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Originally Published at The Motley Fool


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The Formula to Guarantee Failure (120% LTV Refi)
[X-posted at METAR]

Simple... be a saviour to the weakest links!

120% LTV bailout financing, taxpayer guaranteed!

http://www.mortgagenewsdaily.com/5122008_Fannie_Mae_Aid.asp


Under the new rules Fannie will refinance mortgages at up to 120 percent loan to value and the program appears to be limited to loans that are paid to date and that Fannie either owns or insures.

Reward the irresponsible,
Penalize the mature & responsible,
Push away those ready to step in at realistic market values,
Prevent natural healing & recovery for as long as possible...

Hmmm... sounds like government at its best!

Dave Donhoff
Leverage Planner

Originally Published at The Motley Fool


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Interest rate trends generally run in very long cycles.

Back to truth here, and the facts are that we are still in very favorable (and increasingly so) interest rate trends. Further, for technical reasons, the dropping trend is likely to flatten out & simply remain low for a very long time before it finally retraces above it's resistance levels... some foresightful analysts suggest an expectation of longterm mortgage rates remaining below 7% for more than 20 years forward.


That is all fine, but paying down your mortgage generates a guaranteed return.

A return is something you can bank and then spend, which paying down a mortgage does neither.

It DOES generate a savings, which is certainly a benefit... but it not a 'return' by the use of the English language.


However, your financial exposure to real estate is the same whether you have debt on the home or not.

Not entirely truthful. Liquidity is safety (all else equal,) and less liquidity increases risk and vulnerability. Liquidity may come at a cost of leverage, but TANSTAAFL... everything has its tradeoffs, including responsible risk avoidance.


If [your home value] rises 10K you made 10K, and vice versa.

"Made" (or the reverse) on paper, perhaps... but whether you have seperated your equity from the vulnerable real estate asset or not has an IMMEDIATE effect on your cash position.

The realities of people with paper-wealth going bankrupt for lack of liquidity far far surpass those of people upside-down on paper, but with strong liquidity, who cannot weather the storms & cycles.


Borrowing against your home to buy equities is a very risky strategy, only appropriate for the most experienced and risk tolerant investors.

To be responsible and balanced, you must equally acknowledge that UNDER-leveraging your real estate (at any time, regardless of whether at initial purchase, or later as appreciation creates an imblancing of portfolio alotment) is NO LESS RISKY than over-leveraging.

"Proper-Fit" is the prudent position to take, and "leverage avoidance" is as irresponsible as "debt consumptive."

And borrowing to buy stocks in the name of diversification is very foolish, and I sincerely doubt you will see any competent advisor suggest that.

FAILING to separate your equity from an over-allotment of any one asset class is foolish. I trust you are wise enough to come to this realization.

Again, "proper fit" portfolio balancing is the key to safety... and, not ironically, is also frequently the optimization of growth.

Cheers,
Dave Donhoff
Leverage Planner

Well, it's now two months later, and rates seem to keep going up

They do???? What rates are you watching, and what timeframe are you comparing them against?

By what I am seeing they are going a whole lot of nowhere in any big hurry... wiggling up a little, wiggling back down a little.


so I'm getting nervous again - any change in advice?

Yoga & meditation... great stress reducers!


What's the consensus opinion about where the rates will be this summer - higher or lower than now?

"Consensus" won't do you any good... in times of volatility fear reigns supreme, and when most people are uncertain and afraid the prevalent sentiment will be that "danger is imminent."

That sentiment will be the "consensus" and it will be completely ungrounded and irrational.

There is always SOME degree of possibility for a market reversal from the still-unbroken downtrend in mortgage rates... it has to happen eventually... HOWEVER, the statistical odds overall are low (trends, once established, tend to stay in place approximately 3/4 of the market time,) and the longterm technicals suggest a likelihood of a much further extended period of longterm rates staying below 7%.

Cheers,
Dave Donhoff
Leverage Planner

Any ideas - thinking about a short-term I/O just until the old house sells, then a conforming jumbo.

I wouldn't recommend gambling on doing multiple refinancing in quick succession if avoidable... especially in the jumbo world right now.

Rates are low in general, and despite "scary volatility" are likely to remain and even stretch a bit lower in the upcoming several years... but the timing of those volatile whoopdiedo's can play significant havoc on you if you get yourself tied into a timing strategy that doesn't put patience on your side.

I/O vs Amortization is a balance-sheet financial planning question... not something that can be responsibly advised based on simply the mortgage itself, alone.

If you are at a position in your financial life where you need to pull back from growth, and move into a more defensive position, then amortization marches in that direction.

If you are a responsible money/budget manager, and at a life stage where growth is more important, amortization is not your friend.

Hope that's helpful.
Dave Donhoff
Leverage Planner

The house will need some minor work, so we're wondering how we can get cash back into our hands after closing to do the work.
One idea is to ask for more than the standard three percent from the seller. Is this a reasonable thing to do?

Might be reasonable to you... but it won't fit the financing guidelines, so you wouldn't be able to do that AND get a mortgage from a bank.


We might even be willing to pay $320k for the house, if they'd offer up something like...I don't know...maybe six percent towards our closing costs? Does this kind of thing ever happen?

Yes, but it depends on your loan program. If you are willing to take a non-prime mortgage, you can have a 6% seller contribution toward closing costs (but only closing costs, and no cash-in-hand at closing.)


The other idea is to offer less than $300k (maybe $280k) and take out a home equity loan shortly after closing.

If you are in a declining market, you are not going to find a HELOC to squeeze back out the 10% down... else you could have just qualified for it on the purchase financing in the first place.


Would anyone be able to recommend or argue against these ideas? Are there other options that we're just not considering?

You COULD try to use renovation financing (its basically a light verson of construction financing,) but the simplest option is to offer the price the seller will accept conditional on THEIR renovation to your desired standards. You will probably have to put up the renovation amount of funds as non-refundable earnest money up front as the sellers are unlikely to be excited about spending their own cash on a deal where the buyer could walk away & leave them with the tab. The good news is that the earnest funds you put up WILL be applied toward (or may perhaps be your entire) down payment.

ALTERNATIVELY, go find a home that you can afford to buy and still have enough cash left over to do any renovations you want after closing.

Luck!
Dave Donhoff
Strategic Equity & Leverage Planner

This is from a conversation with an "Newby Investor Mentorship" client;

(Names changed)

--------------------------------------------------------------------------------
Andy has hired us for Investor Coaching and Mentorship as he wants to reach financial freedom using real estate, yet he is still renting his home, so his first acquisition will be his personal residence. He is having frustrations getting his desires for an awesome investment deal to mesh with his wife's desire for a nice, livable home;

Hi Dave,
Just an FYI I think. Please feel free to offer any advice (I look forward to it).

Harbor Place rejected our $240K offer (and in fact withdrew their $242K offer and now are offering us the same home for $249K).

Linda is discouraged more than I am and suggested we hire an agent now since she's tired of browsing for houses online.

I know your position but still wanted to ask if you had any suggestions.
I appreciate your input and thank you for that,
Andy



--------------------------------------------------------------------------------
From: David Donhoff
Sent: Thursday, April 03, 2008 10:05 AM
Subject: Andy- The importance of baby-steps, and Momma's nest


Hi Andy,
You are discovering a very typical and important issue;

Culturally, females typically want a "nest" more (at least initially) than they are concerned about economics.
AFTER they are provided with their "nest" then some of them are more interested in economics.
(Yes... this is a generality and a stereotype of women... but generalities exist because of likeliness.)

The only major positive difference an agent will make is to be a wedge to loosen you up in your pricing demands, versus your space/quality demands. You can swallow hard and decide this on your own without an agent if you are willing to.

If you are ultimately unwilling to, an agent will only create more frustration for you both (and Linda's frustration will come back to haunt you in far more ways than just economic ;~) In American blues music, there is a saying; "When momma ain't happy, ain't NOBODY happy!"

You are learning a LOT about real estate investing... absorb your experiences well (even the negative pressures,) because these are the issues you will be negotiating with and against when you are seeking to acquire investment homes, and when you are seeking to attract and secure the highest quality, top-dollar tenant/buyers.

HOWEVER... I suggest that your top order of priority RIGHT NOW is;
Relax your affordability standards slightly, AND help Linda bring her quality standards down just a little bit... promise her this first home is JUST your "first home" and not the home you will retire in... maybe not even the home you'll have your kids in (or else tell her you'll be in a position to "move up" to more space if/when there's a 2nd child on its way, or before the kids are ready for grammar school.) It is the "stepping stone" to your future dream home.

IN VERY SHORT;
TURN OFF you "investor's brain" (or at least mute it from your consciousness,) and focus 1st on being "the hunter/provider" for Momma. (Yes.... an "investor" IS a "hunter/provider"... but you get the idea. Adopt the attitude of "HOME first... INVESTMENTS later.")

ULTIMATELY, your personal residence will also be serving as the basis for your "Private Investment Bank of Andy" anyway... so its not like you're wasting your efforts. You can't get the balance sheet started until you have a home... and you won't have ANY home if you can't have a happy wife ;~)

SO... acquiring your "Happy Nest" IS still part of the master "financial independence plan"... even if you start off with a little monthly payment more than you originally hoped.

Hope that all makes sense. Us guys... sometimes we have to learn the hard way.
David Donhoff
Financial Advisor
Certified Mortgage Planner
Private Real Estate Banker/Investor
Licensed Life, Health & Annuity Agent
David@NoBullFinancial.com
www.NoBullFinancial.com
425-652-1001 Cell
425-223-4520 Desk
888-662-8551 Toll Free
425-822-5305 Secure Fax

Originally Published at The Motley Fool


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If I use that 60k for a down payment my mortgage will be 240k vs 300k. That is a pretty significant difference in terms of pay.

Not really... $60,000, at 5.5% is $275/month.
If you are only in the 18% tax bracket, that's $225.50/month real out-of-pocket.

That $60,000 saved, in a WORST case scenario, could cover that $225.50 differential for over 22 years (!!!)

$300,000 at 5.5% is $1,375/month... $1,703.37 amortized.

$60,000 safety funds retained could cover your full payment for almost a full 3 years (2 years 11 months) were you to slip into some unfinanceable situation.

LADDER the funds into CDs (some earning from 5-6% currently) and you could safely tread water much much longer if you had to.

PAY the money into the bank with a down payment, and you've forfeited all of those safety options (BUT you saved a little bit off interest... basically giving up the insurance benefits of cash.)

Further, keeping your cash equity seperated from your real estate reduces your vulnerability to downcycles and retains your control of the equity, allowing you to put those funds into longterm retirement employment elsewhere.


From what you are implying it would be irresponsible to make any down payment on a house... which just seems counter intuitive.

From strictly a financial perspective, keeping your cash seperated from your illiquid asset equity (real estate in this case) is the more conservative, safer option. "Irresponsible" is a different issue.

If you CAN finance your real estate 100% at costs (including avoiding mortgage insurance considerations) that are competitive in the big picture of your safety funds, and alternative interest/returns capabilities, then doing so can be very effective for your safety and most-direct retirement approach.

Voluntarily paying more cash into your illiquid real estate than the banks require, and/or your alternative investments support, is generally counter-productive to your best interests.

"COUNTERINTUTIVE"... yes, indeed... the more you know, and the more you cautiously calculate, the more you'll discover that the general public's "intution" about money tends to keep them poor and enslaved. Nothing should be taken for granted when it comes to money management.

Cheers,
Dave Donhoff
Strategic Equity & Leverage Planner

Originally Published at The Motley Fool


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Pros;
- Emotional negotiating power (sellers are often easily swayed (beyond relevance) by "cash on the barrelhead,")

Cons;
- Risk of overweighing your family portfolio into non-growth 'bond-like' equity too early, significantly retarding retirement safety, security & timing.
- Raising your risk profile for predatory litigation (far more significant when self-employed or an investor,)
- Raising your risk of net worth loss from uninsurable disasters (as in Katrina, et. al.)
- Concentration risks (lack of diversification) if/when real estate softens or dips,

OVERCOMING the "loss of deduction" Con;
- If you buy all-cash, and re-capitalize your equity (refi) prior to 90 days from closing the sale, your total closing costs are treated (for tax deductibility in the year incurred) purposes as "same as a purchase." This beats the daylights out of the tax treatment were it deemed an actual refinance.

With real estate acquisition, leverage interest is a great part of the costs of security.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

Originally Published at The Motley Fool


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How practical is it to buy a house with no money down and not pay closing costs myself? I have money set aside, about 10% of what I would buy, but I prefer to keep this money.

"Practical"??? It is EXTREMELY "practical" I would say (for you, anyway ;~)


Are there any lenders out there that would do this?

It could now be quite difficult to get 100% financing,plus closing costs financed, unless you were working with a loan officer very familiar with such creative structures (plus sellers and a set of agents (both sides) savvy & flexible enough to play their required parts.)

STILL... it IS doable.


I wouldn't even know where to begin to be honest with you. I'd imagine there are some sort of assistance for first time home buyers.

Might be. The only FTHB assistance that is better than a seasoned owner would get are programs that are periodically available from local agencies (such as local county or city development programs.) Check with your state department of financial institutions or real estate for leads on that.

If you're in an approved "rural development" area, the USDA guarantees loan programs to 102% of purchase price, and allows unlimited seller contributions. Check for your area here;
http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp&NavKey=property@11

If you're not in such an area, there is still 100% financing that will allow up to 6% seller contribution toward your allowable closing costs.

Lastly, there are many various excellent creative seller-financing strategies to carry you (and your seller) through a 1-5 year period, during which (if you follow your strategic instructions) you'll create the track record necessary to allow you a streamlined refinance as though you had been an owner the whole time.

BOTTOM LINE; find a good loan pro familiar with the above.

All the best!
Dave Donhoff
Strategic Equity & Mortgage Planner

Originally Published at The Motley Fool


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This lender matched the best rate we had from the other lender, at lower closing costs.

Double check the combined total in all 800# lines on the GFE. Everything below that is meaningless for comparisons between lenders/brokers.

I have to verify what a yield spread premium is, and I will do that now.

Ignore the YSP comments, it would most likely do nothing but confuse you (if it is even disclosed.) Its not money out of your pocket anyway, but money out of the final note buyer's pocket to the originator... (and it could be more, or less, to the Originator between the two sources without making any bottomline difference to you personally anyway.)

Besides... the builder's financing affiliate is almost always most likely to be a table-funded "banker" (basically a broker with a credit line to make your loan at the table, and minutes later "sell" the closed loan off to their host bank... which allows them to legally avoid disclosing to you the "ysp" (or "srp" in this case) they are collecting from the final note buying bank.)

If you really do have a trusting relationship with your broker, I would strongly recommend you have him/her tightly review & compare ALL final numbers. I've personally bought several properties from builders and watched the monkeybusiness their lenders have tried to pull to appear better-priced (even when I told them in advance I am a broker and know their own back-end bank's real wholesale pricing.)

There are only two times a builder's lender can beat your broker;
A) The builder is willing to subsidize their lender, basically losing some money in the process, in order to "keep control away from outsideers" and to avoid the hassles of independent underwriters inspecting their work and holding them to accounts,

AND,
B) You've happened to have chosen a broker that specializes in only a specific niche of business, and therefore doesn't have wholesale providers in the realm where you best qualify.

I've never (not ever, not in my 11 years in the biz, so far,) seen a builder's lender sincerely competitive on their own independent account without the builder taking some of their healthy sales profit from your purchase and tossing it into the lender's mix to make the deal work.

In the end, remember; TANSTAAFL ;~)

Good luck in your new home purchase!!!
Dave Donhoff
Strategic Equity & Mortgage Planner

Originally Published at The Motley Fool


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Ahhh... HEAVENLY!!!

It is the sound of almost HALF of the previous loan officer population in WA state being eliminated!!!!!

http://www.bizjournals.com/seattle/stories/2007/12/31/daily8.html?f=et80&ana=e_du

(ONLY the quality survive!!! My firm's production team has tripled; all licensed, all successful...)

ALL due to WA state's initiative to set standardized testing & licensing requirements, including federal background checks!

More states are poised to follow... and the sewage will continue to be jettisoned!!!

Happy New Year!!!
Dave Donhoff
Strategic Equity & Mortgage Planner

Originally Published at The Motley Fool


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Do you consider this financial action to be a critical one in your life? Some say that a home purchase is the single largest investment most people ever make intheir entire lives. Is that the case for you too?

If so, you may want to be very careful not to get swept into the temptation to treat it like a consumer-product purchase of a commodity. The initial result will be probably 1/4 to 1/2 Million Dollars of leverage commitment up front, and could end up making the difference of multi-millions to your net worth (varying greatly according to how well you manage it) by the time of your retirement.

Shop your professional support (finance, real estate, legal, medical, etc.) via this basic outline;
A) build a growing/shrinking list of "possibles" from any/all sources... family, referrals, advertisements, whatever,
(This list is just 'raw material' that you'll constantly shave down... might be just in your mind, or might be a written list of names... but keep plenty in mind as you proceed,)

B) do some pre-research... Google them (and follow various thread links,) check with the relevant licensing boards,
(Anymore, I'm suspicious of anyone claiming to be a service professional who doesn't have a minimal online profile... it actually takes work/effort to NOT be referenced online anymore.) Obviously a well-developed intentional website says a lot about what you can expect... schlocky sites say something else... and virtually no references tells a tale as well.

After you feel like you are a little less "in the dark" about particular choices;
C) call and/or schedule a "potential client interview" (which universally are almost always gratis, regardless of profession.) During your initial interview, you want to determine if there is a mutual, personal, basis of trust and respect that you experience with the prospective professional. If you DO NOT end up with a sense of trust and respect, absolutely nothing else will matter... you can get promised or "quoted" anything and everything under the sun, but you'll never be quite sure whether its all smoke & mirrors and if you are being guided appropriately.

Too many consumers get scared or self-intimidated when interviewing service professionals, lose track of the important questions, and fall into the default conversations of issue technicalities (beds/baths, interest rate, whatever.) AT FIRST, ALWAYS KEEP IN MIND... you need to really REALLY discover if you can TRUST and RESPECT the person you are getting to know... and if you sense that THEY will trust and respect YOU (because that will indeed determine how you are treated.)

D) As you work through your list, you ought to get more & more comfortable with the process of being in the drivers' seat as the interviewer of the professionals.


Hope that helps!
Dave Donhoff
Strategic Equity & Mortgage Planner

Originally Published at The Motley Fool


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It has been four months since the contract was signed. Do short sales normally take this long,

Usually, yes...

or should we start looking for a different house?

If timing & certainty have importance, than a shortsale wasn't for you in the 1st place... proceed to option B.


But, I'll tell you, we are very ready to walk. We get no explanation, no concessions, no apologies, just wait, wait, wait.

ahhhyup.... par for the course in shortsale negotiations with banks.


No one ever calls us; every week I call our agent and she calls their agent and then something little happens. It seems like if we did not keep pestering our agent, nothing would be happening on this.

A) Agents are rarely trained in shortsale negotiations
B) Most who ARE trained only negotiate passively, as that's the standard method BETWEEN agents,
C) ALL who TRY are frustrated... because the shortsale departments do not respond to traditional negotiations methods.

I cannot believe it is in anyone's interest for us to walk away, but we are not going to sit around forever. How long should we wait before we move on?

If timing & certainty are important enough, then I suggest you "close this chapter" in your mind, and move on.

I always recommend to my buyers that shortsales be exclusively reserved to investors who can afford to be ambivalent with the clustermonkey process.

Good luck in your shopping!!!
Dave Donhoff
Strategic Equity & Mortgage Planner

Originally Published at The Motley Fool


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When calculating DTI, do I need to account for tax deductability of mortgage payments, or penalize myself for the fact that I'm currently taking a standard deduction and my mortgage deduction will thus be smaller than it might be?

No... the DTIs are based on gross pre-tax income and are set up front to factor the costs of taxes and daily living expenses... and that's yet another of the many quibbles wiser financial minds have with the traditional qualification standards... a 38% DTI is a much MUCH tighter daily budgetary fit for someone earning a gross $35,000 than it is for someone earning a gross $350,000... regardless of taxes.

After all... at 38% DTI...

• A $350,000 earner is left with $217,000 "mad money" to spend on food, gas, insurance, braces, etc.


• A $35,000 earner is left with $21,700...


• A $20,000 earner has a whopping $12,400 to spread throughout the economy (woohooo! THat's what... $1,033 PER MONTH! ;~)

And they all qualify exactly the same as far as conforming debt-to-income ratios are concerned.

THEREIN lies a learning; Plan on your finances on own discretionary measurements... NOT according to what the institutions use as packaging & securitizing measurements.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

Originally Published at The Motley Fool


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A few excerpts from a recent Wall Street Journal. (The last sentence, which I've bolded, is the most worrisome.)

The subprime mortgage crisis is poised to get much worse…

Source: http://online.wsj.com/article/SB119586137992302497.html

More than half of the subprime delinquencies and foreclosures this year involved loans that hadn't yet reset, and thus were due to factors such as weak underwriting and falling home prices, according to Rod Dubitsky, an analyst with Credit Suisse.

The majority of subprime ARMs due to reset next year are so-called 2-28 loans, which carry a fixed rate for two years, then adjust annually thereafter…

The number of borrowers facing higher payments isn't growing merely because the amount of loans with resets is higher. Another factor is that those with a looming reset now have a tougher time sidestepping it by refinancing or selling their home…

Falling home prices mean that many borrowers have little or no equity in their home, making it tougher for them to get out from under their loans…

In other words, even though they might be able to make the payments on a refinanced loan, their lack of equity means they don't qualify for those loans.

The projected supply of foreclosed homes is equal to about 45% of existing home sales and could add four months to the supply of existing homes, says Dale Westhoff, a senior managing director at Bear Stearns. This is a "fundamental shift" in the housing supply, says Mr. Westhoff, who believes that home prices will drop further as lenders "mark to market" repossessed homes.

Foreclosed homes typically sell at a discount of 20% to 25% compared to the sale of an owner-occupied home, analysts say. Lenders are eager to unload the properties, and the homes tend to be in poorer condition…

The big concern is a vicious cycle in which foreclosures push down home prices, making it more difficult for borrowers to refinance and causing more defaults and foreclosures. (emphasis mine)