Arn Cenedella

Archive for the 'Real Estate Finance' Category

2008 will bring change to FICO score calculations

The Wall Street Journal reports that Fair Issac will change the way their credit scores are calculated. The new system will be more forgiving on an occasional late payment but will be harder on repeat offenders. The FICO score developed by Fair Issac is used overwhelmingly my most real estate lenders.

Bay Area Foreclosures

The San Francisco Chronicle ran an informative and illiminating article Sunday on Bay Area Homes in Foreclosure.

6,557 Bay Area homes and condos were foreclosed on my lenders in the first 9 months of the year.

Of these, nearly 1 and 6 (a little under 1,000) were owned by individuals who lost more than 1 property to foreclosure during this time period. Additional almost another 350 were lost by owners who did not live in the property – i.e they were investment (speculative????) purchases. Based on my experience, I would say many of these other properties lost in foreclosures were in fact investment/speculative purchases. Often times buyers will tell lenders they intend to live in the property as thier primary residence in order to get a more attractive interest rate and terms when in truth they have no intention of living in the property as their residence.

Almost 7 out of 10 properties lost in foreclosure were purchased with no money down. This means all of these owners (about 4,500) lost no money because of the foreclosure. Another 325 owners made a downpayment of less than 5% of the purchase price.

It is interesting to note the geographic distribution of these foreclosures.

There have been few foreclosures in established Peninsula neighborhoods.

Most foreclosures have and are occuring in areas with significant new construction.

Real Estate Financing (Part 1)

Buyers and homeowners are faced with a myriad of financing options.

There are 30 or 40 year fixed rate mortgages. There are mortgages fixed for 3, 5, 7, or 10 years which then turn into adjustables. There are adjustable rate mortgages where the interest rates adjusts monthly, every 6 months, or every year.

Everyone wants to know: “what loan is best for me?”

In a series of posts to come, I will try to go through many of the questions buyers and homeowners ask when trying to decide which of these financing options is best for them?

Let’s just look at 30 year fixed rate loans for now.

Most lenders will offer several different interest rates based on how many points (also known as loan origination fees) are paid by the borrower.

 A borrower might be faced with the following options:

6.75% at 0 points

6.5% at 1 point

6.0% at 2 points

Which loan is the best deal?

Well, it depends on how long you will have the loan.

Let’s compare the first 2 options (6.75% at 0pts v 6.5% at 1pt).

You will pay 1 point equal to 1% of the loan to reduce your interest rate 1/4%.

So every year you have the lower rate loan, you save 1/4% in interest a year.

So it will take you 4 years of paying 1/4% less in rate to recoup the cost of the 1 point loan fee.

Therefore if you think you will have the loan for less than 4 years, it would be best to pay no points and pay a slightly higher rate. If you think, you will have the loan for more than 4 years, then the 6.5% at 1 point is the better option.

 If you compare the first and third option (6.75% at 0pts v 6.0% at 2 points), one can see that at a cost of 2 points, one would save 0.75% in rate every year. The break even point is therefore 2%/0.75% or 2.67 years or 2 years and 8 months. So if you will have the loan for more than 2 years and 8 months; then getting the 6% at 2 points loan is the better option.

This calculation can be done for any set of rate and terms.

Of course, one might not always be sure they will be in a house or how long they will have the loan. My suggestion might be – when in doubt pay less points. If rates drop you can always refinance into a lower rate. If you pay 2 points and then refinance after 2 years effectively, you will have paid 1% per year additional for that loan.

I will investigate other scenarios in future posts. If you have questions, I would be glad to answer them. 

It’s very rare – a balanced newspaper article about real estate

This unusual event took place in this Sunday’s September 9 New York Times.

The headline in the article was “It’s Time to Take a Deep Breath“.

How true !

The following points were made by Ben Stein:

1. The sub-prime mortgage industry helped many individuals to buy a home – without the sub-prime mortgage industry many of these individuals would not have been able to buy a home. Owning a home is the bedrock of the American Dream.

2. There is plenty of blame to go around – the sub-prime issuers and the bundlers of sub-prime mortgages – certainly share some of the blame. But many borrowers also faslified their loan applications and failed to do their own due diligence of their terms of their loans.

3. The time to buy real estate is when it it is down.

4. The Federal Reserve Board is on the case and they have stepped in to prevent further panic in the financial markets.

5. The US economy is very very large and it can not be derailed by anything we have seen right now.

I believe all of this is true. It is an issue – it is a problem – but it isn’t the end of the world. Our housing market and economy will get through this and hopefully we will have learned some lessons while we do.