Saturday, January 26, 2008

Misconceptions About Mortgage Rates' Driving Forces Can Cost Borrowers

Each time the Federal Reserve cuts interest rates, borrowers converge upon their mortgage representatives expecting lower interest rates. Unfortunately, they find that mortgage rates often rise after the Fed cuts rates, and those who have held off on refinancing or locking rates thinking a Fed rate cut will reduce mortgage rates, are actually faced with higher rates than before the Fed's rate reduction.

Consumers who are looking to get the best mortgage rates need to understand that the Federal Reserve can only control the discount rate and the Fed funds rate, which are both very different from mortgage rates. Borrowers are constantly mistaken in thinking that rate cuts by the Fed will result in lower mortgage interest rates. That simply isn't the case.

Another common misconception is that mortgage rates are directly related to 30-year Treasury bonds or 10-year Treasury notes. "Both 30- year Treasury bonds and 10-year Treasury notes are government securities and backed by the full faith and credit of the U.S. government. They have no direct effect on mortgage rates.

Mortgage rates are based solely on mortgage backed securities. The trading performance of mortgage backed securities, which are issued by Fannie Mae and Freddie Mac, determine the direction of mortgage rates. Finding the catalyst that causes mortgage bonds to move will give consumers the keys to finding out what makes mortgage rates rise and fall.

Inflation is a key factor in pricing long-term bonds, because inflation erodes future returns. Since bonds pay out a set amount over a long period of time, that amount will be less valuable in future markets, especially if inflation is high. Because bond investors are very aware of this, they will require a higher rate of return or interest on their investment to compensate them if they feel that inflation will be increasing.

To understand the relationship between bond prices and mortgage rates, first put yourself in the position of a mortgage bondholder, like a mortgage lender. If it looks like inflation is going to cut away at the value of your bonds, you'll need to charge more interest on the mortgage loans you generate in order to compensate for that lowered value on the bonds. So if you anticipate increases in inflation, perhaps caused by the Federal Reserve lowering rates, you'll probably be raising mortgage rates in response. Therefore, because rate hikes by the Fed are designed to slow inflation, that is actually very good news for bondholders or mortgage lenders. A Fed rate hike can actually help reduce mortgage rates.

The Fed's rate cuts stimulate the economy by making borrowing cheaper, which in turn gives vendors the ability to increase prices. That leads to inflation, which erodes the value of long term bonds and more specifically, of mortgage bonds. When MBS values are in jeopardy, mortgage rates tend to rise.

While these key factors are better indicators of mortgage rates, borrowers and homeowners should remember that there is no surefire way to predict the market.

Keep an eye on the MBS market, but also bear in mind that the best rates may be behind us. Mortgage rates are still low, and we could see some quick dips. Borrowers should always consult a qualified mortgage planner who can advise on any market changes. If you're looking to refinance, be prepared to act, so you can make the most of any lower rates while they last.

Tuesday, January 15, 2008

Ways People Prevent Foreclosure

A short sale is one of many ways a homeowner can prevent a foreclosure. Whether you are an investor or homeowner you should know and understand all of your options. A short sale is often the best option available to the homeowner but knowing all options is in the best interest of all parties so an informed decision can be made.

For the purpose of instruction we will assume you are a homeowner facing foreclosure.

Foreclosure Rules

Rule #1: Contact your lender right away to discuss your options.
Rule #2: Never ignore the lender's letters or phone calls.
Rule #3: Ask the lender for a reinstatement or repayment plan.
Rule #4: Know your options


Reinstatement might be possible when you are behind in your payments but can promise a lump sum to bring payments current by a specific date. Call the lender and ask to speak with the workout department. The lender would prefer to have the loan reinstated and have you stay in the home then to foreclose on the property.

Repayment Plan

If your account is past due, but you can now make payments, the lender may agree to let you catch up by adding a portion of the past due amount to a certain number of monthly payments until your account is current.
Example. You fall 5 payment behind on your house

Private Money Loan Up To $25,000

A Private Money Loan is often the best solution for the homeowner because it allows them to bring the other loans current. Most private money lenders require a total loan to value ratio below 75% and are equity based lenders meaning more importance is placed on the house securing the debt than a personal credit rating. Make sure you are dealing with a private money lender like ours and not a mortgage broker, bank, or hard money lender(all of these may charge exorbitant points and fees costing you more money). With a private money lender you keep the ownership of your house, borrow only what you need, and can repair your credit over time.

Sell Your House To An Investor

If 1, 2, & 3 are not an option then you can sell your house to an investor. On average a seller nets 85% of the sales price after taking into consideration all selling, closing, & misc. expenses. An investor will expect to make a reasonable profit but can close quickly with cash or may take over existing debt & bring the loan current. A credible investor closes quickly which starts rebuilding your credit immediately and may put cash in your pocket depending on your equity. If you have little/no equity see #6.

Sell Your House and Lease Option Back

This is a very popular option and must be done by a willing investor. Typically the investor takes over the existing debt or gets new financing then gives the seller the option to buy the property back at a later date for a higher amount. The seller gets to stay in the house and make reasonable lease payments while rebuilding their credit. Done right this can be a solution but the disadvantage is you lose ownership of the house and tax write offs. Another option that may be less expensive is getting a Private Money Loan. If you have little or no equity an investor may be able to do a short sale(see #6) then lease option the house back to you.

NOTE: We are not a big fan of lease optioning the home back to the owner because unless it is done correctly there is too much that can go wrong at a later date. We mention it here to cover all the options.

Short Sale

A short sale is when an investor purchases a property conditioned upon the lender discounting the loan(s) to a lower amount. This may be the only solution for sellers that have little or no equity or are over financed owing more than the value of the property. Make sure you work with a credible investor experienced in short sales. Do not do business with anyone that guarantees or promises results- they simply can't because there is no way of knowing what discount a lender will accept. Many times acceptance will not occur until just before the foreclosure date. Note: If you have little or no equity it is important to start working with a credible investor ASAP because the short sale process takes time.

List The Property With A Realtor

This is the option of last resort. FACT: there are thousands of houses listed on the MLS that Realtors can't sell. Average days on the market continues to climb! The foreclosure process limits the time you have to sell. You simply don't have the time. Realtors do not understand options 3, 4, 5, and 6. Realtors increase your costs with exorbitant commissions and most seasoned investors avoid working with Realtors on short sales.

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Monday, January 14, 2008

Startling Predictions

As the U.S. economy slides into a protracted recession, baby boomers will recognize that they are poorer than their parents were when their parents were in their early sixties. Without the appreciation of a house to cash in on, they will give up their long-held dreams of retiring comfortably at 65.

Estate homes and multimillion-dollar condominiums will tumble in value, even below current prices. Many will be left vacant. It will take at least seven years for many of the properties that have been built in the past two years to be occupied. Investors in these properties will be wiped out.

More than 80 percent of the existing real estate development industry will go bankrupt.

Following real estate development will be the larger part of the banking and financial services industry. Thousands of young investment bankers and hedge fund managers will be out of work. This could happen as early as the middle of next year.

As the U.S. economy slides into a protracted recession, baby boomers will recognize that they are poorer than their parents were when their parents were in their early sixties. Without the appreciation of a house to cash in on, they will give up their long-held dreams of retiring comfortably at 65.

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Saturday, January 12, 2008

Investor Expectations

We monitor whether investor expectations are getting more optimistic ahead of earnings as a sign that a stock may be at risk of the "sell the news" crowd stepping in after earnings. Investors should avoid (or short) such situations. Why? The upside potential of a positive earnings report is limited, because the market has already priced the stock for perfection.

Typically, you want to see a company report strong earnings when investors expect a weak report. A stock will usually rally more than average, as skeptical investors rush in to buy shares to play catch-up. That added buying pressure tends to force prices higher.

With that, here are three behavioral rules to remember during earnings season. Refer to them
regularly, as these simple rules have stood the test of time when it comes to earnings season

Avoid the temptation of running with the crowd. The crowd tends to get whipped into a frenzy ahead of an earnings announcement, as investors buy a stock based on their positive expectations. This means that the stock price reflects ambitious expectations, which are often hard to meet. Under these circumstances, a stock that reports positive earnings will likely sell off because of its bloated behavioral value.

Look for the under-appreciated opportunities.

Keep an eye on companies with low investor expectations headed into earnings. In contrast to rule number one, low expectations are easily met or exceeded beat. That's when investors move in and drive prices higher. Pay attention to rules one and two.

Wednesday, January 9, 2008

Why would anybody sell a property for under market value?

Their specific motives are varied and many, but one thing is probably true: The person who put together the deal these people agreed to likely had strong sales and negotiation skills.

As important as it is to know the investment techniques and understand how the numbers work, it's also important to recognize that interpersonal skills play a key role in real estate investing. As an investor, your first "product" is yourself. People want to do business with people they like and trust, so you need to show them that you are likeable and trustworthy. You need to sell yourself to buyers and sellers, tenants, fellow investors, funding sources, and all those other people who play a role in the process. It's important to recognize that this isn't about manipulation or deception, it's about communication and fairness. It's about finding out what the other person needs and showing how your proposal will meet that need.

You're probably involved in sales more often than you realize. Whenever one person wants another person to take a particular action, something is being sold. In commerce, the action is usually the purchase of a product or service. But sales also occur when a teenager is angling for an extended curfew, when a parent is trying to coax a toddle to eat vegetables, when one spouse works on convincing the other that a vacation at the beach is better than a trip to the mountains-essentially, whenever two people are communicating, elements of the sales process are occurring. That's why it makes sense for everybody to learn selling skills, whether you see yourself as a salesperson or not.

A good way for a real estate investor to approach sales training is to look for a program that teaches sales skills along with negotiating and also touches on marketing. If you aren't marketing your business, people won't know to contact you when they have a real estate problem you can solve- and you'll miss out on a lot of potential deals. If you find the deals but can't get sellers to accept your offers or buyers to pay your price, you won't be able to close on the transaction-and if you don't close, you don't get paid. If the other party is receptive but not entirely satisfied with your proposal, you need to know how to negotiate so you can work out the details.

Tuesday, January 8, 2008

The Markets Is Still Nervous

After that absolutely atrocious performance by stocks on Friday, following one of the worst employment reports in years, the major U.S. equity market indices closed little changed on Monday, thanks to that late session buying spree that helped pull most of them off some of their worst levels of the day.

There is a ton of nervousness out there on Wall Street and the wall to wall coverage of the recent U.S. Presidential primaries isn't helping to soothe anybody's fears at this point. We believe that our nation's economic leaders are simply out to lunch. Maybe it's because it is a presidential election year and everything has to be filtered throught the elected pinheads on Capitol Hill to see how a recession heading into an election will or will NOT benefit them. Maybe it's because it's the 8th year of a two term President and he doesn't have alot of political capital left to spend. Who knows, but a defensive strategy at this point is undoubtedly the way to go.

A quick look at the price chart pattern and the near term technicals for the small cap Russell 2000 appear to be quite clear. The next few months could be a bruiser for those bullish on small caps. That means this is obviously turning into a stock picker's market. That said, the trend has also obviously turned bearish, so there will be a lot more stocks likely to head down than up. If that's the case, it may be time to look at those small caps which are optionable and consider employing a risk averse short strategy of just buying near term put options on stock's whose technicals tell us clearly that their best days may be behind them for a while.

Remember, while it always less confusing and usually much easier to make money in a bull market, there's also always ways to make money in these markets regardless of what is happening with the overall trend. If that trend flips to the downside, a good trader simply 'flips' his mindset and concentrates on how to make money off of that trend and one way to do that is to short the market. That said, not all sectors typically do badly in a downturn. In fact, some sectors such as healthcare and consumer staples can actually do quite well.

So while we may be making some suggestions over the next few weeks (or months) that are quite unorthodox to those of you who've been members for a while - like shorting a particular stock or buying put options on another, we also will be looking for those sectors and stocks within bullish sectors that still could have decent upside potential. Obviously, in those cases, we'll be making bullish suggestions.

Monday, January 7, 2008

I Buy Houses

The forecast is for a longer, deeper home-price slump than previously expected, with double-digit declines in many markets.

The United States is deep in its worst housing slump since the Great Depression, and according to a new report, it's not going to get better any time soon.

In a new survey, Moody's says many metro areas will record losses of 20 percent or more during the downturn, with the national median price for single-family homes dropping 13 percent through early 2009. Factoring in discount offers from sellers, the actual price decline would be well over 15 percent.

Eighty of the 381 metro areas covered by the report will record double-digit losses, according to the report. Most of the worst-hit markets are in once high-flying areas, such as California and Florida.

The steep losses were bound to arrive sometime. Throughout the housing slump, which began in the summer of 2006, experts kept expecting prices to tumble, but it wasn't until recently that they dropped substantially, according to Mark Zandi, chief economist for Moody's

"There has been a sea change in seller psychology since the subprime shock this summer," he said. "Sellers now realize they have to drop their prices to make a sale and prices are coming down very rapidly in some markets."

One such place is Punta Gorda, Fla. In Moody's outlook, prices there will undergo the steepest correction of any U.S. market. From their peak during the first three months of 2006, to their bottom, forecast for the second quarter of 2009, prices will decline 35.3 percent. That's in nominal dollars; adjusted for inflation, the loss will be even greater.

Other metro areas expected to go through crushing price drops include:
Stockton, Calif., where prices are forecast to drop 31.6 percent, Modesto, Calif. (-31.3 percent), Fort Walton Beach, Fla. (-30.4 percent) and Naples, Fla. (-29.6 percent).

The worst hit market outside the Sun Belt is expected to be
Ocean City, N.J. where prices will fall 24.9 percent, according to Moody's. Prices in St. George, Utah (-21.8 percent), Grand Junction, Colo. (-18.9 percent) and Atlantic City, N.J. (-18.6 percent) will also suffer. In the Washington, D.C. metro area, Moody's forecasts a decline of 18.4 percent.

Home prices are being pulled down by an even more severe decline in home sales, which Moody's expects to bottom out in early 2008, when unit sales will be down more than 40 percent from their peak.

Home builders continued to add to inventory even as the slump got well under way, contributing to what is now an 11-month back-log of homes for sale, according to the National Association of Realtors.

Many of these homes are sitting completely empty: The Census Bureau reported a total of 2.1 million vacant homes for sale. Vacant homes add pressure on prices because owners of these houses are usually more willing to slash prices to move the properties. They cost out-of-pocket cash each month while providing neither income nor shelter.

Even though home construction has now contracted severely - the Census Bureau reported Tuesday that new housing starts were down to an annualized rate of 1.187 million units in November, the lowest in 16 years - it will take time to work through the excess inventory.
The housing slump will have a substantial impact on the overall economy, according to Moody's, which says it will depress real gross domestic product by more than a percentage point this year and by 1.5 percentage points in 2008.

Speculative investment in the mid-2000s helped fuel the current slump. Zandi pointed out that 16 percent of mortgage originations during 2005 were for non-owner-occupied housing, twice the number of a few years earlier.

"And that's a very conservative estimate of investor demand," he said. "Many home buyers lied on their mortgage applications." That's because interest rates are lower for owner/occupied dwellings.

Buying for investment was especially prevalent in many resort areas, such as Ocean City, N.J. Many buyers were betting they could hold onto the property for a short time and sell it for a quick profit, a difficult feat to finesse, considering the high transactional costs. Many speculators came late to the party and got caught in the slump. Now their properties are adding to mountainous inventories.

Another factor was excessive new home construction, especially in once hot markets. As prices skyrocketed, builders rushed to take advantage of the increases, contributing to the now high inventories.

Also adding homes to markets was the increase in foreclosure filings. When lenders take back properties, they put them back on the markets. Foreclosures have just about doubled this year.
For the slump to end, much of the excess inventory will have to be worked through. Zandi doesn't envision that happening much before 2010, which he forecasts to be a very modest recovery year with low, single-digit growth.

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