By JAY BRYAN, The Montreal Gazette November 9, 2010
Mortgage debt in Canada climbed by 7.6 per cent in the past year to exceed $1 trillion -a figure that's sure to spark new worries about a housing bubble in Canada.
But a look below the surface of this number is far more reassuring.
First, the sheer amount of mortgage debt sounds daunting, but what's really important is how fast it's growing. It turns out that this growth has slowed a good deal from a trend rate of 10.7 per cent in recent years, an encouraging sign. The forecast is for a further downshift.
As well, it's hard to find signs of bubble behaviour or of a financial squeeze on homeowners.
Few Canadian homeowners are speculating on housing and most have a fat equity cushion in their properties. Better yet, most could afford monthly payments of at least $300 above their current ones, according to a new survey.
This information is courtesy of an outfit that represents many of Canada's mortgage brokers and insurers, the Canadian Association of Accredited Mortgage Professionals, which has just published a wealth of housing-market intelligence in its annual report.
Bottom line, CAAMP president Jim Murphy says in a statement accompanying the report: "Canadians are being smart and responsible with their mortgages. They are building equity in their homes and making informed, long-term mortgage decisions."
This sounds like one of those motherhood statements that you expect from sales-oriented organizations like your local real-estate board, but the interest of mortgage lenders is quite different, giving Murphy's optimism a bit more credibility.
His members would suffer big losses if there were a big deterioration in people's ability to pay off mortgage debt - a crucial factor that drove the 30-per-cent collapse in U.S. home values over the past several years.
And it's not just CAAMP that's unconvinced about any bubble. At BMO Capital Markets, senior economist Sal Guatieri has just taken another look at Canadian home valuations and concluded that the average price across the country is too high, but not by a lot.
At the peak of the home-buying frenzy late last year, Canadian prices were overvalued by maybe 18 per cent, he estimates, but this has diminished to about 11 per cent as the market cooled and incomes edged up. (His calculation is based on the long-term relationship between prices and personal incomes.)
With prices still richer than incomes would normally support, there's some pressure for further cooling in prices, Guatieri believes, but he doesn't see a drop of more than five per cent.
That's partly because incomes continue to rise, helping to narrow the gap. It's important to remember that Canada's very low mortgage interest rates can support prices above the average level for quite a while, providing time for the slow advance of incomes to do most of the rebalancing.
Will Dunning, the chief economist at CAAMP, has a similar outlook. As demand for housing cools, he expects to see a sharp drop in new housing construction (a forecast that looked exactly right when we saw yesterday's news of a nine-per-cent drop in housing starts last month), but little pressure on resale prices.
Dunning predicts that the average Canadian home price for 2011 will be a modest 3.9 per cent lower than in 2010, simply because of price declines that have already affected some markets.
But this annual average represents past price movements. He thinks the trend in 2011 and 2012 will be one of small price gains, just enough to offset inflation.
That's because the balance between homeowners listing properties for sale and people looking for homes to buy has shifted back toward buyers, but not nearly far enough to kneecap prices. In Dunning's view, the market these days is just about balanced.
Friday, November 12, 2010
Monday, November 1, 2010
Should buyers beware?
Deciding whether to rent or buy should be based on a lot more than just the asking price - Taken from Maclean's Magazine Online
by Jason Kirby on Monday, October 25, 2010 5:20pm - 27 Comments
Mary Altaffer/AP/ DARRYL DYCK/CP
In mid-November, Vancouver’s condo king, Bob Rennie, will take a very public mulligan. That’s when he plans to relaunch sales at the troubled Millennium Water development, the site where Olympic athletes bunked during the Winter Games. For all the praise designers and visitors from around the globe have heaped on the project’s cutting-edge, ultra-green features, the $1-billion Millennium Water sorely lacks one crucial component—buyers. Two-thirds of the 740 units in the complex sit empty. Hence Rennie’s plan to jump-start sales by way of discounts, an HST tax holiday, and a break on property taxes and maintenance fees—initiatives that could knock 14 per cent off the initial price tag of some units.
Vancouver taxpayers, who are ultimately on the hook for any losses, aren’t the only ones eager to know if the gambit pays off. In the eyes of prospective buyers in the city, and across the country for that matter, the high-profile project has become a touchstone for whether the real estate market is about to tank. And for first-time buyers sitting on the fence, the prospect of a sharp correction on the horizon is just one of the factors they must consider before taking the plunge.
The debate over whether to rent or buy has become a permanent fixture of the real estate world. And with roughly 70 per cent of households now owning their own home—a rate even higher than in the U.S., where the cult of home ownership first took root—it’s clear the buy crowd is in the lead. But the economic upheaval of the past three years has brought the issue into focus. On the one hand, those who valued stocks and bonds as a better way to build wealth while renting have likely seen their portfolios decimated. Major indexes plunged to levels not seen in a decade, though they have staged a rebound since. At the same time, the carnage in the U.S. has exposed the risks inherent in bubbly housing markets. “Real estate has been seen as a very good place to put your money during the past decade, but I think sentiment is starting to change,” says Benjamin Tal, an economist at CIBC World Markets. “After the subprime crash, people have realized prices can go down quite substantially, even in Canada.” Not surprisingly, predictions of a crash abound. David Rosenberg, the chief economist at Gluskin Sheff + Associates and a noted bear, believes house prices in Canada are overvalued by 20 per cent.
Such dire warnings have been made before about Canada’s frothiest markets, particularly Vancouver and Toronto. And so far they’ve been off the mark. Just last week it was revealed Canadian home sales in September crept up another three per cent from August, albeit down sharply from the year before.
Which means, for now, a big part of the rent or buy decision comes down to affordability. In the short term, says Vancouver financial planner Doug Macdonald, renting wins on that front. “There is no doubt about it that renting right now is a bargain,” he says.
Patrick Doyle, a Toronto software developer who writes the personal finance blog A Loonie Saved, has crunched the numbers for himself and believes it just doesn’t make sense to buy at today’s prices. Especially after factoring in all the extra costs that come with owning a home, like property taxes, insurance, utilities and general upkeep, which can quickly add up. “I choose to rent because I already have a day job, I don’t want to be a property manager, I don’t want to be a real estate speculator, I don’t want to be a highly leveraged investor and I don’t want to be responsible for repairs and maintenance. I just want a place to live,” says Doyle. “If I were to consider giving up these advantages to buy a house, it would have to save me substantial money. Instead, it costs more. For me, that makes the decision a no-brainer.”
Aside from the question of affordability, there are plenty of other reasons people choose to rent rather than buy, say experts. The most obvious is the flexibility that comes with being free to uproot and move easily. Renters also have more choice when it comes to location, since coveted neighbourhoods are typically out of reach for first-time buyers.
More strategically, it might not make sense for some people to buy a home if it means there’s no money left for saving elsewhere. That’s the concern held by Moshe Milevsky, an associate professor of finance at York University’s Schulich School of Business. “Real estate can be a good investment, but it’s very undiversified,” he says. “If I could buy property so that my kitchen is in Toronto, my bedroom in Vancouver and my bathroom in California, I’d be fine, but instead I have to buy it in one place. It’s like putting your entire portfolio into one stock.”
In fact, some renters simply believe that, over the long run, they can do more to grow their net worth if they avoid home ownership and put their money into stocks. But wait, aren’t stock markets dead? Not really. Over the last two decades the S&P/TSX Composite Index and its predecessor generated an average annual return of around six per cent, after adjusting for inflation. And yes, that includes the heart-stopping plunge of 2008. Over the same period, Canadian residential real estate as a whole has lagged behind. National house prices appreciated at an annual average rate of 1.9 per cent, though it’s long-term historical average is slightly higher at 2.5 per cent. But many rightly point out the benefits of owning a place of your own add up to far more than just price appreciation. “I don’t like looking at housing as a rate of return, because clearly you’re getting a service out of the house as a place to live,” says Adrienne Warren, economist at Scotia Economics.
For one thing, even with interest payments to the bank, owners are ultimately paying themselves to live in their homes, rather than shovelling money into their landlord’s pocket.
Owning a home is also an effective hedge against inflation over the long term. That’s because hard assets like homes generally keep pace with inflation. And when owners sell their principal property, they don’t incur any capital gains tax—though homeowners face their own set of taxes and penalties in the form of land transfer taxes and realtor fees, which can add up into the tens of thousands.
A compelling argument for buying right now, regardless of high prices in most major cities, is record-low interest rates. While the variable rate has been climbing steadily as the Bank of Canada tightens interest rates, mortgage lenders have been slashing fixed rates. A five-year fixed rate can be had for as little as 3.9 per cent, while 10-year rates can be found for less than six per cent. Given that the prime interest rate over the last three decades averages out at 8.1 per cent, according to CanEquity.com, it’s no wonder so many house hunters find today’s rates irresistible.
There are dangers that come when debt is so cheap, of course. Bank of Canada governor Mark Carney has repeatedly warned Canadians not to expect low rates to persist forever. But given the mortgage rate environment and the slowdown in the housing market, it’s a far better time to buy than it was just a year ago, say realtors. Back then, Canada’s housing market was in the midst of a surprise rebound and bidding wars were the norm. “We’ve gone through a market where there’s been a lot of multiple offers and it’s been difficult for buyers because there’s so much emotion involved,” says Monte Hannah, a Vancouver realtor. “Right now it’s very balanced.”
Above all, most proponents of home ownership argue that buying a place of your own is an ideal form of forced savings. Canadians clearly aren’t up to the task on their own. In a typical year, fewer than one-third of Canadians make use of their registered retirement savings plans, and even fewer make use of tax free savings accounts, first made available to much fanfare in 2009—though the reason for that could be because so much of their income goes toward mortgages and renovations. Those onerous monthly payments not only help build up equity over time, it keeps one from wasting money.
Still, some advisers worry too much emphasis gets placed on this argument. That’s because a home is not a liquid asset, and if all your savings have to go to paying for it, you’ll be left with empty pockets down the road. “Your house can’t put food and bread on the table,” says Bruce McDougall, a financial planner in Burlington, Ont. “You need cash for a retirement that lasts a lot longer than it did a couple of decades ago, and your house isn’t necessarily going to provide it.” Ideally, shrewd homebuyers should settle for properties they can afford that allow them to also invest in a more diversified portfolio of stocks and bonds. Easier said than done.
Everything depends on where you are in life, of course. But the staggering rise of house prices in the last few years means it’s probably good to keep renting for a while. And if you’re leaning toward buying a house because you think the stock market is a dead end, well, think again. At the same time, if you’re leaning toward buying because otherwise you won’t save anything—and you aren’t buying merely to flip the property in another two years—then go ahead. Either way, observers like Milevsky at Schulich believe the debate between renting and buying has gotten sidetracked in recent years by talk of investments, returns and portfolio allocation. “This debate has become so financial,” he says. “It’s lost the qualitative lifestyle aspect that should drive the decision. When a 22-year-old kid comes out of college and immediately asks, ‘Should I buy or should I rent?’ the question should be, ‘What do you want to do with your life—do you want to start a family, explore the world, build your career?’ That’s more important than the few hundred you may or may not save each month by doing one versus the other.”
by Jason Kirby on Monday, October 25, 2010 5:20pm - 27 Comments
Mary Altaffer/AP/ DARRYL DYCK/CP
In mid-November, Vancouver’s condo king, Bob Rennie, will take a very public mulligan. That’s when he plans to relaunch sales at the troubled Millennium Water development, the site where Olympic athletes bunked during the Winter Games. For all the praise designers and visitors from around the globe have heaped on the project’s cutting-edge, ultra-green features, the $1-billion Millennium Water sorely lacks one crucial component—buyers. Two-thirds of the 740 units in the complex sit empty. Hence Rennie’s plan to jump-start sales by way of discounts, an HST tax holiday, and a break on property taxes and maintenance fees—initiatives that could knock 14 per cent off the initial price tag of some units.
Vancouver taxpayers, who are ultimately on the hook for any losses, aren’t the only ones eager to know if the gambit pays off. In the eyes of prospective buyers in the city, and across the country for that matter, the high-profile project has become a touchstone for whether the real estate market is about to tank. And for first-time buyers sitting on the fence, the prospect of a sharp correction on the horizon is just one of the factors they must consider before taking the plunge.
The debate over whether to rent or buy has become a permanent fixture of the real estate world. And with roughly 70 per cent of households now owning their own home—a rate even higher than in the U.S., where the cult of home ownership first took root—it’s clear the buy crowd is in the lead. But the economic upheaval of the past three years has brought the issue into focus. On the one hand, those who valued stocks and bonds as a better way to build wealth while renting have likely seen their portfolios decimated. Major indexes plunged to levels not seen in a decade, though they have staged a rebound since. At the same time, the carnage in the U.S. has exposed the risks inherent in bubbly housing markets. “Real estate has been seen as a very good place to put your money during the past decade, but I think sentiment is starting to change,” says Benjamin Tal, an economist at CIBC World Markets. “After the subprime crash, people have realized prices can go down quite substantially, even in Canada.” Not surprisingly, predictions of a crash abound. David Rosenberg, the chief economist at Gluskin Sheff + Associates and a noted bear, believes house prices in Canada are overvalued by 20 per cent.
Such dire warnings have been made before about Canada’s frothiest markets, particularly Vancouver and Toronto. And so far they’ve been off the mark. Just last week it was revealed Canadian home sales in September crept up another three per cent from August, albeit down sharply from the year before.
Which means, for now, a big part of the rent or buy decision comes down to affordability. In the short term, says Vancouver financial planner Doug Macdonald, renting wins on that front. “There is no doubt about it that renting right now is a bargain,” he says.
Patrick Doyle, a Toronto software developer who writes the personal finance blog A Loonie Saved, has crunched the numbers for himself and believes it just doesn’t make sense to buy at today’s prices. Especially after factoring in all the extra costs that come with owning a home, like property taxes, insurance, utilities and general upkeep, which can quickly add up. “I choose to rent because I already have a day job, I don’t want to be a property manager, I don’t want to be a real estate speculator, I don’t want to be a highly leveraged investor and I don’t want to be responsible for repairs and maintenance. I just want a place to live,” says Doyle. “If I were to consider giving up these advantages to buy a house, it would have to save me substantial money. Instead, it costs more. For me, that makes the decision a no-brainer.”
Aside from the question of affordability, there are plenty of other reasons people choose to rent rather than buy, say experts. The most obvious is the flexibility that comes with being free to uproot and move easily. Renters also have more choice when it comes to location, since coveted neighbourhoods are typically out of reach for first-time buyers.
More strategically, it might not make sense for some people to buy a home if it means there’s no money left for saving elsewhere. That’s the concern held by Moshe Milevsky, an associate professor of finance at York University’s Schulich School of Business. “Real estate can be a good investment, but it’s very undiversified,” he says. “If I could buy property so that my kitchen is in Toronto, my bedroom in Vancouver and my bathroom in California, I’d be fine, but instead I have to buy it in one place. It’s like putting your entire portfolio into one stock.”
In fact, some renters simply believe that, over the long run, they can do more to grow their net worth if they avoid home ownership and put their money into stocks. But wait, aren’t stock markets dead? Not really. Over the last two decades the S&P/TSX Composite Index and its predecessor generated an average annual return of around six per cent, after adjusting for inflation. And yes, that includes the heart-stopping plunge of 2008. Over the same period, Canadian residential real estate as a whole has lagged behind. National house prices appreciated at an annual average rate of 1.9 per cent, though it’s long-term historical average is slightly higher at 2.5 per cent. But many rightly point out the benefits of owning a place of your own add up to far more than just price appreciation. “I don’t like looking at housing as a rate of return, because clearly you’re getting a service out of the house as a place to live,” says Adrienne Warren, economist at Scotia Economics.
For one thing, even with interest payments to the bank, owners are ultimately paying themselves to live in their homes, rather than shovelling money into their landlord’s pocket.
Owning a home is also an effective hedge against inflation over the long term. That’s because hard assets like homes generally keep pace with inflation. And when owners sell their principal property, they don’t incur any capital gains tax—though homeowners face their own set of taxes and penalties in the form of land transfer taxes and realtor fees, which can add up into the tens of thousands.
A compelling argument for buying right now, regardless of high prices in most major cities, is record-low interest rates. While the variable rate has been climbing steadily as the Bank of Canada tightens interest rates, mortgage lenders have been slashing fixed rates. A five-year fixed rate can be had for as little as 3.9 per cent, while 10-year rates can be found for less than six per cent. Given that the prime interest rate over the last three decades averages out at 8.1 per cent, according to CanEquity.com, it’s no wonder so many house hunters find today’s rates irresistible.
There are dangers that come when debt is so cheap, of course. Bank of Canada governor Mark Carney has repeatedly warned Canadians not to expect low rates to persist forever. But given the mortgage rate environment and the slowdown in the housing market, it’s a far better time to buy than it was just a year ago, say realtors. Back then, Canada’s housing market was in the midst of a surprise rebound and bidding wars were the norm. “We’ve gone through a market where there’s been a lot of multiple offers and it’s been difficult for buyers because there’s so much emotion involved,” says Monte Hannah, a Vancouver realtor. “Right now it’s very balanced.”
Above all, most proponents of home ownership argue that buying a place of your own is an ideal form of forced savings. Canadians clearly aren’t up to the task on their own. In a typical year, fewer than one-third of Canadians make use of their registered retirement savings plans, and even fewer make use of tax free savings accounts, first made available to much fanfare in 2009—though the reason for that could be because so much of their income goes toward mortgages and renovations. Those onerous monthly payments not only help build up equity over time, it keeps one from wasting money.
Still, some advisers worry too much emphasis gets placed on this argument. That’s because a home is not a liquid asset, and if all your savings have to go to paying for it, you’ll be left with empty pockets down the road. “Your house can’t put food and bread on the table,” says Bruce McDougall, a financial planner in Burlington, Ont. “You need cash for a retirement that lasts a lot longer than it did a couple of decades ago, and your house isn’t necessarily going to provide it.” Ideally, shrewd homebuyers should settle for properties they can afford that allow them to also invest in a more diversified portfolio of stocks and bonds. Easier said than done.
Everything depends on where you are in life, of course. But the staggering rise of house prices in the last few years means it’s probably good to keep renting for a while. And if you’re leaning toward buying a house because you think the stock market is a dead end, well, think again. At the same time, if you’re leaning toward buying because otherwise you won’t save anything—and you aren’t buying merely to flip the property in another two years—then go ahead. Either way, observers like Milevsky at Schulich believe the debate between renting and buying has gotten sidetracked in recent years by talk of investments, returns and portfolio allocation. “This debate has become so financial,” he says. “It’s lost the qualitative lifestyle aspect that should drive the decision. When a 22-year-old kid comes out of college and immediately asks, ‘Should I buy or should I rent?’ the question should be, ‘What do you want to do with your life—do you want to start a family, explore the world, build your career?’ That’s more important than the few hundred you may or may not save each month by doing one versus the other.”
Monday, October 25, 2010
Six suggestions for avoiding mortgage fraud
DIANNE NICE
Taken from the CTV news website
Whenever the housing market starts to heat up, so does mortgage and real estate fraud. Buyers rush through deals to avoid losing out, but can end up being scammed if they’re not careful.
While there are no statistics on these types of fraud in Canada, in the United States, it is estimated to cost victims between $4-billion and $6-billion (U.S.) a year.
“Mortgage scams are carried out in all different forms and involve a multitude of people, some who don't even know they're being taken advantage of,” says Diane Scott, president of the Calgary Real Estate Board.
Ms. Scott says at least two types of mortgage fraud have occurred in Calgary this year. One is property flipping, in which a dishonest seller artificially inflates the value of a property using a phony appraisal and then sells it for a large profit. The phony appraisal often remains with the property through multiple transactions, making it difficult to determine the property's true worth, and the end buyer is left paying for a mortgage that is much higher than the home's value.
The other involves “straw buyers,” who are offered money to lend their identity and good credit record for use on fraudulent mortgage applications. The fraudster uses the information to apply for a loan, then disappears with the money, leaving the straw buyer on the hook for the mortgage payments.
Other types of real estate scams include title fraud, where your identity is stolen and used to assume the title of your property, which can then be used to sell your home or get a new mortgage. The criminal takes the mortgage money and runs. You may not even find out about the fraud until the lender contacts you or someone pulls up in a moving van, claiming to be the new owner of the house.
And there’s also foreclosure fraud, in which a homeowner having trouble paying a mortgage is offered a loan in exchange for up-front fees and an agreement to transfer the property title to the scammer, who is then able to take the victim’s loan payments, sell the house or remortgage it and leave with the money.
While a lawyer, realtor or licensed mortgage broker can help ensure all legal precautions are taken, it’s still important to do your homework before you buy, Ms. Scott says. Here’s her advice on how to avoid becoming a victim of fraud:
1. Beware of unusual offers. Never lend your identity to anyone or sign documents you do not fully understand. “If it sounds too good to be true, then it probably is,” Ms. Scott says.
2. Do the math. Look at the listing history on the property and do a comparative market analysis. Check the number of sales and price ranges for the community. If the home’s listing price is much higher than the average value of neighbouring homes, it could mean someone is flipping the property or has had it fraudulently appraised.
3. Don’t assume the seller is honest. Get your own realtor or independent representation for your purchase. If the seller objects, something is wrong.
4. Do a land title search. This will show the name of the property owner, any mortgages or liens registered on the title, as well as previous sales and transfers. You can also buy title insurance to protect against title fraud.
5. Get your own appraisal. You may want to include, as part of your offer to purchase, the option to have the property appraised by a member of the Appraisal Institute of Canada.
6. Secure your deposit. Make sure your money is being held in a real estate trust account by a realtor or lawyer. This will ensure your money is safe until the deal closes.
Taken from the CTV news website
Whenever the housing market starts to heat up, so does mortgage and real estate fraud. Buyers rush through deals to avoid losing out, but can end up being scammed if they’re not careful.
While there are no statistics on these types of fraud in Canada, in the United States, it is estimated to cost victims between $4-billion and $6-billion (U.S.) a year.
“Mortgage scams are carried out in all different forms and involve a multitude of people, some who don't even know they're being taken advantage of,” says Diane Scott, president of the Calgary Real Estate Board.
Ms. Scott says at least two types of mortgage fraud have occurred in Calgary this year. One is property flipping, in which a dishonest seller artificially inflates the value of a property using a phony appraisal and then sells it for a large profit. The phony appraisal often remains with the property through multiple transactions, making it difficult to determine the property's true worth, and the end buyer is left paying for a mortgage that is much higher than the home's value.
The other involves “straw buyers,” who are offered money to lend their identity and good credit record for use on fraudulent mortgage applications. The fraudster uses the information to apply for a loan, then disappears with the money, leaving the straw buyer on the hook for the mortgage payments.
Other types of real estate scams include title fraud, where your identity is stolen and used to assume the title of your property, which can then be used to sell your home or get a new mortgage. The criminal takes the mortgage money and runs. You may not even find out about the fraud until the lender contacts you or someone pulls up in a moving van, claiming to be the new owner of the house.
And there’s also foreclosure fraud, in which a homeowner having trouble paying a mortgage is offered a loan in exchange for up-front fees and an agreement to transfer the property title to the scammer, who is then able to take the victim’s loan payments, sell the house or remortgage it and leave with the money.
While a lawyer, realtor or licensed mortgage broker can help ensure all legal precautions are taken, it’s still important to do your homework before you buy, Ms. Scott says. Here’s her advice on how to avoid becoming a victim of fraud:
1. Beware of unusual offers. Never lend your identity to anyone or sign documents you do not fully understand. “If it sounds too good to be true, then it probably is,” Ms. Scott says.
2. Do the math. Look at the listing history on the property and do a comparative market analysis. Check the number of sales and price ranges for the community. If the home’s listing price is much higher than the average value of neighbouring homes, it could mean someone is flipping the property or has had it fraudulently appraised.
3. Don’t assume the seller is honest. Get your own realtor or independent representation for your purchase. If the seller objects, something is wrong.
4. Do a land title search. This will show the name of the property owner, any mortgages or liens registered on the title, as well as previous sales and transfers. You can also buy title insurance to protect against title fraud.
5. Get your own appraisal. You may want to include, as part of your offer to purchase, the option to have the property appraised by a member of the Appraisal Institute of Canada.
6. Secure your deposit. Make sure your money is being held in a real estate trust account by a realtor or lawyer. This will ensure your money is safe until the deal closes.
Monday, October 18, 2010
Top 6 Mortgage Mistakes
Mark Riddix, provided by
Tuesday, October 12, 2010
During the 2007-2009 financial crisis, the United States economy crumbled because of a problem with mortgage foreclosures. Borrowers all over the nation had trouble paying their mortgages. At the time, eight out of 10 borrowers were trying to refinance their mortgages. Even high end homeowners were having trouble with foreclosures. Why were so many citizens having trouble with their mortgages?
Let's take a look at the biggest mortgage mistakes that homeowners make.
1. Adjustable Rate Mortgages
Adjustable rate mortgages seem like a homeowners dream. An adjustable rate mortgage starts you off with a low interest rate for the first two to five years. They allow you to buy a larger house than you can normally qualify for and have lower payments that you can afford. After two to five years the interest rate resets to a higher market rate. That's no problem because borrowers can just take the equity out of their homes and refinance to a lower rate once it resets.
Well, it doesn't always work out that way. When housing prices drop, borrowers tend to find that they are unable to refinance their existing loans. This leaves many borrowers facing high mortgage payments that are two to three times their original payments. The dream of home ownership quickly becomes a nightmare.
2. No Down Payment
During the subprime crisis, many companies were offering borrowers no down payment loans to borrowers. The purpose of a down payment is twofold. First, it increases the amount of equity that you have in your home and reduces the amount of money that you owe on a home. Second, a down payment makes sure that you have some skin in the game. Borrowers that place down a large down payment are much more likely to try everything possible to make their mortgage payments since they do not want to lose their investment. Many borrowers who put little to nothing down on their homes find themselves upside down on their mortgage and end up just walking away. They owe more money than the home is worth. The more a borrower owes, the more likely they are to walk away.
3. Liar Loans
The phrase "liar loans" leaves a bad taste in your mouth. Liar loans were incredibly popular during the real estate boom prior to the subprime meltdown that began in 2007. Mortgage lenders were quick to hand them out and borrowers were quick to accept them. A liar loan is a loan that requires little to no documentation. Liar loans do not require verification. The loan is based on the borrower's stated income, stated assets and stated expenses.
They are called liar loans because borrowers have a tendency to lie and inflate their income so that they can buy a larger house. Some individuals that received a liar loan did not even have a job! The trouble starts once the buyer gets in the home. Since the mortgage payments have to be paid with actual income and not stated income, the borrower is unable to consistently make their mortgage payments. They fall behind on the payments and find themselves facing bankruptcy and foreclosure.
4. Reverse Mortgages
If you watch television, you have probably seen a reverse mortgage advertised as the solution to all of your income problems. Are reverse mortgages the godsend that people claim that they are? A reverse mortgage is a loan available to senior citizens age 62 and up that uses the equity out of your home to provide you with an income stream. The available equity is paid out to you in a steady stream of payments or in a lump sum like an annuity.
There are many drawbacks to getting a reverse mortgage. There are high upfront costs. Origination fees, mortgage insurance, title insurance, appraisal fees, attorney fees and miscellaneous fees can quickly eat up your equity. The borrower loses full ownership of their home. Since all of the equity will be gone from your home, the bank now owns the home. The family is only entitled to any equity that is left after all of the cash from the deceased's estate has been used to pay off the mortgage, fees, and interest. The family will have to try to work out an agreement with the bank and make mortgage payments to keep the family home.
5. Longer Amortization
You may have thought that 30 years was the longest time frame that you could get on a mortgage. Are you aware that some mortgage companies are offering loans that run 40 years now? Thirty five and forty year mortgages are slowly rising in popularity. They allow individuals to buy a larger house for much lower payments. A 40-year mortgage may make sense for a young 20-year-old who plans to stay in their home for the next 20 years but it doesn't make sense for a lot of people. The interest rate on a 40-year mortgage will be slightly higher than a 30 year. This amounts to a whole lot more interest over a 40-year time period, because banks aren't going to give borrowers 10 extra years to pay off their mortgage without making it up on the back end.
Borrowers will also have less equity in their homes. The bulk of payments for the first 10 to 20 years will primarily pay down interest making it nearly impossible for the borrower to move. Besides, do you really want to be making mortgage payments in your 70's?
6. Exotic Mortgage Products
Some homeowners simply did not understand what they were getting themselves into. Lenders came up with all sorts of exotic products that made the dream of home ownership a reality. Products like interest only loans which can lower payments 20-30%. These loans let borrowers live in a home for a few years and only make interest payments. Name your payment loans let borrowers decide exactly how much they want to pay on their mortgage each month.
The catch is that a big balloon principal payment would come due after a certain time period. All of these products are known as negative amortization products. Instead of building up equity, borrowers are building negative equity. They are increasing the amount that they owe every month until their debt comes crashing down on them like a pile of bricks. Exotic mortgage products have led to many borrowers being underwater on their loans.
The Bottom Line
As you can clearly see, the road to home ownership is riddled with many traps. If you can avoid the traps that many borrowers fell into then you can keep yourself from financial ruin.
Tuesday, October 12, 2010
During the 2007-2009 financial crisis, the United States economy crumbled because of a problem with mortgage foreclosures. Borrowers all over the nation had trouble paying their mortgages. At the time, eight out of 10 borrowers were trying to refinance their mortgages. Even high end homeowners were having trouble with foreclosures. Why were so many citizens having trouble with their mortgages?
Let's take a look at the biggest mortgage mistakes that homeowners make.
1. Adjustable Rate Mortgages
Adjustable rate mortgages seem like a homeowners dream. An adjustable rate mortgage starts you off with a low interest rate for the first two to five years. They allow you to buy a larger house than you can normally qualify for and have lower payments that you can afford. After two to five years the interest rate resets to a higher market rate. That's no problem because borrowers can just take the equity out of their homes and refinance to a lower rate once it resets.
Well, it doesn't always work out that way. When housing prices drop, borrowers tend to find that they are unable to refinance their existing loans. This leaves many borrowers facing high mortgage payments that are two to three times their original payments. The dream of home ownership quickly becomes a nightmare.
2. No Down Payment
During the subprime crisis, many companies were offering borrowers no down payment loans to borrowers. The purpose of a down payment is twofold. First, it increases the amount of equity that you have in your home and reduces the amount of money that you owe on a home. Second, a down payment makes sure that you have some skin in the game. Borrowers that place down a large down payment are much more likely to try everything possible to make their mortgage payments since they do not want to lose their investment. Many borrowers who put little to nothing down on their homes find themselves upside down on their mortgage and end up just walking away. They owe more money than the home is worth. The more a borrower owes, the more likely they are to walk away.
3. Liar Loans
The phrase "liar loans" leaves a bad taste in your mouth. Liar loans were incredibly popular during the real estate boom prior to the subprime meltdown that began in 2007. Mortgage lenders were quick to hand them out and borrowers were quick to accept them. A liar loan is a loan that requires little to no documentation. Liar loans do not require verification. The loan is based on the borrower's stated income, stated assets and stated expenses.
They are called liar loans because borrowers have a tendency to lie and inflate their income so that they can buy a larger house. Some individuals that received a liar loan did not even have a job! The trouble starts once the buyer gets in the home. Since the mortgage payments have to be paid with actual income and not stated income, the borrower is unable to consistently make their mortgage payments. They fall behind on the payments and find themselves facing bankruptcy and foreclosure.
4. Reverse Mortgages
If you watch television, you have probably seen a reverse mortgage advertised as the solution to all of your income problems. Are reverse mortgages the godsend that people claim that they are? A reverse mortgage is a loan available to senior citizens age 62 and up that uses the equity out of your home to provide you with an income stream. The available equity is paid out to you in a steady stream of payments or in a lump sum like an annuity.
There are many drawbacks to getting a reverse mortgage. There are high upfront costs. Origination fees, mortgage insurance, title insurance, appraisal fees, attorney fees and miscellaneous fees can quickly eat up your equity. The borrower loses full ownership of their home. Since all of the equity will be gone from your home, the bank now owns the home. The family is only entitled to any equity that is left after all of the cash from the deceased's estate has been used to pay off the mortgage, fees, and interest. The family will have to try to work out an agreement with the bank and make mortgage payments to keep the family home.
5. Longer Amortization
You may have thought that 30 years was the longest time frame that you could get on a mortgage. Are you aware that some mortgage companies are offering loans that run 40 years now? Thirty five and forty year mortgages are slowly rising in popularity. They allow individuals to buy a larger house for much lower payments. A 40-year mortgage may make sense for a young 20-year-old who plans to stay in their home for the next 20 years but it doesn't make sense for a lot of people. The interest rate on a 40-year mortgage will be slightly higher than a 30 year. This amounts to a whole lot more interest over a 40-year time period, because banks aren't going to give borrowers 10 extra years to pay off their mortgage without making it up on the back end.
Borrowers will also have less equity in their homes. The bulk of payments for the first 10 to 20 years will primarily pay down interest making it nearly impossible for the borrower to move. Besides, do you really want to be making mortgage payments in your 70's?
6. Exotic Mortgage Products
Some homeowners simply did not understand what they were getting themselves into. Lenders came up with all sorts of exotic products that made the dream of home ownership a reality. Products like interest only loans which can lower payments 20-30%. These loans let borrowers live in a home for a few years and only make interest payments. Name your payment loans let borrowers decide exactly how much they want to pay on their mortgage each month.
The catch is that a big balloon principal payment would come due after a certain time period. All of these products are known as negative amortization products. Instead of building up equity, borrowers are building negative equity. They are increasing the amount that they owe every month until their debt comes crashing down on them like a pile of bricks. Exotic mortgage products have led to many borrowers being underwater on their loans.
The Bottom Line
As you can clearly see, the road to home ownership is riddled with many traps. If you can avoid the traps that many borrowers fell into then you can keep yourself from financial ruin.
Wednesday, October 13, 2010
The Housing Market: Is it Time to Rent or to Buy?
Taken from Time Magazine onlineBy Janet Morrissey Monday, Oct. 11, 2010
The stalled economy, expiration of homebuyer tax credits, marked-down home prices, stubbornly high unemployment and concerns about a double-dip recession all leave prospective homebuyers wondering if now is the time. Is it time for renters to convert to buyers and for existing owners to grab that dream home on the cheap? Or will housing get even cheaper?
Home prices have plunged about 30% from their mid-2006 peak on average, with some areas, like Las Vegas, seeing prices plummet in excess of 60%. At the same time, foreclosures have continued to rise in 2010 from their 2009 historic highs and have pressured prices further.
(See high-end homes that won't sell.)
Buyers who are eyeing condos and townhomes in particular might want to check out Trulia's latest rent-vs.-buy index, which tracks 50 of the country's largest markets. It offers a breakdown on cities that offer the best buying opportunities and those that are still renters' markets.
According to Trulia, a real estate search engine, the best markets for bargain condos are Arlington, Texas; Fresno, Calif.; and Miami. Others in the top 10 include Mesa, Ariz.; Phoenix; Jacksonville, Fla.; Detroit; Columbus, Ohio; El Paso, Texas; and Nashville. Some of these cities are among the markets hit hardest by the boom-and-bust phenomena, foreclosure crisis and job layoffs, says Tara-Nicholle Nelson, consumer educator at Trulia.
The firm calculates the price-to-rent ratio by comparing the average listing price of a condo or townhome with the average rental rate of two-bedroom apartments and condos on Trulia. Basically, the calculation takes the median price of the condo in a market and divides it by the annual rental payments generated on a similar property.
When it comes to renting, New York City real estate ranked first on the list as being cheaper to rent than to own although rents there have been on the rise recently. The Big Apple was followed by Seattle and Forth Worth. Rounding out the top 10 renters' markets are Omaha; Sacramento; Kansas City; Portland, Ore.; San Diego; San Francisco; and Boston.
(See pictures of Americans in their homes.)
Nelson says she was particularly surprised that condos in Omaha, Fort Worth and Kansas City were more expensive to own than to rent. She attributes this to lower unemployment rates and affluent families paying up, which kept condo prices up. Some cities avoided the housing bubble, she says, another reason prices have held.
Still, even if the broad rent-vs.-buy ratio favors renting, prospective buyers should take into account other factors, such as how much prices have fallen from their peak, potential tax advantages and the length of time the buyer plans to live in the property, Nelson cautions. For someone who isn't looking to flip the property for a quick buck — those days are over, aren't they? — and plans to stay in a home for 10 years or until they're hauled off to the grave, buying now could make financial sense even in some of the renters' markets, she says.
In recent months, there have been signs that housing may finally be bouncing along the bottom. The Standard & Poor's/Case-Shiller composite home-price index shows prices rose, albeit modestly, for the past few months, and some major lenders, such as Bank of America, GMAC Mortgage and JPMorgan Chase, have put foreclosures on hold in 23 states over record-keeping issues. All of this indicates price declines may stall — at least temporarily.
But Alex Barron, founder of Housing Research Center LLC, remains bearish on buying. He expects prices to fall another 10% to 30% before the sector bottoms out. Inventory has increased since the expiration of the homebuyer tax credit, he notes. Barron speculates that once mortgage rates start ticking up, home prices will likely tumble. "Prices will correct 10% for every one percentage point the mortgage rate goes up," he says.
Foreclosures are also pressuring prices. Barron notes that bank repossessions totaled 718,000 in the first eight months of 2010, up 23% from the record 584,000 during the same period a year ago. He speculates that once the current foreclosure suspension is lifted, a flood of foreclosures could hit the market. That added supply will likely cause another correction in home prices.
Read more: http://www.time.com/time/business/article/0,8599,2024445,00.html#ixzz12Gg1trt2
Tuesday, October 5, 2010
The Housing Death Spiral Means A Mammoth One In Five Borrowers Will Default
Michael David White, Housing Story Oct. 4, 2010, 8:08 AMA Mammoth One in Five Borrowers Will Default
A leading mortgage analyst predicts over 11 million homeowners will default and lose their home if the government fails to take more radical intervention.
Amherst Securities Group LP, one of the most respected names in mortgage research, has trumpeted an ambitious call-to-government arms in its October mortgage report.
“The death spiral of lower home prices, more borrowers underwater, higher transition rates (to default), more distressed sales and lower home prices must be arrested.”
The authors dismiss recent talk of mortgage performance improvement as statistical sleight-of-hand magically conjured by modifications.
“This ‘improvement’ (in mortgage performance) simply reflects large scale modification activity having served to artificially lower the delinquency rate” (Please see the chart above of mortgage balances delinquent and re-performing. All charts in this post are from “Amherst Mortgage Insight” dated October 1, 2010.).
The report offers an astounding forecast of the fate of severe negative-equity properties. Nineteen percent of properties with a loan-to-value (LTV) of 120% or greater are defaulting every year. A death-defying 75% of mortgages on 120% LTV properties will eventually go bad (19% + 19% + 19%, …).
The current crop of mortgages is already “impaired” at the one-of-five level. Nine of 100 are seriously delinquent. Six of 100 are “dirty current” (made current by modification). Five of 100 are seriously underwater (LTV greater than 120%) (Please see the chart above categorizing the forecast of 11 million defaults.).
The authors, who describe current conditions as leading to “an impossible number” of defaults and one that is “politically unfeasible”, unveil a major arms race of measures to counteract the default tide.
The solutions include mandatory principal reductions, looser underwriting of new mortgage loans, leveraged capital pools for investors, and penalties for defaulting homeowners. Amherst reports that a family who defaults can live rent-free for 20 months on average. They propose that missed mortgage payments, including property taxes and insurance, be counted as W2 income.
They make note of recent new signs of distress including two record-low readings of existing home sales in the last two reports. Another block is that underwriting standards have grown much stricter at Fannie and Freddie. Only 2% of Freddie purchases are now bad-credit borrowers where they represented about 20% of borrowers in 2006. FHA purchase mortgages, however, which have by definition much more lenient lending guidelines, have exploded upwards from roughly 10% of their lending in 2006 to more than 50% today.
The buyer pool is also compromised by the fact that 17% of borrowers now have a seriously compromised credit history. After mortgage default a typical wait-time to qualify again is anywhere from 3 to 7 years. One of the more desperate measures suggested by the authors seeks a new mortgage for those who are now behind or in danger of failing. “This (default) can be fixed by re-qualifying borrowers who are in a home they can’t afford into one they can afford.”
Risk is so high in today’s real estate market that private money has largely left the mortgage category. The retreat is most easily seen in the jumbo mortgage market. Total jumbo mortgage origination has fallen from a high of $650 billion in 2003 to $92 billion in 2009 (see the chart above). Government loans account for 90% of current originations.
“If government policy does not change, over 11.5 million borrowers are in danger of losing their homes (1 borrower out of every 5),”‘ the report said, which estimates the total of homes with a first mortgage at 55 million. “Politically, this cannot happen.”
Friday, October 1, 2010
Ellen Roseman: Why it's crucial to check your credit report
September 15, 2010 8:28 AMBy Ellen Roseman
Ellen Roseman is a business writer at the Toronto Star.
Here's a story that shows the importance of checking your credit report.
I recently heard from Delores, who was trying to renew her condo mortgage. But the bank wouldn't sign a deal unless her credit history was cleaned up.
She found that Rogers Communications had reported a bad debt. She didn't even have an account with Rogers - nor did she receive any collection notices.
It seems Delores had been mixed up with someone who had a similar name. She managed to get the bad debt removed just three days before her mortgage came up for renewal.
You don't want to hear bad news while in the midst of negotiating a time-sensitive loan. So, you should know what secrets might be lurking in your credit files.
Under provincial laws, you have the right to check the credit reports in your name held by Canada's two credit reporting agencies, Equifax and TransUnion. You don't have to pay a fee and you can do it as often as you like, as long as you ask for the report to be delivered in the mail.
What stands in the way of exercising your legal right to check your credit report for free? I point to the fact that Equifax and TransUnion are private businesses, which want to sell as many products as they can.
When you visit their websites, you see promotions for online access to your credit report at $15 and subscriptions to credit monitoring services at $15 a month. But you can't find the information about how to get your free credit report unless you dig very deeply.
In the United States, the law guarantees free access to your credit report at your request once every 12 months. To make things easier, the three U.S. credit reporting agencies have a central website, toll-free phone number and mailing address through which reports can be obtained.
Here's another difference. In Canada, you have to pay to get access to your credit score. This newer piece of information, not mentioned in the laws governing credit reports, is used heavily by lenders to decide whether you get credit and at what rate. The score is based partially on your credit report, but incorporates other factors.
In the United States, consumers are entitled to receive a free credit score if they're denied a loan or insurance because of their credit rating. They're lucky to get this right, which came about as part of the Wall Street Reform Bill passed last July.
Canadians are still struggling to get free credit reports and correct them. Free access to credit scores isn't on the agenda yet. I'd like to see tighter controls on credit bureaus and a greater role for government in ensuring access to this important information.
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