Fed interest rate cut

[Strong Bad]

I see the feds cut a key interest rate by 3/4%.

I'm not a finance whiz, so my question is...

How does this rate cut factor into new car loans? Will it affect them? If so, how long till this cut trickles down to lenders?

Yeah, new car purchase soon.


John

[Kex]

It should certainly help you get a better rate in theory, depending on your credit rating of course.

[strider]

You're one step ahead of me, John.

I'm curious as to how this will affect the mortgage rates. We're locked into a rate 'til 2/20 for refinancing our house, just wondering if we'll be looking at a lower rate or not.

Ben

[PhantomOG]

Supposedly they hinted at further rate cuts so hopefully mortgages rates will continue to go down. I hope I have enough equity in my house to put my 80/20 into a single 80 with rates lower.

[polktiger]

It will not hurt car loans or mortgage rates as there pressure will certainly be downward not up. Mortgages frequently use the LIBOR rate as opposed to the Fed Funds rate as a basis. Don't expect a huge drop maybe an 1/8 or 1/4 at best.

[strider]

I hope I have enough equity in my house to put my 80/20 into a single 80 with rates lower.

That's exactly what we're in the process of doing. We did a 80/10 with 10% down in August of '06. We have enough equity (barely) to roll it all into one loan. Going from one at 6.75% (80) and one at 9.0%(10) to one loan at 5.75%, or lower if we're lucky.

[Strong Bad]

My credit union is around the 5.75% - 6% mark with new car loans. You get the best rate with auto withdrawal payments.

It's no wonder the mortgage industry is in such utter chaos right now. They make you finance anything above 80% of the loan at a much higher rate. What a F***ing scam!!! Then you get boned in the arse with closing costs.

The mortgage industry needs some SERIOUS overhauling and not just the subprime lending area! They know how to turn the american dream into a nightmare!

[Kex]

My credit union is around the 5.75% - 6% mark with new car loans. You get the best rate with auto withdrawal payments.
...
I don't know if you'll be able to get better than that. That rate already seems pretty low to me, and even a 0.25% decrease from there will only make a small difference in your monthly payment. If you can already get that rate, I don't think you have anything to worry about (other than pushy salesmen, but there are ways and means to control those guys too).

[PhantomOG]

Penfed has new auto loans at 4.99% (https://www.penfed.org/productsAndRates/loans/vehicleLoans/newAutoLoans.asp)

join NMFA for $20 if you are not military or related to military.

I haven't dealt with them directly but they are supposedly good. My brother has an auto loan with them, he was happy.

[Kex]

The duration and type of the loan also typically affect the rate. Thirty-six month loans benefit from a lower rate than a sixty month loan. New car loans are always cheaper than used vehicle loans ... etc. etc.

[kn505]

For mortgage fixed rate loan, if you can lower the interest rate by 0.25% and avoid a large closing cost, you can save a few thousand dollars. I created an Exel file to calculate the savings, but can't attach it here. If you want the file, email me at kn505@yahoo.com.

[shack]

What the fed is doing may have no immediate effect on mortgage rates. Two different animals. Overnight short term vs long term. What the fed has lowered is the rate banks can borrow from them for overnight short term needs. It immediately affects the "prime" (variable) rate. Long term rates are more affected by the bond market. Remember also that banks set term rates based on what their money costs them...very little of which comes from the federal reserve. Some of the funds the banks lend will reprice immediately (savings, MM, etc.) but CDs will reprice slower. Also many rates are where they are in anticipation of the feds action today. If the decrease is more than they anticipated then we may see some lowering of term rates and certainly the next "emergency" cut will have some addional effect. Loans tied to the prime rate will come down immediately...but term rates (autos, home loans) may be slower to come down. Another thing is banks have been hammered with mortgage and CC defaults. They may take their time lowering rates to recover some of their losses. They will still be VERY selective in who they are lending to as the Govt. regulators of banks are really playing hardball with loan quality there will be no "subprime" situation any time soon.

Long story made short. Car loans and home loans may come down over the next few months...but don't expect them to be 3/4% lower immediately ( or whatever next rate drop is). It will take some time.

[shack]

It's no wonder the mortgage industry is in such utter chaos right now. They make you finance anything above 80% of the loan at a much higher rate. What a F***ing scam!!! Then you get boned in the arse with closing costs.

The mortgage industry needs some SERIOUS overhauling and not just the subprime lending area! They know how to turn the american dream into a nightmare!


John, you don't have a clue. There is a reason for the 80%. Anything above that amount carries a big..no make that HUGE..risk and accordingly deserves a higher rate. The mortgage market doesn't need an overhaul...It needs to go back to making sure when someone buys a home, they can afford it, both in terms of making a down payment and making the monthly payment. The problems we are seeing today are due to lending 100% of purchase price, not having to prove income (stated income) and assets, unscurpulous mortgage brokers (and bankers), bad R/E agents and quite frankily people buying a home that have no business buying a home.

In the past we have been treating the "American Dream of owning a home" as a God given right and not a priviledge earned...therein lies the problem.

I agree paying "points" is bad...but making sure there is good title, making sure of what the home is worth, making sure there are no legal issues, making sure the transaction is handled correctly, etc...are valid costs which should be born by the parties involved. NOT a scam.

[Face]

So how much longer till I can refinance my house in the 4.X range?

[Strong Bad]

You call it "going back to...." and I call it "overhaul." Whatever you choose to call it, it needs to be changed to fix all the problems that have come about and that have existed for quite a while.

Lets go for this scenario and feel free to debate it. I ask replies to be civilized and to educate us who may not be seeing the whole picture. I see these things day in and day out and seriously have to question why it is the way it is. It's our right to question these things.

Here goes...

I decide to buy a $200k home and have $40k sitting in a bank account. The lender runs through everything and determines i have excellant credit, solid income and can well afford this home. No issues at all. I say however, ya know what, i don't like the idea of wiping out my savings just to satisfy the lender in putting down 20%. I like having that cushion of very liquid cash on hand for who knows what emergency may arrise. I could get in an accident tomorrow and need that liquid cash to keep things above water for a little while.

The lender has determined me to be a solid borrower in their eyes, so why is it the borrower gets nailed for a higher rate on anything above 80%? Who determined the 80% mark?

I do agree that things must be tightened up bigtime. These interest only loans are a damn joke! They made it WAY too easy for people to get a home they could not possibly afford.

Talk to me folks!

[Kex]

Adding to your discussion, Strong Bad, here in SoCal, some of us with theoretically good incomes and stellar credit cannot even get a home! A cheaply built 1,400 sq. ft. 1940s tract house on a 7,000 sq. ft. lot in an ordinary neighborhood in Santa Monica now costs $1.5m. These are homes with no double glazing, AC, or insulation. Heating is frequently from rudimentary floor furnaces. If you buy one, you then owe more than $1,000 per month in property taxes!

Now to the 20% thing: who has 20% of $1.5m just lying around available?! It's impossible unless you already owned a home that you can sell. Along with closing costs and Realtor commissions on such huge values it is now estimated that only 3% of the L.A. population can afford the median home price, and we have yet to see a home that is anywhere close to the median price (the cheapest we have seen is about 50-60% over that). Even if you can get your $1m home, you then own something that would not even be worth $200K in many parts of the country.

When home prices get to these levels for homes of this quality, it really is a scary situation, and market readjustments can put even very careful people into a high risk category if they find that they need to sell to change jobs or something similar. Even a 10% reduction in their home value would shatter most American families' emergency savings, especially after financing such a purchase.

[PhantomOG]

Banks are in the business of making money. Period. Sure, they'll give you a loan, but they want to make money on it so they charge you interest. However, there is a risk that you'll default on that loan. If that happens the bank keeps the house but that doesn't absolve all of the risk. The value of the house could have gone down and the bank might not be able to sell the house for the amount you bought it for. That's why unless you put a substantial amount down payment (~20%), the bank is going to charge you a higher interest rate because their risk is higher. They know that a certain number of people will default and they will lose money, they have to charge a higher interest rate to make up for that.

As for California? Move! :p I mean, its all going to fall off into the pacific anyways, right?

[shack]

John to use your scenario. The bank loans you $200,000 and let's you leave your $40,000 in the bank because you have good credit, good income etc...

THEN...any number of things could happen. You lose your job. You spend the $40K living the high life till you get that "perfect" position you know is out there. You pinch one of the strippers on the ass...she turns around and slaps you silly, you trip over your headphone cord, fall an hurt your back and can't work either job...no workmans comp, you use up what little disabilty insurance income you have and again the $40K goes out the door. You take a picture and get sued by whoever and a huge judgement goes against you and....the $40K is gone. Whichever scenario....you're broke and can't make your house payments.

The bank starts to forclose. Even if the market is flat...EVERYONE knows it's a forclosure so the market price comes down 5-10% right off the top. In a bad market (like now) it may be down 20% or more. Then there are the legal costs to foreclose, the maintenance and upkeep, taxes, insurance, utilities marketing expenses (banks have to pay realtors too)...all the sudden that house that was worth $200,000 sells for $190,000, less $5,000 in legal fees, $5,000 in mainenence and repairs (and that figure is assuming you didn't trash the place since you knew you were losing it :rolleyes:) $10,000 in realtor's fee, on top opportunity cost of losing the income from the $200,000 that could be out to someone who is making their payments. If the loan is at 80% of value, there is a reasonable chance in a "normal" market that the bank may come out whole. At 100% LTV chances are they just wrote down a $30,000-$40,000 loss. At an average net profit margin of 2% The banks need to have $2,000,000 in funded loans for a year just to cover the losss on one $200,000 mortgage loan.

The 20% is not some random figure taken out of the air. Historical data says that when a bank forcloses on real estate they recover 80% of the amount the property sold for. EVEN in a rising market.

Therein lies the risk. Good customer, good savings, good job and all the sudden it all goes to hell and the bank is stuck with the loss. Banks are "risk averse" not risk takers. They are not entrepenurs...but have a fiduciary responsibilty to depositors and shareholders. They rent money that is not theirs and simply make money on the difference in what they have to pay depoitors to borrow thier money and what they can charge borrowers to use it. Even if the loan goes bad they have to give the depositor back thier money and that comes from the profit that should go to their stockholders.

Thats why any mortgae over 80% loan-to-value should carry a higher rate in terms of PMI insurance or a higher interest rate.

IT'S NOT A SCAM! It's good, prudent business practice.

[strider]

What the fed is doing may have no immediate effect on mortgage rates.

...........

Long story made short. Car loans and home loans may come down over the next few months...but don't expect them to be 3/4% lower immediately ( or whatever next rate drop is). It will take some time.

That's what I was after, thanks for taking the time to explain. I wasn't expecting a 1:1 ratio between today's news and our rate, but thought it might help.

FWIW, ours did lower 1/8 percent today.

[Face]

Since I only put 5% down, I had to pay PMI also. But with house values still on the rise, plus having work done to my home, I was able to get it reappraised for 25% more than what it was originally appraised for, and no longer had to pay PMI.

I wonder how the foreclosure rate would be affected if PMI never existed?

It's a scam if you ask me. If someone is unable to make payments and forecloses on the house, the bank keeps the house and is able to sell it to someone else. They aren't losing money.

If anything, auto loans have to be riskier. If someone defaults and refuses to give the car back, the bank has to pay a repo man to come out and look for it. And what if he doesn't find it since it's a little easier to hide a car than a house. :D Then they have to take the person to court and MAYBE get their money back.

[shack]

It's a scam if you ask me. If someone is unable to make payments and forecloses on the house, the bank keeps the house and is able to sell it to someone else. They aren't losing money.

Then you obviously don't know anything about banking and R/E foreclosures.

[Strong Bad]

Thats all I wanted was a good solid explanation on how they arrive at the figures and percentages that they arrive at. I stand corrected on the SCAM comment. Although, some of the closing cost stories told to me by coworkers scream the word SCAM. But thats another story.

The whole sub-prime lending practice really effed up things. Putting people in homes that there is no way possible they can afford. I remember seeing an article in the newspaper last year about a guy who bought a $250k condo in the N. Va area making $30k a year in income. He didn't last long at all and it went into foreclosure (surprise surprise). He said he was going to sue the lender for misleading him, but I have to ask...how the hell did you think you could afford a loan of that size making $30k?

Kex, do like Lex Luthor did in the first Superman movie. Go buy alot of worthless desert land and when California sinks into the ocean...CHAA CHING! :D I see it in your future...Costa Del Kex! ;)

[Face]

Then you obviously don't know anything about banking and R/E foreclosures.
Can you explain for us?

[shack]

Can you explain for us?

I already did....Post #18.

And banks are not able "make a profit" off of a foreclosed property. When a propety is sold, the proceeds go first to cover the first mortgage and any expenses incurred due to the foreclosure, then to any amounts and expenses due to subordinate lenders and if any funds are left over then back to the mortgagor.

[PhantomOG]

I think they probably were some shady mortgage brokers, but how far is the government supposed to go to prevent people from hurting themselves through their own stupidity? We can't have a man in black standing on every corner protecting people from blowing their life savings on magic beans.

[tonyb]

Shack pretty much nailed it.Two words come to mind...Personal Responsibility.
People scream when they can't afford a house,laws are relaxed to afford them that opportunity,now they scream it's the banks or mortgage peoples fault that they can't afford it.So basically,your telling me that alot of people are too dumb to know what they can/can not afford and need someone else to tell them.Nobody is twisting your arm to take the loan.We like to have stuff,as a society,better cars,homes,latest gear,clothes,and so forth.So lets blame everyone else for my stupid decisions.Fact is,real estate has climbed so fast in so little time the last few years,an adjustment is/was needed.Personal responsibility folks,no more ,no less.

[ohskigod]

The whole sub-prime lending practice really effed up things.




yep, that about sums it up. decisions like this arent made on a case by case basis, its all policy and procedure. Lenders got Dicksl@pped in subprime, therefore all lending practices tightened up like the pope's poop shoot (hitting you in the gut directly)

Ironic thing is, house prices drop and people still cant get houses, hence house costs drop more, kills economy, and so on, and so on. when this all went down and people said it would last 6 months, I tried like hell not to laugh, this is going to take close to a decade to shake.

[tonyb]

And who do you guys think the whole sub prime buisness was aimed at?
Who is screaming the loudest?

[Maurice]

you got it ohskigod. Being a R/E investor for the last 8yrs, I could see this coming at least 3yrs ago. Prices in SoCal went soooo high, something had to give. With regards to the lenders, true lots of people bought homes they couldn't afford, but the lenders hands are just as dirty. They gave out all those loans because they were making money hand over fist. They were very very aggresive to the point of EVERYONE out here getting at least 3 unsolicited calls daily from lenders pushing refi's. Now its a mess, and wont be cleaned up for quite some time.

The reason the subprime market imploded is because the "secondary market" decided to no longer buy those loans, which meant lenders couldn't offer them anymore. But just hold on to your hat, because between now and the end of March, there are nearly 3mil loans scheduled to adjust. And at least out here in cali, values are falling like lead balloons. My home lost just over 100k in equity last year alone.

Be smart, buy gold.:cool:

[shack]

There are a lot of fingers to point at in the whole subprime mess. The lenders are the most at fault for losing money. THEY IGNORED conventional wisdom and sound lending practices and are paying the price. This goes for banks, and any other investors who purchased secondary market paper (insurance companies, pension funds, etc..).

That was the first problem...and while substantial...there are other factors as well. Corrupt mortgage loan brokers who would do whatever it took to get a borrower qualified was a huge factor. They would falsify applications, appraisals, lie about terms, not give proper disclosure...in essence whatever it took to get the loan approved to get their commission. R/E brokers and appraisers were right there in bed as well. The appraisers are the one's who piss me off. I've fired more that one who comes to me and asks "What value do you need to make this work?" I hire them to tell me what the property is "reasonably worth"...not what it takes to make my loan. I want to know that I can recover the amount I loan.

Last but not least are the federal regualtors who oversee the banks and mortgage brokers. They turned a blind eye to the issues IMO in order to not stall the economy. A downturn and correction a few years ago would have been better than what we have now. And again I reinterate....The "EVERYBODY DESERVES TO OWN A HOME" mentality had a lot to do with the feds position.

Lou, It won't take a decade. Once the backlog of inventory of new homes is cleared up and 50-75% of the highly leveraged homebuilders are gone, demand for existing homes will start to rise again. If interest rates stay low there will be plenty of mortgage money for qualified buyers. Once the existing home inventory is thinned out the demand for new homes will pick back up very quickly. The MARKET should be back to full speed in 3± years. The effects may linger but the home market will rebound because the demand for housing will continue as long as there is population growth.

Values...It will take a while for them to get back. They were over-inflated due to speculation and bad lending to non-qualified borrowers. I hope they stay down for a while to reflect "true" values.

[Maurice]

There are a lot of fingers to point at in the whole subprime mess. The lenders are the most at fault for losing money. THEY IGNORED conventional wisdom and sound lending practices and are paying the price. This goes for banks, and any other investors who purchased secondary market paper (insurance companies, pension funds, etc..).

That was the first problem...and while substantial...there are other factors as well. Corrupt mortgage loan brokers who would do whatever it took to get a borrower qualified was a huge factor. They would falsify applications, appraisals, lie about terms, not give proper disclosure...in essence whatever it took to get the loan approved to get their commission. R/E brokers and appraisers were right there in bed as well. The appraisers are the one's who piss me off. I've fired more that one who comes to me and asks "What value do you need to make this work?" I hire them to tell me what the property is "reasonably worth"...not what it takes to make my loan. I want to know that I can recover the amount I loan.

Last but not least are the federal regualtors who oversee the banks and mortgage brokers. They turned a blind eye to the issues IMO in order to not stall the economy. A downturn and correction a few years ago would have been better than what we have now. And again I reinterate....The "EVERYBODY DESERVES TO OWN A HOME" mentality had a lot to do with the feds position.


You hit the nail right on the head shack. LO's, AE's, Brokers, appraisers, & regulators ALL screwed this thing up bad. But money was being made and the economy "appeared" strong so regulators looked the other way. As for me, I'm gonna sit on the side lines until prices have bottomed out, then start picking up pieces and hold em' til the next upswing. The greatest wealth is always built during hard economic times by those who have the means to scoop up assets when they are selling cheap. Some of the greatest fortunes ever made in this country came out of the depression.

[polktiger]

I believe the 20% is set by FHA and Mannie Mae/Freedie Mac along with the "jumbo" level for what is a conforming loan when these mortgages are packaged and resold by the loan originator to the holders like Fannie and Freddie. In fact I am not sure Fannie and Freddie are permitted to buy non-conforming loans or loans that don't have 20% equity involved.

Kex - You hit on a big issue. Ours is not as bad as California, but in the last 10 years, the wage base in tourism heavy (read extremely low/minimum wage) coastal SC (combined with virtually no companies writing homeowners insurance) has caused many people that work in our area to buy houses they can not traditionally afford becuase of all the retirees coming down here and people buying vacation homes. (This also leads to the high number of illegals living in the area becuase they are willing to live 10 to an apartment and make what tourism jobs are able to pay. The "locals" are having to move away becuase they can't afford to work and live here. It will become a real problem in about 15 years, but our local politicians are both too stupid and too concerned about re-election to care. All they do is whine about why no "high paying" businesses locate here. Duh, they can't afford to pay their employees enough to live here.

[polktiger]

One last piece of the rant - The real culprits are the ones that were pushing and buying all these mortgages. Very, Very few, if fact less than 10 mortgage originators (and no brokers) actually hold this paper. It is packaged and sold as an investment product to US Banks, foreign banks, state pension plans, etc. These are the people that made the market that provided the funds for these loans. In my opinion they are the cause of the problem. I don't want to hear that this is just capitalism. Pure capitalism exists in college economics classes. It does not exist in the real world. The people buying and selling this paper were merely creating a market for junk debt, calling it investment grade mortgage backs and banking a huge commission. (Note the commission is paid to the seller and the agent for the buyer. There are lots of state retirement plans that are really being hosed in these deals due to lack of knowledgeable oversight.)

[shack]

I believe the 20% is set by FHA and Mannie Mae/Freedie Mac along with the "jumbo" level for what is a conforming loan when these mortgages are packaged and resold by the loan originator to the holders like Fannie and Freddie. In fact I am not sure Fannie and Freddie are permitted to buy non-conforming loans or loans that don't have 20% equity involved.


They can as long as there is PMI attached. At one time the Fannie Mae guidelines were that the borrower could do a 80/15/5 (80% first, 15% second and 5% cash down) and were VERY strict as to where the 5% came from. You had to prove that the cash was available and seasoned (meaning you had to have it for more than 6 months). They even did away from allowing parents and relatives to "gift" downpayments without substantial proof that it was a gift. Those guidelines went out the window which was a mistake. Even greater problems IMO were things like "Low Doc" and "Stated income" deals that were predicated solely on credit scores and the value of the R/E. Interest only, negative amortization, "teaser" rates on ARMs were also big factors.

It was all a house of cards that was doomed from the beginning. Hopefully reason will take hold for the long term.

[polktiger]

Don't get me started on the "no doc" crap. I am a CPA in public practice. You would not believe the "doc" they wanted from the CPA profession to go along with a "no doc" loan. Fortunately not many of our clients use the no doc route, but we did have a couple. They would ask for a letter (had to come from a CPA) "certifiying" certain things that the borrower would supply in a typical "with doc" loan. We refused to issue the letters and every other CPA I know of refused to issue the letters. It makes mortgage brokers furious, but the letter basically opens up the CPA that wrote the letter to a litigation should the borrower fail on the loan. Its very technical, but in most states when a CPA drafts the letter the way those mortgage brokers wanted it worded, the CPA basically guaranteed whatever the lie was that was being told, so when the loan goes south, the CPA is on the hook to the lender for the losses.

[carpenter]

I'm afraid there's a major down side to the interest cut.
The USD downward spiral means that the government will have an easier time paying off
existing debt, but a harder time raising money from the markets (selling new debt). essentially this means that investors would demand higher interest rates for the money they loan to the US treasury, as the risk becomes greater (an ever weakening USD means that the principle is not guaranteed).
Now, here comes the nugget, if the government can not raise enough money to execute it's plans, there are three courses of action.
1. sell more debt => we just explained why its gonna be a problem
2. decrease government spending => yeah right ...
3. raise more taxes from the people. => something that a newly elected administration can get away with, as it has enough time till reelection.
new taxes are also a way to fight inflation, as they decrease the amount of money the public has.


a comment about the mortgage rates:
when you buy money form the bank (borrow for a house) the bank calculates the rates based on the risk, and the cost of raising the money in the fixed income inter-dealer markets. the turbulence in the stock markets pushes prices in the Fixed income markets up, as investors a seeking a safer place for their money. The the sub prime earth quake, didn't help either.
this is why IMHO expectations for a dramatic decrease in mortgage rates might be a little early. they might even go up.


P.S.
Personally, if the taxes go to a good place, I can live with paying a little more.
but this is completely beside the point of this discussion, especially because each of us has a different idea on what would be the best use for public money.

[Strong Bad]

Alot of factors kept me out of the market. Years back, I didn't have nearly the income as I do now. During the big boom, I witnessed some people first hand supposedly affording these big mortgages on incomes that, to me, just didn't add up. Then, when my income starting shooting up, the prices of homes got to the point that just screamed "market correction coming soon" as they seemed way overpriced. All of these things just didn't add up to me. I refused to take on an Interest Only mortgage, again, because it just didn't make sense.

I've been patiently waiting and watching from the sidelines to make a smart purchase. I will be a first time home buyer and am told (correct me if I'm wrong) that there are terrific programs out there for first time buyers. I know what I can afford. I will not get in to a home and be "house poor" just so i can say "HA HA, look what I got" then be stuck eating Ramen Noodles.

Shack, thanks for all the info. It did help clarify things. I should have you banned though for not agreeing with me that it's all a scam! j/k ;)

John

[PhantomOG]

P.S.
Personally, if the taxes go to a good place, I can live with paying a little more.
but this is completely beside the point of this discussion, especially because each of us has a different idea on what would be the best use for public money.

ugh.... I can just feel the new taxes coming my way. Did you watch the debate last night? My stomach turned when I heard the words "shared prosperity" from the front runner :mad:

[carpenter]

Did you watch the debate last night?

Yup, and I should have watched what I really wanted: porn.
would have been a much better usage of my time.

in any case, I can see this thread getting locked, if we keep talking about it :o

... back to $$$$$

[polkatese]

Shack, question for you: on a typical variable rate HELOC, maximum credit limit is granted based on LTV of the property, and appraised value. What happen if during this correction the appraised value decrease to the point that LTV > appraised value?

thanks.

[Strong Bad]

As for me, I'm gonna sit on the side lines until prices have bottomed out, then start picking up pieces and hold em' til the next upswing. The greatest wealth is always built during hard economic times by those who have the means to scoop up assets when they are selling cheap. Some of the greatest fortunes ever made in this country came out of the depression.

Exactely! With some common sense and patience, I really feel I can make out very well from all of this. It's my plan anyway.

Some very good info has come out of this thread though. Thanks to all!

[PhantomOG]

The appraisers are the one's who piss me off. I've fired more that one who comes to me and asks "What value do you need to make this work?" I hire them to tell me what the property is "reasonably worth"...not what it takes to make my loan. I want to know that I can recover the amount I loan.

Yeah... those guys suck... so where can I find one and a broker to use them? :p

Seriously though, I know my house has appreciated since I bought it two years ago and I would love to refi my 80/20 into a single 80 but I don't know how the appraisal will go.

[polktiger]

Shack, question for you: on a typical variable rate HELOC, maximum credit limit is granted based on LTV of the property, and appraised value. What happen if during this correction the appraised value decrease to the point that LTV > appraised value?

thanks.

From what I have seen, it can vary. So, in some cases you may have to pay in the reduction or lose some availability. Also a true LOC should renew each year or two in which case the rollover may require a partial repayment of the original advance.

[Early B.]

I already did....Post #18.

And banks are not able "make a profit" off of a foreclosed property. When a propety is sold, the proceeds go first to cover the first mortgage and any expenses incurred due to the foreclosure, then to any amounts and expenses due to subordinate lenders and if any funds are left over then back to the mortgagor.

The reality is that there are a variety of factors that determine if a bank will make a profit from a foreclosed property. In my neck of the woods, for example, a house can go into foreclosure with a zillion bucks of equity build into the sale of it, and the bank is not repsonsible for notifying the previous homeowner of the equity that belongs to him. The bank simply keeps what doesn't belong to them. Of course, most homeowners aren't aware that they are entitled to equity, less arrears to the first lienholder, the subs and expenses. This happens all of the time, especially in less affluent neighborhoods. The laws regarding such issues can change depending upon municipality.

[shack]

Shack, question for you: on a typical variable rate HELOC, maximum credit limit is granted based on LTV of the property, and appraised value. What happen if during this correction the appraised value decrease to the point that LTV > appraised value?

thanks.

If the note is typical, there is a "catch all" clause that the bank can use to create an event of default that may read something like: "default occurs if at the determination by the bank that it is insecure for any reason;" which could allow them cancel the line, accelerate the maturity of the note. Deterioration of the value of the collateral could fall under that clause. It is a unilateral clause that you agreed to when you signed the note.

HOWEVER, banks do not like to own real estate and will do just about anything to avoid doing so. If you are paying the line on time and meeting all of their other criteria it is doubtful they would call the note in that circumstance. Secondly, most HELOCs are second mortgages and in order for them to forclose sucessfully, they would have to buy out the first mortgage holder's note and most banks would consider that good money after bad. Keep your payments current and you should not have any problems.

[shack]

I'm afraid there's a major down side to the interest cut.
The USD downward spiral means that the government will have an easier time paying off existing debt, but a harder time raising money from the markets (selling new debt). essentially this means that investors would demand higher interest rates for the money they loan to the US treasury, as the risk becomes greater (an ever weakening USD means that the principle is not guaranteed). Now, here comes the nugget, if the government can not raise enough money to execute it's plans, there are three courses of action.

a comment about the mortgage rates:
when you buy money form the bank (borrow for a house) the bank calculates the rates based on the risk, and the cost of raising the money in the fixed income inter-dealer markets. the turbulence in the stock markets pushes prices in the Fixed income markets up, as investors a seeking a safer place for their money. The the sub prime earth quake, didn't help either.
this is why IMHO expectations for a dramatic decrease in mortgage rates might be a little early. they might even go up.


This has some validity. Mortgage rates are driven by bond and treasury yields moreso that short term interest rates. As investors get more concerned about the volitility of the equity markets, they are more willing to take the lower returns but more stable fixed instruments like bonds and CDs which could drive bond prices up. If that is the case, mortgage rates could increase. We have been in a situation of an inverted yield curve for quite some time. A typical yeild curve will have short term rates lower than long term rates due to the uncertainty of the future. Currently long term rates are significantly lower...which indicates a correction could happen and mortgage rates increasing to some extent. Not a certainty by any means...but a possibility.

[shack]

I will be a first time home buyer and am told (correct me if I'm wrong) that there are terrific programs out there for first time buyers.

Yes there are. But be aware that there are often income limitations with some of these programs. Most oftern these are State run programs and differ by State, so it would be good to check to see what the limitations (if any) are in Maryland.

[DaveMuell]

Shack, I have read your posts. I have been in and around banking now for 20+ years and you know what you are talking about.

Keep up the good wrok; there are some folks that can learn a thing or two about what they don't even know they don't know.

[shack]

The reality is that there are a variety of factors that determine if a bank will make a profit from a foreclosed property. In my neck of the woods, for example, a house can go into foreclosure with a zillion bucks of equity build into the sale of it, and the bank is not repsonsible for notifying the previous homeowner of the equity that belongs to him. The bank simply keeps what doesn't belong to them. Of course, most homeowners aren't aware that they are entitled to equity, less arrears to the first lienholder, the subs and expenses. This happens all of the time, especially in less affluent neighborhoods. The laws regarding such issues can change depending upon municipality.

Perception...but not fact. GA has the 4th highest foreclosure rate in the nation and it is one of the easiest to do so. But that does not allow the financial institution to recover more than what they are owed (including principal, interest, fees and penalties). If they are doing so it is against GA law and federal law. Additionally GA residents have a "right of redemtion" and can go back an reclaim the property under certain guidelines. You may be thinking of people that buy properties at tax sales, where someone can buy the property for the amount of delinquent taxes and reap the windfall equity. Individuals and companies can do this. Banks cannot.

[shack]

Shack, I have read your posts. I have been in and around banking now for 20+ years and you know what you are talking about.

Keep up the good wrok; there are some folks that can learn a thing or two about what they don't even know they don't know.

Thanks Dave. If I haven't learned a thing or two about my industry after 30 years...then it's time to move on to something else. :D

[polkatese]

If the note is typical, there is a "catch all" clause that the bank can use to create an event of default that may read something like: "default occurs if at the determination by the bank that it is insecure for any reason;" which could allow them cancel the line, accelerate the maturity of the note. Deterioration of the value of the collateral could fall under that clause. It is a unilateral clause that you agreed to when you signed the note.

HOWEVER, banks do not like to own real estate and will do just about anything to avoid doing so. If you are paying the line on time and meeting all of their other criteria it is doubtful they would call the note in that circumstance. Secondly, most HELOCs are second mortgages and in order for them to forclose sucessfully, they would have to buy out the first mortgage holder's note and most banks would consider that good money after bad. Keep your payments current and you should not have any problems.

Thanks, Shack, your explanation is very helpful. My HELOC rate is actually goes down below my first mortgage by more than quarter point (mine is PRIME minus 3/4 after today's emergency cut). That doesn't happen too often.

[tonyb]

Perception...but not fact. GA has the 4th highest foreclosure rate in the nation and it is one of the easiest to do so. But that does not allow the financial institution to recover more than what they are owed (including principal, interest, fees and penalties). If they are doing so it is against GA law and federal law. Additionally GA residents have a "right of redemtion" and can go back an reclaim the property under certain guidelines. You may be thinking of people that buy properties at tax sales, where someone can buy the property for the amount of delinquent taxes and reap the windfall equity. Individuals and companies can do this. Banks cannot.

Very true....even in my state,on tax sales,previous owners still have a period of redemtion.And if they do redeem,you get some good interest on your dough.

[rskarvan]

Shack, your financial knowledge is very educational. Thanks for sharing.

Personally, I think this sub-prime mess is just a result of stupid lenders making stupid loans. What would be wrong with letting the banks/institutions just "EAT THE LOSS" and go bankrupt? Let the government bail-out the FDIC-insured losses. Other than that, let those who participate in the risk... share in the results of the risk.

Those who HELOC in a balloon market deserve to eat the loss.
Those who experimented with variable rates deserve to eat the loss.
Those who invested in the banks deserve to eat the loss.

Ok... lets say the economy tanks due to irresponsible banks.
How is the FED "bailing them out" going to force them to be responsible in the future?

I think its incredibly irresponsible of the FED to deflate the value of US currency by increasing "cheap money" to banks. Joe average retired US Citizen with no-debt didn't sign-up for the risk that the sub-prime market took. Why should he have to suffer the effects of the bad monetary policy for imported goods (deflated dollar)?

There is no free lunch. Maybe that is a lesson that must be forced on the financial community.

[sucks2beme]

Some of the loans out there were amazing. Interest only is one I don't get.
The theory is the owner would be able to flip the house in a year or two for big bucks.
BIG PROBLEM. They were giving equity loans on homes in some areas in as little as
6 months after purchase. Also amazing.
This all assumed that homes could go up in price forever. Sorry, bad
assumption. This made flipping easy. Which in turn, invited idiots to try.
All this turned ugly fast when the market slowed.

If the bulk of buyers in a market can't afford the house, guess what happens to prices?
What's sad is we, the public, have to now foot the bill to bail out lenders that
took these huge risks.

Wait til the commercial/retail crunch comes. That's next on the hit parade.
In some areas, like here in Dallas, you can't throw a rock without hitting a strip mall.
The same stuff repeats itself every six miles along any highway.
How many damn Starbucks and BB's do we need?

[polksda]

Some of the loans out there were amazing. Interest only is one I don't get.

Yup. There was a time that it was simply assumed that as a homeowner (I'm not talking commercial or investment property) you got a 30-year fixed-rate mortgage. If you had a bit better income compared to what you were buying, you went for a 15- or 20-year fixed rate mortgage.

Then all these "special" mortgages started coming out seemingly with one goal in mind: to lower the perceived (initial) monthly payment as far as as possible, thus luring people into buying bigger/better housing than they could afford. Only problem: At some point the bill comes and you have to pay the check.

Interest-only mortgages? Are ya kiddin' me?

What's next, multi-generational mortgages like the Japanese have?

Granted, I'm looking at all of this from a lay perspective, but it seems like there are a lot of Johnny-come-lately mortgage schemes that make the used car business seem ethical.

Of course, I can't afford high-end housing; I live in the low rent district. My house is a shack, comparatively speaking, but it's a shack on a 20-year fixed rate 5.25% mortgage...

[shack]

Banks are allowed to fail all the time. I have been involved in the asset purchase of a couple of them and the years of lawsuits that followed...and it is not pretty.

The banks and investors that participated in the "subprime" mortgage market ARE paying a heavy price in terms of lost revenues, depletion of capital, deterioration of stock value. There is more to come as credit card defaults will be the next big hit IMO. The free market will sort this all out. HOWEVER....the govt. can simply not allow one of the 10 largest US banks to fail. A failure by Chase, Citi or BOA would immediately throw the enconmy into a tailspin and most likely a depression. It CAN'T and WON'T be allowed to happen.

As far as the fed lowering the interest rate...those who believe that the problems of the economy are caused soley by the "subprime" crisis are paying too much attention to the TV talking heads who wouldn't know micro economics from micro wheels toy cars. Since they don't have a clue, they spout the only thing they know over and over (subprime) and I would bet they couldn't tell you what a suprime mortgage was if you asked.

Increased cost of fuel and food, increased personal debt, R/E speculation, an inverted yield curve leading to a decrease in long term investment, rising medical care costs, disincentive for investment, too much financial market speculation, etc, etc, etc, are all factors. The economic issues were going to happen and the mortgage problems just moved it along a little more. If you look at historic economic cycles...we are long overdue for the correction that is happening now. Instead of real growth, a lot has been smoke and mirrors by speculators. Both in the R/E and financial markets there has been too much valuation based on speculation as opposed to REAL intrinsic values.

If you understand what the fed does when it lowers the discount rate and monetary economics, you see what they are doing is more symbolic than direct intervention. They haven't devalued the US dollar vs other currencies per se by doing so, but if the economy recovers the dollar will actually gain as foreign investment funds flow back into the US .

The largest free market economy in the world will work its way out of the current issues and we will be just fine.

[Maurice]

I hearby nominate SHACK for Secretary of the Treasury!!

[Strong Bad]

I hearby nominate SHACK for Secretary of the Treasury!!


+1

Ya got my vote man!

[shack]

I hearby nominate SHACK for Secretary of the Treasury!!

And have to deal with all those damn politicians...NO THANKS. :p

...but thanks for the complement...

[rskarvan]

"After the manipulations of the U.S. gold market by European buyers which led to the crash of 1907, the public was looking for a solution to the gold problem as America moved from an agrarian to an automobile economy.

So with popular support, the twelve regional Federal Reserve Banks (Fed) were created with the enactment of the Federal Reserve Act, December 23, 1913 , to regulate the value of money by controlling its supply. Changing from a gold-based currency backing to a fiat money system would free the United States from the risk of more foreign manipulation of her economy.

The U.S. government had no debt when the Federal Reserve Act was passed in 1913. "

-- A Study by Rand Fanshier 3/1/2004

I wonder, would the FED of 1913 approve the role the FED plays today?

[shack]

The Fed of a 100 years ago would have no clue about ANYTHING the Fed is dealing with in 2008.

Believe it or not...much has changed since then. :rolleyes:

[rskarvan]

My point exactly.

[rskarvan]

Federal Reserve Act:

To provide for the establishment of Federal reserve bank, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.

- Dated Dec. 23, 1913.

>>> So, the FED must take responsibility for the sub-prime mess because they failed to effect adequate supervision of the banks?

[rskarvan]

Deleted.

[shack]

The vast majority of consumer mortgage loans are outside the perview of the banking system regulators. While the banks are major players, private mortgage companies generate most of the loans and non banking investors purchase most of the loans in the secondary market.

Since you want the government to somehow be responsible for everything, we could just socialize it...then you could be a happy camper. BTI

[rskarvan]

I already am a happy camper. You make a very valid point about the mortgage loans originating outside the banking system. The FED certainly shouldn't regulate private money lending in a secondary market.

[PhantomOG]

Damn... Wachovia is advertising 30 year fixed rates at 5.00% today. :eek:

[danger boy]

I"m currently in the process of refinancing my home.. yay... great rates to be had. it's a no brainer in my case. :D

[shack]

Damn... Wachovia is advertising 30 year fixed rates at 5.00% today. :eek:

The feds action brought the rates down .25%± from last week. Be sure you are aware that Wachovia's advertised rate includes a 1% origination fee. Now is probably a good time to refinance. Rates might come down a little...but not much. You might wait to see what happens at the end of the month (another fed rate drop) but it may or may not have any effect on mortgage rates. It may not be worth the risk to try and time another .25/.50% drop.

[Strong Bad]

Damn... Wachovia is advertising 30 year fixed rates at 5.00% today. :eek:

Attention K-Mart shoppers, blue light special in the mortage rates aisle! :D

For all the negatives going on in the mortgage arena, ya gotta look at the positives.

For those looking to refinance, it's looking very good for you.

For those of us (my case) who have sat on the sidelines watching and waiting, we can really come out of this with a solid rate on a fixed traditional loan on a nice piece of property.

Treasury Secretary Shack, any thoughts?

[PhantomOG]

You might wait to see what happens at the end of the month (another fed rate drop) but it may or may not have any effect on mortgage rates. It may not be worth the risk to try and time another .25/.50% drop.

I was probably going to wait until the end of the month. I guess its possible it could go up. I hope not.

[danger boy]

The feds action brought the rates down .25%± from last week. Be sure you are aware that Wachovia's advertised rate includes a 1% origination fee. Now is probably a good time to refinance. Rates might come down a little...but not much. You might wait to see what happens at the end of the month (another fed rate drop) but it may or may not have any effect on mortgage rates. It may not be worth the risk to try and time another .25/.50% drop.

good advice Shack.. and i am waiting till the end of the month.. but if they don't cut the rates again. i think i can lock in 5.075% now on a 15 yr loan. :D

[shack]

I would jump now. It is the best of times for someone looking to buy a home...IF you don't have to sell a home first and have good credit.

It is a buyer's market with some prices down 20% or more and cheap money. DON'T wait very long to see if they go down more. A bird in the hand...so to speak.

[66chevyIISS]

yes, the buyers market is killing my refi! We looked into refinancing our house a few months ago to consolidate our 80/20 loan. Our house would of had to appraise at 500K and was currently around 489K so we decided to hold out. This was probably good because now the houses are appraising down in the low 460s thanks to a couple that have been on the market for 5 months and they keep dropping the price.

So now were looking at just refinancing the 20% into a lower fixed rate. (currently a variable at 8%). good ol economy! I'm just glad were not ass backwards in our house like I am sure some of our neighbors are that purchased last summer for rediculous prices.

[PhantomOG]

How are you arriving at the appraisal value? Just by the list price for house on the market in your area? I'm trying to determine an approx appraisal value for my house for a refi as well.

[66chevyIISS]

It's nice to have an appraiser friend who can pull comps for you, but a great website you can use it www.zillow.com. Will give you a good idea on what it might appraise for. You can also search comps on that site to see what other houses in your area recently sold for.

[SKsolutions]

Before you spend time and/or effort, check your existing mortgage. You may have prepayment penalties or time restrictions.

[PolkWannabie]

Prepayment penalties ? ... I thought those had been made illegal a couple of decades ago.

[SKsolutions]

Perfectly legal. Have seen it snuck in more than a few times.

[SKsolutions]

Copied and pasted from my weekly market update: 1/26/08

Mortgage bond prices fell last week pushing mortgage interest rates higher. Trading was volatile following the unexpected Fed rate cut. Bonds were positive the beginning portion of the week buoyed by a struggling stock market. In a surprise move, the Fed lowered the federal funds rate 75 basis points to 3.5 percent to help the struggling economy. This came ahead of the scheduled Fed meeting January 30th. Stocks reversed the negative trend posting gains following the Fed move. Unfortunately this caused mortgage bonds to suffer and pushed rates higher. For the week, interest rates on government and conventional loans rose by about 1/2 of a discount point.

Based upon the January 25 market close, the 30-Day Federal Funds futures contract for the February 2008 expiration is currently pricing in a 100 percent probability that the FOMC will decrease the target rate by at least 25 basis points from 3-1/2 percent to 3-1/4 percent at the FOMC meeting on January 30.

In addition, the 30-Day Federal Funds futures contract is pricing in a 70 percent probability of a further 25-basis point decrease the target rate to 3 percent (versus a 30 percent probability of just a 25-basis point rate decrease)

All eyes will be focused on the Federal Open Market Committee meeting Tuesday. A rate decrease is expected. However, the magnitude of the change remains uncertain.



Keep in mind that a Fed rate cut does not automatically mean mortgage interest rates will improve, as was evident the latter portion of last week. The Federal Reserve has direct control over the level of short-term interest rates. The Fed’s influence over longer-term interest rates is less certain.
A cautious approach to float/lock decisions is prudent heading into the Fed meeting this week. Be prepared for potential market volatility.

There are indicators that show some promise and those that are down. If it's worth the refi or purchase, I'd try to lock in soon. If bond prices fall, rates will go up despite what the Fed does with short term rates.

[Face]

Please go down, please go down... :D

[SKsolutions]

There should be another dip soon, but no one knows for sure. If you can find a reputable lender/broker, and you've done your homework, start the process. Some will lock you in at todays rate, & give you the lower rate if it drops before you close the loan.

[PhantomOG]

Ok! Let's see those rates drop! :D I passed last week. I hope it works out for me.

[jdhdiggs]

Mortgage rates are going up again today. Looks like last Thursday was the best day to do it....

[shack]

Mortgage rates are going up again today. Looks like last Thursday was the best day to do it....

A functon of demand and bond rates...

As I explained last week the change in mortgage rates isn't necessarily correlated to a change in the discount rate. They haven't moved much but are up about 1/2 percent over the low of last week. I would suggest NOW is a good time to get locked in, because the rates are VERY good, even if not at the bottom.

[PhantomOG]

Yeah... there must be tons of people re-financing. You can't get ahold of mortgage people at the 1800 numbers for major banks.

[jdhdiggs]

Yup, locked in at 4.5% where, had I had my act together, I could have been at 4% last week... Faaaack!

[strider]

Yup, locked in at 4.5% where, had I had my act together, I could have been at 4% last week... Faaaack!

Yes, but isn't it nice to be in a position where you can complain about 4.5%?

[jdhdiggs]

Hell yeah, paying your bills on time and not overextending yourself has it's perks: Both my Wife's and my credit ratings are over 810 now so that's good to know... :)

[PhantomOG]

I've never gotten my rating over 800. Maybe its because I'm only 28 with about 10 years of credit history. I'm hoping my current 750-770 range will be good enough to get the best rates.

[AndyGwis]

I'm going to be first-time house shopping in the next 1-3 months once my gf gets a job (she just graduated). Need to figure out what location will work best for both of us once she gets hired.

Sounds like I've lucked out with regards to timing. Should be able to get a nice piece of home for my scrilla and a good rate as well.

[PhantomOG]

yeah, I think Dallas is a pretty good market. Alot of house for the money. Being in Austin, I can't complain too much when comparing with places like California, but it sucks that Austin is so much more expensive than every place else in Texas.

[carpenter]

And now fed cuts rates again, this time 50 bps.
can you say ..... hysteria?

[jdhdiggs]

I've never gotten my rating over 800. Maybe its because I'm only 28 with about 10 years of credit history. I'm hoping my current 750-770 range will be good enough to get the best rates.

Hey, you're my wife's age and I'm only 30, you SLACKER!!! ;)

IIRC, both lenders I went to used 740/750 as the cutoff to the best rates.