Points of Interest

After doing some intense research over the past several weeks and writing about college planning I've become more aware of the issue and the problem it must be posing for any number of American families.

Today I heard a McDonald's radio commercial offering free info for college financing.  That's right, the golden arches super sizing your tuition capabilities.  Obviously, their research has shown them the concern that a great deal of their customers are having regarding rising tuition costs for higher education.

Thinking of refinancing?  Perhaps you are considering this now that:  1) Summer is over and it’s time to get down to business;  2.)  You heard the Federal Reserve reduced rates;  or 3.)  You have some debts that you would like to consolidate into tax deductible payments;  or 4.)  You have an adjustable rate mortgage (ARM), an

ARM THAT IS BROKEN,

a ticking time bomb ready to go off with the next interest adjustment.

It’s always a good time to refi if you can save money.  And when we say save, we don’t just mean reducing or spreading your debt out over more years or eating into your existing equity.  We would not only like you to actually reduce your interest payments but reduce your cash outlay after taxes.

Regardless of why refinancing works for you now, there is one item which will be of genuine concern to your lender: the

APPRAISAL.

And with the market being what it is, we are hearing from appraisers that values for some homes that were bought in the last few years are having trouble appraising.

Don’t let this happen to you.  Get your home evaluated for value now!  Do this before the coming winter market further undermines the possibility of getting the value you need to get rid of your ARM or consolidate your debt.

All you homeowners with a home equity line of credit (HELOC) got a present yesterday in the form of a ½% drop in your interest rate.  That’s good news.  And I’m sure that it will be appreciated by everyone who will benefit from that rate reduction.  Send a thank you note to Ben Bernanke and company care of the Federal Reserve.

It was apparent from the size of the rate cut that the Fed felt the economy and financial markets needed a boost to restore confidence.  But as suggested by Allison Bisbey Colter, Personal Finance Editor from TheStreet.com, it may prove to be no hope for homeowners who need to refinance their mortgages.

And therein is a paradox.  The Fed lowers short-term rates and long term rates rise in response.  I have noted this observation in the past much to the confusion of customers and professionals alike.  It’s a popular misconception that when the Fed lowers rates that mortgage rates will always follow the path down.

But as Keith Gumbinger at HSH Associates points out in the article The Fed’s Cut Won’t Save Struggling Homeowners, "fixed-rate mortgages have been known to rise, despite Fed cuts, particularly if the inflation environment seems troublesome".  And that seems to be what’s happening today.

Even with the Consumer Price Index falling 0.1% in August there is considerable concern with inflation.  Oil is reaching new highs above $82/barrel, other nations are diversifying their holdings away from the US Dollar as it keeps dropping in value relative to other currencies.  A cheaper dollar means that imported goods (oil) are relatively more expensive (inflation).  Inflation reduces the value of long maturity bonds and inversely increases the yield.  Mortgages are more closely pegged to 10 year Treasury yields.

If you are considering refinancing into a new mortgage now may be the time.  You may want to at least consider starting the process and seeing where rates go over the next week.  At the least, you should speak with a professional mortgage counselor to determine your best course of action.

Creative financing does not involve fraud.   It isn’t drenched in deception.  It’s not used to fool the buyer, seller nor lender.  Too often in the everyday world of financing from Northern Virginia around the beltway to Maryland and south to sunny Florida fraud does take the place of being truly creative.  Here’s an excellent definition for creative financing:

“Creative financing is when a loan officer puts to use his vast base of product knowledge and his solid understanding of the guidelines.  A good “creative” loan officer is one who knows how to take a borrower’s uncommon financial picture and find a mortgage loan that meets her needs.  Put a square peg into a round hole; not by force or deception, but with skill and finesse.  Creative financing does not involve the withholding or the misrepresentation of information.  Especially information that is pertinent to the lender making the loan.”

This quote is from Jerome Mayne in TheNicheReport.  Mr Mayne is the founder and President of Fraudcon Inc., a fraud deterrent company.  He is also an ex-mortgage convicted felon.  He has served time in prison.  He knows fraud and the consequences firsthand.

I can't recall a better description of what creative financing truly is.

Seeing all sorts of interesting news of note:

Stockton, CA, home to many of the former subprime mortgage lenders, has been handed the unfortunate distinction of having the highest foreclosure rate of any city in the nation.  Apparently, one out of every 27 households is experiencing this phenomenon.

Oil is hitting new highs above $80 per barrel.

Gorillas are now “critically endangered” and Lamborghini has a car they will sell you for $1.4 million.

Greenspan finally concedes that he didn’t foresee that an explosion of mortgages to people with questionable credit histories could pose a danger to the economy.

Washington Mutual will close two divisions and cut 1,000 jobs.  A knowledgeable and dear friend is one who gets the ax.

Interest rates on Treasuries are creeping back up.

The dollar is sinking to new lows against other currencies.

And to top it all off, the Kilo prototype is mysteriously losing weight. Not to worry.  Memories of physic’s classes remind me that the kilogram is a measure of mass and not weight.

If one weren’t the slightest bit optimistic, you might consider it was the beginning of the abyss.  The press is now giving more time to discussions of recession.  They say it is not a question of when but for how long and deep. But there are promising signs on the horizon:

Countrywide gets $12 Billion in additional secured borrowing power through new or existing credit facilities.

Bill Gross, the “bond king” of finance and his company, PIMCO, will start a distressed-debt fund.  Someone is seeing value in those beaten down mortgage securities.

YOU KNOW YOU ARE LIVING IN 2007 when...

1. You accidentally enter your PIN on the microwave.

2. You haven't played solitaire with real cards in years.

3. You have a list of 15 phone numbers to reach your family of three.

4. You e-mail the person who works at the desk next to you.

5. Your reason for not staying in touch with friends and family is that they don't have e-mail addresses.

6. You pull up in your own driveway and use your cell phone to see if anyone is home to help you carry in the groceries.

7. Every commercial on television has a web site at the bottom of the screen.

8. Leaving the house without your cell phone, which you didn't even have the first 20, 30 or 40 years of your life, is now a cause for panic and you turn around to go get it.

10. You get up in the morning and go on line before getting your coffee.

11. You start tilting your head sideways to smile. : )

12. You're reading this and nodding and laughing.

13. Even worse, you know exactly to whom you are going to forward this list.

14. You are too busy to notice there was no #9 on this list.

15. You actually scrolled back up to check that there wasn't a #9 on this list.

AND NOW WE ARE LAUGHING at ourselves.

Next year, our family will have our oldest child enroll in a college or university.  As much as my wife and I have looked forward to this and will cherish the success in preparing our daughter for this next step, we do so with some trepidation.  College tuition costs are skyrocketing!

"Tuition is out of control," says Robert Dickeson, senior vice president of Lumina Foundation for Education.  Nationwide, college tuition typically increases much faster than general inflation.  The two biggest questions on my mind right now are, "How much will it cost?" and "How will I pay for it?"

There will be direct and indirect costs.  Direct costs are composed of tuition and fees, room and board.  These are fixed costs that the family is billed for by the college. Then there are the indirect costs or the “unknowables”.  They include books, supplies and travel as well as personal expenses such as laundry and any off campus food and entertainment.  For the 2006-2007 school year the national average for personal expenses at a four year on-campus private college is estimated to be $1,277.

Going to college will be one of the most exciting and challenging times of our child's life.  Before our kids pack their bags and ipods, it is essential that we spend time with them thinking about what they want out of their college experience and what environment would foster their growth the most.  The key is to find the college with the best fit for them.  The happier they are at the college they choose, the more likely they are to succeed and complete their degree in the shortest amount of time.

I am delving deeply into the options and learning much quickly.  It is my hope to share our experiences, both good and bad with you in future columns.  We are considering conducting a workshop once we have accumulated the necessary knowledge so that parents of future college attendees can benefit from both our mistakes and good fortune.

It is important for borrowers and realtors to comprehend how a conforming mortgage loan differs from a nonconforming jumbo mortgage.  In the current environment, this could never be truer.

The difference in rates between the two was typically anywhere from ¼% to ½% with the jumbo loans being the higher of the two.  Today, that difference has widened to as much as 1.75% due to the illiquid nature of the jumbo secondary market.

The conforming loan limit is $417,000.  That is the maximum loan amount that Fannie Mae or Freddie Mac will buy from a lender in the secondary market.  Anything above that is a jumbo loan.

If the borrower has a sizable down payment of 20% to 25% then they can get a property with a sale price in the $500’s using the $417,000 as their first and only trust.  But what if the borrower doesn’t have that kind of money for their initial investment?  What can a buyer and their realtor do if they can’t find anything suitable in that price range?  Are they limited to a sales price of $417,000 with a zero down payment?  If they want to purchase a higher priced home with mortgages above $417,000 do they have to pay the higher jumbo rate?

Not necessarily!  We have been successful in using an 80/20 or 75/25 program and running the loan request through Fannie Mae’s Desktop Originator (DO) or Desktop Underwriter (DU) automated underwriting systems (AUS) and getting Approve/Eligible findings.

For instance, we have a married couple who are transferring here from Jacksonville, Florida, and have not been able to sell their home.  They do not want to tap their savings for their new home purchase.  They have superior credit scores and salaried positions with a major employer.  And they understand that now may be a great time to pick up some else’s problem at a good price.  Their realtor was concerned that they were not going to find anything in the low $400s that would be similar in size to what they had in Florida.

We have obtained Approve/Eligible findings for a purchase of up $556,000 with a 75% first trust of $417,000 and a second trust of $139,000 for the remaining 25% of the price.  In addition, the buyers are also eligible to negotiate a closing cost credit from the sellers.  The only restriction is that the buyers have to put $500 of their own funds into the transaction which is more than reasonable.  But that’s it - Less than a tenth of a percent of the selling price!