Pay attention to Ben Bernake’s words and what the Fed is going to do if you are thinking about purchasing a home.

Why? you ask. What does the Fed have to do with my buying a home in Tucson Arizona?

The Fed determines the monetary supply and if we are in for inflationary ride, you may be wise to consider not paying all cash for your property but rather instead take a loan putting 20% down because you will be paying off that 30 year loan with cheaper dollars.

If you can get 4.75% or 5% money, and if we run into inflation in a few years, you still have 80% of that amount you originally were going to use to pay cash for a house, squirreled away and now you can hopefully put it into an investment where you will make more than 5%. And to boot, you will have the interest deduction.

History illustrates that inflation is always with us. Think about ten years ago and the price of an automobile, the price of a pound of hamburger, and the price of home. What are the percentage increases? And yes, it’s true you have had increases in your own paycheck, but that kept you even with inflation.

The Bureau of Labor Statistics at it’s website :

http://www.bls.gov/data/inflation_calculator.htm

has a calculator which will calculate the dollar value in terms of today’s dollar. It’s fun (and frightening) to play with it to see how much of your dollar has been eroded by inflation over the years. $1.00 in 1942, the year I was born, is equal to $13.32 today. $1.00 in 1964 when my daughter was born is now equal to $7.04, and that same $1.00 in 1968 when my son was born is now equal to $6.27.

Humor me with this little exercise. In 2000, you hypothetically purchased a property for $200,000 and financed the entire property at 5% interest for 30 years.
The monthly payment would have been $1,073.64 principle and interest only.

Now, ten years later, the inflationary index (using the calculator) places that home’s value at $253,556.33 in dollars today, and that same $1,073.64 principle and interest payment with inflation is equal to $1361.14 in today’s dollars. That is a 21% increase in 10 years.

So if Bernake wants to curb deflationary pressures by trying to increase inflation through bond buying, some type of inflation may be in the offing. Think about how you want to finance property and consult with your tax accountant and your financial advisor.

Resources:
Articles RE: FOMC meeting

http://blogs.barrons.com/stockstowatchtoday/2010/09/22/et-qe-two-bernanke-bonds-say-yes/

http://www.ibtimes.com/articles/63876/20100920/what-to-expect-at-the-fomc-meeting.htm

http://finance.yahoo.com/news/Gold-Prices-Pop-After-FOMC-tsmf-3153566242.html?x=0

http://caps.fool.com/Blogs/peter-schiff-video-blog-/449832

   The new Mortgage Disclosure Improvement Act (MDIA) promulgated by the federal government is not much of a change for lenders who were ethical and disclosed costs initially;  but for those unscrupulous lenders who performed “bait and switch” during the home buying heyday, lamentations are rampant.

   “The purpose of the new Mortgage Disclosure Improvement Act is to insure buyers are fully aware of closing costs and interest rates which they will be charged on their mortgage loan,” said Courtney Walker, Vice President of Nova Home Loans.  “They don’t get to the closing table and are surprised by the numbers”, Walker continued.

   Within three days of applying for a loan, a full cost disclosure must be given to the applicant.  The cost disclosure must be given before any fees are collected, with the exception of any fee charged for pulling the consumer’s credit report, according to the amendment to Regulation Z, Truth in Lending.  Closing cannot take place for seven days unless specifically requested for an emergency.

   In the heyday, reputable lenders provided cost estimate sheets for their clients with the closing costs and loan costs spelled out, including the interest rate.  Good Realtors helped clients by providing clients with names of honest lenders and kept an eye on closing costs, making sure there were no pre payment penalties or other charges unless the client understood the terms of the loan. 

   This legislation comes as a result of the numbers of people who said they did not understand the terms of their loan and the loan costs, such as the option arm loans or the first 80% fixed rate loan with an adjustable rate for the second loan. 

    “The point of the MDIA is that whenever closing costs or interest rates change, the APR reflects these changes in the closing costs and interest rate.”  Walker gave the following example:  A person is offered a fixed rate and the APR is stated, and then offered a 2% rate with a $10,000 up front charge.  How does that person know which loan to choose?  “How are they going to compare an apple with an orange?  The APR will help do that”, Walker said.

   Under the new legislation, if the APR moves 1/8 of a point either up or down, the lender must redisclose to the client “to insure that the buyer is fully aware”.  The borrower must be given a reasonable amount of time to review the new numbers.   “The buyer must receive, review and acknowledge in writing the new disclosure”  and if the new numbers are not approved, then the buyer must change courses. 

    Escrow fees are included in the APR so it is important that the Title Company named in the buyer contract documents is not changed.  Title companies in the Phoenix area charge different rates than the title companies here in Tucson.  For people purchasing foreclosure or short sale properties, any costs the buyer pays, such as allowable seller closing costs, must be included in the APR. 

    If the market moves tremendously, and interest rates go down, redisclosure is mandated, even if to the borrower’s advantage.  Lenders cannot collect upfront fees from borrowers at the time of application.   These include appraisal fees and lock in fees. 

    Lock in fees are relatively new and are similar to earnest money, Walker said.  The purpose of up front lock in fees is because investors (of the loans which the borrower is applying) are beginning to penalize lenders for not delivering on loans for which borrowers apply.  This is often due to borrowers shopping rates.  “Time, money, and effort is put into getting a loan approved” Walker said, and the lock in fee shows good faith on the part of the borrower.  The fee is remitted at the close of escrow as a credit on the closing statement.

    The new requirements do not add time to the loan process, Walker said.  “Nova underwrites locally, draws the docs locally, and funds from its own money,” she added.  “Even with FHA and VA loans, we have basically a 30 day turn around time”.

    Some lenders are recommending a 45 day closing time, so that if a contract is written August 1, closing should be stated September 15.    A Realtor who works closely with the lender is your best advisor, knowing the turn around times of lenders is even more important, and it underscores the need to use local lenders.

Resources:

Nova Home Loans    http://www.lancedickson.com

Federal Reserve Board Press Release

 http://www.federalreserve.gov/newsevents/press/bcreg/20090508a.htm

Federal Register:  http://edocket.access.gpo.gov/2009/pdf/E9-11567.pdf

     Many out of town people come to Tucson with the idea of purchasing property.  In today’s real estate market, they can cherry pick amongst bargain properties.  But now, with new requirements set forth by lending institutions and the federal government, a little planning goes a long way.

    From the comfort of one’s home in Anytown, USA, a future Tucson resident can use the websites provided by local lenders to apply for home loans.   It should be emphasized, local lenders, regardless of where you are moving, are the people who know and understand the quirks of the marketplace.   If  applying for a loan in Tucson, the lender in upstate New York has no idea what our market conditions are, nor should he/she be expected to know.  Conversely, a lender in Tucson does not know the market in upstate New York.  

    Many of the lenders advertised on television or the internet do not know the local market.  They sit in a huge room with a computer screen and sometimes the borrower does not even talk with the same person twice.  This may not be true for all internet and lenders advertised on television, but real estate agents have a bevy of horror stories because these lenders do not know or understand Arizona law.

    Using local lenders, (three are provided below) and talking with a Realtor who can make initial contact with these lenders, will get you the very best service.  A pre approval and  LSR (Loan Status Report) for the Realtor prior to looking at property, will insure the buyer of being able to make an offer without delay.

    A LSR is required for all offers.  This tells the seller and the seller’s agent, that the buyer has been preapproved for the loan requested and that the buyer has talked with a lender and provided the lender initial data requested.  Unless financial conditions dramatically change, the buyer should be able to consumate the transaction.  The purpose of the LSR is to prevent people from making offers on properties, (and tying up properties from future potential buyers) , which the original buyer cannot afford.

    While in the armchair comfort of home, the newcomer to Tucson can determine what documents will be needed by the lender and can either fax or mail copies of those documents.   Being pre approved streamlines the entire process, and in a market where interest rates jump from day to day, or from morning the afternoon, plus the new lending requirements regarding time frames and disclosures by lenders to the borrower, the soon to be new Tucson resident, sits in the cat bird’s seat.

Lenders:

Lance Dickson Nova Home Loans    http://www.lancedickson.com

Tom Heath   http://www.theheathteam.com

Jerry Sundt    http://www.sundtmortgagegroup.com

Realtor:    http://www.terrybishop.com  

                e-mail:  terry@terrybishop.com

   Purchasing real esate is one of the prirmary reasons the consumer should make sure the credit score does not contain errors.   A difference of 1 % between a 5.5% loan and a 6.5% loan is $128.56 a month.  At 5.5%, payments principal and interest are $1135.57 and and 6.5%, $1264.13 a month,   Over a 30 year loan, this totals $46,283…that is a lot of money!

    When information on a credit report is inaccurate, it should be corrected by the consumer as soon as possible.  The consumer can correct and request deletion of information. The Federal Trade Commission has a web page devoted to credit report including a brief online video.   According to the FTC, check the credit report annually

Resources:

The Federal Trade Commisison:    http://www.ftc.gov/freereports

Patrick Ritchie  http://www.TheCreditRoadMap.com

About credit cards and divorce:    http://www.creditcards.com/credit-card-news/dividing-credit-card-debt-divorce-1282.php

Equifax Credit Information Services, Inc.    http://www.equifax.com

P O Box 740256      Atlanta, GA   30374 -0241     (800) 685-1111

Trans Union Corporation    http://www.tuc.com

P O Box 2000  Chester, PA  19022    (800) 916-8800

Experian   Http://www.experian.com

P O Box 2104   Allen, TX  75013   (888) 397-3742

In this era of people tightening their belts, pulling back on many purchases, and the occassional missed payment, credit scores can be severely bruised.   A credit score can impact  many facets of life, from obtaining the job since many companies now look at credit scores as a component of evaluating risk, to getting the best rates for insurance policies.  

Naturally credit scores impact the amount you pay for credit;  the price of a interest on a mortgage, the price of interest on a car, or any loan at a financial insittution.   The best credit terms used to go to people with a score of 720 or better, but now lenders look at scores of 740.  

The law states that consumers are entitled to one free credit report which can be obtained from

           http://www.annualcreditreport.com

There is no charge for this report.  This is not the advertized site seen and heard on television and radio and in print media which is not the government sanctioned web site.  According to the U.S. Public Interest Research Group, approximately 70% of credit reports studied “contain errors of some kind” said Patrick Ritchie, author of The Credit Report Map.

Obtaining a credit report and keeping the credit report over a period of years to use as the basis of comparision is wise.  When disputing errors in the report, previous credit reports can be used as referral tools.  The Fair Credit Billing Act (FCBA) and the Electronic Funds Transfer Act (EFTA) set procedure for consumers to dispute items on the credit report.

The three main credit scoring agencies are Equifax, TransUnion, and Experian.   They take information from creditors regarding payment history of debt, balances, payments, high credit, as well as data from the public records.

Credit score components are 35% pyament history; 30% amount owed; 10% inquiries and new debt; 10% types of credit; and 15% length of history.  It is wise not to cancel a credit card, especially if it has been in use for a long period of time, since it will influence the length of history component. 

The three credit agencies give higher scores to people who keep credit card debt less than 50% of the maximum credit allowed, regardless of payment history.   It is better to have five credit cards with a $5,000 limit each carrying balances of $1,000 each (20% of the maximum allowable amount) than one card with a $10,000 limit carrying a balance of $5,000 (50% of the allowable maximum debt).   The amount owed is the same, but the scenario is viewed differently;  the assumption is made (accurately or inaccurately) that the person carrying the five cards manages debt better than the person carrying one card. 

It is also important to periodically use all credit cards, even if for a small $5.00 payment or for a monthly bill like Netflix or the gym.  This is construed as good money management.  If in a financial squeeze, at least make the minimum payment on every card, rather than trying to make a larger payment on one card at the expense of the others. 

Tomorrow:  More about Credit Scores

Resources: 

http://www.TheCreditRoadMap.com     –  Patrick Ritchie

Federal Credit Reporting Act:   http://www.ftc.gov/os/statutes/031224cra.pdf

The Credit Report – http://www.annualcreditreport.com

Equifax   http;//www.equifax.com

TransUnion  http://www.tuc.com

Experian   http://www.experian.com

   Any number of life events can cause a homeowner to become delinquent on his or her mortgage payment:  loss of job, divorce,  death, incarceration, medical bills, caring for children’s children, caring for parents, adjustments in mortgage terms, accident.  These are life’s events.  Mortgage delinquency is not planned.

   The State of Arizona, through Attorney General, Terry Goddard, and the Arizona Foreclosure Task Force, has issued a booklet about foreclosure which can be download from your computer.  The workbook, which provides timely and accurate information, is at:

                http://www.arizonaforeclosuretaskforce.com

Although this information was written for the citizens of the Grand Canyon State, the worksheets and general information pertain to anyone.  The specifics of foreclosure in Arizona may differ in your state; check with your local HUD office or your own Attorney General’s office, or seek the counsel of a qualified attorney and Realtor who understand the foreclosure process. 

The booklet warns against “scams” where people promise to keep you in your home or suggest you can get a better interest rate.  The old adage applies:  “If it’s too good to be true, it probably is”.

Although it is often frustrating, people who believe they may be in financial trouble, should contact their lender immediately and determine if any “work-out” can be done.  Keeping a journal of information detailing the time and date, plus the general conversation and to whom you spoke is important.  Chances are you will not speak to the same person when you make calls and having this ready reference will be be invaluable. 

You should be prepared to detail the “hardship” you face and a “hardship letter” will be required if you eventually go to a “short sale”. The worksheets in the booklet help the consumer detail how and when the hardship took place. 

For the state of Arizona, a list of housing counselors is provided.  If you are located outside of Arizona, call your local HUD office (Department of Housing and Urban Development listed under the Federal Government).  Housing counselors are trained to work with the lenders and may have more success than you as an individual homeowner may have.  They will need your information from the worksheets.

Budget forms are provided since the lender will want to know about your personal assets and liabilities.  Easy to use forms help determine what type of loan (s) you may have on your property.  Once you complete this information, you should have a good understanding of your financial situation and whether a short sale or foreclosure is the only option, or whether you can keep your home. 

Options are detailed if you elect not to keep your home which also includes bankruptcy and the types of bankruptcy.   Finally  there is a segment on scams and how to recognize a scam.

Remember, this is public information and as soon as Notice of Sale if filed with the Recorder’s Office, people will come out of the woodwork offering to “help” you.   If you know of someone who may be facing financial difficulties, share this information with him or her. 

Be proactive and knowledgeable, for in knowledge there is power.

Resources:

http://www.arizonaforeclosuretaskforce.com/wp-content/uploads/2009/05/2009-arizona-consumer-foreclosure-info-wrkbk.pdf

www.hud.gov

    Celebrations of the winter solstice marked the full rotation of the earth around the sun.    The shortest day of the year is behind us.  Daylight increases with every passing day.  Holiday cheer is abundant and in less than ten days, we will be welcoming 2009 with First Night celebrations.  

    Snowbirds, or to be politically correct, winter visitors  will soon arrive.  While much of the remainder of the country has snow, sleet, freezing weather, and bone chilling cold ahead of them, those people who make a pilgrimage to Tucson will be in for high 60’s and 70’s  weather and increasing daylight – especially since Arizona does not turn it’s clock back!

    For anyone thinking about purchasing a winter home, this is the time!  Although many people pay cash, it may be worthwhile to think about taking a mortgage, especially since rates are 4.625% for a person with good credit scores who can put 20% down.  The 1% loan origination fee charged on this $100,000 loan has a break even point of about four years.  Principal and interest at that rate on $100,000 would be $514.14.

    Wrapping the loan origination fee of 1% or $1,000 into the loan at a higher rate of 5% makes the payment $536.82.  The difference is $22.68 a month.  Dividing the $1,000 by $22.68 gives a break even point of 44.209 months, or nearly four years.

    Although it has been the dream of everyone to be mortgage free, the exercise of examining one’s own mortality may be worthwhile.  Looking at a 30 year mortgage, assuming I am 68 years old, what is the probability I will live to be 98?   When really do I think I will die?  Let’s see, my Mom died when she was x years old, and my Dad died when he was y years old…what does that say about my own gene pool?   Hmmmm….I will probably die about 86 years old.

    So if I have a 30 year mortgage, that means there will be an additional 12 years to pay off when I die.   History has told us that inflation is inevitable… and let’s just calculate a mere 3% inflationary factor each year…interesting…that $100,000 in 2009 will become $245,684.22 in 2039!  It may be more prudent for me to let my estate worry about that remaining 12 years…a consultation with a financial advisor or CPA, might be in order here.

    History also tells us that regardless of the political affiliation of the administration, whenever we have a budget deficit, the government pays it off by printing money…i.e. inflation.  So perhaps 3% is a low rate. If we were to experience 5% – a rate which has been consistent for Tucson between 1993 and 2004, the value then jumps to $446,774.49!

   And then we add the income tax deduction which is calculated on the marginal tax rate…and the fact we keep our $100,000 in tact for other safe but more liquid investments…

   Financing is a personal decision.  But with the price of properties in Tucson now, including Active Adult Communities, people thinking about a second home should consider the advantages of acting now.

Resources:

Tucson Weather and Precipitation:

http://www.weather.com/weather/wxclimatology/monthly/graph/USAZ0247?from=tenDay_bottomnav_undeclared

Lenders:

Nova Home Loans:

http://www.lancedickson.com

Sundt Mortgage:

http://www.sundtmortgage.com

Realtor:

http://www.terrybishop.com

e-mail:  terry@terrybishop.com

Housing Statistics 1993-2007:

See blog

 ” What’s old is new and what’s new is old.”  That adage stands today.   As we all know, no more NINJA loans, no income, no jobs, no assets.  And sometimes the old fashioned way is the best. 

      Putting 3.5% down on an FHA loan after January 1 is prudent.  And conventional loans with 5% or more down, is also prudent.  Where else could you purchase something costing $350,000 with no money down?  It makes no sense.

     But in 1999 Congress repealed Glass Steagall through the passage of the Gramm-Leach-Bliley Act.  This permitted commercial banks and investment banks to compete. 

   Congress deserves to take it’s lumps.  The repeal of the Glass Steagall Act at the end of the Clinton administration combined with the loosening of terms and government encouragement to banks to make  unworthy loans through the Community Revnvestment Act, lead us to this debacle. 

    Money was loose and abundant.  And builders took advantage of this free for all, as did lenders, Realtors, investors in housing stocks, investors in property… anyone who thought they might make a buck. If you could fog a mirror, you could buy a house!

    But now, returning to saner times, people are lamenting the lack of easy money.  But in the 1990’s, people needed a down payment, and they needed closing costs to purchase a house.  In some areas of the country, there are 40 and 50 year mortgages…years ago, a 20 year mortgage was considered long. 

    If people have a vested interest in their home, chances are they will work hard to keep it and they will make their purchasing priorities accordingly.  But if I have no vested interest in my home, why should I deprive myself of something I want in order to make a mortgage payment? 

    That simplifies the problem, I know.  We have 80-20 loans out there with adjustable rates…there are rates resetting at much higher rates…and I know the forclosure rates are at their peaks.  There is plenty of blame everyplace…some of which should be laid at the doorstep of Congress. 

     Let’s hope this financial mess ushers in a period of stability where people begin to count their pennies again before making huge purchases.  And maybe some reflection for all those people who tried to make a fast buck…and some consideration of business ethics and the fact we are dealing with people’s lives and the lives of their families…and maybe…just maybe…some reflection about self responsiblity. 

    It’s a blame game alright, but ultimately, the person responsible is oneself.  

    Resources:

http://my.opera.com/richardinbellingham/blog/show.dml/1796860

http://thestrangedeathofliberalamerica.com/bill-clinton-glass-steagall-and-the-current-financial-and-mortgage-crisis-part-two-of-an-indepth-investigative-report.html

http://www.dealwatchblog.com/post/2008/09/17/Lawyers-say-repeal-of-Glass-Steagall-isnt-to-blame-for-Wall-Street-woes.aspx

http://en.wikipedia.org/wiki/Glass-Steagall_Act

http://mises.org/story/2963

http://www.federalreserve.gov/dcca/cra/

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

http://www.ffiec.gov/cra/

http://mises.org/story/2963