Watson Report

The time has rolled around again for us to address our tax situation. Each year we face this and the internet tax scam artist.

The scam artist are out to get our personal information. They design web sites for us to visit so we can divulge all of our personal information. This is called phishing.They are becoming very sophisticated with the scams they are running.  The web sites they are designing are very "official looking".  The tag line they often use is the ruse is that we will get money back or that the IRS needs relevant personal data. 

If you receive any web or email solitiation that appears to be from the IRS please do not respond.  The IRS requests that you forward all questionable emails to phishing@irs.gov.  The IRS will NEVER request any information from you via the email.  The IRS will use the US Post Service exclusively to contact you about tax related inquiries.

Double Check the URL Address. Keep in mind that all IRS websites begin with the following web address: http://www.irs.gov/. So, if you ever click a link in an email or visit a website that you believe is related to the IRS, the first thing you should do is confirm the website begins with the correct URL address. Remember, sometimes it may "look" legitimate, but is actually an imposter site that is "phishing" for information. So always, always double check the actual URL address before you type any information in the site.

One last thing you should be aware of is opening any attachment that is from a suspicious email. That could be a whole world of hurt to you and your computer. 

I hope you have enjoyed the uplifting news about the tax season.  This is not my favorite season by a long shot.

People have been lending and borrowing money with each other since...well, forever. 

The credit and debt system began before the written word. Approximately 9,000 years ago man invented counting tokens to keep track of trades and obligations. In fact, the art of writing was invented to record our financial dealings.

The Sumerians were the first recorded culture to develop the concept of interest. The Sumerian word for interest was mash. It was also the word for calves.

The concept of returning more or "giving birth" to your asset came from lending cattle. If you lent someone a herd of 30 cattle for one year, you would expect to be repaid with more than the original 30 because the herd multiplies. The herder's wealth has a natural rate of increase equal to the rate of reproduction of his livestock.

If cattle were the standard currency of the time, then loans in all comparable commodities would be expected to "give birth" as well. Why shouldn't the same be true for money?

Barter is the simplest form of trading labor, but it is inherently inefficient. If you cannot easily locate someone with the exact item you want, you are out of luck. The internet has changed the inefficiencies of trading labor for money.

The social lending web sites allow lender and borrower to come together and transact a loan.  You can be the lender or the borrower. As the lender you receive a return on the money you make available to a borrower. As the borrower you can borrow money from an individual at a rate that is agreeable to you.

The very first created was www.Prosper.com, which allows individuals to borrow and lend small amounts of money, for any variety of purposes. Recent posts include families wanting to start a small business and a father seeking to pay off his son's medical bills...you can see their pictures and read their stories. Although risk of default is certainly a potential - because these are generally individuals unable to borrow via more traditional methods - it is quite a learning experience, and the rate of return will be higher than via a traditional savings account.

Another similar site is www.Zopa.com - also a social lending site, but with a few key differences. If a borrower request is approved, Zopa funds it directly, raising funds by offering Certificates of Deposit (CD) to be purchased with attractive rates of return. If you purchase a CD, you are required to choose at least one borrower request to sponsor. By sponsoring a borrower you marginally reduce the interest rate earned on your CD, which in turn is used to reduce the rate that the borrower is paying. Best of all, your money and your rate of return is guaranteed and insured.

Perhaps the most intriguing of the social lending sites, www.Kiva.org is a blend of charitable giving and online lending. This site specializes in very small loans made to individuals in third world countries. The loans requests and photos are fascinating...who knew that a cow could be purchased for only $500, or that you could literally purchase tons of coffee and cocoa for $1000? The downside to Kiva is that the loan is not repaid with interest, and because it is a loan and not a charitable contribution, it is not tax deductible. But the upside - helping those in developing countries create and expand their businesses, provide for their families and improve their countries economy as a whole - well, this offers a substantial rate of return, just of a different type.

As a lender you can select the borrower that you choose to work with. You read the borrowers request on what they want to use the money for.  Some of the scenarios are very moving.  If you want to assist a borrower that is trying to better their situation you are afforded that opportunity to be the benevolent banker.  At some of the sites your money and your rate of return is guaranteed and insured up to $100,000.

As a borrower you put in your request for loan with your unique situation.  You put in your request at the web site for all to read. You explain to the lender why you would be a good candidate to receive a loan from them.

This is all very grassroots and a unique use of the internet.  Now you can invest your money directly to help another individual that is in need. Please do your homework and make sure you understand how the programs work.

When a lender closes or files for bankruptcy what should you do. The most important item is that you continue to make your payments by the date they are due.  Keep an accurate paper trail on when you sent in the payment, the address you sent payment and the amount of the payment.

When the lender files for bankruptcy or closes the doors they are required by law to send you notice that the your loan will be transferred to a new servicer. You should also receive a notice from the new servicer with information on where you send your payment. The two notices must take place at least 15 days before the effective date of the transfer. 

The transfer will not affect any terms or conditions of your mortgage contract except those related to the servicing of your loan.  You have a 60 day grace period after the transfer to a new servicer.  That means you can't be charged a late fee if you send your mortgage payment to the old servicer by mistake and your new servicer CANNOT report your payment as late to the credit bureau.

It is important that all mortgage holders take a second and read their monthly statement.   Keep good records of your payments so you can access them should a problem arise.  If you escrow for taxes and insurance, review the annual escrow statement to make sure the payments are being made.  You may consider making a quick call to your insurance agent and check on line with your county web site to make sure all payments are current. 

If you think that you have been charged a late fee or penalty you don't owe or if you have any other problems you have recourse. The rules under the Real Estate Settlement Procedures Act (RESPA) must be adhered to by your lender.  What you must do is to continue to make your regular payments. Contact your servicer in writing in a separate communication.  DO NOT write on your coupon or invoice that you receive from your servicer. The servicer must acknowledge your inquiry in writing within 20 business days of receiving it and take action within 60 business days.  The servicer must correct your account or determine that the accounting is accurate, and then send you a written notice of the action it took and why, and the name and phone number of someone to contact for more information or help.  DO NOT subtract the disputed amount from your mortgage payment.  Some mortgage servicers may refuse to accept what they consider a "partial" payment.  They could return your check and charge you a late fee or claim your mortgage is in default and start foreclosure proceedings.

Below is request and response for clarification on how ARM loans work.

YOUR CONCERN

We are planning on staying in our house for another 2 years (we want to sell as soon as the Northstar Commuter Rail is complete in Fall of 09). I believe our current rate is 4.75% correct? We are finishing up our 4th year in our house this winter, so the interest rate won't rise until next winter, right? If that can only be raised by a maximum of 1% each year after 5 years, then we won't even reach the 6% mark (if we can sell in 2 years).

MY RESPONSE:
 
The information that I have is that you have a conventional 5/1 ARM with a close date of Jan 2004 and a start interest rate of 4.75%.  That would put your reset (adjustment) date at approx. Jan 2009. 
 
Let me go over how the interest rate is determined at reset.  There are two numbers that determine what the new rate will be.  The first number is your margin.  The margin number is fixed and will never change as long as you have the loan.  Most of the margins are either 2.25 or 2.75.  The majority of margins on the ARM loans that I originated were 2.25 so I will use that number when I give you an example of what the reset rate will look like today.  The second number is the index number.  This number will change with the market place.  The most common index that was used with my past loan products was the 12 month LIBOR index.  To determine new rate at reset the lender will take the current index and add the margin and that will be the new rate for the next 12 months. In your case if the reset would take place today the MARGIN (2.25) + the LIBOR index (4.686) = NEW RATE 6.936.  Lender will round up (of course) to nearest 1/8 of a percent and the new rate would be 7%. In a worst case scenario if the LIBOR index was at 7.5%  in Jan. of 09 your rate would go to 9.75% (2.25+7.5=9.75).  In a best case scenario if the LIBOR index was at 2.5% in Jan. of 09 your rate would remain at 4.75% (2.25 + 2.5 = 4.75)
 
There is no set standard for conventional Arm's caps.  Most of the Arm's I originated had the following caps 5/2/5.  What the 5/2/5 numbers mean is that the ARM can adjust as much as 5% in the first adjustment period(first number five).  After the first adjustment the loan will then adjust every 12 months (MARGIN + INDEX=NEW RATE). After the first adjustment the loan can go no more than 2% up or down in any one adjustment period (second number two).  The last number (5) is the life cap.  That means that the adjustment interest rate can never exceed 5% over the state rate (4.75+5=9.75). Your life cap is 9.75%.
 
You will find all the numbers (margin, index and caps) that pertain to your loan in your closing papers.  Look for the papers that have the heading Mortgage Note or Adjustable Note or NOTE.  Read through your note and you will have the correct numbers.  Please feel free to call me an I can help you with your questions.

 Friday, September 14, 2007

Allow me to introduce you to the new FHASecure mortgage product.  This product was developed by the Federal Housing Administration to enable homeowers to refinance various types of adjustable rate mortgages (ARMs) in which the payment as adjusted (reset).

A little history is in order to understand why the present program was developed.  Many individuals obtained short term ARMs to buy their house. The ARM products were typically fixed for two (2/28) and three (3/27) year periods. The products were offered to borrowers who had unique credit or employment situations.  The two and three year windows would allow borrowers to establish a good employment and credit history in the hopes that they would be able to refinance into a 30 year fixed product.  Now many of those ARM products are adjusting (resetting) and the homeowners are finding that after the reset, the housing payments on the new interest rate are greated than they anticipated.  Some homeowners have payment increases beyond their abilty to pay. 

You have the problem, now we need to look at a possible solution.  Below are some of the eligibility highlights of the FHASecure Initiative:

• The mortgage being refinanced must be a non-FHA ARM that has reset
• Six months prior to the reset period the homeowers monthly payments were paid on time with no late payments and that other recurring obligations were paid on time.
• A second mortgage is permissable with this program.  The second can be used to cover the gap between the FHA max. mortgage amount and appraised value of home.  The FHA loan limit in Hennepin County MN is $276,683.
• Late mortgage payment are permitted after the reset period. This is the only game in town that will allow you to refinance if you have had recent mortgage lates.
• Underwriters must determine, as part of the underwriting process, that the reset of the non-FHA ARM monthly payments caused the homeowners inability to make the monthly payments. Homeowers must qualify for the new payment using the FHA guidelines for this program. The payment-to-income and debt-to-income ratios remain at 31% and 43% respectively.
• Maximum loan to value (LTV) for the FHA first mortgage is 97.75% of the appraised value in excess of $50,000 for homes in Minnesota.
• There is no ceiling on the combined loan to value (CLTV) if a second mortgage is involved. 
• FHA will permit the inclusion of the existing first lien, any purchase money second mortgage, closing costs, prepaid expenses, discount points, prepayment penalities, and late charges.  FHA will also permit arrearages (principle, interest, taxes and insurance) to be added into the new loan amount provided the arrearages arose after the reset period.
• The FHASecure loan is NOT considered a cash out refinance

This is a brief over view of the FHASecure Loan.  This product could be a possible solution to your present situation. If you have not been delinquent with your payments but are having a hard time I would like you to consider a regular FHA refinance.

If the water is getting deeper and you feel you may need some help please give me a call before it is to late.

With the prospect that a significant fraction of homeowners are at risk of slipping into default on their mortgages, allow me to introduce the Equity Review process. This program is designed to determine what decisions homeowners need to make now in order to protect themselves from fallout in the mortgage market. As home price appreciation has leveled off from the heady days of the housing boom and interest rates have risen, the default and foreclosure rates have soared.

A total of 179,599 foreclosure filings were reported during the month of July, up 9% from June and up 93% from July 2006, according to RealtyTrac, an online marketplace for foreclosure properties. So-called "exotic" mortgage products such as interest-only and hybrid ARM loans are catching the blame for this increased default rate. Borrowers who took out these products are suffering from payment shock as their monthly payments reset to higher amounts.

The mortgage planning software that I have used for the last five years is The Mortgage Coach. I have been using this software for over five years primarily to help my present clients select the correct loan program for THEIR home purchase situation. The software allows us to review up to four loan scenarios and project how the loans will perform over time.  The time review of different loan products can show you how much you will be paying or saving in the future.  With past scenarios the differences that I have seen can be tens of thousands of dollars. When you select your loan product to purchase a new make sure you understand the future performance of that loan product.

THe Mortgage Coach also has a section to facilitate Equity Reviews. With the Equity Review we can look at your present loan and debt profile and see if it would make sense to restructure your present situation to a more tax friendly / payment friendly loan scenario. The software provides and detailed analysis for alternative mortgage programs thereby allowing homeowners to preempt potentially devastating changes to their budget.

The recommendations that I make are based on risk-analysis.  It's an analysis tool that let's you look at potential changes in your payment structure in the future based on the type of program you have.

If you have some concern or questions about your loans' present and future performance please give me a call.  We can set up an Equity Review for you to make sure that the future does not contain that MORTGAGE SURPRISE.

STAY INFORMED

Anyone watching or reading the financial news over the last few weeks has seen a lot of angst and consternation over the state of the mortgage industry. In fact, one of the larger lenders in the US, American Home Mortgage, was forced to shut down operations recently. But why? What is happening, what does all this mean to you and most importantly... what should you be doing do right now to make sure you are protected?

Here's the scoop.

Over the past several years, many loans were made to homeowners with somewhat non-traditional or "non-conforming" situations, be it a poor credit history, inability to document income, or any number of factors that do not fit within the traditional "box" for home loans. These loans are often called "Sub-Prime", or "Alt-A", meaning that they were somewhat riskier in nature than A credit, prime, or traditional loans. Another type of "non-conforming" home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417K, which is the current maximum loan that can be done using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done - it's called a "jumbo loan" - but the end money comes from private institutions, not from the large government sponsored entities of Fannie and Freddie.

Most non-conforming loan product rates popped significantly higher recently. Here's what happened.

The end investor for Subprime or Alt-A loans will charge a premium for taking on a pool of these loans, because they know that traditionally, they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure has been on the rise - partly due to the fact that with credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell in order to get out of trouble. So now, these end institutions are demanding a much higher "risk premium" for taking on these pools of loans, as they see the rates of default are climbing higher.

But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101K for a $100K loan that will bear interest, they may only be willing to pay $95K for that $100K mortgage to account for the risk. Multiply that times thousands upon thousands of loans...and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a "liquidity crisis", and is exactly what happened to American Home Mortgage - there was no mismanagement, but they simply got caught holding too many "hot potato" loans, forced to sell them at massive losses...and eventually they had to make the decision to close the doors and stop the bleeding.

Further, even when a lender is able to take some losses, they may be subject to a "margin call". This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset that they are secured on is now diminished. This is exactly like margin calls in the Stock market. If you have a loan against a Stock that is losing value, you will get a "margin call" and need to pay down the loan, as the underlying Stock is losing too much value to be considered adequate collateral any longer. So for the big lenders, as their portfolio is losing value due to increased risk premiums and losses...the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, which then exacerbates the problem.

In response to seeing this situation play out in the demise of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared - and likely over-prepared - for increased risk premiums down the road. Even though loans above $417K are not presently suffering from increased delinquencies like the Subprime and Alt-A loans are, these rates popped higher as well, because they are being purchased by smaller private entities that can't afford to take on any margin of risk.

What happens next? The major damage is probably already done, and the present situation will likely settle out over the coming year. Lenders will stop pulling products off the shelf, and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize.

But here are a few important things YOU should do right now:

ONE: Even if you are not presently in the market for a home loan of any type, make sure that your credit standing is as solid as possible. Many people in the market for a home loan didn't expect they would have a need, and didn't plan in advance to ensure their credit would qualify them for the best possible financing. With no immediate need for a home loan, time is on your side... why don't we take a few minutes together and just make sure you are prepared, should a need arise down the road? Call or email me right away.

TWO: If you are in the market for a home loan, or know someone who is - understand that now is the time to be working with a real qualified professional who can keep you informed of changes in the market and get your loan funded quickly. Now is NOT the time to be playing the risky game of trying to scour the entire nation to find someone who promises to save you a paltry amount on costs, or deliver a rate that seems too good to be true.

Your home and your financing are just too important, and times have changed. I am here to help and advise during these volatile times - and would welcome calls from you, your friends, family, neighbors or coworkers.

Scott Rheinhart

INTEGRITY ASSOCIATES

OFFICE 952-405-2895

CELL 612-281-9990

scott.rheinhart@gmail.com

www.sherlockofloans.com