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Reverse Mortgages and Reverse Mortgage Purchase NM Mortgage Finance Authority $8,000 First-Time Homebuyer Tax Credit Why do most lenders sell their mortgages?
Real Estate Contracts and Time Value of Money Cash-strapped homeowners eye equity sharing Son's plan to buy parents' house won't work Volatile Rates Make Locking a Must
Reverse Mortgages and Reverse Mortgage Purchase
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NM Mortgage Finance Authority
Explaning the History and Removing the Mystery
In 1975 the New Mexico state legislature created the New Mexico Mortgage Finance Authority, a public body politic and corporate, separate and apart from the state, constituting a governmental instrumentality, with the power to raise funds from private investors in order to make such private funds available to finance the acquisition, construction, rehabilitation and improvement of residential housing for persons and families of low or moderate income within the state.
MFA provides innovative policies, products, education, and services in collaboration with strategic partners to ensure that all New Mexicans have access to affordable housing. We engage in self-sustaining practices to strengthen the social and economic development of New Mexico's communities and families by financing, developing, and preserving homes.
Read More About LOW INTEREST Loans and the NM Finance Authority
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$8,000 First-Time Homebuyer Tax Credit
$8,000 First-Time Homebuyer Tax Credit
The credit is now available
The credit is now available for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009 and does not require repayment.
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The homebuyer tax credit is one of 10 key provisions of the American Recovery and Reinvestment Act signed by President Obama into law on Feb. 17, 2009.
The bill provides for a $8,000 tax credit that would be available to first-time home buyers for the purchase of a principal residence on or after January 1, 2009 and before December 1, 2009. The credit does not require repayment. Most of the mechanics of the credit will be the same as under the 2008 rules: the credit will be claimed on a tax return to reduce the purchaser's income tax liability. If any credit amount remains unused, then the unused amount will be refunded as a check to the purchaser.
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Why do most lenders sell their mortgages?
Why do most lenders sell their mortgages?
Some disagree with the practice, but there are benefits
By Jack Guttentag, Monday, August 25, 2008.
Inman News
"Why do most home mortgage lenders sell their mortgages instead of keeping them? I have a problem with negotiating my mortgage deal with one firm over a week, then having my loan sold to another firm that I did not select, and with whom I am obliged to deal for as long as 30 years. Is it possible for me to find a lender who will promise not to sell my loan?"
Mortgage lenders comprise two very different types of institution. The largest number are mortgage companies, or as they prefer to be called, mortgage banks. Mortgage banks are state-chartered temporary lenders who must sell the loans they originate because they do not have the long-term funding needed to hold them permanently.
Mortgage banks borrow large amounts, but only for the short periods they must hold mortgages prior to their sale. The unsold mortgages serve as collateral for these loans. As the mortgages are sold, the loans are repaid.
Mortgage bankers need very little capital because they have excellent collateral to secure the short-term loans they need to operate. To hold mortgages permanently would require long-term funding sources, which in turn would require much more capital. That is a different business.
While mortgage banks always sell the mortgages they originate, they may retain the servicing under contract with the buyer. Where servicing is retained, borrowers continue to deal with the same firms that loaned them the money in the first place. Over the years, however, servicing has become quite concentrated among larger firms, and most mortgage banks today no longer service mortgages. They are strictly in the mortgage origination business. The upshot is that borrowers who take loans from mortgagee banks rarely have their loans serviced by the same firm.
The second type of mortgage lender is the depository institution: commercial banks, savings and loan associations, savings banks and credit unions. These institutions are chartered by both the federal and state governments to provide a wide variety of financial instruments to consumers and businesses, including deposits or deposit-type instruments, and many types of loans including home mortgages. Among these groups, only savings and loan associations have viewed themselves historically as being primarily home mortgage lenders, and since being badly burned in this market in the 1980s, their commitment today is not nearly as strong as it used to be.
Depository institutions have the capacity to hold mortgages permanently in their portfolios, if they want to, and some do. They have more capital than mortgage banks, and deposits typically provide a more-or-less stable funding source. But depositories can also sell mortgages in the secondary market, the same way that mortgage banks do, if the mortgages they write don't fit into their portfolio strategies.
Many depositories have a general policy of holding any adjustable-rate mortgages (ARMs) that they write, but selling fixed-rate mortgages (FRMs) in the secondary market. This policy evolved after the interest-rate explosion of the early 1980s, which bankrupted many savings and loans holding FRMs. In a rising-rate environment, a depository's cost of funds will rise much more rapidly than the income it earns on a portfolio of FRMs.
Some borrowers such as the one whose letter I reproduced above are nostalgic for the old system, which existed before there were mortgage banks, when your mortgage lender was your mortgage lender until the loan was paid off. Loans were not sold and all lenders serviced the loans they made.
Is it possible for a borrower today to find a lender who will operate that way? Such a commitment could not be made by a mortgage bank -- it would have to come from a depository that serviced its own mortgages, and that was prepared to give up the right to sell them.
I seriously doubt that any depository would commit never to sell its FRMs, but it is possible that they would do it for ARMs, The marketing possibilities are certainly intriguing; here are some un-copyrighted tag lines: "We are your lender for life, guaranteed." "We don't abuse customers we plan to keep." "We believe in long-term relationships, not casual encounters."
Borrowers were never consulted about the changes in industry practice that resulted in their being thrust into long-term business relationships with firms they did not select. There were side benefits to these changes, of course, including much greater competition for loans and easier lending terms. Still, it would be good if borrowers could choose a lender for life, even at a slightly higher price, and even if they have to take an ARM. Right now, they have no such choice.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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Real Estate Contracts and Time Value of Money
Real Estate Contracts and Time Value of Money
What is A Real Estate Contract?
The information on this page is not to be considered Legal Advice! This information is intended to be used with some creative thinking with your REC. Keep in mind your REC can be Tailored to meet the needs of both the Buyer and Seller. Legal counsel should be considered!
It is a legally enforceable agreement by which an owner of real property agrees to sell and a buyer agrees to buy the property on a deferred payment arrangement. Transfer of legal title is delayed until all of the deferred payment is made. If the buyer fails to meet the obligation stated in the REC and defaults, then the seller may, at his option, forfeit the buyer's interest in the property without court action, or declare the entire unpaid balance due and payable and file suit to collect.
If the buyer fulfills his obligation under the agreement, then the proper deed will be released by the escrow agent and can be recorded to give the buyer legal title to the property. Until the purchaser has fulfilled his obligation under the contract, he does not have legal title, but instead has what is called equitable title.
Example of a Wrap (mortgage) with an REC
| Sale Price | $130,000 |
| Down Payment | -25,000 |
| $105,000 | |
| 1st Mortgage is Wrapped | |
| ___________ | |
| PV | $105,000 |
| I |
8.5% |
| N |
360 |
| PMT |
$807 |
| 5yr. Balloon Payment | $100,265 |
| ___________ | |
| Balloon Payment | $100,265 |
| Current Mortgage Balance | -$75,000 |
| 5yr Balance Due Seller | $25,265 |
| Down Payment | $25,000 |
|
Gross Net |
$50,265 |
| Closing Costs @ 8% | $10,400 |
| Net Seller | $39,865 |
N = Term, or how many payments, Total
I = Interest Rate
PV = Present Value, amount of contract
PMT = Monthly payment
On the usual and typical REC you would assume the Seller would stand to make $25,000 less closing costs with the initial down payment and another $25,265 would be due upon final execution of the REC for an amount the seller could consider profit of $39,865.
Considerations For Using an REC For Seller and Buyer
• Terms of sale can be tailored to meet the needs of both the buyer and seller.
• The credit worthiness of the buyer can keep him from buying with a conventional, FHA or VA mortgage.
• The seller may want to take advantage of a low interest rate first mortgage by using a wrap contract.
• Little or no down payment may reduce the availability of a mortgage.
• An REC can provide a monthly income for the seller usually at an interest rate much higher than would be available at the bank.
• Usually a sale can be closed much faster with an REC than with a new mortgage.
• An REC can be used to finance vacant land that could not otherwise be financed.
•The Market is adjusting and Listings are Aging
• The Seller has an urgent need to Sell a Property
• With the Market adjusting it may become more difficult to obtain a Mortgage.
Let's consider another value added thought with consideration of Time Value of Money!
The Time Value of Money may or may not be the best application for your situation whether your buying or selling real estate. However this brings an interesting suggestion to consider. As Real Estate Agent/Brokers are we advising our Clients in a way that would benefit them the most. The ultimate goal we should keep in mind is achieving the highest value in the shortest amount of time for our clients. Fair market values are determined exclusively by two parties (Buyer and Seller) coming to an agreement.
For purposes of this illustration we'll consider the mortgage being paid with it's assigned rate and it will be wrapped with the entire monthly payment. Let's focus on the amount carried in addition to the 1st mortgage which is $30,000. In this example the 30k is carried for 60 months at 8.5% interest. Considering the Time Value of Money the PV of $30,000 becomes $45,110.
Time Value of Money Carried on an REC
|
Sale Price |
Down Payment |
Amount Carried |
1st Mortgage |
Amt. Carried <1st Mortgage |
Months Carried |
% |
PV - Carried Amount |
|
$130,000 |
$25,000 |
$105,000 |
$75,000 |
$30,000 |
60 |
8.5 |
$45,110 |
|
Amount Due After |
60 Months |
= |
$120,110 |
||||
| 1st Mortgage |
-$75,000 |
||||||
|
$45,110 |
|||||||
|
Down Payment |
+ |
_ $25,000_ |
|||||
|
Net To Seller After |
60 Months |
$70,110 |
|||||
Using the Time Value of Money consideration will net the Seller an additional $30,245 and it may not result in a closing which the Seller and Buyer are motivated to complete. However, all parties have different needs and wants and it is our job as Real Estate Professionals to consider all avenues. This is not to be mistaken that the seller is taking advantage of the buyer. Considering the Buyer has equitable title to the property and the seller is taking all financial risk until the REC is fully executed and the buyer has fulfilled his obligation under the contract. If the Seller were to put the $30,000 in an interest bearing fund of some sort would that money make 8.5% or what was negotiated. This would be considered prudent money management. Please remember all aspects ie. percentage rate, term on contract and amount carried could vary and make significant differences when variations are applied.
Additionally as Real Estate Professionals advising our clients of ways to best acheive their highest capital gains it's also important to advise them it may not result in the desired sale of their property.
Some of this information is from the Escrow Company I use:
Terry White
Sunwest Trust, Inc.
3240 D Juan Tabo NE
Albuquerque, NM
www.sunwesttrust.com
Cash-strapped homeowners eye equity sharing
Cash-strapped homeowners eye equity sharing
Reverse mortgage alternatives charge zero interest, reduce upfront costs
By Tom Kelly, Wednesday, May 21, 2008.
Inman News
The soft national housing market and chaotic mortgage environment has sent lenders and investors back to the drawing board in an effort to sharpen their pencils and produce an alternative to corral new business.
The latest niche product designed to tap the trillions dollars of equity tied up in seniors' primary residences has spread not only to second homes but also to residential rentals and commercial properties.
Equity Key has rolled out an equity-share option that differs from a reverse mortgage in that the program does not charge interest on money taken out of the home. Instead, it gives Equity Key an equal share in the future appreciation of the property based on its present market value.
The concept is similar to the Rex Agreement, another new equity-sharing vehicle that also claims a share of future appreciation. The main differences are that the Rex Agreement has no age restriction while Equity Key is aimed at homeowners between the ages of 65 and 85. The Rex Agreement is not available for second homes and investment properties at this time.
According to Equity Key, it pays the property owner a specific lump sum (approximately 12 percent to 15 percent of the property's value) or an annual recurring payment in the approximate amount of 0.9 percent to 2.4 percent of the home's value. In exchange, Equity Key splits any future appreciation on a 50-50 basis with the property owner. The owner retains the equity he or she has accumulated.
When the owner moves out or passes away, Equity Key sells the property, and the accumulated equity (all the equity the owner had prior to the Equity Key transaction plus 50 percent of what accumulated subsequently) goes to the owner's heirs. The homeowner's estate has the first right of refusal to purchase the property at the current market value, according to the company.
Here's how equity-sharing agreements work in a typical situation: Let's assume a home is valued at $500,000 and the owner signs an equity share for a $50,000 advance. If the house sells seven years later for $600,000, the equity sharing company gets $100,000 -- $50,000 in repayment and half of the $100,000, the home's appreciation since the deal was signed. If the value is flat after seven years, the sharing company gets only $50,000. (With Equity Key, the owner does not have to repay the initial advance if the owner meets the term of the agreement.)
If the house's value decreases by $100,000, the sharing company and the homeowner would share the loss equally -- $50,000 each. The equity-sharing company would receive no money upon the sale while the homeowner would be liable for the remaining $50,000 of loss.
Owners must continue to maintain the property while keeping taxes, insurance and any mortgage payments current, and not exceed the agreed-upon limit on the total principal amount of any loans that may be secured by the home.
Providers of reverse mortgage alternatives are betting they will draw customers because of their fewer upfront fees and costs and absence of an interest-bearing mortgage. The big unknown is the future value of the home. Regardless of the peaks or valleys of appreciation, the owner will owe the equity-sharing company 50 percent of the value from the time the agreement was signed until the day the property is sold.
Reverse mortgage funds can be distributed either in a lump sum, regular monthly payments, line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can't owe more than the value of the home. There are no restrictions on how reverse mortgage funds are used.
If Equity Key acquires the property at the end of the agreement term, it will charge an acquisition cost equal to actual third-party costs to sell it. This cost will not be greater than 8 percent of the fair market value of the house at the time of sale.
In order to participate, homeowners must be in good health and able to qualify for a life insurance policy. Ineligible homeowners include smokers, those with Type 1 diabetes and others who've had recent bouts with cancer. Equity Key takes out an insurance policy to protect its interests in case the homeowner dies before the company recovers its initial investment. If the owner does not meet the Equity Key requirements, the $300 application fee is refunded.
If you plan to tap in to any property equity -- primary residence, second home or rental -- do so wisely and with the help of professional advice. Depending upon your circumstances, one way might be better than another.
To get even more valuable advice from Tom, visit his Second Home Center.
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Son's plan to buy parents' house won't work
Son's plan to buy parents' house won't work
Why bank is unlikely to agree to loan
By Ilyce Glink, Tuesday, May 20, 2008.
Inman News
Q: My parents own the home that I live in. They would like to sell the property because they need the money. The property is worth at least $300,000.
The only income I currently have is $140 per week in court-ordered child support.
My idea is to ask a bank to give me a mortgage for $230,000. I'd pay my parents $200,000, or something like that, so that they can have most of the cash value, but the bank will have some equity/collateral as an incentive to give me the loan.
I can then use the extra $30,000 to pay the mortgage (which would be about $1,600 per month) until I get back on my feet financially or I sell the property.
Is there any jargon or terms I can study up on, and does this sound possible, or can you make any recommendations?
A: This sounds like a good idea, but in reality, few if any banks will give you a loan with an income of $140 per week. That's an income of $7,280 per year. A 30-year fixed-rate $230,000 loan at 6 percent would cost you $1,378 per month, and that doesn't include an escrow for real estate property taxes and homeowners insurance premiums.
You would need to have an income of maybe $100,000 in order to afford a home that costs $300,000 or you would have to have significant other assets to give the bank a reason to give you a loan.
If you are looking for a place to live and your parents can't wait to sell their home, you should plan to move out of your parents' house and into an inexpensive rental. With the cash they get from the sale, perhaps they can help you pay for your rent until you're back on your feet financially.
I don't know what your credit history or credit score looks like, but these days, lenders are looking for a credit score of at least 680. Please visit AnnualCreditReport.com and pull a copy of your credit history. You can then pay around $7 for a copy of an Equifax credit score, which is the one closest to what mortgage lenders use.
If your credit score isn't at least 680, then you should take the next year or two to work on rebuilding your financial life: Find a job, rent an apartment, start saving the 5 or 10 percent you'll need for a down payment, plus extra for reserves, and work on cleaning up your credit history.
Once you've started your new job, rebuilt your credit history and raised your credit score, you can start looking for a house to buy.
If your parents want to wait a couple of years before they sell their home, you might be in better shape at that time -- with a new job and a high credit score -- to buy the home from your parents.
Good luck.
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Volatile Rates Make Locking a Must
Volatile Rates Make Locking a Must
If lender won't honor rate, broker may be true culprit
By Jack Guttentag, Monday, April 28, 2008.
One of the unpleasant features of the mortgage crisis has been heightened volatility in the prices faced by borrowers. For example, the wholesale rate on 30-year fixed-rate conforming mortgages rose from 5.23 percent on February 6 to 6.16 percent on February 26, dropped to 5.65 percent on March 3, rose to 6.23 percent March 6, dropped to 5.38 percent March 20, and rose to 5.812 percent April 2. These numbers are drawn from the wholesale price data shown daily on my Web site.
Increased price volatility invariably means an influx of letters from borrowers on lock problems. The lock is a mutual agreement by the lender and the borrower that their transaction will be at a specified price. Looking ahead, both are protected -- the borrower against a rise in rate, and the lender against a decline.
Broadly, my letters from borrowers fall into two groups. One group locked when the rate was high, and now that it is lower they ask any or all of the following questions: are they committed ethically (yes); how can they get out of the commitment (by relinquishing any fees they have already paid); and can they induce the lender who locked their rate to reduce it (no)?
The second and much smaller group locked when the rate was low, now it is higher and the lender has refused to honor its commitment. Or so they have been told by their broker. In most such cases, the broker is the true culprit (see below).
Usually, lenders stand by their locks, because their reputation is at stake. Further, walking away from a lock antagonizes the loan officer or broker involved in the deal, who will be shut out of their commission if the loan doesn't close. Lenders do renege on occasion, usually when many deals, a lot of money, and perhaps the firm's solvency are at stake, but it is man-bites-dog news.
When borrowers renege, in contrast, it is dog-bites-man. A pervasive attitude is that the lender should stand by the lock if rates increase, but borrowers should be free to look elsewhere if rates decrease.
To some degree, lenders are responsible for this. Because they fear losing business, they don't press borrowers to recognize that they are committed by a lock, and they don't much penalize borrowers who walk away when rates decline. Usually, the borrower will lose no more than $500, the cost of an appraisal and credit report, which is not much of a deterrent if the rate drops significantly after the lock.
Mortgage brokers can play Dr. Jekyll or Mr. Hyde in the locking process. Dr. Jekyll explains the lock process to the borrower, including the borrower's obligation. Dr. Jekyll never tries to forecast interest rates, always advising the borrower to lock ASAP. And Dr. Jekyll passes through the lock statement as soon as it is received from the lender.
Dr. Jekyll also uses his experience and judgment to advise the borrower on how long the lock period should be. The borrower doesn't want a longer lock period than is needed because each 15-day extension raises the price. On the other hand, if the deal doesn't close within the lock period, all protection against a rate increase is lost. Dr. Jekyll explains the cost and risk of a longer versus a shorter lock period, but leaves the final decision to the borrower.
Mr. Hyde, in contrast, likes to play games that may increase his fee. In contrast to Dr. Jekyll, who charges a set fee for his services and passes through the price from the lender, Mr. Hyde's fee is unstated and expansible. He has an incentive to select the shortest possible lock period because the price saving will go to him rather than the borrower. If the borrower loses the lock because the loan doesn't get closed in that period, Mr. Hyde will blame the lender, Realtor, or someone else.
The worst game played by Mr. Hyde is telling the borrower the loan is locked when it isn't. If rates go down, Mr. Hyde can get a better price than the one promised to the borrower. The benefit may be shared with the borrower on a refinance, but on a purchase where the borrower is committed, Mr. Hyde will keep it all.
If rates go up, Mr. Hyde has an array of excuses for losing the lock, most of which involve blaming the lender. That's why borrowers should accept no excuses for not being provided with the lock statement from the lender.
Another game that Mr. Hyde plays is to offer to lock with one lender as protection against a rate increase, while applying to a second lender, without locking, in case rates drop. This makes an attractive pitch to the borrower, but don't buy it. Brokers who play this game are scamming their lenders, and they will find a way to scam you as well.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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