Joseph-Brady.com

Pack the Mortgage Up with the Furniture?

Portable mortgages are an idea that makes sense...maybe.  The concept is simple.  You get a home loan at a 30-year fixed rate.  If you lock-in when rates are low, you keep that rate for the life of the loan and transfer the loan to a new property.

Borrowers would love it because it makes them feel that the loan they "earned" stays with them forever.  Secondary markets (the ultimate purchaser of most loans) and banks, won't love this idea.   

Portable mortgages are available in Canada.  E-Trade Financial experimented with this loan product in 2003.  They charged borrowers a rate premium of .375% to guarantee that portability.  That means that if the "market rate" was 5.5% in 2003, the borrowers who optioned to take the portable mortgage, received a rate of 5.875%. 

The rate premium was charged to appease the secondary markets by providing them the extra money to hedge the interest rate risk.  The interest-rate risk for the investors could be hedged through mortgage derivatives or a collared options strategy.  I'm not exactly certain how that strategy will work so I'm asking Pat Kitano to comment; he was a capital markets guy on Wall Street (I was a consumer markets guy) so he might have an interesting take for us money geeks.

What are some of the problems ?

WACC is the most obvious problem for the consumer. if you have a $200,000 mortgage at 5.875%, and you want to transfer $200,000 in equity to a $500,000 home, you'd have to obtain a $100,000 second mortgage at 8.5%.   This would give you a WACC of 6.75%.  That's about .375% higher than the current market for a 30 year fixed rate, conforming loan.

Downsizing movers would probably not benefit. I have to think that a 20% equity position will need to be maintained. reducing the loan amount would severely hamper the secondary market's ability to hedge that interest rate risk so they would most likely disallow such a transaction.

Not all county recording offices are automated. The County of Philadelphia is still recording deeds like they did in 1963 while Maricopa County has been automated since the early 90s. This makes it difficult for a lender to perfect a proper lien on the new home.  Moving from Philly to Phoenix shouldn't be a problem but the reverse could be catastrophic for the lender.

Mortgage originators will HATE this idea. Over 70% of the home loans in the country are originated by mortgage brokers.  Brokers make no money on the servicing of the loan and would most likely resist the adaptation of this new product.   I suppose brokers could charge a slight premium in origination fees to recapture that lost future income.

Conclusion:

I'm predicting that a portable mortgage, while a unique marketing tool, would ultimately not be of benefit to most consumers.  In today's new real estate paradigm, equity harvesting offers more benefits to the consumer than the old "stay and pay" approach of the Depression Economic and Boomer Economic paradigms.  Its a fun topic to bounce around but the practical applications just don't make sense.

*Article written by guest author Brian Brady and is solely his opinion and information.

Title Insurance: A Necessary Evil

Here is a great story about why title insurance is really a bargain:

Wildwood was always the "party town" of the Jersey shore.  High school kids and college students used to head down to Wildwood to celebrate their newfound freedom as adults.  You all know how that goes; raucous parties which made it difficult for Wildwood to establish itself as a "family" vacation place.  I guess Mayor Fred Wager and the town council decided that the riches from Casino gaming (allowed only in Atlantic City) were the answer to their problems.

The town council agreed to deed a parking lot to the Delaware Indian tribe who would pay the city $8 million annually in rent.  The tribe also agreed not to operate restaurants, nightclubs, etc.  Just a gaming hall.  Well, this set up tremendous drama because New Jersey state law only authorizes casino gaming in Atlantic City (and takes a 8% tax on all receipts).  Other ancillary businesses were not happy about Wildwood encroaching upon the monopoly AC had (I imagine the Sopranos family was upset also).

Don't stop reading, yet.  Here's where it gets funny.

The state talked about intervening.  It seems that the Delaware Indian tribe  sued the city and state claiming that Wildwood sat on ancestral tribal grounds.  Well, the tribe's law firm must have had some good researchers because they found a problem in the chain of title.

It seems that all land sales and treaties have to be ratified by the US Congress.  Somehow, someway, some bright young law clerk discovered that Congress never ratified a treaty for the sale of the land from (you guessed it, the predecessor of the Delaware tribe) in the early 1800s.   I don't need to tell you Realtors about unexecuted contracts.  It further stated that all the land from Princeton south, in the State of New Jersey was affected by this non-ratified treaty. 

New Jersey in the most densely populated state.  It affected some 6 million people and some 2 million households.  Close to 7 million pieces of property would be subject to a HUGE title claim.

A year later, the tribe withdrew the lawsuit.   

Do you think title policies are a bargain now?

*Article written by guest author Brian Brady and is solely his opinion and information.

Reading an Appraisal Like an Underwriter

Who owns the appraisal? The lender owns the appraisal; the borrower pays for it and is entitled to it after the loan funds or is declined.  Lenders have 90 day to furnish it to the borrower.  The waiver, accepted by the lender and borrower requires immediate access to the appraisal report.

Appraisals are opinions of value and limiting conditions of that value by a human being.  They are not an edict from the Almighty above.  They are folded, spindled, and mutilated by 1-3 people before the value is accepted (especially nowadays).  Underwriters disagree, alter, and guess about value after reading an appraisal report.

Here are the quick things you should look for on a residential appraisal:

Part One: check the certification of value and limiting conditions.

Part Two:  check the description of improvements.  Appraisers will comment on the "condition' of the property here.

Part Three:

a) Land Value shouldn't exceed 35% of the total value except in extreme locations. That's a red flag.   

b) Sales comparison approach. This is where the appraiser uses comparable sales or "comps".  Appraisers adjust comps for variations from the subject property.  Wild fluctuations or huge adjustments are red flags.

c) Lenders expect an appraiser to "bracket" the subject property with adjusted vales (one higher, one lower than the subject)

d) comps should be "closed" transactions within 6 months of the appraisal date and within one mile of the subject property.  Deviations should be well explained in the commentary.

e) The cost approach should be relatively close to the sales comparison approach in value.  Take note, the improvement value is what is used to determine fire insurance coverage.

f) Market analysis: declining values or declining areas always promulgate further review.  Stable or rising values is always a winner.

The final section (or addenda) should include the appraiser's license and Errors and Omissions policy.

Who owns the appraisal? The lender owns the appraisal; the borrower pays for it and is entitled to it after the loan funds or is declined.  Lenders have 90 day to furnish it to the borrower.  The waiver, accepted by the lender and borrower requires immediate access to the appraisal report.

Appraisals are opinions of value and limiting conditions of that value by a human being.  They are not an edict from the Almighty above.  They are folded, spindled, and mutilated by 1-3 people before the value is accepted (especially nowadays).  Underwriters disagree, alter, and guess about value after reading an appraisal report.

Here are the quick things you should look for on a residential appraisal:

Part One: check the certification of value and limiting conditions.

Part Two:  check the description of improvements.  Appraisers will comment on the "condition' of the property here.

Part Three:

a) Land Value shouldn't exceed 35% of the total value except in extreme locations. That's a red flag.   

b) Sales comparison approach. This is where the appraiser uses comparable sales or "comps".  Appraisers adjust comps for variations from the subject property.  Wild fluctuations or huge adjustments are red flags.

c) Lenders expect an appraiser to "bracket" the subject property with adjusted vales (one higher, one lower than the subject)

d) comps should be "closed" transactions within 6 months of the appraisal date and within one mile of the subject property.  Deviations should be well explained in the commentary.

e) The cost approach should be relatively close to the sales comparison approach in value.  Take note, the improvement value is what is used to determine fire insurance coverage.

f) Market analysis: declining values or declining areas always promulgate further review.  Stable or rising values is always a winner.

The final section (or addenda) should include the appraiser's license and Errors and Omissions policy.