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Archive for the ‘Mortgages’ Category

The mortgage industry has long been able to adapt to changing market conditions. When interest rates rose to double-digit levels in the late 1970′s, the industry made more adjustable-rate mortgages available. When the savings rate began to drop and Americans had less to put down on homes, the industry made more flexible loan products available that did not require as large a down payment. And now, as immigrants begin to comprise a larger and larger portion of our population, the lending industry is begun to introduce loans that are tailored to an immigrant population that may not have solid credit histories or Social Security numbers.

These loans, known as ITIN loans, are offered to illegal immigrants that do not have a Social Security number. They can qualify for the loans by obtaining an Individual Taxpayer Identification number (ITIN) from the Internal Revenue Service. The IRS issues these numbers to people who are required to pay taxes but are ineligible for a Social Security number. The government uses these numbers for tax purposes only. A few small banks, as well as national banks Citibank and Wells Fargo, have started to issue loans to customers who have an ITIN but not a Social Security number. Most of these loans have been issued in California, but they will probably be available in other places soon.

The process of obtaining an ITIN loan is somewhat more complicated than that of applying for a conventional mortgage. Applicants with an ITIN usually have a credit history that is less well documented. As a result, the usual background work required issuing such a loan is more complicated and more time consuming than for a conventional mortgage. In addition, fees and interest rates will tend to be higher than for other types of loans in order to compensate lenders for the additional trouble and additional risk.

While there is plenty of opposition to lending money to people who are here illegally, few would argue that a neighborhood that consists of homeowners, rather than renters, is a better neighborhood for everyone. Owners are much more likely to take care of their property and show concern for the neighborhood as a whole than are renters. Thus, any lending plan which encourages people to buy, rather than rent, is good for everyone.

Here is a commonly asked question.

“My understanding is the federal government is going to be offering financing to private equity and hedge funds to buy up the bad debt aka defaulted mortgages.”

If anything it would seem this would at the very least invite a whole heck of a lot of competition.

What are your thoughts on this?”

Well, here are my thoughts:

How to Buy Mortgages from Banks – The Four Buckets

The “competition” merely adds to the deal source for buying mortgages from banks.

There are 4 “buckets” in the note buying industry:

a) Big boys – buying $100M and above

b) Mid boys – buying $20-100M

c) Small boys – buying $1-20M

d) Mom and pops – buying How to Buy Mortgages From Banks, Defining Your Deal Sources

If you’re a Mom and Pop or a Small boy, the Mid and Big boys are now deal sources to buy notes for you!

They’re looking for a big IRR (e.g. quick flip on their real estate notes) and they’re buying more competitively than the small boys and the mom and pops.

View them as a note buying deal source, partner up with them, come up with some transparent “Cost plus 5? type of approach where you give them 5 points in exchange for cherry-picking their portfolio and piggy-backing off their due diligence, and why wouldn’t they be interested in selling notes to you?

So if you’re worried about the drip from the water fountain (or the fire hose!) being intercepted in some way, just shift yourself a little so that you catch the drips from the guy who just got in front of you.

And you can always go look for another water fountain to buy mortgages aka nonperforming notes.

I assure you that the Mid and Big boys are NOT out there building relationships with the 8,000+ FDIC insured banks.

And last time I checked, those 8,000 have a few non-performing notes in their portfolios!

Hope this was useful (and inspirational) information for you.

It’s time to take massive action.

It’s all out there, for those that choose to see the buying notes opportunity.

The major difference between how mortgages are calculated in the US and Canada rests solely on the way compound interest is calculated.

To understand the difference between US and Canadian mortgages, however, we should start at the beginning.

Compound Interest

The underlying assumption of compound interest is that interest is earned on interest. Therefore, with compound interest you apply the interest rate to the original principal as well as to all accumulated interest. This is different from simple interest, where the interest rate is applied only to the original principal amount.

Hence, the higher the compounding rate and the more frequent the compounding (known as the compound period), the larger the resulting mortgage payment.

For example, assume a loan amount of $100,000 at 7.00% interest rate amortized over 25 years. The monthly mortgage payment is $706.78 when compounded monthly and $700.42 when compounded semi-annually. As you can see, the payment is higher when the compound period is monthly rather than semi-annually because monthly compounding is clearly more frequent than semi-annual compounding.

Okay, let’s consider the difference between US and Canadian mortgages.

Mortgages in the United States are compounded monthly whereas mortgages in Canada are compounded semi-annually. This means that monthly mortgage payments on identical loans are higher in the United States than they are in Canada because the number of compounding periods per year is higher (as our example above reveals).

The Formula

To calculate the mortgage payment in either country correctly, you must first calculate the interest rate per payment. Here’s the formula:

((1+interest rate/compound period)^(compound period/periods per year))-1

For example, assume an annual interest rate of 7.0%, and twelve periods per year. The calculation for the interest rate per payment for semi-annual compounding (as in Canada) is:

((1+0.07/2)^(2/12))-1 = 0.575%

The calculation for the interest rate per payment for monthly compounding (as in the USA) is:

((1+0.07/12)^(12/12))-1 = 0.583%

Are you able to see the difference? With semi-annual compounding, the compound period is 2 (twice annually) whereas with monthly compounding the compound period is 12 (twelve times annually).

Okay, now let’s calculate each country’s loan payment where:

rate = interest rate per month (0.575% or 0.583%)
loan amount = $100,000
nper = total number of payments for the loan (300, or 25×12)

Formula: -PMT(rate,nper,loan amount)

Canada: -PMT(.00575,300,100000) = $700.42
USA: -PMT(.00583,300,100000) = $706.78

How to Make the Calculation

There are several ways to compute mortgage payment. You can use a mortgage calculator, a spreadsheet program like Excel, or in some cases, real estate investment software.

Whatever method you use, though, hopefully by knowing the difference between how mortgages are treated here in the United States versus those in Canada, as well as how to compute them, you will get the results you desire.

I had a conversation with a new Note Buyer the other day, and he told me that he was launching himself into buying defaulted mortgages after spending a long time wholesaling properties.

What worried me was when he said: “Dean, I want to get into buying defaulted mortgages in order to keep people in their homes and get some good cash flow.”

Don’t get me wrong. I’ll be the first to admit that Humanity counts.

But …

Don’t lose sight of the forest for the tree.

Don’t Try to Use Only One Exit Strategy For Buying Defaulted Mortgages

It just won’t work.

You see, you may WANT to pursue A SINGLE exit strategy for the defaulted mortgages you purchase (in this case, he was looking to re-perform all the notes he bought – possibly by modifying them all – and then to hold them for cash flow).

Buying Defaulted Mortgages: Multiple Exit Strategies Are Needed

In order to invest successfully in defaulted mortgages, you need to be like Rafael Nadal.

Nadal is a really well-balanced tennis star. He has an amazing serve, excellent grass court experience, plays solidly on clay, and can fire a wicked forehand.

Follow the same approach when buying defaulted mortgages. Learn how to pursue MULTIPLE Note Buying Exit Strategies at once.

Be careful you don’t “stick yourself” with one note buying strategy.

Using Foreclosure as a Buying Defaulted Mortgages Tool

One useful tool to get a borrower to cooperate with you in getting a loan modified can often be to start a foreclosure action.

Why?

Because for someone who has been missing payments regularly and hasn’t been current for a while, sometimes a wake-up call with a foreclosure notice (combined with a helping hand from you to help them with a loan modification) is what prompts them to get their act together, take control of their situation, and to work their way out of their delinquency.

Don’t fall into the same trap the investor I talked to did.

Don’t think that 1 Exit Strategy to your Defaulted Mortgage Buying business is enough to make you successful.

You really need to be a jack of all 5 Exit Strategies to do well in the note buying business.

The massive amount of recent advertisements for reverse mortgages may be tempting – but the negatives of a reverse mortgage can have far reaching consequences to consider.

The important thing to remember is even if the negatives of a reverse mortgage do not impact you directly, they can be extremely difficult for your survivors – or even for you if you choose to ever leave your home. A reverse mortgage is different from a regular mortgage or home equity loan in that there are no payments to consider – there will not be a bill hanging over your head after you receive your money. But you will be losing equity in your home, something you do need to think about.

Reverse mortgages have yet to catch on in the same way that second mortgages and other loans have, so fewer people are truly aware of what happens when you get a reverse mortgage. These mortgages only comprised .7 percent of all mortgages in the US last year – a very small portion of the mortgage world. What happens in a reverse mortgage starts out simple – a lender agrees to pay you monthly payments in cash or available money, in effect purchasing the equity of your home from you in payment installments.

In this way, the negatives of a reverse mortgage do not seem so obvious. You are getting money, not having to borrow against your home, and you cannot be kicked out of your home for non-payment of a loan. Unfortunately, there are hefty fees levied against your equity, meaning you actually will get less money via payments than your house is worth. Additionally, you will be leaving your family with a debt if you pass on – one that will require them to take action.

If a family member gets left your home or property that has a reverse mortgage, they will be required to either pay back the money you received in order to keep the home, or sell it in order to get what ever remaining equity is left in the home and pay back your mortgage. Additionally, they are forced to go through many hoops and may not be able to actually live in the home, which can be a difficulty for some families.

It is important to think about all of the ramifications of the reverse mortgage before choosing this way to get additional money. The negatives of a reverse mortgage can outweigh the positives, making this a less than ideal choice for your family.

While some homeowners and retired people see the advantages of getting a reverse mortgage, it is also extremely important to be knowledgeable of this loan programs downfalls. Once you know all of the facts you may find that this type of mortgage is not for you after all. With that said, here is a look at the disadvantages of reverse mortgages.

The process of reverse mortgage is basically paying you for the equity of your home upfront as an immediate lump sum, or as monthly income payments. If you own a reverse mortgage, retirement can be easy for you and your home because it sustains for both of your assets. Life can be a lot easier in your retirement days. However, before jumping into contracts that you only know about the outer shell, it is important to be informed of the disadvantages to know if it really suits you in the long run.

Paying Off Your Home

One of the requirements of a reverse mortgage is that you must pay off the balance of your existing mortgage with the proceeds if you still owe money on your home. While this may not be a big issue for many retirees, it will be if you still have a substantial balance on your mortgage.

Future Debt

One of the bigger disadvantages of this type of loan is when you want to leave your home to your heirs. The debt from the loan is passed on to them in the event you die. In most cases the home will need to be sold in order to pay off the reverse mortgage. Anything that is left over would go to them, but if you are looking to pass your home onto your heirs debt free, then this can be a major disadvantage and something you will really want to consider. Of course, if you have no immediate family then this is a moot point.

Despite its advantages, it is important to understand the disadvantages of a reverse mortgage so that you can make a more informed decision on whether this loan is right for you. These are only two of the major issues and you should further check into them before deciding whether to proceed further. Don’t get me wrong, this loan is very beneficial in the right circumstances. You just need to do your homework to know if you fit the criteria.