Wednesday, April 7th, 2010 at
6:30 pm
A more timely book I can not think of. The mortgage world is in tatters, banks are falling in ever increasing numbers, and our flagship automotive industry is going cap in hand to the government begging for a bail out package.
Plunder makes for a very interesting read, it takes a long hard look at what led up to the current crisis, and maybe more importantly explores the actual people responsible, yes there are individuals that can be identified.
Danny explains that the entire fiasco has been fueled by greed at all levels of the financial and even to a certain extent government levels. Deregulation played a large hand in the house of cards, it provided the method that created the subprime lending environment.
So what is subprime lending? I have to admit that prior to reading Plunder I really did not know. Subprime is just a word, and one that I had assumed had some connection to prime lending rates, I was wrong. It actually has its roots in the credit worthiness of the borrower. By tailoring loans with a sliding scale of interest rates, and over valuing credit worthiness many more people could qualify for loans than using traditional methods. This sounds like a risky business, but not so said the banks, they made their money in the up front fees then sold the paper en mass to larger institutions as asset backed.
Many would say this was a Ponzi scheme, it could only survive as long as three conditions were met. The borrower kept on increasing his purchasing power, i.e. made more money to meet the increased debt load that he was incurring. Secondly, house prices continued to rise, which increased the equity of of property. And thirdly the economy continued to grow at a predictable rate. A problem in any one area would cause trouble, a problem in all three areas would spell disaster. Well, house prices started to drop, the economy slowed, and wage increases slowed.
To add further trouble food and fuel shortages led to a steep increase in price. Suddenly the entire fabric of our economic system is at risk. As foreclosures increased, the ‘asset backed’ notes that had buoyed Wall Street for a decade became a huge millstone.
Danny Schechter makes many salient observations, why didn’t the government act while there was still an opportunity to be proactive? Why didn’t the main stream media at least get the message out? Well the government had little interest in further eroding voter confidence, Iraq and 9/11 had already taken their toll, the economy seemed the one area where they could still strut their stuff. The media on the other hand had no reason to be the bearer of bad news, much of their revenue came from advertisements from companies selling subprime loans.
One of the most revealing aspects of Plunder is to be found in the preface section. Danny talks about the difficulty of finding a publisher. He is hardly a beginner in the media game, he has published a number of other books, has directed a number of documentaries, and has been active in TV for many years, yet he encountered great animosity over this particular book.
Plunder is well worth seeking out, Danny Schechter does a very good job of dissecting the current dilemma. he also is not shy about naming the actual culprits. You can pick up your copy from Amazon.
By: Simon Barrett
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Friday, February 26th, 2010 at
2:59 pm
If you have used your IRA, or other self directed retirement plan, to purchase an investment property the mortgage loan you obtain must be NON-RECOURSE. What does this mean? A traditional loan provides for “recourse” to the borrower. In other words, if, for whatever reason, you don’t make the mortgage payment the lender reserves the right to come after you, -personally – for the balance of the loan.
The IRS will not allow you to personally guarantee a loan made in the name of your IRA. Therefore, all IRA mortgages must have no recourse, that is, be “NON”- RECOURSE to you. In simple English – the cash flow from the property must be sufficient to cover the mortgage payment and all expenses because the lender can not come after you for any shortfalls.
IRA property mortgages are not resold into the secondary market through the usual network of mortgage bankers, mortgage brokers and banks.
IRA property mortgages fall under the category of commercial loans. With a traditional mortgage the lender may look at the rent and cash flow on the property, but the majority of their decision to give you a mortgage is based on your personal credit, personal income and your current debt load. Here, the property takes a back seat to your personal ability to repay the loan.
With commercial loans you, your credit and your income take the back seat. The property’s cash flow is the major consideration. In fact, your credit and income may never even be addressed. So how does a lender underwrite an IRA mortgage? The same way and methods they apply to apartment buildings, strip malls and office buildings. The lender will want to verify the ability of a property to generate sufficient cash to pay the mortgage, taxes and operating expenses.
This is a two step process. First, the lender will look at certified copies of leases and operating expenses that have been obtained from seller. The lender may also ask for certified copies of the sellers tax returns. The lender will develop a picture of what typical annual operating expenses will be for the property. If there is a question of “authenticity”, rents may even be verified directly with the tenants. Once income and expenses are determined, credits and debits are applied to come up with a net operating income- NOI – figure.
Being the conservative group that they are, the banker will then order an appraisal on the property. The appraiser will determine the value of the property based upon two approaches. First is the usual “Market” Approach which looks at recent resale of comparable properties. Most investors are familiar with this appraisal method.
What is different is the second approach called the “income approach”. Here the appraiser lets the lender know what the income and expenses are in the market, for properties that are similar to the property that the lender is being asked to mortgage. This is why IRA mortgages have higher appraisal fees – because substantially more work is being asked of the appraiser.
The lender then analyzes both sets of figures, from the seller and from the appraiser, and will then calculate their own NOI. So far the procedure is pretty straightforward. Here the numbers “are doing the talking”.
Lenders, always conservative beings, will want a cushion in the expenses to cover the “extraordinary” expenses should they become more “ordinary”. By this I mean… This “cushion” is given the name DSCR – Debt Service Coverage Ratio. Depending upon how quickly a property could be sold in the event of default or foreclosure, the lender will make sure that the “cushion” is larger, rather than smaller. A property like a strip mall which could take months to sell would typically have a 25% cushion. In other words, a 10 to 25% cushion is left in the available cash after expenses and before the lender calculates the maximum mortgage for the property. You now know what a Debt Service Coverage Ration of 1.10 to 1.25 is. The .10 to .25 is the cushion. Let’s see a quick calculation.
A six flat is being sold for $300,000, has a net operating income of $1908.00/ month. The lender uses a DSCR of 1.20 for a multi-family building. The net operating income (NOI) of $1908/month is divided by 1.20 which leaves you with a figure of $1590. This is the maximum Principal and Interest – P&I) - that can be applied and still meet expenses and “the cushion”.
Using a 25 year amortization Interest rate of 7% The maximum mortgage (PV) is $224,950.00
Again, the numbers, in the above scenario, are “doing all the talking”. This property would require the IRA to use $75,050 (25%) as a down payment.
So, here you have it. A peek behind the banker’s curtain in determining mortgage qualifications for IRA owned properties.
Steve Miszkowicz is the President & Managing Member of Chicago Trust Administration Services LLC
www.chicagotrustadministration.com
©2008 by Chicago Trust Administration Services LLC, all rights reserved
By: Steven Miszkowicz
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Monday, November 23rd, 2009 at
5:15 pm
The financing vehicles have been in place for several years now for a borrower using some creativity with a seller to make 100% financing possible. However, the real estate market had been so hot in many areas in the U.S. the sellers did not have to even entertain anything resembling creative financing. With a softening market, creative financing is back as a helpful tool to allow sellers to unload their properties as long as an over supply of inventory exists.
Harold and Laura had been renting a home in a suburban area for three years. They had been digging out from under a heavy debt load of medical collections. Laura was leaving work one day and a truck had crossed the line and pinned her in her small car for a half an hour until the jaws-of-life was used to extract her out from her crushed vehicle. With a broken hip, ankle, eye socket and fibula a long recovery ensured and Laura was not able to work for two years. The other driver was at fault, but any financial recovery was years down the road as the other insurance company was playing hardball.
In the meantime, with constant harassment for the out standing medical bills and the weight of credit card and installment debt that existed prior to the accident was just overwhelming. Harold had been working two jobs just to meet the basic family needs. Family help was limited and really wasn’t expected. Laura’s therapy had been going on for a year now and real progress was being made. Her employer had kept her job open as a customer service representative ironically at a credit card service center. The benefits were limited and very little of the medical bills and rehab had been covered. Harold and Laura had been seeking some financial advice from a local bankruptcy attorney. It was decided that with their level of income and huge medical bills that filing a Chapter 7 Bankruptcy action might be the best thing to do for mental sanity and cash flow. A Chapter 13-payback plan would be crippling for many years to come.
As the bankruptcy attorney explained to Harold and Laura that in his practice example after example comes before him where just bad things happen to good people and that there was no shame in taking care of their financial affairs in this manner. The rationalization process followed.
Two months before filing the bankruptcy, the insurance company was offering a small settlement based on an allegation that Laura may have temporarily been distracted by talking on her cell phone and thus reduced her reaction time. Rather than put up a long protracted fight Harold and Laura, for better or worse settled for an amount that just covered her payoff on her totaled car. They were relieved of that installment. Their attorney for the accident urged them not to settle, but with Laura’s eminent recovery and the stress of the whole ordeal, they grabbed what they could at the time.
Harold and Laura received their notice of the Final Discharge of their Chapter 7 Bankruptcy. All the collections for medical bills, non-secured credit cards and one major medical bill that had resulted in a judgement being awarded for the first responding hospital had all been wiped out. They excluded their family car from the Bankruptcy matrix (which names all the debtors), which still had a $6,850 balance with a $295/month payment remaining.
They also excluded a credit card that they had for years and had a low balance and a low monthly payment. This allowed Harold and Laura to maintain two trade lines and their on time rental payment of some $1,250/month outside the Bankruptcy action. Laura had now been back to work at her old job for two weeks. She was fortunate to take advantage of a car pool with a fellow worker who lived a half mile away.
It was like the world had been lifted off their shoulders. Now Harold and Laura had their rent, one car payment and a small credit card and their home utilities. The cell phone service had gone by the way side many months before.
Even through the most brutal times and the lowest of the low, Harold and Laura, as their custom, visited Open Houses after church every Sunday. It was always in the neighborhood and never more than two home visitations. It was Harold and Laura’s way to cope with the dark cloud that had beset them. During this process, they became familiar with a local Realtor who took a very personal interest in their situation. The Realtor, named Betty, knew they were not ready to do anything until some things had been handled.
At the most recent Open House visit, Harold and Laura shared that they had put their financial challenges behind them. Laura was feeling great and off all her pain medication. Betty raised the prospect and questioned them if she could figure out a way to get them into a home at a little more than they were paying in rent with little or no money out of pocket, would they have an interest at least in hearing more about it. Harold raised his hands with palms up and a shrug of the shoulders, and shared that it wouldn’t hurt to listen to some possibilities. The accident had caused a detour in the quest to own a home, but it had not killed their dream.
Betty set up a meeting with the Realtor’s in-house mortgage broker to discuss their options. A joint credit report was pulled and as Harold at the time made the most money his middle score was utilized to qualify for a mortgage. His middle credit score was right at 500. The mortgage broker went on to explain that they would qualify for an 85% Loan To Value mortgage. Due to their lack of a cash down payment, it was added, that the only way that they could use this loan option would be with a seller held second of 15% loan to value with the seller also paying up to 6% of the contract selling price.
This would then give them a 100% Combined Loan To Value (CLTV). The loan would need to be a Fully Documented loan with verification for employment and income. The mortgage broker felt like he could present Laura’s employment gap due to the accident and use her current income for qualifying purposes. Totaling up the income versus the debts, it was determined that Harold and Laura could buy a home in the $175,000 range IF the seller would offer reasonable terms on the 2nd mortgage. Betty piped in that she had been sitting on a listing for six months and the owner now may have an interest in holding some paper versus renting the property again and deal with the tenant challenges on repairs and upkeep. The home was close to their current residence.
Betty was able to work out the deal with reasonable terms on the second mortgage that would keep the overall monthly payment down at least for the first three years. As the mortgage broker explained, that should be plenty of time to establish a better credit history and qualify for a lower interest rate loan in two years. As an added bonus, the seller agreed to pay all the closing costs and prepaid expenses such as annual hazard insurance and tax escrows plus replacing a leaky roof. Harold and Laura moved into their newly purchased home putting all the travails of the past in the rear view mirror.
Sometimes bad things happen to good people. In this current real estate market, there are creative possibilities. It won’t last forever; the time is at hand for seller help and creative financing.
Dale Rogers
www.sellerhelpsbuyer.com
www.brokencredit.com
By: Dale Rogers
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