An Avalanche of Mail

Editor's Note:

Get your pens and pencils ready.

I've been invited back to appear on the Forbes on Fox television program…and this time I'm going to deliver a blockbuster.

During my appearance, I'm planning to reveal my next blockbuster recommendation — a company so strong I'm labelling it my Next Big Growth Stock for the Next 3 Years.

During my first appearance on this program in April ‘06, I offered up 2 recommendations (Micros and Ormat Technologies)…which have since shot up more than 17% and 15%, respectively. And I think this one could be even bigger.

So be sure to tune in this Saturday — at 11:00 a.m. Eastern time.

It's an appearance you won't want to miss.

Best Regards,

Brian Hicks

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When I introduced the "Mortgage Matters" aspect of this column last week, I was prepared for a fair amount of interest. But what has come in since that column ran has been nothing short of an avalanche of inquiries.

And while I have done my best to answer most of your questions, some of them can only be answered here.

As part of the deluge, a large number of you wrote to say that you were perplexed by what I had written regarding the urgency of refinancing.

You didn't exactly see where I was coming from when I wrote, "If many of you don't act now it will be too late to do so in the future. Market forces simply won't allow it."

And while I do agree that it was something of a mysterious statement, it is true nonetheless.

Here's why.

To qualify for a loan, even in this easy credit environment, certain guidelines have to be met before an underwriter can grant approval.

Some of these are simple and some are rather mundane, but all of them are necessary, because if any of them are missing a loan can be disqualified.

The problem is that many of these conditions will become harder and harder to meet in post-bubble banking world.

At the moment I see three distinct areas where these qualifications are going to become harder to meet.

They are:

1. Guideline Changes: As the banking excesses of the bubble are unveiled in a monumental string of blown-up loans and foreclosures, the loose and risky lending standards that led to these disasters are going to be severely restricted by banking regulators. I spoke about this in my column "NEWSFLASH: The Fat Lady Has Sung." Regulators have already begun changing the guidelines on interest-only and negative amortization loans, making them harder to qualify for. In due time, all "stated" and "no income/no asset" loans will be reined in too. And when common sense finally prevails, the people that used these products to qualify in the past will find them no longer available-even in the sub-prime markets.
2. Falling Home Values: For the most part, a bank is only willing to lend you a maximum 100% of the value of your home. During the bubble, many borrowers took advantage of this by borrowing the full 100% or 95% of the appraised value. This means that many homeowners have little or no equity in their homes. As a result, even a minor 8% decrease in home values could end up leaving many a borrower "upside down" on their mortgage, meaning that they owe more than it is worth. This likely scenario would make refinancing practically impossible for most people. For instance, if you have a $300,000 mortgage on a property that is now worth only $276,000, your maximum loan amount from a lender is only that $276,000. Refinancing this property would require you to bring at least $24,000 to settlement to close the deal. If this happens, you will be stuck.
3. Rising Interest Rates: The Fed may soon cut, but that could mean very little to rates. After all, the Fed hiked rates some 17 times and rates barely budged. That's because interest rates are not merely an expression of the time preference for money. They also factor in risk. And in an environment of falling home prices, there is substantially more risk than in a market that is appreciating. Add to this mixture the increasing number of foreclosures generated by insane lending standards and you have a situation where both adjustable and fixed rates rise, trapping you in your mortgage.

So while it was incredibly easy to borrow money when the market was going nuts, it is going to become much harder to do so as the realities of the credit bubble come home to roost.

That's why I recommend that if your loan is anything that could be described as "exotic," you should at least think about refinancing now before it is too late.

Your "Mortgage Matters" Questions

Dear Steve,

I presently have a 15-year fixed mortgage at 4.75%. I have approximately 11 years left on the mortgage and a balance of approximately $146,000. My house was recently appraised for $390,000. I am considering refinancing my house with an "interest only" 6.75% 30 year mortgage.

Actually the mortgage is for less then interest only(the principle goes up every month) for the first five years. I would then take the equity of approximately $150,000 and invest it elsewhere. This would give me a large interest tax write-off plus some income from my $150,000 investment.

Is this a "smart" idea at this time?

I was planning to put my $150,000 equity into a "hard money" real-estate program where I could be earning around 20% per year.

Any advice you could give me would be appreciated.

Thanks,

L. G.

—–

Dear L.G.,

Congratulations on your real-estate created wealth.

The loan program that you are talking about is exactly the type of "exotic" deal that I am urging people to turn away from. It's an Option Arm loan, which means that it works something like your credit card. If you do not make the full interest payment, your loan balance will actually increase, further eating away at your equity stake.

Beyond that, it is also adjustable, which could send your payments skyrocketing beyond your ability to pay them when the loan adjusts after its teaser period. And while I'm sure that the monthly payment looks great, keep in mind that it's the bait that lenders use to push these programs.

If you are intent on extracting some of your equity, I would recommend a home equity line of credit. The rates may be higher but there are little or no closing costs involved.

That way you would get the benefit of the money you need without having to pay the exorbitant costs and fees associated with refinancing your first mortgage.

Even better than that, you would keep your existing 4.75% rate (which is great) and actually make progress every month toward paying down your principal. And just think, in 11 short years that loan will be paid off!

Good luck in your endeavor, but remember that real-estate investing is a much tougher game now. That 20% "hard money" profit may now be much harder to come by.

By the way: Foreclosures are up dramatically across the nation. In fact, according to industry experts the foreclosure rate is expected to surge to 4 in 100 borrowers. The "normal" rate of foreclosures is 1 in 100.

It might not sound like much . . . but it is.

Nationally, 318,355 properties entered some stage of foreclosure during the third quarter of 2006, a 17 percent increase over the previous quarter and a 43 percent yearly increase over the third quarter of 2005.

The housing bubble has popped, but the banking debacle has just begun. E-mail me your mortgage questions at steve.christ@angelpub.com.