Traci Gregory, Financier

Rates, Market Commentary, and tears from Dave Fox

First the good news: Jumbo rates for loans up to $1 million are down to 6.875 - quite a lot from the 8.5 we saw a few weeks ago.  AND, that's at 90% LTV, which I didn't know if we'd ever see on a super jumbo again . . . Vertice, in their market commentary says "Treasuries rose after a government report showed housing starts in the U.S. plunged to a 14-year low in September. The data may add to speculation that the Federal Reserve will reduce borrowing costs this month to curb an economic slowdown."  We already new it was a new low, didn't we?

And last, but not least, Dave Fox was voted off the island last week for loan fraud (kicked off his television show) and now, he's gone on the air, cried real tears, and guess what?  For the second-degree felony charge, Fox has been placed on 36 months of a plea in abeyance, and he's back on the air.

Now that is what I call fraud deterrence.

Unbelievable.

The Black Swan: The Impact of the Highly Improbable

Nassim Nicholas Taleb (essayist and mathematical trader) writes in a sometimes stilted and perhaps condescending fashion - but his book is entertaining, and for the most part interesting.  He truly rakes over the coals the experts  on Wall Street who make predictions based on historical data (perhaps this could include the buying and selling of mortgage backed securities?) because they use trends, and ignore the improbable.

His outlook is to first acknowledge the black swan; and then employ it, to his advantage.  His belief is that we neither make huge gains nor have huge losses through the historical, only through the improbable, or unthinkable.

The name "The Black Swan . . ." is taken from the fact that for years the world knew there were NO black swans; using the metaphor "black swan" meant nonexistent.  Then Black Swans  were discovered in Australia. 

Taleb's black swan is " . . .  a large-impact, hard-to-predict, and rare event beyond the realm of normal expectations."  September 11, 2001 is referred to as a "black swan".

Real Estate investors know that now is the perfect time to buy real estate with the foreclosure market being what it is, but it is a dreadful time to get a loan for real estate.  As a large-impact, unpredicted and rare event, it seems to qualify as a black swan.  So, if we acknowledge it, how to use it?

Borrowers are certainly being given every opportunity to get refinanced on loans in default in ways that no one would have ever thought possible - the FHA Secure program will allow a refinance to people ONLY IN DEFAULT and allow them to keep the second mortgage they have now.  Lenders are developing programs that will allow a cltv of 125%; refinancing what was an 80% first mortgage up to 100% value and allowing the second to stay, increasing the loan to 120% of the value of the property.  I wouldn't want to owe 25% more than my house was worth, but it beats foreclosure.

For real estate investors (and I'm not recommending speculation here . . . take note) there are properties that were manipulated by developers and builders that could present a powerful black swan advantage in the price they're getting now, and the equity they afford.  I've seen condos in Atlanta that were listed for $1,000,000 sell for $250,000 in bank sales in the last month.  They're a bargain at $250K even if the market takes a couple of years to recover.

This is the time to think outside the box - and stay on the lookout for the black swan.

Rock Czar of Real Estate, Frank McKinney

I've recently discovered Frank McKinney, named by the WSJ as the Rock Czar of Real Estate, and I must say, I've fallen for him.

He has shoulder length blonde hair, and for me, that's a great start, but as a businessman, he is someone to be reckoned with and I have a great admiration for what he has done in his life, and the way he has done it.

He started out with a $50,000 bungalow in South Florida and now builds $100 million estate homes that are sold by Sotheby's . . . What a difference 20 years will make, huh?

I'd guess the reason more of us haven't heard of him is because his market is limited to a small percentage of the world population, but I highly recommend a) reading his book Frank McKinney's Maverick Approach to Real Estate Success and b) putting his principles to work in your life!

Buy it used, get it from the library, or get it from Amazon, but if you're a real estate investor, there is something in that book for you.

Rock Stars, Professional Athletes, Business Moguls

So what do Rock Stars, Professional Athletes and business moguls have in common and why are they on my mortgage blog?

Well, some of them have me in common, and those  who do, live in houses with loans that are termed Mega Jumbo.

A super jumbo loan is anything over $650,000. A Mega Jumbo is over a million dollars . . . and up to 10 or 12 million dollars.

And, while one would think if you lived in a mega-million dollar house you wouldn't be concerned with financing products, or monthly payments, the reality is that some of you are.

The new philosophy on owning a home is to regard it as an asset, or a vehicle to accrue assets, rather than merely creating a liability on your balance sheet.

To accomplish this, you get as much house as you can for as small a monthly payment as you can, and invest the rest in something that is making money faster than your mortgage is deferring interest. 

The most popular super jumbo mortgage program is the "interest only loan", which allows you to pay interest only for a defined period of time which can mean substantially lower payments for larger loan amounts.

Are interest rates higher? Mostly yes. Super Jumbo loans tend to carry a higher rate than conforming loans but rate also depends on your overall risk profile. Loans are priced based on risk, and layers of risk mean high interest rates.  Mega Jumbos  are also priced specific to the borrower, the property and the risk.  These loans aren't priced on a rate sheet, and as such are more difficult to quote to borrowers.

General rules are

• full doc loans are less risky that stated loans;
• Verified assets are less risky that stated assets;
• Higher credit scores are less risky than lower credit scores;
• Owner occupied properties are less risky than second homes or investor loans.

So, when you layer a stated income loan, with stated assets, on an investor property, the layers of risk have multiplied, and the interest rate is higher. Add that to the risk of a million dollar property (or more). Before a lender writes the check, they asses the risk they are taking, and your interest rate is the result.

Stated Pay Option Arm to $6 million? Perhaps, it depends on the layers of risk in your property. (Note) I have Stated Pay Option arms  to 100% LTV only on properties that cost $1,000,000 or less.

I also have asset based loans to 100% ltv, up to 12 or 14 million.  This means they are cross-collateralized with other assets, properties, CDs, brokerage accounts, etc.  These are more complicated to price and complete, but well worth the effort when you consider that the more expensive the property, the lower ltv a lender wants to give up.

You should have in reserves, after either purchase, stated or full doc, about 25% of the value of the house.  If you are a strong borrower (huge credit scores, low loan to value) you'll get by with less.  I've done a loan for 4.5 million, at 78% LTV with about 750K in reserves . . . that's half what you'd expect, and it worked.

As of 10/2006 a  standard interest only loan for $6 million  is going to run in the $35,000 per month range, so your income should be $90 to $100 K per month, or your trust account should pay that much. The pay option arm could drop the payment to about $10,000 a month . . . but you have to qualify at the full payment. 

You can see how that $25,000 per month in your investment program could make a big difference over five years . . . as long as you're making money.  Because unless you sell the house before your option payment period is over, you're deferring interest at the rate of $25,000 per month, too.

Send me an email if you've questions on any of these programs;  in most cases we have solutions for the most complicated deals.

And, I wish you the best! I think we should all live in six million dollar houses