Why I Don’t Like Bi-Weekly Mortgages…..

Since it’s only Thursday and I’ve had four people ask me about whether they should take advantage of a bi-weekly mortgage plan and I surprised all four of them with my answer, I thought I’d share with you why I don’t like bi-weekly mortgages.

First, let me explain the concept of a bi-weekly mortgage and how it works.   Let’s say that you’ve got a $100,000 mortgage at 6% and your minimum payment is $599.55 (let’s round it to $600 for example purposes.)

The way a bi-weekly mortgage works is that you would pay $300 every two weeks (a half of a payment) and that means that over the course of 12 months, you’d make 26 half payments (or 13 full payments.)   That means that over the life of the loan, you’ll pay the loan off 5.5 years faster.   That will save you $24,700 in interest.

So what’s not to like about that?  Saving $24,700 is a very good thing!

But there are a couple of things I don’t like about a bi-weekly mortgage and then I’ll show you what I call “The Better Way:”

• With a bi-weekly payment program, the half payment comes out of your account every two weeks, but it doesn’t get applied to your mortgage until the end of the month.   So let’s say that your two half payments are scheduled to come out on the 10th and the 24th of the month.    Your money ends up sitting in a different account (controlled by your mortgage payment servicer) and then applied to the loan at month end.    Every single “bi-weekly” plan that I’ve ever seen operates that way.   How do I know?  I’ve personally investigated some and I know that the mortgage servicing computer platforms are set up so that they have to recognize a complete payment every month otherwise it gets flagged as delinquent.   Don’t believe me, ask your bank if you can bring them 1/3 of your mortgage payment in cash every week for three weeks.    See what they say.    It’s a personal thing, but I don’t like having my money sitting in someone else’s account.
• Fees – You will probably find people who will disagree with me, and they are probably hidden quite well, but there are fees involved.    Typically, there’s an up front set up fee and a small monthly fee.

The Better Way:

The principal behind the bi-weekly is good, but I recommend that you do it one of two ways instead:

• Take your payment, divide it by 12 and add that much extra on to your payment every month.    You experience the same savings without the fees and your money stays in your account.
• If your income is “variable” (bonuses, etc.) commit to making 1 house payment out of your bonuses every time you get a bonus.  I have a customer who got 20% of his income in a December 31 bonus.   Every year, he made three house payments on December 31. 

Is the bi-weekly plan better than taking 30 years to pay off the mortgage?   Absolutely.   Is there a better way?    I believe there is.

Hope that helps enlighten you on my feelings on the matter……..

It’s Different This Time…..

Don Peck from the Atlantic Magazine has a rather sobering analysis of the current economic conditions and how it’s different this time than it has been the last few.

We’ve been saying on here that there is a seismic shift going on in consumer thinking and spending.  What he has to say reaffirms that view.

Well worth the read, but don’t read it late at night…….

 

……The Long Road Ahead

SINCE LAST SPRING, when fears of economic apocalypse began to ebb, we’ve been treated to an alphabet soup of predictions about the recovery. Various economists have suggested that it might look like a V (a strong and rapid rebound), a U (slower), a W (reflecting the possibility of a double-dip recession), or, most alarming, an L (no recovery in demand or jobs for years: a lost decade). This summer, with all the good letters already taken, the former labor secretary Robert Reich wrote on his blog that the recovery might actually be shaped like an X (the imagery is elusive, but Reich’s argument was that there can be no recovery until we find an entirely new model of economic growth).

No one knows what shape the recovery will take. The economy grew at an annual rate of 2.2 percent in the third quarter of last year, the first increase since the second quarter of 2008. If economic growth continues to pick up, substantial job growth will eventually follow. But there are many reasons to doubt the durability of the economic turnaround, and the speed with which jobs will return……

Read the whole article here……

Real Estate Owned by the Three “F”

This chart is courtesy of Calculated Risk.

A few thoughts of mine below the chart……

Okay, a couple of thoughts:

• One can argue all you want about statistical noise, about how the housing crisis is getting better, but when you look at a chart like this, it clearly shows that the three “F”s (Fannie, Freddie and FHA) are seeing growing inventories of real estate owned.
• When you combine that with the chart from JP Morgan which shows serious delinquencies rising, it doesn’t paint a pretty picture.

Expect continuing losses at the three “F” and continued pressure on home prices.   More in the harder hit areas, but on a national basis as well, I’m afraid.

The Fed – Translated….

What the Fed Said Last Time	What the Fed Said This Time	What Difference does it make…..
Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating.	Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing.	Deterioration is abating vs. stabilizing – a modest improvement but if that’s all the improvement we’re going to get in 6 weeks time, it’s going to be a long way back.
Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit	Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.	What’s the difference between weak labor market and “high unemployment?  I’m thinking that it’s not an improvement, but I’m not sure.
Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls	Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls.	Two important changes on this part – one good and one not so good.    They went from saying business spending appears to be picking up to "rises signifcantly.”   That’s a good thing.   However when talking about buildings (both residential and non), the terminology got significantly worse since January.
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.	To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.	Two important things in this section:  1) The Fed has reaffirmed that they will be done purchasing mortgage backed securities in 15 days.  I’ve read a number of analysts who have said that the mortgage rate market is acting like nothing is going to happen.   That makes for a rude surprise coming. 2) In January, the FOMC “hinted” at buying additional securities if needed.    That’s now toned down significantly.

 

So what does it all mean for the mortgage world?  A couple of thoughts:

• The largest buyer of mortgage backed securities is leaving the market in 15 days.   (And they really really mean it this time!)  That’s not going to be without an impact on the mortgage rate markets.    According to the analysts that I’ve read and heard, the predictions range from .25% in the first 30 days to a gradual increase of 1% or more over the next 18 to 24 months.
• It shows an analysis of the economy that is mixed.   There are parts that have improved since January but parts that haven’t.

We aren’t out of the woods yet…….

The Latest Problem with Employment Verifications

More on Mortgage Delinquencies and the Shadow

I got this chart from my friend, Paul Jackson, over at Housing Wire.

A couple of points that stand out on the graph:

• The number of 150+ day delinquencies is up substantially, like by 400%?
• The rest of the categories are up but not nearly as high.
• That says to me that we’re seeing a transfer of the pipeline.   The same amounts are going from 30 to 60 to 90 days delinquent at a time, but the “catch all” of the seriously delinquent loans is growing.  That’s not a trend that should make anyone happy.
• This says that if the current trend continues, we’ve got a big shadow inventory coming to the market.

What’s that going to do to the market?

• Most likely put downward pressure on house prices
• Most likely put increased pressure on mortgage backed securities which will lead to higher costs and tighter guidelines.
• Most likely lead to increased government intervention trying to prop the housing market higher than it should be.

It will be interesting to see……

New Underwriting Guidelines

I just received these new underwriting guidelines by e-mail.   It didn’t say when they are effective……

NEW UNDERWRITING UPDATES

• All borrowers’ birth certificates will be required with pictures taken in the hospital with medical staff. Birth certificate with a live home delivery will not be eligible for first time home buyers.
• Marriage certificate with bridal dress will be required if both husband and wife are required to qualify for the loan.
• GFE will not require signature, but will require blood sampling from a recognized institution within three days of application.
• DNA test will be performed at closing to avoid any non-arms length transactions. Loan funding will be contingent upon satisfactory receipt of DNA results.
• Verification of deposit will be acceptable only if Bank representative is present at the closing.
• Copy of Pay stubs and W2 will only be acceptable through IRS and only with a wax-sealed envelope mailed directly to the lender.
• Seven witnesses from the neighborhood will be required as proof of primary residence in case borrower owns more than 1 property.
• All appraisers will be required to use masks and ear plugs at the time of inspection to avoid any personal influence by the borrower or broker for the appraised value.
• In order to correctly calculate DTI and true housing ratio a list of grocery items, monthly usage and brand names will be required with receipts and projected 12 month consumption chart.
• Closing will not occur without loan officer presence at settlement and loan officer picture will be taken at the closing in a mug shot format with loan number. Picture should meet standard guideline of 2 X 2 inch in color format with one facing and one side view.
• Loan officer picture will be attached to the Deed and note and will be made available for general public and security agencies in case borrower defaults on the loan.

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Housing Starts – When Up is Down

Yeah, you heard that right.   Compared to February of 2009, housing starts were up.   Compared to January of 2010, housing starts were down.   Compared to what the market expected, housing starts were “less down.”

You’re going to hear a lot of it blamed on bad weather.   I’m not so sure I buy that as being that big of an impact.    I think those who want to build will build either way.  What do you think?

U.S. Housing Starts, Permits Fall in February

U.S. housing starts and permits to build new homes both fell in February as winter storms in some parts of the country disrupted home building, a government report showed on Tuesday.

The Commerce Department said housing starts fell 5.9 percent to a seasonally adjusted annual rate of 575,000 units, reversing the prior month’s gain. Compared to February last year, starts were up 0.2 percent.

 

Housing Double Dip?

Meredith Whitney thinks so.    Listen to what she had to say on CNBC this morning…….

 

Known Unknowns – Huh?

The CEO of PIMCO (the largest bond investor in the country) did an interview on CNBC this morning.   I’m going to attempt to translate what he said…..  (My comments are in bold)

Investors should be holding healthy levels of cash in order to take advantage of "known unknowns" that become clearer as the economy evolves, Pimco’s Mohamed El-Erian told CNBC.

Keep a lot of cash because you don’t know what’s going to happen and you need to be ready for anything.

"The mindset is critical," he said, for investors who need to understand that the environment has changed in terms of government policy adjustments and cyclical events that influence markets.

The environment has changed means  “It is different this time.”   The way the government is dealing with things is different and correspondingly, the way the markets react is different.

Those cyclical moves are important to note for how they perform within the larger structural environment of financial markets, said El-Erian, co-CEO of the world’s largest bond fund.

"There are cyclical tailwinds for now that are going to overcome the structural headwinds," he said.

I have no clue as to what he means by cyclical tailwinds vs. structural headwinds……  

"You construct a portfolio and more importantly you retain optionality," which said should entail "cash for very high-quality holdings that allow you to reposition as the future gets clearer."

Retain optionality – that means keep the doors open for whatever might happen because we don’t really know what’s going to happen.

The ability to react to events could be critical for investors who are used to things happening in a more predictable fashion.

Get used to an unpredictable market – things aren’t going the way they used to and aren’t subject to the same market forces as they used to be.

"This is a wonderful time to be an active manager,

because we can earn lots of money charging lots of fees?

with all these things moving," El-Erian said. "We are in the midst of a paradigm shift where things happen but they don’t happen in the linear fashion that everyone wants them to happen."

Hang on to your hats, it’s going to be a wild ride.

In contrast, he said the Federal Reserve is likely to stay in a holding pattern when it meets this week to put together its own strategy to manage monetary policy.

"They’re not going to do anything dramatic because they want to see how the tug of war between the cyclical tailwinds and structural headwinds plays out," he said.

El-Erian said he expects to see "a multi-speed world" where "part of the world is going to grow and grow robustly. There’s going to be another part, the US and UK, that is going to have difficulty once all the stimulus and inventory cycle goes through."

Can you say, “I’ll take a double dip of uncertain recession with a topping of volatility?”

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