My New Blog

Welcome to the new and improved Real Estate Insider. Content this quarter summarizes the past year and presents some strategies, deadlines, and outlooks for the year ahead in real estate. I'm proud to have had this article featured as the mortgage market summary for the Minnesota Chapter of the Financial Planning Association which goes out to all of their 900 members. If they want to know this inside information, you need to know it as well. I've highlighted the main topics of each paragragh so you can skim through if you are looking for something specific. I finish with some testimonials. After doing mortgage for over 10 years (working in a small firm and for the largest lender in the country) I strongly believe that the business model I have in place is the best for mortgage delivery. As always "Genuine, Experienced, Resourceful".

If you or someone you know is or will be needing a home loan in the next year, you would be doing them a disservice by not having them check with me to compare.

Much like most industries, change defined 2009 in the mortgage industry. With rates hitting record lows on May 17th and December 8th of last year there was sweeping interest in refinancing as well as record numbers of first time home buyers entering the market. Many large banks left markets or the industry altogether. Minnesota licensed mortgage companies went from the 2006 high of 4,200 to 580 during renewal this fall. Government stepped in to attempt to provide some regulation and standardization which led to a lot of consumer frustration as the banks left standing tried to implement new rules "on the fly" just as many had reduced their workforces significantly. One main area of consumer frustration surrounded the appraisal process which removed contact between the appraiser and the loan officer. This was an attempt to remove possible undue influence by the loan officer by asking the appraiser to find higher comparable values in order to make the loan work. This process, while implemented rather badly by those involved, has seemed to work to the extent of making banks more confident in their loan to value designations and bringing some sanity to house price offerings. It has led to much of the depreciation in overall home prices. A problem with this new regulation is that consumers interested in refinancing now have to pay for an appraisal and hope the value is there. If it isn't the loan doesn't proceed and the person is out that money. In previous days a loan officer could check with an appraiser first on value before the consumer was charged and the appraisal fully executed. The biggest overall change last year was in the documentation area. Banks significantly tightened standards of qualifying and often double and triple checked everything about the qualification process from appraisal to income. Those that were business owners, self-employed, or had previously skated by on stated income programs were hit hard and sometimes were shut out of the refinance process altogether (unless they went back and amended their tax returns to show more income or realize less deductions!). The most oft heard quote around my office was "Boy, we didn't have to show that ___ years ago." The biggest indicators of getting the best rate are loan to value, cash out, and credit score. Read--if you are negative in one or more of these categories banks determine that the loan is a higher risk than most and will charge higher rates. Anything above 80% loan to value comes with about a quarter percent higher rate (anything above 70% if you are taking cash out). Credit scores above 740 will get you the best mortgage rates. If your scores are between 620 and 740 your rate and/or ability to get a loan will be affected depending on the other "risk" factors of the file. The Obama administration rolled out the Home Affordable plan in an attempt to stabilize the market by allowing modifications to lower the interest rate for people that were behind in their payments or by allowing those that had bought at the high mark and now were "underwater" in terms of loan to value to refinance their primary mortgage even if their loan to value was at 125%. Current national estimates are that one in four households with a mortgage are underwater. I applaud the effort, stabilization and then eventual appreciation is in all of our interests. However, the amount of people being helped right now is hampered by only 25% of people in foreclosure qualifying for a modification. Reasons are the elimination of stated income qualifications, one or more heads of household are unemployed, and the overall decrease in average credit scores. As well, the refinance program for those that are current on their payments but owe more than their house is worth, only applied to the 1st lien on a property. Those who have a second mortgage are having to subordinate (keep in place) their second with mixed results. Banks are charging higher interest rates to people having to use this program with the second still in place. At this time most Mortgage Insurance companies and second mortgage providers, who were hit the hardest when the housing market fell are reluctant to participate in this program. Currently, second mortgages above 80% loan to value are hard to come by, have high or adjustable rates, and have disappeared from the investment property market. This program ends in June of this year. FHA loans launched back into popularity because of their low down payment needed for purchase (3 1/2% minimum compared to 5% for conventional loans) and tolerance for lower credit scores. These guidelines are as I write tightening including higher down payment requirements and up front costs for lower credit scores . The drawback of FHA loans is that they are typically 1-2% higher cost than conventional loans at closing because of the Mortgage Insurance Premium. ARM's lost much of their popularity compared to 2003-04 when 1/2 of all loans originated in Minnesota were adjustable. Most consumers are preferring the fixed variety. Exceptions are those seeking jumbo loans larger than $417,000 and consumers knowing they plan to retire and sell their house to move up north or down south. Right now, no lenders want to service jumbos until the market stabilizes and many consumers having to refinance or purchase in this category are doing 3 or 5 year fixed ARMs and waiting for the jumbo market to rebound. Historically, it always has. Construction and remodeling loans have disappeared from much of the market, especially on the high end. These loans have been removed from the retail and broker communities altogether except for the FHA rehab loan product which has a max loan amount depending on the county and has some stringent requirements complicating the disbursement of funds and code regulation. Some consumers are having luck with small to midsize banks that have capital and appealing to the bank president or senior mortgage person on a case by case basis. These loans as well will come back to the fold as values stabilize. "When to refinance?" is another question on consumers' minds. A common rule of thumb is if you can get 1/2 % lower with a no closing cost loan, or 1% lower with some closing costs it makes sense to refinance. Here is the key to this--do you plan to stay in your house significantly past the break even point. The breakeven point is determined by measuring the new payment savings divided by the cost to get the new mortgage. This gives you the number of months to "break even" before you start to fully realize the savings. Anything under 2 years usually makes sense. (The break even for a no closing cost loan is zero months.) "When to buy?" or "When will the housing market hit bottom?" are common questions I get. The key here is timeline versus tightening credit guidelines as well as the low rate considerations. First, because we are probably at minimum 2 years from exhausting all the foreclosure inventory, houses probably won't start to appreciate for another 2 years. (It takes 18 months in Minnesota from the time consumers miss their first payment to the time banks take over, clean, list, and resell properties). You want to make sure that you are prepared to stay in a house you buy now for 5 years or more. Credit tightening should continue for about 2 years as well. So if you are on the border of qualifying right now you may want to move quickly. Finally, rates are very low and at some point probably will go up and stay that way for awhile. Geographically, the Minnesota housing market appears stronger than most. We were #1 on many lists for diversity of the home buying populations, rate of annual decline of depreciation, and sales numbers. This should continue as long as our resident companies stay competitive and the metro area continues the influx of population growth from rural areas in the five state region. Mortgage rates have benefitted from the poor economy, the interest in our debt from foreign markets, and the subsidization of bond purchases by the Obama Administration. All driving bond yields down and with it the rates on short and long term mortgage money. The latter of these is set to end on March 31st of this year. This date is a deadline for many savvy real estate buyers who want to lock in before that time. Inflation and an eventual economic rebound will also send rates higher. To mitigate this, banks may reduce their profit margins this year to keep rates low even if bond yields start to increase. They have some wiggle room because those banks left standing having been reaping high profits from both charging more for each step in the loan process and setting rates about three times the pre-collapse average compared to bond yields. They also benefitted from the TARP zero interest funds loaned to them. The key here is can they continue to "write off" their troubled assets to get these off their books and show profits to shareholders and if the new proposed government tax on large lenders doesn't eat into their profit margins. As I write this rates continue to rival their lowest levels in history. There are two 100% financing options left available to Minnesota consumers. One is the VA home loan and other is the little known USDA rural housing loan. Only available to rural (non-twin cities) residents, the rural housing loan also comes with the stipulation that the person doing this loans' housing situation is improved, along with some other stringent guidelines. The first time homebuyer $8,000 tax credit has spurred purchase levels and is set to end April 30th. Please note that ANY purchaser of a home can get a $6,500 tax credit up until this deadline. Please check with your tax professional for the details. As with any of these deadlines, they could and may be extended. The key to getting a low rate and a great deal on a house is getting through the mortgage process, which right now is a bit of adventure. Happy hunting...

"My clients have been very pleased with the service Todd has provided, especially with explaining options and providing guidance and insight."

Nate Wenner, CPA, PFS, CFP^?, CIMA^? Principal, Regional Director

Wipfli Hewins Investment Advisors

2009 President-MN Financial Planning Association

"I've known Todd for several years now as part of an industry organization. His depth of knowledge and professional approach has led me to use him for my mortgage as well as refer my clients to. My firsthand experience with Todd and his organization has given me confidence to refer clients knowing that they will be treated to high quality service and very competitive rates."

Shawn Jacobson, CFP? Vice President

Legacy Financial Advisors

2008 President--MN Financial Planning Association

"Todd did a super job at exploring all the possibilities for our personal home mortgage loan. When it seemed like all avenues we were on just lead to a dead end, Todd was persistent, and found us something we could work with!"

Alicia C CEO

"I just wanted to take a minute and thank you for referring me to Todd; we closed today, and had a completely problem-free experience with Todd and Stephani. Both of them were super-responsive to my calls and emails, and everything was done quickly, efficiently, and professionally."

Scott R Maple Grove Homeowner

"I have known Todd for over five years now and worked with him on many transactions. He is very knowledgeable, resourceful, and helpful when dealing with people on a case by case basis. In every case, he has succeeded both the clients and my expectations. I will continue to refer my clients to Todd to help them in the loan process."

Grant Rick, Edina Realty

There are a number of options to finance that new home--even if the market is slow and listing times are long...

First, get a team of experts on your side.  Interview a few realtors and see which ones have the best strategy for selling your existing home.  Ask them how long their personal listing times are, how they plan to market your home, and what exclusive listings techniques they employ to stand out in an overcrowded market.  A good realtor will be straight forward with you about freshening up your homes interior and exterior, as well as what price you should list at and ultimately hope to get for your home.

Second, consider some form of refinancing of your existing home to put down money towards your new purchase.  Traditionally, a bridge loan, not tied to your house, but to other collateral (credit, assets, banker relations) was common to use.  But, increasingly, these have become outdated and are very expensive in terms of carrying high interest rates and fees.  A better way is to do a cash out fixed rate or home equity line refinance on your existing property.  You can often use the equity in your current home and the fact that it is your defacto primary residence to your advantage, often at little or no cost to you with much better interest rates than a bridge loan.

Finally, the key is to give your self enough time to do this!  Add to your team of experts a good accountant and financial planner to make sure...

• you are buying at the right time
• your new purchase fits your overall financial plan
• you take advantage of every tax break you can
• you really feel like you can handle the stress of moving into a new house while fixing up and selling your new one
• you have the time to get the first loan done before getting emotionally tied to a new home

Remember, if you have to rush a new home purchase, you may lose leverage in bartering a good price for your new home, not adequately presenting your old one, and possibly making mistakes with your finances that could cost you money and leaving you feeling stressed when you should be elated that you have taken advantage of a down market.

Bottom line, get to mortgage broker first, and involve the other professionals on your team before you go house shopping.  You will be glad you did.

Many people ask me about internet shopping for a loan. My problem with this has always been that...

1) those low rates are usually deceptively advertised "$200,000 loan with a monthly payment $399" Read--Option ARM

2)Their loan officers are $10 an hour employees with often little experience in the industry or with loans that don't fit into a neat box and

3)their offices are not local, where to you go for remediation if you are unhappy?

A client and good friend of mine needed to refinance his existing home. I invited him to go to an internet site, the one with tree in the name, and get four mortgage quotes. He did and emailed the results to me. The quotes we're semi-competitive until I read the fine print. The closing cost estimates didn't include title and the computer didn't catch that this was a cash out transaction. Translation--closing costs on any of the terms quoted on this $200k deal $6,300. I went shopping on the wholesale side and found that I could match any of the quoted rates. And get this, (and I was amazed myself), for $1,000 closing costs. Folks, I know the "when banks compete, you win" motto seems comforting, but I believe it is just another way to present a united front of costs and rates that are too high. If you need a loan, shop the internet, and then run the figures by me. You will be glad you did.

Reverse mortgages (also called home equity conversion loans) enable elderly homeowners to tap into their equity without selling their home. The lender pays you money based on the equity you've accrued in your home; you receive a lump sum, a monthly payment or a line of credit. Repayment is not necessary until the borrower sells the property, moves into a retirement community or passes away. When you sell your home or no longer use it as your primary residence, you or your estate must repay the cash you received from the reverse mortgage plus interest and other finance charges to the lender.

Most reverse mortgages require you be at least 62 years of age, have a low or zero balance owed against your home and maintain the property as your principal residence.

Reverse mortgages are ideal for homeowners who are retired or no longer working and need to supplement their income. Interest rates can be fixed or adjustable and the money is nontaxable and does not interfere with Social Security or Medicare benefits. Your lender cannot take property away if you outlive your loan nor can you be forced to sell your home to pay off your loan even if the loan balance grows to exceed property value.

The Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission (FTC), is designed to promote accuracy and ensure the privacy of the information used in consumer reports. Under the FCRA, both the credit reporting agency (CRA) and the organization that provided the information to the CRA (usually the credit card company) must correct any errors or incomplete information in your report.

If you do encounter a mistake on your credit report, several steps need to be taken to correct the matter:

1. The first thing to do is get a copy of your credit report from each of the three major CRAs: Equifax, http://www.equifax.com; Experian, http://www.experian.com; and TransUnion, http://www.tuc.com.

2 In a written letter, tell the CRA what information you believe to be inaccurate. Include copies (not originals) of documents that support your position. Provide your complete name and address, identify each item in your report you dispute, and request deletion or correction. Be sure to make copies of your dispute letter and enclosures.

3. Send your letter by certified mail, return receipt requested, so you can document what the CRA received.

4. The FCRA mandates that all CRAs reinvestigate the items in question — usually within 30 days — unless they consider your dispute frivolous. They also must forward all relevant data you provide about the dispute to the credit card company. After the credit card company receives notice of a dispute from the CRA, it must investigate, review all relevant information and report the results to the CRA.

5. If the disputed information is found to be inaccurate, the credit card company must notify all nationwide CRAs so they can correct this information in your file. Disputed information that cannot be verified must be deleted from your file.

6. When the reinvestigation is complete, the CRA must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the CRA cannot put the disputed information back in your file unless the credit card company verifies its accuracy and completeness, and the CRA gives you a written notice that includes the name, address, and phone number of the credit card company.

7. In addition to the CRA, you should also write to the credit card company about the error. Again, include copies of documents that support your dispute. If you are correct — meaning the information you disputed is found inaccurate — the credit card company cannot use it again. Further, at your request, the CRA must send notices of corrections to anyone who received your report in the past six months.

After I put in an application for credit with a lender, including pulling his credit report, my client called me the next day and said that "Heather" left a message on his voicemail that said she was calling about his "loan details" and wanted to make sure he was getting the best possible deal.  After calling him back and getting a little more info, we discovered that Heather 1) doesn't work for me nor the lender in question and 2) Heather was deceptively trying to sound like she was affiliated with my clients current loan request, get my client on the phone, get his information, and try to sell him something different.  Uncool.  I apoligized for the confusion and ultimately my industry.  We did talk about how this current debate goes much deeper, including the credit reporting agencies who sell inquiry information to other mortgage lenders (telemarketing sweatshops) under the guise of consumers right to weigh different loan offers and the federal governments inability to stop this practice.

My clients come to me to shop around, knowing each one of their financial pictures are different, and trusting I will give them many practical and creative solutions at a fair price, with the best rates around.  Getting a mortgage--read:uncovering your financials and credit--is stressful enough without trying to decipher whether the Heathers of the world are actually working with the lender and broker you know.   

1. Call 1-888-5-OPTOUT (1-888-567-8688) or visit www.optoutprescreen.com. When you call this toll-free number or visit the website, you will be asked to provide certain personal information, including your home telephone number, name, Social Security number, and date of birth. The information you provide is confidential, and will be used only to process your request to opt out. Don’t enter any personal information until you have checked for indicators that the site is secure – a lock icon on your browser or a web address that begins https.
   
   Opting out of prescreened offers does not affect your ability to apply for credit or to get it. Your opt out request will be processed within five days, but it may take up to 60 days before the prescreened offers stop coming. If you have a joint mortgage, both parties need to opt out to stop the prescreened offers. If or when you want to opt back in, use the same telephone number or website.
   
   
2. Put your phone number on the federal government’s National Do Not Call Registry to reduce the telemarketing calls you get at home. To register your phone number or to get information about the registry, visit www.donotcall.gov, or call 1-888-382-1222 from the phone number you want to register. You will get fewer telemarketing calls within 31 days of registering your number. Your number stays on the registry for five years, until it is disconnected, or until you take it off the registry.
   
   That said, the FTC wants you to know that many companies use other tools to identify marketing prospects, and that the Do Not Call Registry won’t shield you from all telemarket­ers – for example, those with which you have a business relationship. Even if you opt out of prescreened offers and put your number on the National Do Not Call Registry, you can expect some unsolicited offers.

For more information about the Fair Credit Reporting Act, the law that spells out the terms under which companies can check credit reports, visit www.ftc.gov/credit.

The FTC works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

Note--I was proud to have this article featured in the August 2007 Financial Planning Association of Minnesota newsletter... 

Some mortgage lenders and brokers are falling over each other to advertise No Fee Mortgages or No Closing Cost mortgages.  I've even heard unscrupulous advertisements stating that "paying any closing costs" during a mortgage transaction is "too much."  These ads, in effect, say lenders, appraisers, and title companies will work for free if you just ask them to.  (Not to mention having the government waive their various real estate transactional taxes!)

This is, of course, just marketing designed to get the consumer in the door to get them emotionally tied to buying a new home or the cash out that can come from refinancing.  To get to the bottom of this, let's examine three phrases which are commonly thrown around in mortgage advertising and often confuse the public:

• No Cash to Close-this just means that any costs associated with the loan are financed into the new mortgage (no adjustment to rate)
• No Fee Mortgage-this often means the lender waives its upfront fees, but has the consumer pay for the appraisal, title, and transactional taxes (slightly higher rate)
• True No Closing Costs-the lender pays all costs associated with the transaction (significantly higher rate)

These are all legitimate ways to structure the financing of a real estate transaction. The first is quite commonly done.  The only drawback in doing so is that the consumer will be charged interest on those costs over the life of the loan.  The second two involve having the lender increase the rate offered to the consumer to make the loan more profitable for sale on the secondary market. This profit then can pay for some or all of real estate transactional fees for the consumer.  Which combination is best?  Of course, the one that costs the consumer the least amount of money to secure the house and the loan!

First, let's break down the costs of a real estate transaction into costs that won't change and costs that are variable.  The costs that won't change are appraisal, title fees, transactional taxes, and deposit of initial funds into the hazard insurance/property tax escrow account.  These should be very similar with each bid you get.  The two things that CAN vary significantly are the rate and here is the key to this--fees to the broker/lender.  They are called a number of different things--application fee, broker fee, origination fee, discount points, etc.  Sort out the third party fees and total the fees to the lender.  These give you the cost of getting the rate.

Let's remember, rates and upfront lender fees on a real estate transaction have an inverse relationship.  When one goes up, the other goes down.  So, what you and your clients have to decide is which combination of rates and fees make sense to keep both the cost of the transaction and the cost of holding the loan as low as possible.  This relates to timeline.  How long will your or your client hold the loan.

And here lies the guessing game.  How long are you or your clients going to hold this loan?  Remember--life happens--divorce, job transfer, better schools district.  The fact is, most consumers are moving more--about every 7 years.  The average life of a loan is about half of that!  However, each consumer's situation is different and the lender's profit is typically unaffected by each of these scenarios.

Take the transactional costs associated with each mortgage offer and divide it by the cost savings monthly of taking the lower rate.  This will give you the number of months to break even in each case.  If you or your client is planning to hold the loan longer than the break even point, they will be then saving money monthly after that point.

The other thing to consider her is products' availability and lender's risk.  These tie to the fine print you see on the bottom of all mortgage ads.  These ads again offer quite a low interest rate for consumers that fit neatly into a box with all positive lending criteria that decrease a lender's risk of doing a home loan.  Positive lending criteria include low loan to (house) value, good credit/assets, measurable job history and income.  If you or your clients don't fit neatly into that box, it helps to know a good mortgage consultant who can think ahead through the underwriting process and make sure the rate quoted at the start of the process matches the liability level of the overall file.  This insures no surprises during the verification process and final rate offer from the lender.  As well, a good mortgage consultant will always present you or your clients with the best way to structure their financing cost based upon the consumers various lending criteria (income/assets/credit/equity position) and estimated timeline for how long they plan to hold the loan.

Generally speaking, improvements that increase the market value of a property will increase the appraiser's estimated market value.  The following are typical improvement that will increase the estimated value of your property:

• Added rooms or garages
• Substantial moderization of kitchens or baths
• Central air conditioning
• Fireplaces
• Decks
• Extensive remodeling

New paint, professionally done neutral decor, and landscaping are often cited as ways to increase your listing price if you are selling.  I've seen it happen.  Although it may not effect the appraised price of your home, it doesn't hurt. 

Remember, if you are remodeling or fixing up the house for resale, keep things neutral.  This may insure that a greater number of people will like the new rooms, etc.  If you plan on staying for awhile, go ahead and paint that bathroom red!  

Some improvements don't necessarily add to your homes value.  New water heater, roof, porches or steps, plumbing or electrical.  Homes are supposed to have these in working order.  Again, however, a combination of these all done at once can be attractive to a buyer and can improve the price you get for a home you are selling.