Here is another guest post by Raoul Badde. Raoul Badde is an Ambassador to CAMB and has worked in all aspects of mortgage lending for over 8 years. He currently works with and advises mortgage brokers through www.your-ae.com. Enjoy! If you’d like to submit an article for publication here email me directly.

Before we get started I would like to direct you to two excellent posts:

• The 7 most important questions to ask your loan agent before starting the mortgage process
• 5 Ways to Know You Have a Legitimate Good Faith Estimate

These are perfect starting points for your basic loan originator interview.

Since the passing of the recent housing bill (HR3221) many of you may be asking more questions about FHA financing as an option. For those of you in the market for a new home you’ve likely been presented an FHA loan as a financing option.

If you currently have a mortgage and were looking to consolidate debt or get a little bit of cash-out, you might have been shown an FHA loan as a possible option.

If you are shopping for a mortgage of some kind right now and you have some “dings” on your credit, a loan officer may have brought this loan up as an option for you.

This post is going to be a little lengthy but it will all be useful information and will help you to navigate through the myriad of pieces comprised in an FHA loan.

1. Where did FHA Come from:

The FHA (Federal Housing Administration) was originally established in 1933-34 to give jobs to the Trades people of this country immediately following the Great Depression. It did so by encouraging existing home owners to take out home improvement loans for and put this group of people back to work. The original program was a tremendous success putting over $250 million dollars back into the Economy and working to stabilize the economy and workforces of our country.

In 1934 The FHA expanded its program to include financing for First Time home buyers and homebuyers of properties in distressed neighborhoods to help bring jobs and people back into areas deserted during the Depression. The FHA and its lending programs is once again looking to bring a similar stabilizing effect to our Housing market. We’ll see if it works.

2. Screen Your Broker/Loan Officer:

First: you need to familiarize yourselves with this little engine brought to you by HUD for people wanting to look up Authorized FHA Lenders (brokers). HUD requires that every loan officer that is working on an FHA loan is licensed, paid W-2 wages and works for a HUD sanctioned company.

However, there’s a little loop hole that allows a loan officer who is not “HUD Approved” to work as an assistant to the actual loan officer but they may not earn over $1000 or 1% AND by HUD’s definition and RESPA’s requirements you’re supposed to pay these assistance fees out of pocket (not out of proceeds or from broker credits).

My Advice: Stay away from these assistant led transactions.

If you can’t find the company you’re talking to on this search engine then you need to thank them for their time, inform of this fact, and move on.

What we’re seeing is a significantly more committed loan officer and company owner that is working above board and originating HUD business. These are people that will ace your 7 questions and point out the 5 ways listed above for you. Another piece to consider when selecting a broker for your transaction is whether or not they are a member of their state broker association. Members of these organizations are properly licensed, have taken the required continuing education courses for their state and are required to follow a code of ethics that they will be happy to share with you. Here in California the group is called: CAMB (California Association of Mortgage Brokers), they carry other similar such names in your states. You can start by looking for them here on the National Association of Mortgage Brokers (NAMB) site if you’re in another state.

3. Financing Options for FHA loans:

There are many different options available for you as a borrower when it comes to using & utilizing an FHA loan.

• You could obtain a cash-out loan for 95% of the value your home
• If you’re in a high cost area, depending on your loan amount, it could be lower @ 85%
• You could refinance an existing 1st and 2nd lien (both of which had been open for 12 months) together into a rate & term loan for 97% of the value of your home.
• You could in theory refinance a 1st lien and subordinate (leave in place) an existing 2nd lien if that lien holder would oblige your request (there is no CLTV cap under FHA).
• You could purchase a home with as little as 3% down (increasing to 3.5% on October 1st)
• You could get a gift for your down payment on your house
• You would still be able to obtain financing for a refinance or purchase even with some credit “dings” or lower fico scores (the market floor is around 580) without any big adjustments to your interest rate.
• You could leave collections and old delinquent cards in place in order to get your mortgage financing in place without having to pay off these items
• Your Program options include:
• 1/3/5/&7 year ARM’s
• 30 year fixed rate
• 15 year fixed rate
• This loan is only for 1st Time Homebuyers, Owner Occupant Homeowners and in some cases move-up buyers

4. The Truth about Mortgage Insurance:

Whether you have 40% equity in your home or you are buying a new house with 3% down you are going to be faced with Mortgage insurance. Now, the reason that FHA is able to offer some of the products it offers is because it is basically an insurance program. In fact, it’s insured twice: once up front at the closing of the loan and again every year, paid monthly, throughout the life of the loan.
As someone who is looking at FHA as a financing option, you have to be aware of the Mortgage Insurance.

1st: the Up Front Mortgage Insurance Premium (UFMIP) will always be 1.5% of the loan (Beginning October 1st- currently varies on FICO & LTV).

2nd: the Annual Mortgage Insurance or Monthly Mortgage Insurance (MMI) of .50% of the balance of your loan over a 12 month period will be with you for (nearly) the life of the loan.

There are two instances when you can remove the Monthly Mortgage Insurance coverage required by the FHA.

1. you have paid your MMI for a total of 60 months from date of closing
2. you have paid the original loan you took out down to 78% of what was originally borrowed.

There is a third quasi instance of removal whereby you obtain a streamline refinance (or FHA to FHA) loan within 3 years of your original loan and then you get a factor of your UFMIP returned to you but your clock starts over with respect to MMI.

If you obtain a loan with an amortization period of 15 years (15yr Fixed) then your MMI would be cut in half to .25% of your loan amount over a 12 month period.

When considering the options for the UFMIP you have the right to finance this additional cost and NOT affect your Loan to Value calculation. This would then be added to your loan balance and you would calculate your payment based on the new higher loan amount over a 30 or 15 year term.

You may also pay this UFMIP at closing out of your proceeds or as a closing cost. It may also be paid for by any credits you may have obtained in writing your purchase contract.

It will show up on your HUD (final settlement statement) as a closing cost charged to you as the borrower whether you are financing it or not.

5. The Real Deal about Points/Discount/Yield or rebate:

Your lender has many options when working on your loan and itemizing charges for your loan is just one of them. Closing costs for these FHA loans can, in some instances, be higher than on conventional loans. Appraisals are most definitely going to be a little more expensive because of certain requirements. Also, as there is a significant amount of additional paperwork required by your loan officer, you may find these loans to carry higher associative fees then on conventional loans.

In California lenders/brokers aren’t allowed to charge more than 5% in total fee inclusive of Title & Escrow, recording and other settlement charges. In HUD’s rule book, the limit for an Origination point is 1%. However, your lender or broker may be charging you a discount fee of up to 2% OR if you walk into a Bank Of America or Wells Fargo branch they may be collecting “yield or rebate” and not even disclose it to you. Brokers (especially in California) are required to show you every single fee that they earn, charge or deliver with respect to your loan closing. Retail (BofA, Wells etc.) aren’t required to show you many of these associated fees, so it can be very confusing to properly determine the true cost of your loan.

If you come across a Good Faith Estimate showing discount points being charged to you keep in mind that these may not be used to buy down the interest rate for your loan, your loan officer or broker could simply be pocketing these fees for themselves. So: make sure on your final settlement statement that if there are discount points AND you have agreed they are for the purposes of obtaining a lower rate that they are being paid out to the provider of the end financing and not to the broker/loan officer.

Appraisals typically cost about $500 in California because your appraiser is acting as a “mini” home inspector for the final lender. The appraisal will never substitute an actual inspection, but you will notice the appraiser poking and prodding where you may have never seen him do such things before. Don’t worry, it’s normal.

All other charges are the same as with any other type of loan. There are not special recording or processing fees involved with funding an FHA loan, if your lender/broker tells you otherwise you may do well to find another option. Typical Lender fees range from $700-1100 and typical broker processing fees range from $450-$600 per transaction.

As we head full steam into the wind that is the housing market of 2009 and beyond you can be assured that you will see many more Government loan programs in any many instances these will be the best priced, lowest cost option for your needs.

As with any financial lending product it is important to remember: do your homework and only work with those brokers most forthcoming about the process, their costs and the timing of the transaction.
Brokers that carry the seal of CAMB/NAMB or the Lending Integrity Seal should be given extra consideration for their willingness to uphold the ethics and best practices in their industry.

Raoul Badde
CAMB Ambassador

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Filed under: Earnings reports, Yahoo! (YHOO), International Business Machines (IBM), Merck and Co (MRK), Technical Analysis, Stocks to Buy

SkillSoft PLC (NASDAQ: SKIL) provides on-demand Internet-based training courses for professionals in business and information technology (IT). The company catalog includes more than 6,600 courses addressing such issues as project management, sales, business strategy, finance, regulatory compliance, operating systems, network technologies and Web design. SkillSoft also offers online coaching for more than 100 IT certification exams and provides access to some 19,000 engineering, IT, and business books online. Clients include IBM (NYSE: IBM), Merck (NYSE: MRK) and Yahoo! (NASDAQ: YHOO).

The firm pleased investors last week, when it reported Q2 EPS of ten cents and revenues of $83.3 million. Analysts had been expecting seven cents and $82.4 million. Management also guided Q3 EPS to 9-10 cents (nine cent consensus), Q3 revenues to $84.0-$85.5 million ($84.83M consensus), FY09 EPS to 35-38 cents (34 cent consensus) and FY09 revenues to $335-$338 million ($336.43M consensus).

Continue reading SkillSoft (SKIL): Shares cycle in bullish ‘flag’ consolidation pattern

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Filed under: Products and services, Newsletters, Stocks to Buy, Housing, Recession

“Home prices are becoming affordable again, so the decline in prices is likely more than half over,” say Dr. Marvin Appel and Gerald Appel of Systems & Forecasts.

Meanwhile, the technical experts believe that long-term investors can now look to get back into the real estate investment market and recommend two ETFs that are based on rental REITs.

“Many analysts do not expect the financial markets to improve significantly until home prices stop falling. The pace of existing home sales remains low, and available inventory relatively high, both indicating that buyers are not yet able to step into the market at current prices.

“However, that could change within a year. Home prices are becoming affordable again, so the decline in prices is likely more than half over.

“The median home price is now more affordable to the median household than at any time since the start of 2004. My analysis suggests that housing prices will have to fall a bit more, but the housing market is not far from being reasonably valued for the first time in five years.

Continue reading The right REITs focus on rentals

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Fannie Mae and Freddie Mac are on the verge of government intervention, reports the Financial Times.  As credit worries continue to wreak havoc on the financial markets liquidity concerns at the two massive GSE’s sparked a stock sell-off that left both company’s stocks down nearly 25%.

Any government intervention or recapitalization would severely undercut the value of any current shareholder stock by diluting the living daylights out of it.  Many had hoped that the mere notion of the US Treasury backstopping the GSEs would put an end to the market unrest.  This drove Fannie and Freddie stock higher as investors gained confidence that the market would stabilize with the weight of a US government guarantee.  Now that it looks exceptionally likely that it will actually happen investors are once again spooked.

From FT.com:

Fears about the financial system grew on Monday as money market liquidity tightened and sharp falls in the share prices of mortgage financiers Fannie Mae and Freddie Mac led the US stock market lower.

Fannie’s and Freddie’s shares lost 22 per cent and 25 per cent, respectively, after an article in Barron’s suggested that the US government was considering recapitalising the companies on terms that would all but wipe out existing shareholders.

The concerns about Fannie and Freddie also spread to their debt, which fell in price. This threatened to push interest rates on mortgages backed by the two firms higher and put further pressure on the battered housing market.

The price of insurance against default on Fannie and Freddie subordinated debt hit record levels in the credit default swaps market, according to data from Markit. Risk spreads on their senior debt – which most analysts presume would be fully honoured by the government in any rescue – widened to levels last seen in the immediate run-up to the Treasury’s July 13 rescue plan, Credit Suisse said.

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Filed under: International markets, Newsletters, Commodities, Oil, Stocks to Buy

“We are moving headlong into oil,” notes John Reese, who analyzes stocks based on the criteria used by “legendary” investors such as Buffett, Graham and Lynch.

In his Validea newsletter, he says, “My fundamental models indicate that the oil industry is where the best values in the market are.” Here’s a look at W&T Offshore (NYSE: WTI), which is based on the criteria used by contrarian David Dreman.

“The economy and stock market have gone through a legitimate crisis because of the credit woes, and it takes time for something like that to work itself out.

“But the important thing to remember is that we’ve been through financial crises before — even bad-debt financial crises like this one — and the market has always stabilized and then pushed higher.

“And history has shown that those who can stick with the stock market through down times like these will be rewarded.

“David Dreman — one of the gurus I base my strategies on — notes in his recent Forbes column, ‘If you pack up now, chances are you’ll miss a good part of the next bull market. A large part of the gains are always made in the first few months of one, when market-timing investors are still on the sidelines.’

Continue reading W&T Offshore (WTI): Drilling with David Dreman

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Many of you in middle school had the opportunity to read William Golding’s Lord of the Flies.  The book looks at two boys, Ralph and Piggy who find themselves on an island next to a plane crash site.  Soon they find out that they are not alone on the island.  At first, all is civil […]
Related Posts:
■Foreclosed: Predicting Foreclosures in California. How Many Homes will Be Foreclosed in 2008?
■Foreclosures? Housing Bubble? In Southern California? Impossible!
■Zillow is Off by a Small Amount. Try $250,000 off with Proof!
■Foreclosures jump statewide by 40% in California in just one quarter! Welcome to California’s Gold!
■California Housing: 1 out of every 192 Homes in Trouble. Top Ranking State in the United States.

Many of you in middle school had the opportunity to read William Golding’s Lord of the Flies.  The book looks at two boys, Ralph and Piggy who find themselves on an island next to a plane crash site.  Soon they find out that they are not alone on the island.  At first, all is civil and cordial as they build bonds with the children on the island.  Yet as time progresses one of the “others” branches out and begins to take on his hunter role more deeply.  No, this isn’t Lost although the leader of the other hunter group is called Jack.  Back to the story, one of the themes of the book is an examination into human nature and how culture created by man fails.  What we have witnessed in California this past decade is a financial lord of the mortgages.  People woke up one day and found easy access to credit and instead of harnessing this new found wealth diligently and prudently they savagely ate it up like a starving child trying to eat up all the food before his brother has any chance to eat.

Such is the mania that ensued during this housing speculation.  There really was no one governing or regulating the industry.  Think for a second how patently absurd zero down or no documentation mortgages are.  Would you give a stranger off the street $10,000 because they told you they made $200,000 a year as some stunt double for a reality television show?  Of course not.  Yet banks over and over made $500,000 mortgages to strangers since it wasn’t their money which they were lending.  Who really cares what happens to the money after all so long as you get your nice commission.  Is it any wonder why FBI statistics show a massive jump in mortgage fraud over the last few years?  This has been the largest financial heist in history and all it took was a bunch of people with suits and access to credit to perpetuate this mess.

And like Lord of the Flies, the group that has gone savage is attempting to capture Ralph who is still trying to get off the island and back to civilization.  To capture Ralph, the others set the island on fire thus alerting a warship that is passing by even though they were trying to fry Ralph.  The navy officer sudden arrival puts all the boys in order and is astonished at what has occurred.  He expected better.  Now we have politicians, authorities, financial institutions, and everyone else peering into the mortgage island and are “astonished” at what has been going on.  Many of these lenders are still woefully optimistic that many of the Alt-A loans were made in good spirits and many of the borrowers will want to make diligent payments on a $600,000 home that is now seeing comps in the $400,000 range.  Yeah right.  Welcome to the island lenders.

Before we go on, I’m going to post a graph showing four very important items.  Many readers have been asking for a graph highlighting the California median price, monthly sales, REOs, and notice of defaults.  Here it is:

*Click to Enlarge

I know the chart is a bit busy but it is useful to put all the data in one quick glance to quickly see what is happening.  Let me highlight each of the 4 data points individually:

(1)  Median Price

For this chart we are using the median price dished out by DataQuick.  The data provided by the California Association of Realtors has a much higher median price but we’ll go with this for the time being.  It is worth noting that these two measures were divergent on the way up but now they are crossing paths at the bottom.  The peak was reached in March, April, and May of 2007 at $484,000.  The current median price for a California home is $318,000.  A drop of 34% in one year is no small potatoes.  Yet much of this furious price discounting is the massive amount of foreclosure and distress sales going on.  Many are trying to argue that this is skewing the data but as an intelligent buyer, why in the world would you buy a home from seller looking for prime value when you can negotiate with a desperate bank and make them an offer that they most likely will take?

This leads us to the next point in the chart which is the monthly sales.

(2)  Monthly Sales

Without a doubt, sales have been perking up since spring of this year.  And this is good news.  Yet you need to dig through the spin to understand why sales are going up.  Sales are going up because prices are dropping like a rock in a lake (refer to point #1 above).  Any good student of economics realizes that price can have an impact on demand.  Sellers weren’t lowering prices so the market hit a wall for a few months.  Yet now that banks and lenders are the major players in the market they are willing and realistic about the current market conditions and are not shy about chopping prices lower.  They have to keep slashing prices since their inventory numbers are skyrocketing.

Which leads us to our next point, notice of defaults.

(3)  Notice of Defaults

The recent trend in housing spin is that notice of defaults (NODs) have hit a peak and are trending lower.  Take a look at the graph.  These are historical highs.  So the fact that we have backed off a bit isn’t much of a big deal.  Here is some quick math for you:

July 2008 Data

NODs:             40,219

Total Sales:      39,507

As you can see NODs are now above the amount of actual sales.  Compare this to January of 2007 when we had 32,245 sales and 16,225 NODs.  The big issue with this is the amount of NODs that are actually converting over into REOs and foreclosures.  Some of these NODs will be sold as a short sale but most likely these will be taken back by the lenders as REOs.  Since the vast majority will convert to defaults the sales we just saw are essentially just enough to recycle the distressed property.  44.8 percent of all the sales last month were foreclosure resales.  That is a stunning number.

Which leads us to our final data point, that of REOs.

(4)  Real Estate Owned

Lenders are overwhelmed with the amount of inventory they are seeing.  If nearly half the sales each month are foreclosures, and distressed properties are now selling for 50 to 60 percent off peak values you can rest assured that the median price is going to get hammered even further.  I saw a few homes that were on the market in the Inland Empire for 5 figures!  Just imagine when that property sells what that will do to comps.

Look at the chart again.  Last month banks took back 28,795 homes!  So even though the sales number of 39,507 looks promising, banks just got a nice batch of 28,795 homes to sell.  That is:

39,507 (sold) - 28,795 (REOs back to lenders) = 10,712 drop in overall inventory 

You really have to look at it this way.  Even though banks are seeing a bump in sales it is largely due to the massive discounting going on with these foreclosures and financing that is happening in the conforming areas (i.e., government conventional loans).  You can rest assured that many of those NODs are going to become REOs in the upcoming months and thus add more inventory in a market that is already saturated.  And many of the cheerleaders forget that our economy is in difficult times.  Why would anyone buy if they suspect they’ll be losing a job or seeing a cut in their income?  They won’t and this will happen as time goes on.

In addition, you need to remember that many of the $300 billion in pay option ARMs in California are going to default without notice.  That is, it was a nice 3 or 5 year teaser rate but once the anniversary date hits you can rest assured many folks are simply going to stop making payments.  No struggle but a conscious move to stop making payments on an overpriced asset.  Currently with the negative amortizing payment it may be cheaper than renting.  But once that payment resets there will be no point and they can try selling the home but once again look at the graph and the trend in NODs and REOs.  This frankly has the potential to grind the entire economy to a sudden halt for the next few years.

If the lesson isn’t evident, it is that people were not responsible enough to handle having access to ungodly amounts of credit.  This is fine if it was contained to a single institution.  Why should we care if a bank is so irresponsible as to loan its own money to unqualified candidates.  That is their choice and that is between them and their shareholders.  But when they look at the government for help (aka you and everyone else that has been diligent) it becomes society’s problem.  Time to send these toxic institutions and mortgage programs onto an island once and for all.

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California Foreclosures: Foreclosures and Charting the REO Trend. Lord of the Mortgages.

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Related Posts:
■Foreclosed: Predicting Foreclosures in California. How Many Homes will Be Foreclosed in 2008?
■Foreclosures? Housing Bubble? In Southern California? Impossible!
■Zillow is Off by a Small Amount. Try $250,000 off with Proof!
■Foreclosures jump statewide by 40% in California in just one quarter! Welcome to California’s Gold!
■California Housing: 1 out of every 192 Homes in Trouble. Top Ranking State in the United States.

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Filed under: Google (GOOG), Employees

This story may sound quite strange to some people, as the perks at the Google campus have been known to be among the best in the industry, if not the best. But the blogosphere was abuzz after Valleywag reported on Sunday that Google Inc. (NASDAQ: GOOG) will be taking dinners off the menu. Not just that, but while breakfast and lunch will remain free, the rumor had it that there would also be “No more tea trolley. No more snack attack in the afternoon.”

The initial reaction to this may be, really, this is what they’re whining about? Don’t they know many Americans would love to trade with them and “worry” about such things instead of worrying about paying their mortgage or losing their jobs? Why concentrate on a story of “less riches”?

Well, one possible reason this has grabbed the attention of many after all is because of the scary signal it may give. Could this be a sign that the economic hardship has reached even tech darling Google? Are there no safe havens? And with recent concern that the dollar rally could hurt Google’s result, the ‘no dinner’ story has indeed been blown out of proportion.

Continue reading Dinner still on at Google - but for how long?

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