bigger or newer home? If you have the money, then do it. I have told friends of mine that if they are happy knowing the house they are going to buy is going to de-value by 20% over the next 2 years then it does not matter, i.e pay $300k and in 2010 its now worth $240k. As long as you are comfortable with losing $60k in equity in your home then go for it. Just do not complain in 2 years if you lose your job and cannot sell your home or your neighbors bought the same exact home for $230k. Remember, nobody pays full price for real estate anymore.

6. First time home buyers really need to take a look into their future if they plan on buying in Michigan. Let’s say that right now you currently rent a 2 bedroom apartment for $900 a month. In the same city you live in you could get a 3 bedroom home for $120k. Lets assume you have money for a 20% down payment which would give you a loan for $96k. Assuming 30 year fixed mortgage rates are around 7% you can get a monthly payment for about $640 a month. With property taxes and home owners insurance your probably looking at $900 a month. Not bad. You get another bedroom and a tax write off now. What if you could wait another year. That same house or one just like it is now worth $108k. This is $12k off the asking price now. Lets say you put down the same 20%. You get a mortgage of $86,400. Monthly principal and interest payments are $575. This saves you $65 a month in interest over the life of the loan. Over 30 years it comes out to $23,400 + $12k in down payment you saved by waiting a year = $35,400. To somebody buying a $108k home, I know that is a lot of money. It would make more sense to just rent for another year while home prices keep on dropping. This way you can save more money and not have to worry about things like the furnace blowing, replacing a roof, mowing the grass, and any other things that can go wrong with a house. If you rent, all of those are included in your rent payment. When you own they are additional payments on top of your mortgage payment.

7. Renting is the way to go in Michigan and let me tell you why. Landlords cannot raise rents on their properties because there are not enough people to rent to. Even the people buying homes for rentals are feeling the pinch. Here is a great example. My family owns a rental property in Eastpointe, MI. We bought the home in 2005. Fixed it up and have been renting in since. Since 2007 there have been a number of homes on the street which have been foreclosed on. Speculators have came in and bought those homes for $30k (we paid $60k plus upgrades to make the house pretty). The mortgage payment on those houses are now half of ours. They charge $200 less a month for rent than we can because our mortgage payment is higher. Its basically the same house. Ours is just a little nicer, but why would somebody pay $200 more in rent just because it has newer appliances? You wouldn’t. So now we are on the outside looking in. We need the money to cover the mortgage payment. We had to lower our rent by $30 a month so now we just break even. Hopefully, you see where I am going with this. This is happening in every city including Royal Oak, Ferndale, Warren, Detroit, Farmington Hills, etc. The renter can now negotiate because there are so many homes and apartments available. Before, it was never like this. Remember, if something goes wrong with the house its not your responsibility to fix it, its the landlords.

8. The economy in Michigan sucks. What makes you think your job is not replaceable? It is. What makes you think you will not be laid off? You could be. Why tie yourself into a bigger mortgage payment or take on the responsibility of being a first time home buyer in a dying economy? It would be smarter to stay what your doing until outside economic forces cool down. I read this article from the Detroit News and it blew me away. It talks about the possible sale of Chrysler to General Motors. About 37k Chrysler workers live in the State of Michigan. If GM were to buy Chrylser, some 21k hourly workers and 15k salaried workers could lose their jobs throughout North America. Of the 36k that could lose their jobs half of those are in Michigan. Some 18k people could be unemployed because of the sale. Now you need to think about all of those people who do not have jobs anymore and how their lifestyles are going to change. These are good paying jobs (a little too good paying). You will see even more homes go into foreclosure in Michigan because nobody can make the payments on their home loans. This will cause home prices to drop even more.

9. The 18k number is probably on the small side. Take into consideration all of the suppliers Chrysler has. All of those places would not be needed anymore. More small businesses would close in result of the Chrysler sale. Lets add another 6k in job losses just from the suppliers. Now we have 24k unemployed people. Now you need to take into account where those 24k spend their money at. Places like restaurants, movie theaters, car dealerships, lawyers, Dr’s offices, and shopping malls. All of those places will be hurt too because nobody is spending money. The cities of Sterling Heights and Auburn Hills would be hit hardest. The Chrysler World Headquarters (a 1 million square foot building) in Auburn Hills would be of no use, and the plant on 17 Mile Road and Van Dyke would be obsolete. Auburn Hills collects $3 MILLION in taxes and Sterling Heights $2 MILLION in taxes every year just from Chrylser. Let alone all of the people that own homes in those cities who work for Chrysler. All of the tax revenue they collect from property taxes is gone. Do you think those two cities might go bankrupt without the revenue? I wonder who is going to pay for the police and fire departments. Lets add another 500 city and county workers on top of that. We now get about 24,500 more unemployed people JUST IN THE STATE OF MICHIGAN if this sale of Chrylser to GM goes through.

10. Figuring out real estate prices is all about supply and demand. The supply of homes is getting larger and the demand for them is getting smaller. If 24,500 people are given pink slips over the next 2 years just from Chrysler it will cause home prices to drop even more. Do not think you are getting a deal because the home you want to buy is worth half of what it was in 2004. The market is telling you what its worth. If you are comfortable where you live in Michigan right now then you need to stay put. It will save you thousands of dollars on the price of a home over the next two years. Stay posted on the sale of Chrysler. If it goes through then you may need to wait longer than 2010.

Post from: The Top 10 Reasons

The Top 10 Reasons To Not Buy A Home In Michigan Until 2010

1. Let’s say that you are trying to refinance your mortgage. It does not matter if it is because you are trying to refinance from a adjustable rate mortgage to a 30 year fixed rate mortgage or if you are just looking to take cash out of the equity of your home. Every single mortgage company in the United States is probably going to be following almost identical underwriting guidelines.

2. One of the main guidelines is that all mortgage lenders must do an appraisal on the home. There was a time during the refinance boom that sometimes you could get away without having to do an appraisal. The only times you could do this was when you were doing a “rate/term refinance” or doing a second mortgage like a home equity loan. A “rate/term refinance” is one where you just change the terms of the loan, i.e, change from a 30 year fixed to a 15 year fixed or redo a loan with a higher interest rate to a lower interest rate. What the mortgage banker would do is take your application and put a value into the desktop underwriting (DU) system, wait a minute for the approval and if it came back with a “Property Inspection Waiver” you could do the loan without having to do the appraisal. This was a nice feature because it saved the client $300-$400 off the closing costs because an appraisal was not needed and the loan would close in half the normal time. The property inspection waiver could only be done if no cash was being taken out of the home. If you were doing the second mortgage some mortgage companies had this program called an “Automated Valuation Model” or “AVM.” All that they did was put your addredd into this program, the program would look at recently sold homes, take those values and shoot a number back. If the number made the second mortgage work you could do the second mortgage only without having to do an appraisal.

3. The one thing that the mortgage company has no control over is what the appraisal comes in at. It is what it is. Calling a client back to tell them that their house is not worth what they thought it is might be the worst part about being a mortgage banker or mortgage broker. First thing is that they know that you are going to say something like “I just put in new French doors,” or “The granite counter tops are only two years old.” Trust me, I’ve heard all of the stories. The one I heard all the time was that “we just put in a $20k in ground pool.” Most people do not know that having a pool de-values your home unless you live in Arizona or Florida. The other one is that now the mortgage company cannot close this loan which results in wasted time and a lost commission.

4. Even if you are dealing with a nation wide mortgage lender like a Countrywide, Chase, Bank of America, or Quicken Loans the mortgage company is going to call an appraiser from your local area. The operations team of all mortgage companies have a database of appraisers to choose from and they hire one to schedule the appraisal with you. Mortgage companies do not have a in house appraiser that they fly out to value your home and then fly them back in. I could not imagine how costly that would be or how it would even work. I remember days at Quicken where the company as a whole would get over 2,000 new loan applications in the door from around the country. The labor cost would be huge.

5. Who knows your area best than an appraiser from your local area. They probably live within a couple miles of you and know what neighborhoods are best and all of the extra little factors that determine what your house is worth.

6. After the appraiser is done going through your house and taking pictures of comparables (comps) in the area they go back to their office and start adding and subtracting things you have in your house. They add up things of value like an extra bathroom, more square footage, new cabinets, fireplace, etc. After that they start subtracting value based on what the other homes in the area have that yours does not. Take for instance a garage. If yours does not have it then its a major value deduction. The one factor that really determines the value is what the most recent sales prices where of homes in your area. The appraiser will try to find homes that have sold within the last 6 months because those will tell what the market is saying what homes are worth that are similar to yours.

7. When its all said and done, the numbers are added up and a value is written done and the appraisal is faxed back to the mortgage company. The appraisal team is notified and the value is put back into the desktop underwriting system to see if an “approval” is still granted by whoever insures the mortgage, like a Fannie Mae for instance. If the system still says its approved, then you proceed with the mortgage and close the loan. If it comes back with an error (it usually says “Refer”) then you need to see whats not getting the approval. If its the appraisal coming in too low than there is nothing that can be done.

8. This is where you need to see if your mortgage banker can move some numbers around. Maybe you can take out less cash to get an approval. Then you need to see if the loan still makes sense for what you are trying to do. Maybe there are other factors not getting you the approval now because of your debt to income (DTI) ratio or your credit score is low or you do not have enough assets in the bank.

9. The one thing that the desktop underwriting system really likes is a low loan to value. Approvals are easy to get if you have a LTV under 80% and sometimes up to 90% depending on your credit score. Anything higher than those numbers and you are not going to find any help anywhere. This is mainly due to the credit markets tightening. The days of loans up to 100% LTV are basically gone and if your appraisal comes back at over 90% its not because the mortgage company wanted you to spend $350 to do an appraisal that was not going to come through and then deny you on the loan. Its because that is what your house is worth. The mortgage companies are in the business to close loans, not to deny you on a loan.

10. There are times when you can get a second opinion done. In the mortgage business they call it a “value appeal.” This is when there are things that the appraiser just flat out missed. It happens, they are people and people make mistakes. I have seen it where the difference of $3k in value of the home can kill a deal. If the home owner can find more recent comps or can show a reason for the bump in the value then the mortgage lender can take those and give the appraisal back to have the appraiser re-certify it. Sometimes, they will give the value increase and sometimes they will not. It sounds kind of shady (because it is). I can probably picture some conversations between a mortgage brokers and a appraiser saying that they will never use them again if they do not make the value a certain number. I know that happened because it has been in every major newspaper for the past two years. Any credible lender will not let this happen because they have too much riding on it. So if your appraisal comes in low you have two options. You can pay $350 for another appraisal from a different company. I only saw this work once over a two year period. I had a client that lived in Vail, Colorado and the mortgage company I worked at sent a appraiser from Denver, Colorado which is about 100 miles away. The appraisal came in very low and my client told me that we needed to use an appraiser from Vail. We ate the cost (only time this happened) and ordered an appraiser from Vail. Appraisal came in $100k more than the first one. Weird, but it worked. Second option is just to accept that your house is not worth what it was during the years of the refi boom of 2002-2006 and eat that $350 you spent on the appraisal. From all accounts, regardless of where you live, your house has probably gone down in value by 20% from 2006-2008. Don’t feel bad, its not your fault, its not the mortgage companies fault, its the markets fault.

Post from: The Top 10 Reasons

The Top 10 Reasons Why You Should Give Up Trying To Refinance Your Mortgage If The Appraisal Comes In Low

1. The FHA loan has became popular once again over the past 6 months mainly due to it being one of the only 100% financing loans able to use to buy a home. With all of the major mortgage companies going bankrupt around the country they all lost their ability to use their own loans. What I mean by using their own loans is that many companies, let’s say Quicken Loans for example worked with larger banks and investment firms and they wrote their own guidelines. This means that they made their own rules and as long as a bunch of underwriting guidelines were met than the loan could be written and sold on the secondary market for a profit.

2. Realtors loved this during the days of the refi/purchase boom. Since the mortgage companies had their own guidelines a person looking to buy a home could buy just about anything they wanted as long as it had four walls and a roof. It was up to the person buying the home to make sure that the house was up to par with a home inspection.

3. The mortgage companies did have some standards (have to give them some credit). They would not allow you to buy a home that did not have any type of flooring covering the sub floor. This means that the whole house had to be carpeted, tiled, or wood floors down to cover the sub floor. The kitchen had to be complete. You could be missing a dishwasher or a fridge but the sink had to be in. The mortgage companies would find out when the appraisal got back because in the report it would state what is missing and there would be pictures on it too.

4. Now when the FHA is the only option out there for people to get approved on a loan some new standards have been imposed. The FHA’s main guideline is that a home inspection must be done on top of an appraisal. An appraisal and a home inspection are two different things. An appraisal looks at the features of the homes compared to the other homes like it in the neighborhood and determines a value (even if it is missing flooring). A home inspection looks for things like leaky pipes, bad foundation, broken windows, bad roof, mold, and others.

5. If the home that the buyers put an offer on fails the home inspection than the loan cannot be closed until all of those things that made it fail the inspection are cleared up. At that time the loan can close. In reality though, how many people are going to go and dig into whatever space they might have on their home equity line of credit just to fix up the house to be able to sell it to you in a couple months after all of the repairs are fixed. What they are going to do is wait until somebody else comes around that is approved on a conventional 30 year fixed rate mortgage that does not need to pass a home inspection to sell the home. More than likely the people trying to sell the home are probably upside down on their home anywyas and can’t afford to put any money into it because then they will need to bring money to closing. If somebody does not come to them with a normal conventional loan they will probably have to foreclose on the house.

6. With the home not passing the inspection you already know what the look on your realtors face is going to look like. Its going to be one of disbelief and anger at the same time. Since realtors get paid on commision they just waisted a bunch of time on a deal that has a 95% chance of not closing now. The realtor can either keep looking with you for new homes or just bail on you completely. In this real estate market you might get lucky and find somebody who will stick with you because the realtor is not closing a lot of deals right now because not that many people are getting approved on mortgages at all.

7. The FHA requires all borrowers to escrow their property taxes and home owners insurance with their mortgage payment. This means that they now have to bring more money to the closing table to suffice what they need. In total they need money for escrow, down payment, and closing costs. More than likely the person looking to buy the home do not have this kind of money in a bank account any where so this becomes a lost cause.

8. FHA loans require twice as much paperwork as a normal loan. With all of this paperwork mandated by the FHA there always seems to be some thing that pops up and deters the loan from closing. This alone can drive a realtor crazy because all they want to do is show you a house that you like and close the deal so they can move on to the next client.

9. If you are in the market to buy a home right now and are using a pre-approval from a mortgage company using a FHA loan you better get a move on. On October 1, 2008 the FHA is implementing new guidelines that gets rid of all down payment assistance programs and requires borrowers to come to the table with 3.5% downpayment now. I hope you have told your realtor that you are using a FHA loan because imagine how mad they will be if they find out in the middle of September that you have one and the offer you put on a house gets accepted and then the loan cannot close. If you want to get into a house and can only get approved on FHA you better start hustling because it takes most mortgage companies 3 weeks to close a loan and about 4 weeks to close an FHA loan due to its lengthy paperwork.

10. If you want to see your realtor make a funny face just say the words “FHA” to them. You will probably be asked if this was your only loan that you could get approved on. Do not be insulted because of it, the realtor is just trying to cover their butt and not waste a lot of time showing you houses that you will never be able to close on. With so many quirky guidelines you can see why the FHA does this. To really see why they are so stringent you need to step into their shoes. Why would I want to lend you money on something that is not even up to code? If I lent you the money and you defaulted on the home than all I (the FHA) would own is home that is broken down, beat up, and probably needs thousands of dollars to bring it up to code to hopefully sell it. I guess we can thank the U.S Government for doing at least one thing right and making sure we are not buying run down houses.

Post from: The Top 10 Reasons

The Top 10 Reasons Realtors Do Not Like FHA Loans

1. Right now around the country your home is taxed based on a percentage of what the value or home is worth based on what the county assessor thinks it is worth. As an example lets say your local county government has a property tax of 1% and your home was assessed at $300k. You would pay $300k x 1%= $3000 a year in property taxes.

2. This is a great system for the county when property values are going up because as your property value goes up the amount of money you pay in property taxes goes up. The county government does not look bad at all because they did not have to raise the percent to bring in more money, it was the market that did it.

3. For the most part people do not complain about paying a little more in property taxes because they have been told that the value of the property has gone up. Everybody likes hearing this news. Even to hear that it went up 10% in value in one year is pretty amazing. Using our $300k example would result in a new value of $330k and new property taxes of $3300. Not bad knowing that you could sell the house for $30k more and only had to shell out $300 more a year in taxes. Hopefully you played it safe and took out a 30 year fixed mortgage and are not worrying about a adjustable rate mortgage payment going up.

4. Never had property values gone up so fast as when they did during the refi boom of 2002-2006. Homes prices around the country went up anywhere from 30%-200%. This was just ridiculous. In a lot of cases new cities were created because of all of the home building going on. This resulted in a lot of new revenue for these cities to bring in to fund their police and fire departments. Let alone the Parks & Recreation, new government and school buildings and more spending.

5. This system seemed to be good for everybody because with the rising cost of real estate most people still felt ahead. What was really happening in the background was a real let down. Cities saw all of this new revenue coming in and decided to start investing in new buildings and spending on frivolous things just because they had the money.

6. Fast foward to the present and now home prices are dropping around 12% every quarter. This is erasing any or all of the gains each home owner has had in the appreciation of their real estate investments. Never mind the people that bought their home in the past two years because unless they put a large down payment on their home they are probably upside down on their mortgage. There has also been the matter of all of these homes going into foreclosure. With the homes being foreclosed upon the county government is losing out on the revenue it gets from the property taxes it collected. Now the county is in a real bind because they assumed that property values were going to keep on rising just like they were doing over the recorded history of real estate prices. Since they were spending all of the extra surplus money they received to go out and buy stuff many county governments are now in debt and have no way to pay it back unless they make major changes. These major changes are doing things like laying off teachers, firefighters, police officers, county assessors (bad karma), road repair workers, etc.  

7. Now all of these home owners that were not complaining about paying a little more in taxes because of the previous values of their homes are trying to fight the county and city governments because the county assessor is not lowering what they think your property is worth. Even though you can go up and down your street and see homes selling for far more less than what you were assessed at. What a city assessor and an appraiser look at are similar and different in a number of ways. The appraiser is getting paid either way. The county assessor needs the property tax revenue to stay the same so he can still have his job.

8. Now the county needs to raise more revenue than what it was bringing in during the refi boom to make up for all of the homes in foreclosure and rising prices on things like gasoline to fuel all of the government vehicles, pay salaries, utility bills, etc. Would you believe that some counties are trying to raise property taxes on your declining property value? There argument is that you do want Police and Fire Departments, right? You do want a school around the corner for your kids, right? You want your kids to get picked up by a bus so you do not have to be late driving your kid to school, right? Looks like there is nothing you can do but play by the rules that do nothing but stick it to you. Many people were stuck in the whole taking cash out of the equity of the inflated value of their home to pay thinks and this included their property taxes and home owners insurance. Some sought out a home equity line of credit to help pay the increases in their tax bill.

9. Think about this for a second. How about instead of charging people what their homes are being assessed at, the county charges them by how much land you own? How many times have you seen homes that share a similar lay out and plot of land but one home owner really takes care of their home and wants to remodel their home with the newest kitchen cabinets, granite counter tops, etc? In the counties eyes the house that is better taken care of should pay more than the house that does not have all of the extras. But isn’t that really a shame. The people that do not put extra money in their house for new appliances or a new kitchen or bathroom should not be penalized. Its probably somebodys grandparents that have lived a certain way for the past 45 years and have not upgraded anything in the past 20 years. Their reason for it is if it ain’t broken don’t fix it. The house is probably clean and spotless, but just old in style. But they both own the same land. Do not penalize the people that upgrade and make them pay more just because. They should be getting the money they put into it when they sell the house for more than grandma and grandpa next door.

10. What needs to be done is the county governments around the country need to change the way they tax their residents. How it should be done is if you own a two acre parcel of land and your neighbor owns a one acre parcel than the person with two acres should pay twice as much. What needs to be done is the county government needs to actually follow a budget and say this is the amount of money we will need to provide the services we need. Each property owner will pay their property taxes based on how much land they own. Take the amount needed for the budget to be taken care of and divide it by the amount of acres the city owns. Then start breaking it down by .25 acre, .5 acre, 1 acre lots, and so on and so on. This way the value of the home is no longer a determination for the city to make. By doing this all county assessors would be let go of course, but this would free up one county job and save the tax payers money. I’m sure there are more jobs related to the assessor position but this is just a start. This will eliminate property owners having to go to a tax tribunal to argue that they should not be paying as much property taxes on their house because of the lowering values. I watched my dad had to go before the City of Eastpointe (in Michigan) Tax Tribunal to argue such a point on a couple rental properties he owns. He was able to get the taxes lowered by at least $100 on two of the three properties and none for the other. Eventhough the proeprty values declined in value over $7500 each on homes that are probably worth around $105k. That is around a 7% drop in one year. If the city would just base the taxes on what they need to make the budget work based on the percent of land you own in the city they would save themselves a lot of time and effort to do other things like I don’t know, find ways to lower taxes.

Post from: The Top 10 Reasons

The Top 10 Reasons Why Property Taxes Are Not Calculated Correctly And Need To Change

1. Mortgage companies starting around November 2007 stopped doing fixed second mortgages and home equity lines of credit (HELOC) due to changes going on in the mortgage industry. A lot of swift and sudden changes came to the type of companies that were farthest away from the actual money like the mortgage brokers, correspondent lenders, then the banks.

2. The banks are the one’s that set the guidelines for anybody who does business with them. Since a mortgage broker does not lend you the money (the bank does that the mortgage broker works with) they were told that they would not be honoring anymore fixed second mortgages or HELOC’s. This lead to a mad dash from all of the smaller companies to close these loans so they could sell them to the bank before the deadline or they would not be able to close.

3. What lead to this rush was a realization that the housing bubble had finally burst. Home owners now owed more than what their house was worth and property values were dropping quickly. Most people that took out a second mortgage did so for home improvements, credit card bills, weddings, etc. The majority of people rolled in a bunch of debts so they could have one mortgage payment that they could write stuff off on their taxes instead of a bunch of smaller payments. This usually saved them payments on their overall monthly payments but all this did was increase people’s appetite to spend more and use their home as an ATM.

4. Now the mortgage companies see the dip in home prices and most could do second mortgages up to 100% of the value of their home. Appraisals were coming in much lower now than even just six months before so they could not give them another second mortgage or even be able to roll a first and second mortgage into one. Mortgage companies look at the loan to value (LTV) of the house and if both combined to over 100% there was nothing they could do.

5. When home owners started defaulting on their home loans and went into foreclosure what happens is if there is a first and second mortgage on the property the company that has the first mortgage would get paid back first in the event of a short sale or auction. The mortgage company that holds the second lien position on the house would get whatever proceeds that were left over…if any. Many received none because there was no way that the house was going to sell for what the home appraised for when they did the loan.

6. With no money coming in to cover the foreclosures the banks just said they are no longer going to do second mortgages up to 95% or above of the homes value. Many large banks like Chase, Bank Of America, and Wells Fargo might still do them because they would hold onto the mortgage note and service it themselves. What these large companies did was shut off the companies that sold the mortgage notes to them, ie the mortgage brokers. What happens is all of the mortgage notes the mortgage broker would have closed on get sold to the larger bank (that actually funded the loan) in a bundle. The banks would accept the notes in one packet and start servicing the loan and collect your interest. The banks left a lot of trust to the mortgage brokers to do the right thing (and most did) but it meant that some mortgages could squeeze through without going over thoroughly. The banks decided it would be in their best interest to get rid of all the small companies selling them the second mortgages and do it all in house.

7. The banks do not know how much farther the real estate market is going to go down. Of course the National Realtors Association says that home prices are leveling off but you should not believe that for a second. Remember that Realtors work on commission and they want to reassure you that you are getting a good deal. If you are not in a rush to buy a home right now, try and wait until about June of 2009 before you start looking to buy. You will probably save another 8%-15% on the purchase price of the home.

8. The banks have realized that home prices have not leveled off yet so they are not in a rush to do the second mortgages yet. What would happen if they did is let’s say that they start doing second mortgages back up to 95% or 100% of the value of the home. People default on the loans and the home goes into foreclosure. The banks should know that the real estate market is probably going to drop another 5%-15% across the country until June 2009 or when home prices get back to what they were before 9/11 happened. So now the bank would be holding onto the note for a second mortgage on a home that is worth 5%-10% less than what it could be sold for. This would leave them with a 5%-10% loss on the money that they lent. Banks are not in business to lose money and this is a losing scenario.

9. The banks are now trying to fight back to all of the mortgage brokers and correspondent lenders (Correspondent lender is a lender that is big enough to fund the home loans but typically borrows from a line of credit they have with a larger bank like Countrywide and sells that bank the mortgage note. A great example of a correspondent lender is Quicken Loans. They do not keep any of the loans and sell them after closing to the larger bank for a quick profit and releasing themselves of the note and the responsibility of the property in case of foreclosure) to take these second mortgages back. It’s becoming a game of hot potato because nobody wants these second mortgages and the finger is being pointed everywhere.

10. Instead of doing second mortgages for every body the banks have decided to only let certain borrowers take out a HELOC. The qualifications have gone up and many banks now will only let you take a second mortgage up to 80% LTV and you need to have over 700 credit scores with no mortgage lates in the last 12 months. Many also make you open up a checking account with them and you have to have to your payments automatically withdrawn. This is a safer bet for the banks because now they can handle the down turn in the market for a little longer and not have to worry about losing out in case of foreclosure or anymore short sales. If you are in the market for a second mortgage or HELOC good luck finding one. You should start out with your local bank and then call up a big bank like Chase or Bank Of America to see what they can offer.

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The Top 10 Reasons Mortgage Companies Stopped Doing Second Mortgages

1. For those of you that do not know what a second mortgage is, it is a lien (loan) against a certain percentage of the equity of the home. What the mortgage company does is recognizes that you have a first mortgage on your home and they take the balance of that loan, get an appraisal on the home and say you have this amount of equity in the home. As an example, you have a first mortgage of $125k and the home is worth $200k, this gives you equity of $200k – $125k = $75k. Depending on what mortgage company you go with and what their guidelines are you could take out a second mortgage up to 100% of the value of the home.

2. During the real estate boom some lenders did second mortgages up to 125% of the value of the home because during that time the value of the home would probably go up during the next year by 25% to cover both the first and second mortgage in case of a sale or foreclosure. This would give the home owner plenty of money to do with it what they want to do.

3. Now with all of the mortgage mess going on in the United States many mortgage companies have scaled back doing second mortgages to 90% of the value of the home or have removed them from their product lists all together. The banks and mortgage companies are now seeing these home owners that borrowed up to 100% of the value of their home over the past couple years can’t pay back the loans and are going into foreclosure, or they just cannot sell the home because they owe to much.

4. When the Federal Reserve lowered the prime rate down to 1% in 2003 cheap money was starting to flow everywhere. Second mortgages were starting to become very popular because now people could go out and buy whatever they wanted with a home equity line of credit (HELOC) with their effective interest rate around 3%. The banks borrow the money at 1% from the Federal Reserve and make their 2% profit and give you the interest rate at 3%. This was cheap because now everything you bought with the line of credit was also a tax write off because it was included with your loan. When you did your taxes it was like whatever you bought you almost bought with no interest because of the tax write offs. Most home equity lines of credit had payments that were spread out over 30 years so your monthly payments were extremely low.

5. The gravy train lasted for about 4 more years up until 2006. This is when the Federal Reserve decided that it was time to start raising the prime rate. The prime rate is the rate which the Federal Reserve lends money to banks. The Fed started raising rates .25% every month for 17 consecutive months before stopping at 5.25% in 2006. What thie means to the average home owner who took out a home equity line of credit is that their monthly payment on the HELOC has now gone up 4.25% over a 1.5 years. If you do the math lets say on a $50k home equity line of credit your payment went from $125 a month at 3% to $302 a month at 7.25%. Plus, the payments on a HELOC are interest only for the first ten years of the loan so all of the stuff you bought cheaply you are now paying $302 – $125 = $177 more in interest a month and the balance stays the same if you do not pay more.

6. In comes the fixed rate second mortgage. On a home equity line of credit the interest rate is adjustable (There are a few local banks that lock HELOC rates in, but they are very hard to find and usually have stipulations like you need to have a checking account with them). Now the average American home owner does not want to have to deal with rising interest rates because it looked like there was going to be no end as to how high the prime rate was going to go. Now, the mortgage companies saw a reason to start coming out with more fixed rate second mortgages and sold them to home owners and the selling point is now you know what your payment is going to be like without having to worry about interest rates. Some mortgage companies used this as a scare tactic and it worked because the home owners were already scared. Most people already had a really good first mortgage with a low interest rate so it did not make sense to refinance the first mortgage, so all they did was refinance the home equity line of credit into a fixed rate second mortgage.

7. Many people that took a fixed rate second mortgage liked the idea that their payment was not going to move anymore. It is very comforting to know what your mortgage payment is going to be like. Interest rates on fixed second mortgages would depend on how high the total loan to value of your loans equaled. If you still had a lot of equity in your home you would get a lower rate. If you locked in a rate and you owed what your house was worth your mortgage rates were probably about 2% higher. There is a risk factor involved in going up to 100% of the value of the home. There are a variety of fixed second rate mortgages available such as a 10 year, 15 year, 20 year, 25 year, and a 30/15 year. All of the above come with different interest rates and the 10 year would have the best with every one after that probably having .125% more than the one before it. Most homeowners took out a 15 year second mortgage because they knew that they were going to pay it down (HA!). The payments were not high on it but for most people that rolled in credit card debt it did save them money initially, but many just rolled the bills right back up after doing the second mortgage. What most people should have done is find a mortgage company that does the 30/15 loan. This loan was unique in that your payment was put on a 30 year amortization schedule with a 15 year baloon payment. What this means is that you will not have the whole balance of the second mortgage paid off in 15 years (probably half of it will be) but during that time if you wanted to pay more you can. The way to get around having to pay the baloon payment would be to refinance the loan before the 15 years. This gave you a lower monthly payment than the 15 year loan and gave you more flexibility with your monthly cash flow. As an example on $50k a 15 year fixed second mortgage at 7.5% is $463 a month and the 30/15 loan at 7.75% of $50k is $358 a month. This puts $463 – $358 = $105 back in your pocket to invest or even put on top of your mortgage payment.

8. Now, home owners feel great because they have no more worries about mortgage payments. Now you need to ask yourself, “why did you get the home equity line of credit in the first place?” The reason you got it could have been for a number of reasons. You wanted to roll in some credit card debt, buy a rental property, a boat, a car, tuition, home remodeling, wedding, etc. The main reason you opened it was to have money available in case of an emergency. With a fixed second rate mortgage, you cannot borrow anymore. Gone are the days where you can write a check from your HELOC or call the bank and have them forward you a check. You cannot borrow anymore. The only way to get more money out would be to refinance the second mortgage again.

9. Let’s say you are okay with the fact that you can’t borrow anymore money (good for you, going old school and saving). You don’t hear anything about the Federal Reserve raising the prime rate any more. This goes on from June 2006 to September 2007. The Fed did nothing. Then in October 2007 the Fed comes out and says we are lowering the prime rate .5%. Great news. That is for the people who kept their HELOC, not good for you because you locked in your interest rate. The people that kept their HELOC will see their payment go down by .5% the very next month and they still have the flexibility to borrow more money (only if you have not maxed it out) if they want. The Federal Reserve comes out the following 3 months and lowers rates by .25% each month. The real kicker comes in December 2007 when the Fed lowers the prime rate by .75%. This is huge. The pattern continues until march 2008 in which the Fed stops lowering the prime rate at 2%. From June 2007 to March 2008 the prime rate went from 5.25% to 2%. If you kept your HELOC opened your payment every month would have dropped and now would be saving 3.25%. using the $50k HELOC balance example at 7.25% (5.25% + the bank’s 2% profit) a monthly payment would be $302 interest only and $50k at 4% (2% + bank’s 2% profit) is $166 interest only, saving you now $302 – $166 = $136 a month in interest. Now the people who took out a fixed rate second mortgage want to get their HELOC back now to save on interest. Sorry, you can’t. With declining values on homes you probably owe more on your house than what its worth. Very few mortgage companies or banks will even lend up to 100% of the value of the home now and many will not go over 90%. Some have put a hold on doing second mortgages or HELOC’s all together until the real estate market bottom’s out. More than likely you are now stuck with what you got.

10. As you can see from the examples above you really need to weigh in all of the factors when getting a second mortgage. It does not matter if it is going to be a home equity line of credit or a fixed rate second mortgage. If you want the flexibility of having cash readily avaialble then keep the HELOC open. It really is not about the rate when you need cash now. If you just want to know that your second mortgage payment is not going anywhere then lock it in. Just do not complain when rates go lower than yours.

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The Top 10 Reasons You Need To Pick The Right Second Mortgage