Michael Wolff's Real Estate & Finance Blog

This past weekend I took a few hours to drive around to some open houses in my area, Encino.

I do this for a few reasons:

1. To see what's being sold in my market

2. To meet local Realtors, to let them know I am around and I am available.

3. To see how the listings are presented to the public and other agents

 

I could not believe the first home I went to.  I walked in and was greeted not by an agent and not by the home owner, but by two kids around 6 or 7 years old waiving toys at me.  Their Mother or perhaps babysitter was right behind them.  Conversation went something like this:

 

ME: "Hi, name is Michael Wolff and I am a Mortgage Broker in the area.  Is this your listing?"

HER: "No, I am just sitting here at this open house"

ME: "Are you an agent or do you work for the listing agent?"

HER: "No, I work for the office.  I help with the open house."

 

And that was it.  She had no info about the home, just directed me to the fliers as her son attempted to take me out with some sort of toy truck tied to a rope.  Both kids followed me around attempting to get my attention by throwing something or making noises.  The mother/host/babysitter didn't do anything to stop them.  The home wasnt the nicest in the area and was apparantly staged for showing because on all of the chairs and beds was a BIG sign with the stagers name on it and in bigger letters "DO NOT SIT ON THE FURNITURE".  Seemed as if the stagers weren't even finished as there were mirrors and pictures stacked against each other in the living room.  The home was otherwise clean but the garage had stacked debris and smelled like dead mice.

 

If I were an agent bringing clients, I would have been embarassed.  If I were an unrepresented buyer, I would not of given this home a second thought!

 

 

 

 

 

This brings me to the topic of this post: "What do you do at an Open House?"

 

3 years ago, this open house may have been sufficient.  Perhaps a slot in the front door that read "Insert Offers Here" would have generated some business.  Not today.  The open house is to not only bring in potential buyers for this particular home but also to network with Realtors for future transactions and to start a relationship with uninterested yet unrepresented buyers for other homes.  How about some of my thoughts:

1. If you cannot attend the open house (hopefully because you have other listings and are hosting a different one!) then at least have another agent who is familiar with the home and area present to field any questions from the guests.
2. Hire a home stager that can make the home look like a home, not like a poorly designed and uncomfortable showcase from the Price is Right!
3. Talk to prospects.  Don't try to sell them the home right there but answer all questions and even ask your own.  Get to know them as people, not a sale.
4. Talk to the other agents!  You never know who has big buyer lists and who would love connecting with a reliable listing agent!
5. Don't bring your kids.  We all love them, but if they can't keep quiet coloring off to the side somewhere you might as well have termites playing golf in the kitchen.

 

Am I way off here?  Comments? Thoughts?

 

 

Your Adjustable Mortgage is Going to EXPLODE!

Wait, not so fast!

Don't believe all you hear.  Just because you have an Adjustable Mortgage (ARM, Option ARM, Hybrid ARM, Left ARM, Right ARM of the Law, etc.), DOES NOT necessarily mean you are in serious trouble.  What MAY get you into trouble is if you don't UNDERSTAND what is going to happen to the loan when it DOES adjust!

First, just like Whiskey there are many different types of ARM's out there.  On the surface to the untrained they may all smell the same but they are way different!  Let's outline the different types of Adjustable mortgages.

 

 

Option ARM's

Known Aliases: "1 Month Option Arm", "12 MTA Pay Option ARM," "Pick a Payment Loan", "1-Month MTA", "Cash Flow Option Loan", "Pay Option ARM", "Hybrid Option ARM", "My Broker told me it was a 1% 30 Year Fixed", and more.

All of these loans have their own different tastes but in general the share the same features:

• Minimum Payment due monthly (based on a 1-2% Pay Rate) which is LESS than the Interest actually due on the loan (based on a 5-8%+ Interest Rate!
• Negative Amortization Possible (and most likely!) This means that instead of paying your balance DOWN, it goes UP!
• Adjustable Feature in either the Pay Rate, Interest Rate or Both.
• Recast.  Recast is when due to the negative amortization your principle balance climbs to a pre-determined level (110%-125% of your original loan amount as outlined in your Adjustable Rate Rider, Note or other instrument you signed and had notarized) you no longer had the attractive minimum payment and instead have the full-amortized payment (both Principle and Interest) which could be more than double or even triple what you were used to.
• Pre-Payment Penalties of 0-3 years of roughly 6 months worth of interest payments.
  

These loans first came on the scene in the mid 80's to combat the normal Fixed Rate loans which were in the 9-10% range.  They offered payment caps as opposed to interest rate caps.  Not bad, but unfortunately these loans increased the principle owed on people's mortgages at an alarming rate.  When things did settle, these loans were good for the short term for people looking to own for only 1-3 years or for investors looking for an increase in monthly cash-flow.  Fast-Forward to the early 2000's and these loans become popular for different reasons:

• Buyers could get a home they really couldn't afford.  This was OK to buyers and their trusted advisors because with the minimum payment, it was now affordable to live in a $1m McMansion.
• Values were climbing without an end in sight.  No one worried about rising balances because this figured paled in comparison to appreciation.  Get into a bind? No problem, refinance out of it!
• Investors loved their return on these loans (increased balances due, pre-payment penalties, increasing values, etc) so they in turn paid Lenders and Brokers pretty impressive commissions for selling one of these to a borrower.  If you as a borrower don't understand YSP (Yield Spread Premium also known as Rebate)  and you didn't care about your Interest Rate on these loans just your minimum Pay Rate, your Broker or Loan Officer could have earned as much as 3% or more directly from the Investor in addition to any origination charged to you directly.

 

Short Term Fixed ARMs

These loans generally had a short term period of a fixed rate followed by a long term period of an adjusting rate.  Subprime loans were famous for being fixed in the shortest of terms and known as 2/28's or 3/27's to name a few.  The "2" or "3" mean the loan was fixed, usually at a decent rate, for 2 and 3 years, respectively, and adjustable for the remaining 28 or 27 years.  Subprime loans also further evolved into the 2/38, 2/48 (yes, it existed) and all other sorts of flavors.  Other types of these ARMs were notated as 1/1, 5/1, 10/6 and so on.  The 1st number represents the amount of time the loan was fixed for, (1 year, 5 years, 10 years, etc) and the 2nd number represents the interval of adjustment AFTER the fixed period; a '6' means every 6 months whereas a '1' means every year.  Get the idea?

Some of the most savvy investors opted for the really low rates of the 1/1 ARMs, playing the market.  Other borrowers opted for the 7/1 or longer fixed periods as lower rate alternatives to a 30-year fixed loan.  If you only planned on owning a home for 4-5 years, this made sense.

 

When will my loan adjust?

If you are reading this now (August 8th, 2008) and you have an Option ARM and you have been making only your minimum payments, you most likely need to refinance right away.  If you borrowed 80% the value of your home when you originated the loan, you are most likely up-side down and should talk to your lender about a Loan Modification so you can sleep at night.  If you have been making your interest-only payment or even the fully-amortized payments, your rate may be where market rates are or possibly even better since the indices (see below) have been performing fairly well.

Now, to determine WHEN your Short Term Fixed ARM will adjust you will need to pull out your original loan documents.  It doesn't matter what you remember or what your Loan Officer told you, it's what you signed that matters.  If you cannot find your loan documents don't worry, you can obtain a copy at your County Recorder's Office or even a local Title Company.  What you are looking for is a document (2-5 or so pages) that is entitled "Adjustable Rate Rider" or something to that affect.  Click the image below to zoom in on the sample.

 

 

About half-way down the page is a section numbered 4 entitled "Interest Rate and Monthly Payment Changes".  Click the image below to see a close up.  If you pay attention to the details, you will see there aren't #'s 1-3.  I have no idea why they were missing.  Anyways, you see that 4 (B) is clearly labeled "Change Dates".  Clearly states the date the loan may change and also how often the loan may change, 6 months.  If you notice on the above sample that this particular loan was created April 16th, 2003.  With a Change Date May 1, 2008 and with a potential change every 6 months, this loan is nicknamed a "5/6 ARM".  Get it?

 

 

How is my rate determined when my loan starts to adjust?

When your loan adjusts, it is based on two numbers: a margin and an index.  The margin is fixed for the life of your loan and is outlined in your original loan documents.  It may not say exactly "your margin is ____" but may say something like "... the Note Holder will calculate my new interest rate by adding ____ % to the Current Index". Click on the image just above and you will see in section 4(C) "Calculation of Changes" the exact wording of this particular loan.  Yours should be similar.

The index is the adjustable portion of your loan.  There are many different indices: 12 Month MTA, 11th District Cost of Funds (COFI), COSI, CODI, T-Bill, LIBOR (6 month and 12 month flavors), Prime Rate, etc.  The MTA, COFI, COSI, CODI and T-Bill were popular with the Option ARMs, the LIBOR was popular with the Short Term Fixed ARMs and the Prime Rate is attached to most of your Home Equity Lines of Credit (HELOC) and Credit Cards. Again let's look at the above sample.  The index for this particular loan is outlines in 4(B) "The Index". Indices are generally published in your local newspaper in the Investment or Real Estate sections or available online on about a million different websites. I like to view them here.

When your loan is about to adjust, simply take the margin and add it to the index. That magic number is your new rate! This can be higher, lower or the same as your current rate.

Michael, wait! Is there a limit to how it can change? I mean, what if it’s really, really high?

No need to worry (or maybe you do need to worry), your loan has limits on how high it can go, how low it can go and on every subsequent change (every 6 or 12 months as we discussed) there are other caps. Click the image below zoom in on a sample of the same Adjustable Rate Rider we've been talking about. Section 4(D) states that on the first Change Date, the rate will not be greater than 10.875% nor lower than 2.25%. For this particular loan, a 10.875% is a 5% increase from what this borrower had been paying for 5 years. This could be a shock. But don't worry! The current 6-month LIBOR is at 3.1184 and the margin on this loan is a 2.25. This means the rate has actually decreased to 5.368%!

 

Michael, wait! This is awesome, I understand now but... what happens 6 months from now? This loan says it will adjust every 6 months!

Again, no need to worry. 4(D) also tells us that after this first adjustment, all future adjustments will never be greater than 1% of what the previous rate was at. Also, the life-cap on this loan is 10.875% which means it can never be higher than that, even 20 years from now.

 

I've done my homework, I know my loan will adjust for the worse and I can't afford it. What now?

You have a few options. First and cheapest is a Loan Modification. You contact your current lender and let them know what's going on. Tell them your calculations, tell them you can't afford the new payment and they can possibly help you by either keeping your rate the same or maybe even offering you a lower rate. You can also hire someone with experience to do this for you.

Second option is to refinance into a fixed loan. You can call me (888 989 6533) and I would be more than happy to go over options with you.

What? You owe more than your home is worth?

You can refinance up to 97% the value of your home with an FHA loan and ask your current lender to either forgive the difference OR carry a 2nd Mortgage above and beyond what the home is worth. This is allowed by HUD but good luck getting your current lender to play ball!

More realistically, thanks to the new Housing Bill you can possibly refinance into an FHA loan for 90% of the current value of your home with a few caveats:

• You will pay Mortgage Insurance on your new loan just like every other FHA loan (unless its a 15 year loan under 90% LTV).
• You will share future equity in your home with the Government.
• You will pay increased fees to the Government for these loans.

Note: As of this writing, these new changes to HUD have not yet been implemented and even when they do; it may take some time for Lenders to work this into their systems.

Lastly, if it makes sense for you, you can always sell your home under a short-sale agreement with your current lender.

Summary

I hope that by reading this post you have a better idea as to how your ARM works and that you have the knowledge now to know if you are in trouble or not.  Knowledge is Power.

Michael Wolff

Not sure if this is considered advertising, selling, or what BUT I have tons of materials intended to spark new business for LO's and Realtors. This current CD in particular is an Interview with Dave Jenks, VP of R&D at Keller Williams University focusing on how to get NEW first-time home buyer business. Please read below and click the CD or link to request one. Thank you!

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No matter where I look, all I see and hear are short-sales.  They seem to be the biggest ticket item out there.  I have met with and spoke to many sellers, Loan Officers and Realtors who claim to know all about them but have no idea how the process works or why a short-sale is a better alternative to a foreclosure.  For the seller, a short-sale is better because you are able to buy a new home just 2 years after the short-sale; a foreclosure keeps you renting for at least 5.  For Realtors and Loan Officers a short-sale is the only way to get paid on a transaction.  A short-sale is generally better for the lender as well because it keeps the house occupied with the water and electricity on, saves it from squatters and (generally) keeps the lawn mowed, not to mention they lose a lot less money.

That's all good and fine. I'm sure you can read all about this in 100 other blogs or websites.  But, for the seller's... what happens AFTER the short-sale? What are their options?  Where do they go? Where do they live? How?

Depending on your situation, your previous mortgage and your attitude, your credit may be completely shot or you may just have some blemishes from the previous mortgage.  The most severe credit issues will probably leave you a renter for a short time while those issues are worked out. I hope you saved the money you weren't using for your mortgage because your new landlord will probably require a few months security deposit.  Don't want to be just a renter?  Perhaps a lease-option would work for you.  This topic requires a few posts on its own but can be a great way to get back into the game in no time.  Besides renting or lease-optioning you could live with relatives or friends.   Perhaps they could move in with you BEFORE the short-sale to help make payments?

If you can or can't get the rest of your finances in order, if you file a bankruptcy, if you short-sold 50% less than you bought it for 18 months ago, if you have more collections than open tradlines.... whatever you've been through, a good credit repair company or legal firm could help you get things back in order.  2 years to buy again after a short-sale? Yes... but thats assuming the short-sale remains on your credit. Yes, even the ugliest of credit can be cleaned up legally and efficiently.  Credit reporting guidelines and the 3 bureaus give you the MAXIMIM amount of time items remain on your credit, but whats the MINIMUM?

No matter what you do, a priority should be to get your credit back in line.  Don't wait for it to fix itself because you will be waiting a long time.  The sooner your credit is back to where it was pre-disaster, the sooner you can own a new home.  Perhaps you can buy an exact model match for half the price?  I recommend two credit restoration companies one is slow and cheap, the other is fast and not as cheap.  Either way you will get the results you need, just a matter of how long you want to wait and how much you want to pay.  Good, Fast or Cheap.... choose two!

Let me know how I can be of service to you.

Michael Wolff