Millions of Homeowners Have Only Three Choices

I believe millions of homeowners that purchased with little or nothing down and folks who accessed the ATM machine one too many times via HELOCs and serial refis with unaffordable payments only have three choices. The first option is to consider refinancing now into an ARM or a fixed mortgage rate to avoid the rate resets that they may be facing in coming months. Most resetting ARM's both prime and subprime are looking at a first adjustment of 2-2.5% from the rate that they were accustomed to paying. This is only an option if their is equity, the client can afford the payment, fully document income and has a decent FICO score. Stated income is still available although the rates are healthy and are only available if their is 10-15% equity in the property.

The second option is to sell. Many people were severely stretching to pay the interest only or even the teaser rate on a pick-a-pay loan. Struggling to pay a mortgage is a bit more satisfying in a stable to rising environment as you get the benefits of home ownership and an investment vehicle. Buying in bubble markets was "worth" it for many people because the rising values allowed them to install an ATM and access money in amounts they had never had access to. The ATM is broken and cashout activity has slowed dramatically in the last year. (See chart below.)

Hundreds of thousands of homeowners have no equity or are upside down. This is especially true in Southern California as we had the largest percentage of exotic loan products and a cashout mania. The 2003-06 zero down purchasing frenzy is coming to haunt folks who bought too much home or who are just now experiencing their first rate adjustment. They are waking up to the fact that it wasn't worth it to pay 50% of their income just for housing. They should consider downgrading or renting. Most rents in Socal are $2000 for a standard single family home in a decent middle class neighborhood. This contrasts sharply with a 4k payment on the same home.

The third option is to conduct a short sale to avoid foreclosure. A foreclosure will destroy a FICO score like nothing else. They will be locked out of buying a new home for years. Folks should try to work out arrangements with their lender for a more affordable mortgage assuming that the late payments are because of a rate reset. If that isn't possible then a listing or a short sale should be explored with the lender and a competent realtor.

A short sale is a fire sale of the house to rapidly sell the home to pay off the lender(s). You don't fool around in this situation and list the home with a hope and pray price. This is where a realtor comes in and lists the home at TODAY'S market price to make a rapid sale. Don't be fooled by the housing inventory numbers, homes will and can sell if people drop prices to meet the available buyers. Home builders are doing this daily with crazy car dealer style weekend sales advertised on AM radio and by holding auctions. Someone will buy anything at the right price. If the home can't be sold or people ignore the reality of the market many will make out an envelope and mail the keys to the lender. That jingle is the last thing a bank wants to hear when they go to the payment P.O. Box. It is happening a lot more often than you would imagine.

If you or someone you know is facing these choices I would strongly advise speaking to a qualified professional about the options available. Consider yourself fortunate if none of this applies to you. Do you have any other ideas for homeowners facing these tough choices? Post your thoughts.

CA Tops List of Most Expensive Homes

If you are looking to buy the average home in the United States, these are the most expensive markets. The average home in this survey by Coldwell Banker is 2,200 square feet with 4 bedrooms, 2 1/2 baths, a family room, and a 2 car garage.
Looking over the list, California has 8 of the top 10 most expensive towns for the average home which is not a surprise with the fantastic run up in property values in the last decade and the largest percentage of wealthy citizens per capita of any state according to Forbes. Also on the list are Greenwich, Connecticut and Boston, Massachusetts in the northeast.
This accounts for the attention placed on housing out in California. When the working rich(doctors, lawyers, small business owners) have to dig up nearly a million to get into an "appropriate" home, housing becomes the leading discussion in the household. And if you held onto a home during the run-up you have a great deal of your wealth tied up in your primary residence. Consideration should be given to repositioning equity into other properties or markets.

Top 10 Most Expensive Markets For “Average Home”
Beverly Hills, Calif. $2,206,883
Greenwich, Conn. $2,018,750
La Jolla, Calif. $1,800,000
Santa Monica, Calif. $1,785,000
Palo Alto, Calif. $1,677,000
Newport Beach, Calif. $1,617,500
Santa Barbara, Calif. $1,599,667
San Mateo, Calif. $1,498,023
San Francisco, Calif. $1,451,250
Boston, Mass. $1,381,250

Why do mortgage rates move around daily?

1) What are mortgage interest rates based on? The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. DO NOT work with a lender who has their eyes on the wrong indicators.

2) What is the next Economic Report or event that could cause interest rate movement?A professional lender will have this at their fingertips. For an up-to-date calendar of weekly economic reports and events that may cause rates to fluctuate, email mrmortgage (AT) thegreatloan (DOT) com and we'll add you to our mortgage rates report. Can't post the address here because the spam bots would get it and we would be getting offers for prescription drugs and to help Nigerians with money exchanges.

3) When Bernanke and the Fed "change rates", what does this mean. and what impact does this have on mortgage interest rates? The answer may surprise you. When the Fed makes a move, they can change a rate called the "Fed Funds Rate" or "Discount Rate". These are both very short- term rates that impact credit cards, Home Equity credit lines, auto loans and the like. On the day of the Fed move, Mortgage rates most often will actually move in the opposite direction as the Fed change. This is due to the dynamics within the financial markets in response to inflation. For more information and explanation, just give me a call.

4) Do you have access to live, real time, mortgage bond quotes?If a lender cannot explain how Mortgage Bonds and interest rates are moving in real time and warn you in advance of a costly intra-day price change, you are talking with someone who is still reading yesterday's newspaper, and probably not a professional with whom to entrust your home mortgage financing. Would you work with a stockbroker who is only able to grab yesterday's paper to tell you how a stock traded yesterday, but had no idea what the movement looks like at the present time and what market conditions could cause changes in the near future?

Give children an XO laptop to climb out of poverty.

Do you want to fight a war on poverty? A war on terror? A war on the senseless waste of the sole source of capital, the human mind? Here’s your chance. For two weeks in November, you’ll be able to buy two XO laptops, the One-Laptop-Per-Child computer, with one coming to you and the other going to a hungry young mind overseas.

From the Boston Globe:
With orders for its rugged XO laptop falling short of its initial goal, the One Laptop Per Child project announced today that it would let consumers in the United States and Canada buy the cute computer for a limited time.

In an interview last week, Nicholas Negroponte, the former MIT Media Lab director and founder of the so-called $100 laptop initiative, conceded that he had not locked in the 3 million orders that he once said were necessary to trigger mass production.

The new “Give 1, Get 1″ initiative could be the antidote, he said, by helping to spread the project.

For a limited two-week span in November, people will be able to buy two laptops for $399, one for the buyer and one for a child in a developing country.

My take: Donate both, perhaps with one going to a child in your own town. Even better:

Starting today, people who simply want to donate a laptop to a child in a developing country for $200 can do so online at XOgiving.org.

I think there must be three billion candidates for this machine, so I can’t imagine how most of them will get one before they are no longer children. But the bounty of the harvest is planted one seed at a time. Click the laptop picture to do your part.

Greenspan Nailed in Interview w/ John Stewart

From the Daily Show on Comedy Central. My favorite show. The only way to get your "news," with a laugh. Enjoy.

The FED cut and rates are higher?

As clients are learning, mortgage rates are higher now than last week, back up to 6.5 percent for vanilla 30-year and 7% for Jumbo mortgages. Yes, higher.
Federal Reserve Chair Ben Bernanke probably has the same frustrated shoulder sag that we do: he played this thing exactly right, and has gotten nothing for his trouble but a run on the dollar.
The Fed's 0.5 percent was actually two quarters: the federal funds rate had been trading near 5 percent, 0.25 percent off-peg, for a few weeks. That was an inter meeting ease not formalized, a deft piece of central banking: if formalized, and then the crunch dissolved by itself, the Fed would have had to execute an embarrassing formal reversal. Instead, Sept. 7 news of sinking payrolls (an economic fade additional to and independent of housing and the crunch) made it easy to cut. At this moment the economy receives some dinky benefit from the cut (Construction money is 0.5 percent cheaper -- wanna build a house? Short-term rates are down -- how about a nice new neg-am pre-pay-penalty ARM? No?), but the crunch is still in place, especially in Mortgageland.

Other benefits have been cancelled as well. The 10-year T-note, driver for all long-term credit, has soared from 4.35 percent to 4.62 percent. The dollar run has been to the euro (now all-time high vs the dollar at $1.41) and to hard assets: gold at a 27-year high $744 and oil at one moment yesterday $84.

A great deal of domestic money has joined the run, buying into the fingernail-on-blackboard theorizing: there was no reason for Fed action; it guarantees a resurgence of inflation; it's just Bernanke's Put; and all bailouts all the time are bad.

This run has foreign fingerprints as well; Asia's currencies are dollar-pegged, but a race to hard assets is typical of our Persian Gulf friends and their several-trillion-dollar-hoard. Big currency moves often involve confidence, and it is disturbing in a time of financial crisis to find money running away from the dollar, the historical safe-haven. Confidence has aspects beyond interest rates and inflation: at some point, the average Persian Gulf observer of U.S. leadership, present and forthcoming, might well conclude that we don't have the good sense that Allah gave to the camel.

I like a good chart to see what happened in the past to see if it can give a little insight into the fog the future. Below is a chart of the U.S. dollar index which is our currency vs a basket of foreign currencies(Euro, Yen, Pound, Australian Dollar, etc.). Immediately below is the chart of the 10Y Treasury rates during the same period. In order to strengthen the dollar, rates need to rise to attract investment and/or taxes need to be reduced to drive growth. Taxes were cut during the early 80's, the growth engine revved up and interest rates dropped dramatically. I don't think with medicare, social security and a war machine at full speed the government can lower taxes. The FED is in a bind. The hope is that as they trash the dollar, this expands our export economy. Reviving growth, increasing tax receipts and paying back all the treasure we borrowed over the last few years. The US government owes 8.9 trillion dollars in bond money.

I believe rates across the board will need to rise in order to attract investment in our economy and to encourage investors to buy mortgage/ government debt. What's your take? I'm sure Bernanke and the new President could use you in Washington the next few years to sort out the problem.

The Thrill is Gone.

Mortgage Rates are trading higher again this morning. The euphoria has worn off from Tuesday's rally following the interest rate cut. Traders have now assessed the long-term negative effects of the sinking Dollar and have begun selling into the market.The US Dollar has been falling against foreign currencies. This is inflationary because it takes more Dollars to buy foreign imports, which is effectively the same thing as a price increase.Bond prices may continue to drift lower throughout the day, pressuring home loan rates higher. For today, I would advise sticking with a locking bias.

What's the cost of the interest rate drop to you?

Have you seen the value of your hard earned dollars? I remember as a child traveling to Mexico struggling to figure out how many thousands of pesos I had to get from my pocket to buy ice cream. The U.S. dollar has not collapsed to that degree but its value has declined dramatically in the last five years. An empire can't wage war and spend like a drunken sailor forever. Eventually, the currency suffers. How does this matter to you? Well as a starter, do you buy gas? Two reasons why it's $3 a gallon is rising global demand and the falling dollar. Oil is traded in dollars and the middle east pegs their currency to the green back. They are demanding more dollars because each month because they are worth less relative to other currencies.

In order to protect the dollar the FED would have had to keep rates steady on Tuesday. They chose to bail out speculative investors(hedge funds, investment banks, and leveraged buyout shops) and hope it trickles down to Joe Six Pack. Investors around the world could end up demanding higher interest rates on our government and mortgage debt.

We have seen the rate on the ten treasury and mortgage paper drift higher today. Just one day after the cut. This could result in much higher mortgage rates in the coming years. I believe fixed mortgage rates are a tremendous value and I think people will look back at 6-7% FIXED as the cheap money years. Have you traveled recently and seen the value of your bucks? Has your business been hurt or benefited from a falling dollar? Comment and you may win a free ice cold Sam Adams. Can I pay for it in EUROS?

Your real estate hasn't dropped like this property.

In a stunning transaction, a Los Angeles luxury Condo Development Sold today. The developer Fifield Cos. has sold an unfinished Wilshire Corridor condo development - once touted as the city's most high-end - to a Dubai developer for $95 million, some $30 million less than a recent valuation. The recent tightening in the luxury mortgage market and declining real estate values in CA forced a sale. Foreign investors are flush with cash and the steady decline of the dollar vs their currencies has made the U.S. an attractive investment opportunity for large real estate players overseas. This is reminiscent of the flood of money from Japan during the 80's. Now it is oil money from the middle east that is searching for an attractive home in the U.S. market. I wouldn't be surprised to see more deals in the coming months especially for luxury condo and hotel properties.

A ray of sun for borrowers and investors.

The long awaited Fed decision arrived with a bang! The Fed surprised many economists and traders with a half percent cut in both the Fed Funds and Discount Rates. Stocks soared higher and enjoyed their largest gain since 2003.
What does the Fed cut mean? Rates on consumer debt, car loans, and Home Equity lines will all benefit. But because Home Loan rates are tied more closely to inflation, it is not uncommon to see less of a reaction...or even an opposite reaction in mortgage rates.
The Fed cut also hurts rates of return on investments, which gives foreign investors less incentive to invest in US securities. This has sent the Dollar much lower against the currency of most major foreign countries. This makes foreign goods more expensive for us to buy, which adds to inflation pressures.
Overall, the Fed cut is good news for the economy, but may nudge inflation a bit higher long term. In the short run, we have seen an improvement in mortgage rates for prime credit borrowers especially within the jumbo and super jumbo market.

The FED drops rates, mortgage rates drop, right?

Clients have been asking on a regular basis what effect the Federal Reserve's expected rate cut will have on mortgage rates. Mortgage rates have rallied for the last month for prime borrowers because of the slowdown in the economy and the flight to quality. Investors around the world have made a clear decision and their appetite is only for mortgage loans extended to very well qualified clients in the jumbo mortgage market or FANNIE MAE paper on the conforming side because it has an implied U.S. government guarantee.

Essentially, risk based pricing has returned to the mortgage space. In a small way the Fed's action influences rates around the world. Most nations have a central bank or monetary policy board and react to local/global conditions to set policy. Europe has the European Central Bank whic primarily influences LIBOR which is the index used for almost all corporate lending and found in the majority of adjustable rate mortgage products in this country. If the Fed doesn't cut .50% I would expect mortgage rates to drift higher and the U.S. stock market to take it on the chin. Let's see what happens tomorrow.

How are short- and long-term interest rates different?
The Federal Reserve Board controls the federal funds rate. The Federal Reserve Board (Fed) has the power to raise or lower the federal funds target rate (Fed funds rate), which in turn influences the market for shorter-term securities. The Fed funds rate is the rate banks charge other banks for overnight loans. The Fed may raise the rate to keep inflation in check or lower it to stimulate the economy.
Long-term rates are market driven. Long-term interest rates, as represented by yields of the 10-year or 30-year Treasury bond, tend to move in anticipation of changes in the economy and inflation.

What causes interest rates to rise and fall?
Economic factors influence interest rates. Both short- and long-term interest rates are affected by economic factors such as inflation, the strength of the U.S. dollar and the pace of economic growth.
For example, strong economic growth can lead to inflation. If the Fed becomes concerned about inflation, it may attempt to cool the economy by raising the Fed funds rate, as it did in 2004 and 2005.
On the other hand, if the economy slows down, the Fed may lower the Fed funds rate to stimulate economic growth, as we witnessed in 2001-2003. Similarly, economic factors also affect long-term interest rates. For example, over the summer of 2003 and then again in the spring of 2004, long-term interest rates rose from historic lows as the economy showed signs of strength.
It should be noted that short- and long-term interest rates don't necessarily move in tandem. While short-term rates rose in 2004 and 2005, long-term rates remained relatively low.

Excellent Series of Greenspan Interviews Today.

Fortune magazine has published an excellent interview with Alan Greenspan. I would encourage you to watch the videos. Unfortunately, they can't be embedded. Here is the link:

Waiting for the FED meeting on Tuesday?

Investors, clients and borrowers in general are looking forward to the FED meeting on Tuesday for a rate cut. The market has priced in a 50bps reduction. Any less and we could see major declines in stock markets. I would think that the FED will cut only 25bps. I think we can gather the overall thinking in these two quotes:

"It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford." - President Bush

"It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions."- Fed Chairman Ben Bernanke

Investors love resetting ARM rates, who knew people couldn't afford the rate jump?

National Mortgage News will run an interview Monday with Countrywide CEO Angelo Mozilo. In the interview, conducted Thursday, Mozilo tries to "clarify misconceptions in the media about why consumers are going delinquent on their mortgages. He blames a majority of the problem on job losses and sagging home prices -- not ARM resets," says NMN editor Paul Muolo."Resets are not the issue," Mozilo told NMN.
Well, yeah... resets weren't an issue as long as home prices kept going up -- you just refinanced into another loan. Hopefully, NMN asked Mozilo why Countrywide cutback ARM production from $19.3 billion in August 2006 to $8.3 billion last month. (Turn sarcasm on.) The resets can't possibly be a problem. Investors love a solid reset from 5% to 7% on their loan portfolio, nothing lines the pockets better. The real problem is these borrowers. They can't pay the higher rates. In the 2-3 years their loan was fixed, all was well. Then property started to decline and many of these folks can't refinance or haven't boosted their 'stated income' the 20-40k to handle the payment increase.(Sarcasm off) If they can the rates are between 6-8% depending on FICO, loan to value, document type, their preference in music, etc To break it down in real terms, clients resetting are moving from 4-5% for prime clients to 6-7%. The annual cap on increases is 2%. Most folks mortgages are based on a 2 or 2.5% spread against LIBOR. LIBOR stands at 5.275% today. On a 500k mortgage loan amount the payment increase is about $800 a month in interest. Here is a chart of LIBOR the last few years:

As you can see global markets are demanding higher rates. All major financing is based against LIBOR. As an example the First Data Corporation private equity buyout deal is pricing $5B worth of loans at LIBOR plus 2.75%. Bloomberg piece here. Client's should carefully evaluate whether they want to keep their loan till the reset or look at a fixed rate. For prime conforming loans they are right at 6% for a 30Y fixed and jumbo mortgage rates are right about 7%. I think these rates are very attractive relative to the prospect of floating against an index that may take years to drop as the global economy slows down.

Mortgage Brokers say 57% of clients couldn't refi in AUG.

NEW YORK, Sept 11 (Reuters) - Some 57 percent of mortgage broker customers with adjustable-rate loans were unable to refinance into a new loan to avoid higher monthly payments in August, a national survey reported on Tuesday.
The poll of 1,744 brokers in the last week of August found that subprime borrowers had trouble refinancing mortgages because loan programs were no longer available, according to a statement from Campbell Communications, the Washington-based research firm that conducted the survey. Prime borrowers were impeded by appraisals and high loan-to-value ratios, it said. Original Article

The fear within the industry has risen dramatically. Many banks and lenders have resorted to cutting appraisal reports from reputable firms 50-100k to deny loans or to limit their risk. This is happening especially in CA. The lenders that are standing have tightened guidelines and leaned on the appraisal review department to knock down values. I have seen appraisals with 5-6 comparables from sales in the last 45 days cut down in value because the lenders appraisal review department thinks values aren't there anymore. The comments note that it is a soft market and they point to the amount of inventory in the area.

These are not high risk refinances. They are 75-80% loan to value refinances for home owners with perfect credit. Appraisal review has often been a mechanism that lenders use to limit risk. World Savings is notorious for having very low appraised value reports from their in house group, which is all they allow under their loan products. They are owned by Wachovia and the CEO commented recently that their pay option arm(read:NEGAM) loans are fine and the business is working well for them. Well, of course it is, they only loan to 80% of their fire sale appraised value number to prime credit levels. We would have to have a depression for Wachovia to worry about their loans.

The practice of having standard prime lenders cut appraisals as a protection method is creating a vicious loop. I would strongly advise anyone that has an adjustable loan to seriously review their financial situation and loan terms.

If values are falling in your neighborhood and you have a large balance vs your CURRENT home value you need to evaluate if you can handle your current loan and any future adjustments throughout the credit storm which could last for several years. Most adjustables are made with a margin against the 1Y LIBOR index(definition below). Which as of today was 5.23%. Most loans max at a 2% adjustment per year. They usually cap at 9.95%. The majority of folks that purchased or refinanced with an adjustable in 02-05 will start to adjust this year and into 2010. For a view of the reset please review older posts.

If adjustments would make things difficult in a year or two. I would advise looking at your refinance options now or consider selling your home. It should be a home not a modern debtors prison.

What it means: LIBOR stands for London Interbank Offered Rate. It's the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in U.S. capital markets and can be found in the Wall Street Journal. In general, its changes have been smaller than changes in the prime rate.
How it's used: It's an index that is used to set the cost of various variable-rate loans. Lenders use such an index, which varies, to adjust interest rates as economic conditions change. They then add a certain number of percentage points called a margin, which doesn't vary, to the index to establish the interest rate you must pay. When this index goes up, interest rates on any loans tied to it also go up. Although it is increasingly used for consumer loans, it has traditionally been a reference figure for corporate financial transactions.

Incredible Price Cuts for Countrywide REO

Have you seen the CA Countrywide REO list recently? Wow, some huge price cuts in the last two weeks. I can't even imagine what is going on in some of these neighborhoods with home prices on their REO getting dropped by 15-20% since they were listed just 6-8 weeks ago. On most of these Countrywide is taking a bath. Your thoughts if you know these areas well would be appreciated. National list here.

Why it all matters.

It is well understand that the credit crunch has effected real estate in the last six months and especially so with the tightening of programs for the jumbo market. The impact of the dramatic change in the mortgage industry will have far reaching effects on clients now and for years to come. Many people don't think they have any involvement with the 'Subprime' problem as the media likes to refer to the credit situation within real estate. The effects are wide ranging and people won't realize the impact on their own pocket book until they have to sell, refinance or purchase. For people looking to sell now or anytime in the next few years need to face the reality of today's market not the fantasy land of what a friend sold for in May. I believe values in bubble markets will continue to adjust lower each month as the inventory increases, closed transactions decline, and the tight money environment reduces the available pool of buyers. As an example, a client could have perfect credit, excellent income, but 100% financing for a purchase over 417k on a single family home is no longer available. That could delay the purchase as the client has to save the minimum 5% down payment, plus have six months of PITI on deposit as well. Every purchase scenario is different as you have people upgrading, downgrading, first time home buyers, and investors all within the marketplace buying/selling homes. But, overall you can see the stress the market is under with the changes that occurred since April when all the subprime lenders began to fold. The impact of the changes in prime mortgage lending really has just begun as it wasn't until the first week of August that the jumbo mortgage market began to change guidelines and move up rates to compensate for the added risk. This won't be seen in the numbers until the Sept numbers are reported in Oct.

Make no mistake, this isn't a liquidity crisis. Money is available to lend, but its available at lower risk levels or much higher rates than the public has become accustomed to over the last few years. In looking at listings throughout the hot areas you can start to see the smart sellers capitulate and move their asking prices down. Buyers are searching for a deal and seem to think prices will move lower so they are very patient. They often are bidding well below asking prices because they are conditioned by watching listings fall in price throughout the bubble markets. We have moved into a period of slowly declining prices in the hot areas, notice the deals that are closing are priced right for today's market. Not what a neighbor sold at in July. The market is different and once all participants understand the changes that have occurred you will see inventory decline and sales volume pick up. This could take several years. A lot of mortgage debt is resetting to higher(unaffordable) rates in the next two years. This could put a lot more homes on the market further pressuring prices. Homes are selling on their fundamentals and buyers are not counting on property appreciation to bail out a poor decision. So they are buying carefully and are often requesting very safe 30Y fixed loan scenarios.

In my next article I will highlight why falling real estate prices will have an enormous effect on people refinancing. After all, one of the tenants of mortgage lending is loan to value. If your neighborhoods values are falling, that will absolutely have an effect on the rates available come the time to refinance. Has the real estate environment changed your plans for selling, buying or refinancing? Please comment.

An option for today's home sellers:Lease-Options

The subprime fallout has made the once-slam-dunk home loans more difficult to obtain. While some neighborhoods continue to be very active, other areas have slowed considerably.
In addition, the first notion of "back to school" already has hit many second-home owners who are beginning to schedule the "winterization" of the family cabin. Instead of going through another off-season with little use and significant maintenance, some owners will use the last few weeks of the summer season to show -- and hopefully sell -- the family getaway, raising for-sale real estate inventory levels in popular areas.
If your house or cabin already has been sitting for sale long enough to bite into your comfort and affordability zones, you might want to consider a lease-option.
A lease with an option to buy often can solve a two-mortgage problem for a seller, and provide a cash-poor buyer with an opportunity to "try out" a house while getting a portion on the monthly rent credited toward a down payment.
Many sellers make a commitment to purchase another house contingent on selling the one they're already in. But when it comes time to purchase the second house, or lose it, the prospective buyer can be faced with making payments on two homes if the first one has not sold.
A 12- to 18-month lease agreement, with an option to buy within the lease period, can solve problems. Here's how a typical lease-option works:
1. The buyer and seller agree on a purchase price, usually a figure somewhere between today's market value and the anticipated market value 12 months down the road.
2. The seller gives up tomorrow's presumably higher value for money in hand today. The buyer pays a bit more than today's value in exchange for very little cash down. Let's say buyer and seller agree the price will be $335,000.
3. The seller charges the buyer a nonrefundable fee for agreeing to this option. The amount can vary depending on factors such as how eager the seller is to move and the size and quality of the house. Typically, the higher the fee, the better the buyer maintains the property.
4. Let's use $3,000 for the fee in our hypothetical transaction. The fee is in addition to the monthly lease payments. And we'll have the seller give the buyer the right to purchase the property for $335,000 at any time within the 12-month lease period. If the option is exercised, the fee could be considered part of the down payment.
5. The lessee has made no down payment, hence the monthly option fee is typically higher than rental market rates. The two parties agree on what portion of the rent will be applied to the down payment. Any amount can be credited. For example, if the monthly fee is $2,000, $800 could be credited to the down payment. (If the seller really is not eager to sell, he may not agree to a higher rent credit.)
6. Buyer and seller must be sure to specify both lease and sale terms in the agreement. For example, when the time comes for the buyer to exercise the option, if the interest rates are at 8 percent, the buyer may not be able to qualify for a loan. It's a good idea to set an interest-rate ceiling in the agreement, or ask the seller to finance the home when conventional rates hit a certain level.
Sellers should read their mortgage agreements carefully before entering a lease-option agreement. Some lenders may activate a "due-on-sale" clause if the seller enters into a lease-option with another party. Many times, lenders will permit a specific lease-option period if notified in advance. And, lenders usually are more willing to participate when they are assured of future business -- like the seller's or buyer's new mortgage loan.
Some realty agents have been reluctant to seek lease-options for clients because they have been unwilling to gamble their commissions on whether the option would be exercised. Others are skittish about deferring their commission until a deal is solidified. However, when open-minded agents understand a lease-option could keep a deal together and result in future business, the concept is readily accepted. A small piece of something is better than a large piece of nothing?

Job Losses Heaviest in months.

What's the trickle down from these job cuts? Many of these have occured in the hottest job areas. Have you heard any stories or any anecdotial evidence of this affecting your local economy?

Property Speculators first to default.

The Mortgage Bankers Association (MBA) has released a report showing that as many as 1 in 5 mortgages currently in default in California belongs to borrowers who are not living in the homes with the defaulted loans. The default rates for investor loans were even worse in Nevada, Arizona and Florida, where one-quarter to one-third of all defaulted mortgages as of the end of June were related to investor loans, according to the report. The MBA defines "defaulted mortgages" as those that are 90 days or more past due or in foreclosure. The rapid rise in default rates has led some members of Congress to call for urgent action to aid borrowers who are threatened with the loss of their homes. But the MBA report suggests that some of these borrowers do not deserve to be helped. Many of the vacant foreclosed homes popping up throughout the U.S. these days were bought by speculators who planned to "flip" their investments for a quick profit but got trapped with the market took a sudden down-turn. "Defaults are on the rise in most parts of the country, but it should be recognized that it is not always the case of a homeowner losing his or her home but is often the case of an investor gambling on a continued increase in home values and losing that gamble," said Doug Duncan, the MBA's chief economist. Many of these investors have "simply walked away from the mortgages," Duncan said.

This is the moral hazard regulators and bankers speak of. People don't want to bail out property speculators that are a large part of the foreclosure problem in the previously hot markets.

"When should I buy a home?" The quick answer.

Thousands of numbers, graphs, charts and economic reports can be boiled down for the first time home buyer looking in the previously smoking hot markets for the quick explaination to the question of "When should I buy a home?" When you see this chart of Countrywide's total national foreclosure inventory that they own and are trying to sell via thousands of realtors across the country start to stabilize and then move down again things are getting better. I don't think that will happen until 2010-11 as the amount of loans resetting to much higher rates is just starting in earnest this Oct/Nov, right before Christmas. These are homes that went to the auction step and Countrywide was the high bidder and won because they were trying to protect their skin in the game. Chart courtesy of the good guys at Countrywide Foreclosure Blog. Here is a recent scheduled adjustable mortgage reset chart also: