Federal Interest Rate and Your Mortgage Loans

For most people they do not really know how the fed interest rate affects their mortgage loans and other financial holdings and debts. Currently the governments around the world are infusing cash into cash strap and beleaguered financial institutions. Having this in mind, the fed interest rate can affect your perception of you approach your mortgage loans. But in reality the effect in your mortgages is almost non existence. The reason for this is simply because your lenders prime rate hardly the benchmark lenders and banks use to index your mortgages.

Take the case of the recent fed interest rate cut, some lenders and banks did follow and lower their lending rates but all of them did. So if you are trying to figure out how it will affect your home loan, you might find it a little bit difficult. Figuring this out is somewhat complicated. One way it can lower your interest rate is because of the intense competition amongst the banks for depositor's money. Because of the credit crunch at the moment, banks have no other place to get money so they might lower their rates but with stricter or stringent qualifying requirements for a home loan.

When there is federal interest rate cut, prime lending rates follow suit. Most of the times these banks will follow by lowering their rates by the same amount the feds do. This could mean an instant reduction for many borrowers with credit card debts or home equity line of credit tied to a lenders prime rate. The only unfortunate thing about this some credit holders will not be able to realize any advantage or any beneficial effects because of the built in card agreements. In other words not everyone will benefit from any rate cuts by the feds.

For people who have fixed rate mortgages, they will not see any changes or any benefit to them and their mortgage loans. As the term suggest, these types of home loans are fixed to a term based generally on a track ten year treasury note which do not respond to the feds short term rates. So for homeowners who have fixed rate type home loans, they do not worry and neither benefit from any rate cuts by feds.

For the most part a rate cut would give much interest to borrowers. The prime rate is the underlying index for most home equity loans, lines of credit, credit cards, and other types of personal loans.

For adjustable rate mortgage, these are generally fluctuating based on other things or indices and not the prime rate. Most of the indices that these lenders use are the LIBOR and the eleventh district cost of funds (COFI) and other popular indices. For the most part these types of mortgage loans will have very little or no effect especially with the current financial crisis and uncharted waters where the financial industry is in right now.

Fed interest rate will have very little effect on your mortgage loans at the moment. To some it does have some effect but not across the board. With all the factors and built in agreements in every home loans and mortgages, it would be very difficult to figure out who benefits and who does not benefit from a fed rate cut.

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Types of Mortgage Loan

These days, many banks and financial institutions are ready to offer mortgage loans to people with good credit history. Moreover, they are ready to offer different types of mortgage loans that suit different people with different needs. The following points present some of the different varieties of such loans that banks and financial institutions offer:

1. Term Loans with Fixed-Term Repayment : These are normal term loan schemes where you get a loan for a fixed duration. The rate of interest can be fixed or can vary based on some benchmark rate.

2. Overdraft-Loan : These are loans in the form of current account overdraft where surplus funds can be parked and therefore interest burden can be minimized. Every month, the overdraft limit is reduced as per the Equated Monthly Installment (EMI) amount.

3. Flexible-Loans : These are loans with a fixed rate of interest for one part of the loan and a floating rate of interest for the other part. It can be designed as per the convenience of the applicant and up to what is allowed under the rules of the bank/financial institution

4. Fixed Interest Loan: These are loans with a fixed rate of interest for the entire duration of the loan. It is well protected against market rate fluctuations. Generally, these rates are somewhat higher than the market rate.

5. Floating Interest Loan: Floating rate of interest is the rate that is linked to the Central Bank's (Federal Reserve) prime lending rate. If the Central Bank increases (decreases) the prime lending rate, then the bank/financial institution also increases (decreases) its interest rate.

Generally, it is advisable to go for floating rate of interest as the rates will be lower when the economy

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Getting Past the Mortgage Crisis

Compliance is now the buzzword when it comes to the mortgage lending industry. The industry, after the huge fall-out, is now going back to the way it used to do business. Proof of income, proof of assets and good to excellent credit scores are once again the benchmarks by which consumers are able to obtain loans. Gone are the days where you just had to have a pulse (in some states a pulse was not even needed) to qualify for a loan. 560 credit scores, stated income, stated assets and 100% financing are no longer viable. People who never should have qualified to begin with will no longer qualify. The market needed a correction and lenders have tightened their purse strings. The sub-prime market is gone and dead....for now.

So how was it that an entire industry moved away from their normal standard operating procedures and got to this point? Why were these loans granted to people who normally would never be able to qualify for them? There is no one good answer for the crisis but instead there are many factors that led to it.

"This American Life", a weekly radio program based out of Chicago, did a show back in May in collaboration with NPR news called The Giant Pool of Money. The show did an excellent job putting into layman's terms how the housing crisis happened in the United States and what caused it.

The show explained that there is a Global Pool of Money in the world that consists of all the money that is being saved everywhere. Insurance companies saving for disasters, pension funds for retirement, money being saved by central banks are all part of this pool. From 2000 to 2006 this pool went from 36 trillion to 70 trillion mostly because of the rising economies of several nations. What took several hundreds of years to create doubled in just six short years. With all of this new capital needing to be invested somewhere, investment managers had to find things to invest in that would give them a good return.

So Wall Street figured out a way to give these investment managers what they were looking for: low risk, high return investments. These low-risk, high return investments were found in residential mortgages. Wall Street investment firms would buy thousands of individual mortgages and package them together as a mortgage pool or mortgage-backed securities. Shares of these mortgage-backed securities would then be sold to these investors. The demand for these mortgage-backed securities became so great that the Wall Street investment firms could not keep up with the demand. It is this demand which eventually led to the requirements for loan qualifications to decrease to the point where a borrower could qualify for a loan with no income and no assets or what is more commonly known as a NINA loan.

While all of this was taking place home prices were drastically increasing as well, which made these mortgage pools seem all that more stable because they were backed by real estate. Many Wall Street investors erroneously believed that since real estate property value had been so stable over the years, there was no reason to believe that property values would change anytime soon or ever go down.

These mortgage pools were compiled by taking Triple A top tier loans and combining them with bad "toxic waste" loans which would make these loans look good on paper but in all reality these loans were doomed to fail because of the "toxic waste" loans that could never be repaid. Once the pool started to go bad then the good money was pulled down with the bad money. The insurance companies and banks couldn't back the loans and the money disappeared.

In order to begin to rectify the mortgage crisis, the Federal Reserve has put together subprime mortgage rules regarding Regulation Z. Rules that on the surface seem like they should have been in place a long time ago to avert such a crises that has affected the industry.

"The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership," said Federal Reserve Chairman Ben S. Bernanke. "Importantly, the new rules will apply to all mortgage lenders, not just those supervised and examined by the Federal Reserve. Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers," the Chairman said.

These new rules will go into affect October 1, 2009 and can be found in the press release section of the Federal Reserves website. http://www.federalreserve.gov/newsevents/press/bcreg/20080714a.htm

There is some good that has come from this. Consumers have become more educated to the process of obtaining loans and new laws have been put into place that will prevent this from happening again. A well educated loan officer that is confident, ethical, driven and understands the business is now a hot commodity once again. A field that was once recognized and highly regarded as one that has helped millions of Americans achieve the "American Dream" is now rebounding to achieve that recognition again.

"Ref:" "This American Life" - From Chicago Public Radio® 5/09/2008 The Giant Pool of Money.

http://www.thislife.org/Radio_Episode.aspx?episode=355

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New Mortgage Programs - Web Based Lending

Online mortgages? Really? Sure. A recent benchmark study by Mortgagebot.com states that of the mortgage agencies with an online presence, fully half of their loans have come through the online channel. This speaks volumes about how Americans are searching for information on home loan lending and how much information they're willing to get from Internet sources.

It also says a lot about the future of the mortgage industry as a whole. With the incredible movement to Web-based commerce still going strong, it should come as no surprise that people are readily engaging in every form of e-commerce, including mortgage applications.

Even less surprising is the market segment doing the online mortgage hunting. Young, affluent and creditworthy, is the description on a popular mortgage news site. These folks are creating the future, now. The market will follow where the money goes, and the money is going to the Internet. While the e-commerce boom has long since died down, the real e-commerce surge is just beginning. The fad that everyone called the 'boom' of e-commerce was nothing more than that, a fad. The real interest and movement of business to the Web began slowly and has continued while the .Com folks have mostly faded away.

It's only natural for the mortgage industry to make the move to the Web. After all, they're following the money, like everyone else. The real blossoming of the Internet as an outlet for all types of industry and business has yet to come, but we're seeing the first budding right now. The Web offers engaging visual interaction with enough information to sate anyone's hunger for knowledge. Websites can be incredibly interactive, even beautiful, and mortgage industry websites are no different. With the right tools, websites can be built that truly promote the beauty and immediacy of the "American Dream".

Web-based lending is making headway, a new mortgage program for a new generation of home buyers. As with most new business formats, web-based lending may take a little while to catch on with the majority of Americans and the need for brick and mortar lending institutions will never go away. Web-based lending, new mortgage program or not, is here to stay. An example of its growing popularity is the simple fact that Mortgagebot.com's study was done in the first place. If there weren't vast potential in the technology, it would have been dismissed completely and many mortgage lenders have realized the error of doing this to their chagrin.

The 21st century's answer to the mortgage industry is web-based lending and it offers lending powerhouses the opportunity for secured future growth. Even with our society's increasing technology, most consumers still shop by brand name. Lenders with established names and reputations stand in good stead of reaping the rewards of web-based lending. New mortgage programs like online lending also increase company productivity with all or most of the customer's information originating from Internet portals. Web-based lending also promises greater competitive opportunities for small companies to grow brand recognition across the nation and even the world.

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Subprime Mortgage Problem - Its Causes and Consequences on the Recent Mortgage Market

Subprime mortgage problem is now at its crudest practice with various reputed mortgage lenders' associations and mortgage lending institutions suffering huge losses. The last week has witnessed three major industry players of the mortgage and financial market going down with a large amount of losses resulting as the subprime crisis.

Merrill Lynch comprehended a considerable amount of third-quarter loss, which has been valued at $5 billion. They blamed the collateralized debt obligations or CDOs and the falling subprime mortgage portfolio for this loss. Washington Mutual is the other house announcing a huge loss by 75% drop of the third-quarter income. The total loan loss stipulation of WaMU is estimated to be $975 million for this third-quarter. The third incorporation suffering from this same problem is the Citigroup Inc. They have declared a 60% drop of their income on this third quarter comparing to the revenue amount of same time of the previous year.

These three groups are suffering from an evident and natural consequence of the events that set this subprime mess of the mortgage industry. The first major attack was on 19th July 2007 as the main US benchmarks hit their pick point. The crisis continued at the same pace till 22nd August 2007 when these major benchmarks plunged by approximately 6.4%. The CBOE Volatility Index of this period apprehended the impending danger by scaling a price rise of a $15 contract to a $23 contract.

The subprime problem is not only the result of poor alertness of the mortgage lenders in granting a mortgage loan, but also it has been a consequence of wrong structuring of the loan products by investment banks. The investment banks in this case had failed to judge the amount of risk a subprime loan carries as a collateral. Along with these joined a number of factors like a sharp bump up of mortgage interest rates. This rise is estimated as 200 base points in 2 years. The real estate industry also suffered a breakage by falling sales and dropping price rates. The process of economic deceleration was also showing its effects. And finally the flexibility allowed in the sub prime mortgage lending qualifications and process completed the preparation ground for the forthcoming blizzard.

Defaults in terms of total credit granted for subprime loans have been estimated falling from a 14.86% at the beginning of 2002 to 10.58% at the end of 2004. But from then on a sharp rise to 13.93%, as estimated at the beginning of 2007, in a very short period demonstrates the easy availability of the subprime loan, preparing the factors of the current subprime mess. Along with the growing availability of the subprime loan also increased the cost of risk ratio from 14% at the beginning of 2006 to 32% at the middle of the 2007. However, the cost of risk percentage is currently sobering down.

The US mortgage market is valued at $10,000 billion. In this figure, the subprime market comprises a 13% share. The gross domestic product or the GDP of the United States is incorporated with a 9% subprime market share. This amplifies the gravity of the subprime mortgage mess. It is not only the mortgage market, the banking and lending industry, but the whole national economy is suffering from this subprime tantrum. The consequence is worldwide.

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Commercial Mortgage Loans - Institutional Funding Vs Private Funding (Banks Vs Hard Money)

It is more difficult to get a commercial mortgage loan today than it was two years ago. The credit crisis has prompted many commercial real estate investors to look into alternative sources of capital.

Private lenders, often called hard money lenders, have gained popularity recently as banks and Wall Street brokers have refused to make loans. It is true that privately funded commercial mortgage lenders can be more flexible and can close loans in just days, but that does not mean they are easy to get.

Before a property owner applies to a hard money lender they should understand the differences between institutional funding and private funding.

Regulation

Traditional lenders like banks, insurance companies and Wall Street investment houses are all highly regulated. Banks carry FDIC or other government insurance, insurance companies are watched over by each State Insurance Commission and Wall Street is governed by the Securities & Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FIRA). There is a tremendous amount of bureaucracy, red-tape and rules involved in originating conventional, institutional loans. All this regulation means that bank loans are slow, banks are not flexible and there are loads of paperwork and documentation involved.

Private lenders are, by definition, private entities. They might be organized as LLCs or Limited Partnerships (LPs) or they might be a single, wealthy individual who makes money by making loans, but they do not fall under the prevue of banking regulation. They must, of course, adhere to all anti-fraud laws as-well-as all laws against un-fair and deceptive business practices, but they don't have to report their specific lending activity to Government Agencies and are not subject to Government licensing or chartering. Hard money lenders can be highly flexible in their underwriting criteria; they can change their own lending policies as they wish for their own reasons. They don't have to require large amounts of documents if they don't want to and they can move very quickly if they like a deal.

Speed

Bank and other institutional loans typically take 90-180 days to close.

Private loans can close in a matter of just days if they have to (a virtual impossibility when dealing with a bank) but generally take about 21 days.

Rates

Conventional loans are usually based on an established benchmark rate such-as the 10 year US Treasury Bond. The bank takes the base rate adds an index and comes up with a loan rate. Treasury and other rate indexes are historically low right now (Fall '09) and commercial mortgage loans (for those who qualify) rates are being priced at between 5.5%-7.5%

Private lenders generally hold the loans they issue in their own portfolios as-opposed to institutions who generally sell their loans to Government Enterprises or the secondary market. Hard Money lenders make their profit on rate and points so they charge significantly more. Most private loans today are being quoted at between 10%-16%

Points

It is rare to see a bank charge more than 2 origination points on any loan.

Private lenders will typically charge at least 3 points and as many as 5.

Terms

Traditional lenders usually offer 3, 5, 7 or 10 year fixed terms on loans amortized over 10-25 years. A balloon payment or a refinance is usually necessary at the end of the term, although more and more banks are offering adjustable rate products that don't require refinance.

Private loans are almost always short term, bridge type loans. Most charge interest only payments rather than amortize. The average private loan term is about 18 months and hard money lenders rarely write a loan for more than 36 months. The loan must be paid off in full at the end of the term.

Underwriting

Regulated institutions are now universally full documentation, full underwriting lenders. Every "I" must be dotted and every "T" must be crossed. They will fully underwrite the property first then the borrower. Both must pass muster or the loan will be denied.

Private lenders are equity lenders. They lend primarily based on the amount of equity in the target property. Investors will find hard money loans require much less paperwork and documentation. Private lenders will be careful and won't lend to just anyone, but the underwriting is much more straight forward.

Loan-to-Value (LTV)

Banks used to lend up to 80% of a buildings value and allow a 10% second position loan, allowing sponsors to borrow as-much-as 90% of a deals value. Those days are gone. Now even the largest, strongest banks won't lend more than 75% LTV and they discourage second loans. 65% is typical unless a borrower has a very strong balance sheet and a large liquidity position.

Private lender will not exceed 65% LTV even for properties that have excellent cash flow. Underperforming or vacant buildings will receive offers in the range of 50%-60% and land loans will come in at well under 50% LTV.

In a perfect credit environment bank loans or loans from other large money centers are the most desirable. They offer the best terms, lowest rate and fewest points. Any one who can qualify should seek funding from these powerful institutions. However, we are not in a perfect credit environment. We are in a mess.

Banks have tightened their standards, property values are dropping and the secondary mortgage bond market has completely collapsed. These circumstances have made it difficult or impossible for people to secure a conventional loan. Private lenders are more expensive and offer only short term financing, but they are filling a vital need and should be considered by borrowers if the bank has turned them away.

MasterPlan Capital LLC - Commercial Mortgage Loans - Privately Funded - Equity Financing - Asset Management - Simple, 1 Page Commercial Mortgage Application Online - Quick Answers - Close in 10 Days - The author, Vincent Remealto, is a commercial real estate valuation and underwriting analyst for MasterPlan Capital.

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