Mortgage news

News, trends and analysis of the mortgage and credit market

Thursday, June 28, 2007

Saving for retirement

Reverse mortgage

Advantages and drawbacks

In general, a reverse mortgage converts home equity into cash in several different ways, ranging from monthly payments to an equity line to one-time payouts -- or a combination.
The amount you can borrow varies according to your age, the value of the home, current interest rates and loan fees.

Although the public has been generally hesitant to embrace them, their popularity continues to climb.

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However, the reverse mortgage market is minuscule compared to that of regular mortgages. Reverse mortgages represent a drop in the bucket -- about seven-tenths of 1 percent of regular mortgages.

Are reverse mortgages a good idea? Most news stories imply they are. Reports suggest reverse mortgages can be a source of ready cash when it's needed.

As with conventional mortgages, reverse mortgage lenders make money through interest, origination fees and points. However, closing costs are significantly higher with reverse mortgages.

In addition, borrowers continue to be responsible for real estate taxes, conventional homeowners insurance and home repairs, and have the added burden of paying for mortgage insurance, too.

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Why would borrowers have to pay mortgage insurance? After all, that insurance is required for regular mortgages if borrowers don't have a large enough down payment, and its purpose is to protect lenders in the event of a default. With a reverse mortgage, there's no such risk to lenders.

Refinance instead?
Some believe seniors should consider borrowing against the value of their homes only as a last resort. If there's no way around it, he says it's smarter to refinance as a 30-year fixed loan.

Here's how that would work: You own a home valued at $300,000. You find yourself in need of a large amount of cash for major home repairs and want a lump sum in the bank for future emergencies. You borrow a combination of cash and upfront costs (rolled into the loan) valued at $100,000 at 6 percent.

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Exclusive of taxes and insurance, you'd be paying back a little under $600 per month on a 30-year loan. And you wouldn't need mortgage insurance because you still have plenty of unencumbered equity.

In the case of a reverse mortgage, younger borrowers can't cash out as much equity as older borrowers. To qualify for a reverse mortgage, you must be at least 62 years old.

Since banks are repaid when the house is sold, it's quite possible a lender might have to carry the note for 20 to 25 years or more. For that reason, a 79-year-old is a much more attractive loan candidate from the bank's perspective.

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Whether the borrower lives six months or 30 years after the loan is closed, he still pays stiff upfront fees. Of course, statistically speaking, older borrowers are less likely to accumulate as much interest as younger ones.

Investigate all the options.

Before committing to a reverse mortgage, take a look at other services available in the community. There are little pools of money around seniors that they are not aware of.

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Wednesday, June 13, 2007

Economic growth pushes mortgage rates higher

No interest cuts any time soon!

A key mortgage rate rose to its highest level in 10 months, propelled by better-than-expected economic growth and a realization among investors that there will be no interest rate cuts from the Fed any time soon.

The benchmark 30-year, fixed-rate mortgage rose 14 basis points to 6.61 percent,a national survey of large lenders found.

A basis point is one-hundredth of 1 percentage point. The last time the 30-year, fixed-rate mortgage was higher was Aug. 2, 2006, when it was 6.65 percent.

The mortgages in this week's survey had an average total of 0.26 discount and origination points. One year ago, the mortgage index was 6.69 percent; four weeks ago, it was 6.29 percent.

The 15-year, fixed-rate mortgage rose 12 basis points, to 6.33 percent. The 5/1 adjustable-rate mortgage rose 15 basis points, to 6.52 percent.

A strong report on the service sector's growth helped push rates higher. Analysts had predicted a slowdown. Instead, the nation's dominant employment sector shot up, the Institute for Supply Management's services index indicates.

Fast growth in the sector would tend to be inflationary, since it could require wage increases for a fast-growing economy to find workers. In addition, Fed Chairman Ben Bernanke repeated an inflation warning.

In a speech delivered to a monetary policy conference in South Africa, he sounded the inflation alarm this way: "Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside".

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Monday, June 4, 2007

Lenders implosion

Subprime meltdown:

Greed is to blame!

The nonprime mortgage business is in a mess because during the boom years, hardly anyone had an incentive to say no. Each reason had a dollar sign attached to it. As long as each participant kept saying yes to risky borrowers, everyone made money.

The people who take applications, the companies that lend the money, the appraisers who check property values, the investment banks that sell mortgages to investors and the investors themselves -- all had millions of reasons to keep mortgages flowing to borrowers who couldn't afford them.

There are individuals and folks in the supply chain here and there that don't care, or don't necessarily have the borrower's best interest at heart. But that can be said about just about any industry where people are paid on commission.

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The mortgage industry is set up in such a way that the participants chase after profits while dumping the risks onto someone else. Brokers and loan officers make their livings by persuading people to get mortgages. There's no profit in telling an applicant that he has no business buying a house.

Except in cases of flagrant fraud, brokers and loan officers are disconnected from poor loan performances so long as there's no fraud. Most brokers are ethical, but there are some bad actors who will do anything to get a commission.

Behind the brokers and loan officers are the companies that do the actual lending. During the nonprime boom years of 2003 to the middle of 2006, lenders had an incentive to approve mortgages to uncreditworthy borrowers because lenders don't hang onto loans for long.

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If the borrower fell behind on the payments, the investor -- not the lender -- would face the consequences.

For their part, investment banks and a few big lenders collect fees by packaging and selling bundles of mortgages. As long as borrowers keep getting approved for mortgages, these companies earn fees. It's not in their interest to halt the gravy train.

Investors greedily scooped up nonprime mortgage-backed securities. Because one of the best ways to create high-yield bonds is to underwrite high-interest, risky mortgages.

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It turned out that investors can force lenders to buy back loans that go bad soon after the loan is sold. Troubled borrowers could sell their houses quickly and for a profit, removing bad loans from investors' books.

But in many places, house prices stagnated or fell in 2006 and fewer people applied for mortgages. Nonprime lenders became more reckless in their lending decisions in an intensely competitive market.

Lots of new borrowers fell behind on their house payments within just two or three months. Rather than lose money on the inevitable foreclosures resulting from these early payment defaults, investors forced lenders to buy back hundreds of millions of dollars in bad loans.

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Some of this could have been avoided if property appraisers had done a better job of identifying situations where home buyers were borrowing more than the houses were worth. But appraisers have long been complaining that they are at the mercy of lenders that lean on them to make sure deals get done.

All these people are behind the carnage we see now. More than 20 nonprime lenders have gone out of business or declared bankruptcy since December because they didn't have enough cash to buy back bad loans.

Lenders aren't going to return to the days of mandatory 20 percent down payments, but they are tightening guidelines. Some nonprime borrowers won't qualify for being homeowners or refinancing.

Ask A Mortgage Related Question

Everyone dreams of owning their own home. But can you afford the house and all of the expenses associated with it? You should be told how much you can afford in the first place before getting the loan.

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