Cashing out After an All Cash Purchase - Watch out!

Since I have heard several people mentioning this scenario, I thought I would share the current state of things in the lending world. First the scenario:

A buyer looking to purchase a home, for whatever reason (maybe it's a multiple-offers, or maybe they are trying to negotiate a better deal by closing faster with cash), they have decided to purchase the property with all cash. The thinking is that they would purchase first, and then right away take cash out from the property. This would be no different from getting a loan in the first place, other than taking a 2-step approach vs. 1 step.

What's the significance here? Well, according to IRS (please double check with your tax consultant), you can only deduct mortgage interest from your tax liability based on the acquisition indebtedness, unless the cash out is done within 90 days of the initial purchase. So, most people think the scenario described above would help them accomplish their goal of getting a good deal while not losing any tax benefits.

The problem here is that most lenders today have a 6-month seasoning requirement on cash-out transactions, meaning the owner would have to wait for 6 months before they can do the cash-out.

So, for those who are contemplating doing the above, be sure to check all fronts before jumping in.

The Real Effects of HVCC

The HVCC (Home Valuation Code of Conduct) law that became in effect on May 1 was designed to "protect" consumers by creating a process in which the appraisal reports are done based on unbiased opinions and without any influence from realtors and loan originators. Under this law, loan originators are no longer allowed to have any direct contact with appraisers during a real estate purchase transaction. The orders are processed through an independent 3rd party company.

With all its good intention, the real effects we have seen under this new process have been quite detrimental to consumers. The average cost for an appraisal has increased by about 40%. The average cost used to be around $375 for a property under $1mil value, an equivolent report today costs around $500. That's real cash taken from consumer's pocket.

For refinance borrowers, especially those whose equity in their house may have eroded to just around 20%, the new process has become an expensive exploration. In the past, we could at least call an appraiser to get a rough estimate of the approximate value without having to go through a full inspection (thus not incurring a cost to the consumers). Under the new law, because we can't have any direct contact with appraisers, the consumers will have to spend the $500 upfront to find out if refinance is a possibility.

There are many other holes in the new process that create new challenges during a transaction. I just hope that the regulators are listening to what people saying, and make some real senses out of this honorable idealistic quest.

Conforming Loan Limits for 1-4 units

I was just asked about the latest conforming loan limits for 1-4 units residential properties. I thought it would be helpful to post this for anyone else who may be looking for the same information. Here it is:

Units General High-Balance
Permanent Temporary (til end of 2009)
1 $417,000 $625,500 $729,750
2 $533,850 $800,775 $934,200
3 $645,300 $967,950 $1,129,250
4 $801,950 $1,202,925 $1,403,400

Rising Mortgage Rates Eroding Affordability

Mortgage rates have been rising for the last 2 weeks. Rates are more than 1% higher than their lowest level. For example, we had seen conforming loans as low as 4.375% for a 30-yr fixed. This past week, they had been hovering in the high 5% range.

How has this change impacted borrowers? Well, many refinance clients who were trying to time the "lowest" market or were hoping for even lower rates (aka below 4%) are now jittery. Did they miss the boat? Maybe. While we may see some improvements in the coming months, it is unlikely that we'll see the same low level of rates that we had seen earlier this year. According to the latest news from the Fed, it doesn't sound like they are ready to purchase additional mortgage-backed securities. With Fed's buying winding down and more investors coming into the market, they will sure demand higher returns than a mere 4% on a 30-yr securities.

What about the home buyers who have been sitting on the fence waiting for the price to drop more and rates to go down further? What has happened in the last 2 weeks in the mortgage market should be a good reminder of the corrolation between home price and mortgage rates. Here's the numerical comparison: 1% increase in rates is equivalent to around 15% change in purchase price. So, here's the question: Rates can go up by 1% in a matter of days, based on what we have seen. How likely are the home prices to go down by 15% in a matter of days? The reality is that the rapid rising rates are eroding the affordability of home ownership. So, for all those buyers out who need to buy a new home this year, remember to focus on the big picture. The long term financing costs outweigh the cost of the purchase many folds.

Can Mortgage Rates Stay Low?

The Fed's been at it again, offering words that sound encouraging at first blush, confirming that their buying program of Mortgage Backed Securities is in full swing and will continue as needed. Of course, the media will pick this up and offer their own interpretation, saying "Good news, the Fed's words on continuing their purchasing program mean that rates will continue to drop lower, and remain low into the summer..." But is this really what that means? Not so.

Here's the truth:
Yes, the Fed has been buying Mortgage Bonds, but if you look at what they are purchasing, they are buying a lot of FNMA 30-yr 5.5% and 5.0% Bonds...which won't have much of an impact on present interest rates. Why? First, see the Fed's purchases for yourself by hitting this link: Direct Link to View Fed Mortgage Bond Buying - http://www.newyorkfed.org/markets/mbs/index.html.

So why is the Fed buying these Bonds? Well if you think about it, it's very smart of the Fed...and maybe even a little sneaky...because 5.5% Bonds actually represent outstanding mortgages with rates of 6 - 6.50%, which are precisely the loans being refinanced at today's great interest rates.
Stay with me here...
With rates at present low levels, many of the mortgages in these FNMA 5.5% pools being bought up by the Fed will be refinanced and paid, thus giving the Fed a quick recoup on some of their investment. And this is likely a big reason why the Fed said they could continue this purchasing program beyond June, if necessary. Bottom line, the Fed buying these higher rate coupons will not necessarily help rates to move lower, as their actions do not impact the loans being originated at today's low rates. In other words, in order for the mortgage rates to go lower to a level where as the news said, "everyone gets 4% - no question asked", the Fed would need to be buying coupons with 3% - 3.5%. Hmm.....

Here's the most important part:
Sometimes I talk to clients who are in a situation where it makes sense to refinance right now, and save $250 per month for example. But when they hear the media throwing around teases of lower rates ahead, they decide to hold off on making the decision to save the $250 per month right now, in the hopes of gaining another $30 per month in additional savings with a lower rate than where we stand presently. Now clearly, rates could turn higher, and this window of opportunity could pass them by entirely.

The clincher is this:
Even if those clients ultimately are correct in timing the market, and eventually grab that lower rate and save another $30 per month - think of what they have lost by waiting. While they delayed, they lost the savings they could have gained by taking action sooner - or in the example used, $250 - for every single month they waited. So even if they got lucky and obtained the rate they were looking for, it could take years to make up what they lost by waiting.

Bottom line is rather than trying to time the market, it's more crucial to evaluate your scenario within the whole context of your overall financial well being.

Market Timing or Long Term Planning? How To Buy Your Next House In This Market

Life has been interesting being a mortgage professional in the past 12 months. Most people I run into seem to have the same curious question: “how are you doing? How’s business?” Maybe secretly, deep down inside, they were expecting to hear me crying and spilling out horror stories about how the sky is falling - just like the rest of the reporters you hear in the media. But the truth is “It’s not that bad”. Actually, I should qualify it by saying “It’s not that bad for people who can truly afford to buy”.

The credit crisis has certainly changed the landscape of the lending industry, but for the better! While it may be more difficult to get a loan these days, it’s becoming an easier market for buyers who are financially positioned to buy. For one, people with 20% down payment don’t have to compete with other buyers with no money down. The economic downturn that we are experiencing right now truly underscores one thing that we believe to be the core of what makes people successful – Planning!

Looking for that perfect house (one that fits your commute requirements, the right school district for your kids, long term appreciation concerns, and maintenance issues, etc) is one thing, but how does such a purchase fit into your overall long term financial planning is another. Culturally, we have not been trained to think that way. For example, for a younger couple who may have had a couple of kids and progressed through their careers, at some point, they get “the hunch” that they can/need/should move up to a larger home. So, the buying process is generally around finding a house that meets their logistical needs. But, what about the financial needs? With increased income, they can probably qualify for more now. But as I always tell my clients, Qualification is different from Affordability – there is a big difference. For most people, signing up for a bigger mortgage payment often means needing to cut back on something else. It is a perfectly fine thing to do, as long as that honest conversation is taking place, and a specific plan is put into place.

Because I often get asked the same kinds of questions from different buyers and the lending guidelines constantly changing, I thought it’s time to do another seminar to specifically address the important questions that home buyers should be asking, especially in this market. It’s on Thur Oct 16th, at 6:45pm at my office in Palo Alto. If anyone is interested, feel free to contact me at blogposts@yulinlee.com or 650-799-8768.

Change is the Only Constant

Boy, just when we thought things may settle down a bit after Fed's takeover of Fannie and Freddie, the fiascals at Merill Lynch, AIG and Lehman just reminded me that we are still in the middle a major shift, not just in the financial industry and but also in the relationships between consumers and service providers. When companies like AIG with 150+ years of history and brand recognition go down in no time, you really start to wonder what the new paradigm will look like, and what kind of trust and relationship we will have with our service providers going into the future.

A year ago when the mortgage industry started experiencing the credit crunch, we started a marketing campaign called "A Scent of Change", which was a series of seminars that were meant to educate our clients about the major changes we were seeing in the lending industry. At the time, we had planned for that campaign to go on for about 6 months. But now, 12 months later, that theme still seems to be applicable. What does that teach me?

There are always external factors that will be thrown at us, which we can't control. But what we CAN do is focusing on the fundamentals so that we don't get blown away by the unexpected. For me, it's about taking care of my clients, building long term relationships, and keep working at my short-term and long-term goals - One Piece At A Time!

We can't time the market in stock prices or mortgage rates, but we CAN time progress in our own journey to success IF we have a plan!

Mortgage Rates Lowered by Government Takeover

Another big day for the mortgage industry. On Sept 7, Treasury Secretary Paulson announced plans to place Fannie Mae and Freddie Mac in a conservatorship governed by their regulator, the Federal Housing Finance Agency (FHFA). As part of the announcement, both companies’ chief executives will be replaced and the government will provide up to $200 billion in capital to restore the firms to financial health.

What does this mean? Essentially, both Fannie Mae and Freddie Mac are effectively government agencies now, from being private companies that were established in 1968 and 1970 resepectively. What's the implication for the consumers? And, why did the mortgage rates go down are a result?

As the U.S. government steps up to gaurantee both Fannie & Freddie's maturing bond payments, more investors are becoming interested in buying their bonds. With more investors buying their bonds, there will be more liquidity into the market to extend mortgages to consumers. More liquidity = lower rates. Yeah!

With what has just happened to Fannie and Freddie, and the fact that the conforming Jumbo limit of $729,500 going away by the end of this year, it makes it a really good time to refinance or buy your next home, especially if your loan amount is in the range between $625K - $729,500. For more detail info and a free consultation about how to take advantage of the current situation, you know where to find me!

Housing and Economic Recovery Act of 2008 - A Few Nuggets For You

The recently passed housing rule signed by President Bush includes numerous changes, but I thought I would share a few with you here (for a full version of the bill, go to http://www.thomas.gov/ and search by bill number for HR 3221, and make sure to view the "EE R" version which is the final version) :

1. A new agency was created to regulate Fannie and Freddie with much broader powers - Federal Housing Finance Agency. Fannie and Freddie now has unlimited government line of credit for 18 months - This will help ease the liquidity crunch we've experienced in last 12 months.
2. Loan limits will be set to $625,500 for high cost areas, including the Bay Area. The limits will adjust again in 2010 based on FHFA home price index. If prices decline, there will be one year lag on downward loan limit adjustments. - This means that if you have a loan amount between $625,500 - $729,500 now, and are considering refinancing or buying, you should do something now before year end to take advantage of the Conforming Jumbo rate.
3. Hope for homeowners - new FHA program - current lenders to write down mortgage balance to 90% of current appraised value, but the borrowers will have to share future equity appreciation with government. - This one seems great at first glance, but a closer look will reveal that it can still be costly to the borrowers and the eligibility standards are pretty strict. For more information on how this might apply to you, contact me for a consultation and I will go over the details with you.
4. Tax Incentives - 1st time home buyers will receive tax credit of 10% of the purchase price of the home not to exceed $7,500. However, it phases out if modified adjusted gross income exceeds $75,000 single or $150K for married filing jointly. There is a recapture of credit over 15 years. - Essentially, this is a free loan from the government.

For more questions, feel free to contact me.

Where is the Mortgage Rate going?

Everyone seems to be interested in where the mortgage rates are going because there are still so many people out there who are either looking and waiting to buy or refinance their existing ARM rates that have adjusted or about to adjust. For those of you who waiting for rates to improve, you may be disappointed by the recent activities in the mortgage market.

Freddie Mac has announced that it is increasing the Market Condition delivery fee rate from 25 to 50 basis points. Additionally it will be implementing additional risk based pricing adjusters, for LTV, Credit score and other risk factors. Freddie is also modifying several other delivery fees for Alt-A, A-minus products to equate their pricing with the risk in those products.

What does this mean in plain English? Freddie Mac is one of the agencies that buys conforming loans from lenders who originate mortgage loans. This statement means that Freddie will increase their fees for buying certain type of loans, and in turn, this increase will get passed to consumers in the rates they will be getting.

So, my advice to those who are still waiting is to get your paperwork together and get moving. At the minimum, talk to a mortgage planner to understand all your options.

How Does the Current Financial Market & Politics Affect You?

This is certainly an interesting time that we live in. With all the turmoils that we've seen in the mortgage industry, the housing market, and the rollercoaster rides in the equity market, everyone is looking at the Federal government to see what it's going to do. Well, there is a new housing bill that was passed by the House and is going to the Senate in the next few days. It is expected that the Senate will pass the bill, and President Bush seems to be willing to sign off on it as well.

This bill addresses issues and concerns for many people. Check out the link below with details of the proposals in the bill and you might find some nuggets:

http://www.nytimes.com/2008/07/25/business/25money.html?_r=2&partner=rssuserland&emc=rss&pagewanted=all&oref=slogin&oref=slogin

How Much Do You Need to Retire?

It's been a long time since I blogged. It's good to be "back".

Lately, I have had quite a few conversations with others about how much do we really need to retire? What I'm finding is that most people don't REALLY know. Some may have vague ideas, and others have no clues. This is pretty concerning given the current economic condition and how it's impacting people in many ways, not only today, but their future.

I attended a dinner presentation last night with the Financial Women's Association group. The topic was "Lessons Learned". The speaker was a well established financial planner who primarily focused on women clients. Some of the points she shared was pretty interesting:

1. Many people confuse "security" with "safety" - for people who have a lot of fear and want "security", they tend to pick "safer" investments. Let's take CDs as an example. The average return on CDs are 3%-4%, which barely keeps up with inflation. If you take taxes into account, you will most likely end up with negative growth.
2. Many women tend to have the attitude of "waiting for that prince charming" - aka have someone else take care of them.
3. Others take the "Alice in Wonderland" approach - finances are just too complicated for me to understand, so I'm going to avoid it as much as I can.

The reality is times have changed, and there is no more pension or social security that we can count on. So, my call to everyone is Take Responsibility for your own finances. The CEO of my company was recently interviewed by The View from the Bay. She's got some messages for you. Check it out:

http://abclocal.go.com/kgo/story?section=view_from_the_bay/consumer_finance&id=6266121

Having a Millionaire Mind

This past weekend, I attended a 3-day seminar called The Millionaire Mind Intensive by Peak Potentials. It was awesome and life changing. While the focus was on learning about our money blueprint, most of the principles can be applied towards other areas of our lives.

The one concept that I particularly liked was that most people feel they have to become a millionaire (or I should say multi-millionaires in this day and age) before they can reach financial freedom. But it is not necessarily so. To be financial free means that you have enough passive income to cover your living expenses. Now, if you can acquire or build businesses that generate passive income exceeding your expenses, then you are financially free without necessarily having to have millions of assets stashed away.

The other benefit of attending this seminar was the fact I got to meet some like-minded great people. Having a network of people who are focused on similar goals is one of the components of becoming successful.

I highly recommend reading the book Secrets of The Millionaire Mind.

Selecting Your Student Loan

As college acceptance letters arrive these days, families are celebrating the good news. But also, some of the start to worry about how to finance college.

Indeed, the student lending market has experienced two dramatic blows last year:

• Amid the subprime mortgage crisis, funding for all kinds of loans has dried up.
• The College Cost Reduction and Access Act of 2007 cut government subsidies to issuers of federal student loans.

In order to help you finding the financial resources to finance college, here are some great tips.

Start federal
With smaller fees, lower interest rates and better terms than private student loans, federal loans are still the best option for most borrowers.

Check your state
More than 30 states have programs to provide federally backed and other education loans to residents or in-state students at competitive rates.

Avoid private student loans
With lenders feeling pinched, expect a big marketing push for their higher margin product, the private student loan. But experts agree that those loans should be a last resort because they carry high variable rates and fees.

Look at your home equity
Don't forget you can refinance your home (if you own one)! You could use a part of the equity of your house to finance college. You will get access easily to the money, and will have a more favorable interest rate than most of the student loans have.

Need to know more about how to use your mortgage to finance college? I will be pleased to advice you.

Senate to help in housing crisis

Senate leaders are working on a package of legislation to help the homeowners on the edge of foreclosure. The fact is that around 4.2 million mortgages were either past due or in foreclosure while 2007 was coming to its end, and 3 million more may deault in the next few months.

The rescue proposals include:

• $10 billiion in tax-exempt bonds to refinance subprime loans
• $4 billion to local governments to buy foreclosed properties
• $15,000 tax credit for purchases of foreclosed homes or newly built homes that have been sitting vacant.

The main goal of this effort is to transform risky subprime mortgage that borrowers can't afford into traditional 30-year loans.

Home prices down record 11%, 13% for San Francisco

Home prices have declined from 10.7% in average nationwide between January 2007 & January 2008. This is the biggest drop since the index has been created in 2000.

Thus, this is the best time right now to consider investing in real estate, whether in the Silicon Valley or in other states, as both prices and rates are low.

The question now that people often ask me: When will it hit the bottom? People want to invest while the price will be the lowest.

Let's not forget that we are in an atypical situation, where the market has meltdown. A real estate investor should not focus on waiting for the bottom, but investing right now as conditions are more than friendly. Also, you have to think about the mortgage market, and see what loan program will fit you the most.

You have questions about real estate investment? Thinking about purcasing a home in Palo Alto or in the Silicon Valley? Feel free to contact me and let's discuss about the possibilities.

(Source: CNN Money)

US Treasury Secretary Henry Paulson blaming the lack of financial knowledge

US Treasury Secretary Henry Paulson is stopping by the Bay area on Thursday, where he will meet with Bay Area leaders to push homeowners to get educated about how the financial industry works.

US economy has encountered a lot of problems these past few months with the sub-prime crisis, a historically low dollar and the stock market struggling meanwhile. Treasury Secretary Henry Paulson acknowledges that the sub-prime mortgage mess continues to be the biggest drag on the nation's economy.

He says nevertheless that both bankers and borrowers are to blame.

"What got us here was some very bad lending practices, some unethical lending practices, financial fraud. But also the other issue is there are a good number of people who signed a mortgage contract and didn't understand it," said U.S. Treasury Secretary Henry Paulson.

The best way to understand how mortgages work and how they fit into your overall finances is to contact me and schedule a free mortgage planning session.

(source: ABC7News)

HUD Raises FHA Loan Limits

At last, after much anticipation, HUD finally published the new FHA loan limits for the high cost areas. For more detail info, check out this site. Since the new loan limits are based on the median housing pricing, the actual loan limits vary by county in which the property is located. As for the direct impact on consumers, we are still waiting for the lenders to "accept" the FHA limits, and implement them both in their program offerings as well as the backend support systems. In other words, if you are looking for a FHA loan right now, you will not see the new loan limits in place yet. I will update you as we get updates from the lenders.

Now, do not confuse this with conventional conforming loans. OFHEO has not weighed in. Once they do, FNMA & FHLMC will make their announcements, and then lenders will make theirs. I do not know about potential pricing hits, and will certainly keep you updated as things progress.

California to Retrain Laid-Off Mortgage Workers

Just saw an interesting news today - California Governor Arnold Schwarzenegger has announced a re-training program to assist many of the people who got displaced by the mortgage market meltdown. As a mortgage professional, I can certainly feel the stress many people are going through, and I am glad to see that the government is taking some measure to assist those in need.

For those of us who are still committed to the industry, I do see tremendous opportunities both in terms of continually improving the kinds of services we provide (a cleansing process) and the type of quality products we will be able to offer to those who are financially ready to take on more assets and liabilities.

It's the best time to invest!

Mortgage Industry Embraces CMPS Institute Certification

I invite you to read this interesting article about the CMPS institute. In this changing market, where a lot of people have been misadvised, it is important while you choose your mortgage consultant to make sure you are working with a highly qualified person.

Certified Mortgage Planning Specialist (CMPS) is a certification I obtained by going through an extensive training, based on five main key areas:
* Financial Market and Interest Rate Analysis
* Cash Flow & Debt Analysis
* Real Estate Equity Management
* Real Estate Investment Planning
* Mortgage & Real Estate Taxation Concepts

As a CMPS professional, I will be pleased to help you not only with your transactions, but also how to integrate the mortgage into your overall financial planning and maximize your real estate investments.