Financial Shock (Updated Edition), (Paperback): Global Panic and Government Bailouts--How We Got Here and What Must Be Done to Fix It

Update

When the original article was being written back in 2008 no one could have foreseen the severity of the disaster that would hit the real estate market and overall economy or the extent of damage that would be done. I certainly couldn't; but I remember a passage from that article relative to the 'safeguards that were built into the FHA mortgage program' and now, in the aftermath of the “Sub-Prime Mess” and having to deal with the present economic crises (disaster), I can't help but reflect back in disbelief at all that has happened to change the entire country and , indeed, the world as a result of recklessness and greed. I think we can safely state now that 'Sub-Prime' is over with. Gone! Done! Kaput!

Looking back

Although the events leading up to the crash of the financial markets - led by the risky sub-prime loans - were widely discussed, written about and aired on all the TV networks worldwide, I have to believe that the hard-working, every day, nine to fivers who went about doing their jobs and supporting their households probably have a lot more to say about what exactly caused the sub-prime mess and who is to blame, because it wasn't this group as some would have had you believe.

Oh yeah. The school teachers; bus drivers; train engineers and conductors; the police officers and firemen; the correction officers and all those who bought their homes by making the required down payment, providing required pay stubs, bank statements, W2 forms and tax returns as proof of their qualification to purchase the home of their choice or dream, if you will. Yeah, the group some said were the ones who didn't have enough down-payment money, good enough income or satisfactory enough credit to buy a home.

This group and many like them throughout the country must have felt a sense of vindication when the entire weight of the economic collapse was lifted off their shoulders with the collapse of the AIGs of the world. Most of this middle class group of people are probably still in those homes they purchased in 2006 and 2007 unless they fell victim to circumstances and were laid off from their jobs because of the crises, which they had no more large a role in bringing about than any other responsible homeowner, despite what others have asserted; others who insisted on looking for scapegoats in the wrong places and ended up blaming the wrong group of people. We now know they were not the reasons for the melt down.

Solid citizens

They are the true professionals. Those home buyers, now home owners, who purchased their homes by utilizing FHA financing were qualified for the homes they bought based upon documentation and verification of income, assets and credit. Here's a bit of information if you're unfamiliar with FHA financing. There is no such thing as a 'no-income/no-asset' mortgage program and there never was such a thing under FHA financing; there is no such thing as an 'investor' loan either; (that went the way of the 'pink-onion-paper-fax machine'); and there was certainly no such thing as a 'piggy-back' mortgage description in any FHA underwriting guideline manual until 2007 when, in an early effort to combat the impending crisis, the agency (FHA) provided as an option in the FHA Secure program, language that "...either the FHA-approved lender making the new mortgage or the existing note holder may take back a second lien that includes closing costs, arrearages or previous secondary financing if the indebtedness exceeds FHA prescribed LTV and maximum mortgage amount limits". That's why it was a solid program pre-Sub-prime-disaster and the it will continue to be a reliable source of financing for respectable, hard working, 'qualified' middle class folks for years to come.

This next statement may be a little tricky so please take your time and look just a little closer. Most people who were designated as sub-prime mortgage borrowers and those who purchased homes using "Sub-Prime" financing could not qualify for the FHA mortgage program, despite the flexibility in the program. The required down payment under FHA guidelines in 2006 and 2007 was a minimum of 3% (it was recently increased to 3.5%), the earnings qualification was 41% of gross monthly income for payment of total monthly debt and until early in '09 the minimum credit score was 580. There is now a 620 minimum score which could vary based on the other loan factors. So here's a mortgage financing observation...

Let's face it!

If a borrower couldn't qualify for FHA-Insured financing, there was definite reason for the lender to have a concern about approving another kind of mortgage for him/her. Here's the point. Those who didn't qualify for financing under the HUD-FHA mortgage program probably shouldn't have purchased homes. If this group of people was responsible for the sub-prime meltdown, then it's more understandable that they should bear the brunt of blame; But...

This raises some other questions: Who are they? What percentage of the buying marketing did they make up? Where did they buy? For what purpose did they buy? To occupy as Owners or to flip as an investment? These and many other questions could provide more in-depth look into how that crises started. That's a story for another time and one that will certainly be worth discussing; but for now, the FHA mortgage applicant, you know - that respectable middle-class I mentioned earlier - can breathe a big sigh of relief, because FHA is here to stay and they are solid citizens who deserve our respect and gratitude for the services they provide everyday.

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Building A Case for Commercial Mortgage loans

Commercial property financing has become more popular over the last five years, and even more so in the last eighteen months. The popularity of this type of mortgage loan can be attributed to events that devasted the residential mortgage market due to the subprime meltdown.

For many years the mortgage industry thrived on the purchase and refinance of residential properties until about eighteen months ago when mortgage lenders began to close down. Due to the implosion of some high profile  mortgage lenders and subsequent tightening of regulations governing residential real estate financing, more mortgage professionals have set their sights on the commercial mortgage loan as a means of replacing lost revenue they experienced as a result of the collapse of the residential market.
The commercial property tells a unique story


The commercial property represents to the purchaser, broker and  lender whether or not it is mortgageable and, in many cases, how it should be mortgaged. Whether a short term Interest Only Balloon loan or a longer term amortized loan is more suitable based on the property's historical performance.

Unlike residential property financing when the borrower's income, employment history, credit history and personal assets are the determining factors in the mortgage approval process the commercial will usually be approved or disapproved by utilizing the income & expense history of the building. In fact, the borrower in a commercial mortgage transaction need not be an individual but can be an entity like a corporation, partnership or other legally established entity.

The term "Net Cash Flow" creates a lot of interest 


It is a term commonly used in the qualifying process of commercial properties. The term is relatively simple to understand because it is really self explanatory, but what is not so simple to understand is how to calculate the Net Cash Flow (NCF) of any particular property.

 The NCF of a property, in most cases, is the key factor in the qualifying process of a commercial mortgage loan. Simply put, it is the difference between Effective Gross Income (EGI) of a building and the Operating Expenses (OE) and is calculated over a period of time - generally 2 to 3 years - to determine a growth or regression. It is therefore very important for a prospective purchaser of commercial property to know NCF Growth rate and whether or not the building is operating in the black.

Purchasing with your head, not over it


Although a building may present a beautiful exterior, excellent curb appeal and exquisite decor which would attract most prospective purchasers of residential property, the purchaser of commercial or investment properties must avoid the temptation to "follow your heart" in their decisions to purchase because that seemingly ideal building may present a totally different picture if it fails to service the debt that will inevitably result from the purchase.

Let the numbers tell the story. Debt Service Coverage Ratios (DSCR), Vacancy Factors (VF), Net Operating Income (NOI) and other ratios and factors are important calculations which will assist the decision making process of the purchaser but, equally as important, the same numbers are relied upon by the broker and the lender's underwriter when qualifying the building for financing. If the numbers don't add up to support a positive cash flow, the purchaser may be getting in over his or her head.

Transitioning from sluggish residential to vibrant commercial


When events change the way things are customarily done, there is generally a transition period which is created that we must employ to acclimate ourselves with the "newness" of habits and systems we are thrusted into. These new habits and systems are comprised of education through touch, feel, trial & error, unfamiliar activity and in many cases, failure.

It all happens in a very short period of time because circumstances do not provide a convenient schedule; but ultimately our successes relate directly to those transitional experiences.There are many in the mortgage industry who are presently going through that transitional period from the residential mortgage business as a primary income source to the pursuit of acceptable competency in the commercial mortgage arena and ultimate success as a commercial mortgage professional.

Success begins with effective communication - Language


Commercial, Real Estate, Mortgages, Net Cash Flow, Investment and Debt Service are only a few of the terms that are used in the commercial mortgage business which many people are already familiar with, and if we can agree that one of the more important requirements of any given field is knowledge of the vocabulary and terms specific to that field, then we should also agree that the first steps one should take when entering a new field is to learn the language.

Although I'm not prepared to delve into an explanatary excerciseon the language of the commercial mortgage industry, I can suggest that anyone who wishes  to learn more about this subject will find  C-Loans to be an abundance of information . For those who already participate in the commercial mortgage market and would like to share experiences or offer pros and cons on the industry by writing  articles , you are welcome to free software that really simplify the writing and publishing process. To download the software, please clink on the “articles” link above.


About the writer


This writer is a loan officer specializing in commercial mortgage financing. My time spent in the mortgage industry dates back to 1992 and prior to that, in the real estate brokerage business which began in 1979. My career has been rewarding, but was not without challenges and yet there is no business I would rather do than commercial mortgage business. I occassionally write an article or blog and have created a few websites relating to the subject of real estate and the various financing methods used to purchase or refinancing it.

My articles are written under the name of Javeton, my pen name. The company I'm associated with in my professional capacity is United Northern Mortgage Bankers of Long Island New York. More information relating to the mortgage industry is published on other pages of this site which may provide answers to some real estate questions you may have.


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Over fifteen years ago while employed by a New York mortgage banking company based on Long Island, I discovered that people were able to purchase mixed-use properties (buildings consisting of commercial as well as residential units) and finance the purchases using 97% financing through a unique program known as 203(k) which was insured by the Federal Housing Administration.


It took me some time to understand the true value of such an innovative program because I believed then that the government was seldom innovative; but when I finally did grasped the real importance and came to understand what a program like the 203(k) could mean to business owners, neighborhoods and communities, I became a staunch supporter of it and was bitterly disappointed when, in 1996, the investor-purchaser feature of the program was discontinued; but the owner-occupant portion remained in-tact and that was a good thing for everyone, and still is.


Today the program is still available to anyone who wants to purchase a mixed-use property or a one to four family residential property that may need a little repair (five thousand dollars minimum repair work needed to qualify). In-fact, the repair requirement part of the program that makes it as unique as it is applies to any property being financed with 203(k) funds, not only mixed-use.


It is my opinion that, in today’s real estate market, it is very important to recognize the facts as they exist and make adjustments necessary to accomplish the goal of homeownership. The goals haven’t changed because people still want to own homes, but they just have to go about purchasing them in a slightly different fashion, and that’s where the FHA programs (both the 203(k) and 203(b)) can be intergral parts of the buying process. Qualifying for these loans are pretty straight-forward and the guidelines are flexible enough such that any serious-minded mortgage applicant can qualify.


The basic requirements for any person to qualify for a mortgage of any kind are that the person is employed for two consecutive years, have the required down payment, possess a reasonable credit history as testament to meeting past obligations satisfactorily and is able to support these qualifying requirements with acceptable documentation; e.g. W2 forms, paystubs, bank statements and so forth. Those are the basic requirements.


The other important consideration is how much of a house the person can afford to purchase and this goes directly to the question of how much of a mortgage he or she can qualify for. At this juncture is where the lender or broker must provide guidance and assistance. The mortgage professional should understand that most homebuyers are expecting a very attentive and diligent ally throughout the process and must be prepared to be that person, even if the homebuyer has done the research necessary to educate himself/herself on the process.


Here is an example of what the numbers in a typical FHA mortgage application may look like with variations and approximations for property taxes and hazard insurance:


The purchase of a single family dwelling at a price of $350,000.00 Down payment under current regulation is 3% or $ 10,500.00 the mortgage amount applied for would be 97% or $339,500.00 the monthly payment at an approx. int. rate of 6.5% over 30 yrs.would be $ 2,145.87 add 1/12 of the annual tax bill of approximately $3,000.00 which is $ 250.00 and 1/12 of the annual property insurance bill of approximately $1,800.00 which is$ 150.00 and finally add 1/12 of the annual mortgage insurance premium (MIP) of $1,697.50 which is $141.46. The total monthly payment would be $ 2,687.33. 


 Based on the above example, the combined annual income needed to qualify for this FHA mortgage, whether it be 203(b) or 203(k), would be $104,026. Bear in mind that if the applicant under this scenario has other monthly obligations like credit card payments, car payments or student loans, those payments must be added and then the result would be calculated using a different ratio to determine the applicant’s qualifications for the loan. The point of this example is to reinforce the practical and common sense approach that is used to determine whether or not a homebuyer can afford to buy the home of his or her choice.


What if he can’t?


It seems to me that if the answer is clear then the available options should be just as clear. We can almost be certain when qualifying a borrower for FHA financing, that there are enough safeguards built into the process to help protect homebuyers from attempting to purchase homes that they cannot afford and this feature serves the best interest of Borrower, Lender, Broker and, ultimately, industry.



Javeton Tony


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First Time Buyer?

 


 This is a follow-up to my earlier article (January '08) on the FHA 203(k) mortgage as a viable alternative for people who would otherwise be locked out of the mortgage financing market, especially in view of all that has happened in the industry.

There are several built-in safeguards featured in the section 203(b) mortgage financing program. As a matter of fact, there are safeguards built into every FHA program except the old Title 1 programs which are almost extinct these days, but we’ll discuss Title 1 at a later date, if necessary. The primary safe guard- feature is a requirement for the applicant to provide documented proof of sufficient income to repay the loan. There is no such thing as “no income verification” or “stated income/stated asset” processing of a FHA application.

In order for us to understand the viability of FHA mortgages as “safe” mortgages we must first point to what is unsafe with regard to the likelihood of default on payment obligation when compared to other mortgage programs. Let’s take a look. 

Beginning with the term “no income verification” as mentioned in the previous paragraph, there are similar terms that existed in the Sub-Prime lending arena which projected a lot of “easy money” lending policies and tended to be very good for business from the mid-nineties up to 2006. “No Income verification” by definition should signify easier-than-usual- money”. Therein lies the problem. Take a look at the following descriptions and see if you can determine their meanings:

“No Income/No Asset”
“No Income/Stated Asset”
“No Income/Full Asset”
“Stated Income/No Asset”
“Stated Income/Stated Asset”
“Stated Income/Full Asset”
“Full Income/Full Asset”
“Full Income/No Asset”
“Full Income/Stated Asset”

There would probably have been other exotic combinations of income-asset requirements, or lack thereof, if it meant that business would’ve been done and house buyers would get the money they needed in order to complete their “Owner Occupied”, primary residences, “Secondary Homes” or “Non-Owner Occupied” residential properties (Investor Properties). Thus far, none of the descriptions mentioned apply to the FHA program except description # 7. Full Income/Full Asset means that a prospective borrower must provide documents that support the income and asset information that is reflected on the mortgage application. In other words, if you want to purchase a home and you calculated the amount needed to pay the mortgage (including taxes and insurance) and how much your down payment is going to be, then you should present your paystubs (the most recent30 days worth), your W2 forms (the most recent two years worth) and your bank statements (the most recent 60 days worth). The other requirement for the FHA application is a tri-merged (three bureaus combined)  “Credit Report”.

First and foremost, let’s dispel with any notion that there is such a thing as a “No credit” mortgage loan because there is not. The credit report is the document most lenders rely upon to determine a borrow’s likelihood of repaying the loan and therefore is used in combination with the house value to loan amount ratio (LTV) to rate the loan in terms of interest rate and points charged to a particular borrower. One important feature of the credit report that helps the lender in this process is the credit scores (FICO) obtained from the three bureaus by a local credit agency. These reports are usually ordered by the lender at the beginning of the mortgage application process.

It was once the belief of many mortgage loan applicants that FHA mortgages are more problematic and harder to get approved for because of the paperwork involved and all the other requirements that were involved in the process, especially the strict appraisal standards, but a lot of those restrictions were recently removed (within the last couple of years) and the process has become more streamlined. The point is that any home buying mortgage applicant who is employed for two consecutive years, has at least three percent of the purchase price of the home and a decent credit background can be a FHA-approvable borrower because the credit report does not present as big a problem as a conventional application would. In the case are some blemishes on the credit report, a reasonable explanation is acceptable along with any supporting documents and that buyer will most likely be approved and permitted to close and move into the new home. The FHA program is insured by the federal government and should be around for quite quite a while, so people wanting to purchase a home or refinance the one they presenly own can be confident in applying for a FHA-Insured mortgage through their local mortgage lenders/brokers. There is absolutely nothing to worry about, there are built-in safeguards for the borrower’s protection. These safeguards are written directly into the rules and regulations of the FHA program.


Javeton Tony  

I watched the superbowl game on Sunday between the New York/New Jersey Giants and the New England Patriots and, along with my entire family, witnessed the sound defeat suffered by the Patriots at the hands of the Giants. We all had a great time seeing the undefeated season come to an end.

Monday morning I opened my eyes and realized that i was suffering from all the symptoms of the flu. The first thought that came to mind was in the form of a question. Was I being punished for having such a good time the night before? It was like a fall from the heights of celebration to the depths of misery.

knowing that I could not afford an extended illness, I enlisted the aid of my wife and gathered all the weapons neccessary to prepare for battle against this confounded enemy of good health and wellness. My weapons of choice were: Hot tea with lemon, home-made chicken soup, a quart of orange juice, my regular four ounces of Vemma juice and one pint of brandy administered two ounces every hour until finished. One additional item in my arsenal that I cannot forget is a vapor rub that my grandmother swore by.

I'm happy to say that I was up and about and back on my feet today, went to my office and caught up with most of the work I missed yesterday. Fast action and the right combination of weapons defeated what could have been a potent enemy known as the flu.

 It has occurred to me that in times of uncertainty people need a clear understanding of all available options so that their decisions are based on substantial information. It is always my preference to provide clarity on any issue I discuss or activities in which I participate whenever possible, thus the following article should serve to provide some answers to prospective purchasers of real estate. 


 Government Program Could Ease Sub-Prime Mess


Have you ever thought about alternative financing programs which may help to alleviate some of the problems that were created by the Sub-Prime dilemma? Utilizing a seldom-used, specialized government program could be the answer if the application is submitted properly.

The Section 203 (k) Rehabilitation Mortgage Insurance program was introduced by the FHA to enable homebuyers to finance the purchase of a house and the cost of rehabilitation with one mortgage only. For homeowners who have occupied their homes for at least one year and intend to continue occupancy, the program can be used to refinance the existing mortgage plus at least $5,000.00 in repair cost.

There are several other uses for the 203(k) program which will be covered later in this article, but right now the focus is on why it should be sought out and utilized in today's market. Make preparations to take advantage of this unique financing option that is seldom used or very often dismissed as being too complicated, too long-and-drawn-out, or too paper intensive.

The 203(k) program, one of many mortgage loans insured by the FHA (Federal Housing Administration) may be one of the best alternatives available to finance the purchase, refinance or rehabilitation of a home today because the risks associated with this loan are historically lower than those of a Sub-Prime (an unconventional reduced income/asset documentation and in many cases higher credit risk mortgage program) loan and the out-of-pocket costs are several thousand dollars lower than a FNMA (conventional) loan would be.

Start your search now for FHA-Approved lending institutions (this could include many banks, savings and loan associations or mortgage companies) in your area and inquire about their program requirements because different lenders may have slightly different underwriting criteria.

Although the program was originally designed to encourage lenders to make mortgage credit available to borrowers who would not otherwise qualify for conventional loans on affordable terms (such as first-time home buyers and residents of disadvantaged neighborhoods where mortgages may be hard to get due to deteriorated values), present market conditions are indicative of the difficulties that existed in the early 90s when this program gained industry-wide popularity.

Learn about the many ways that the 203(k) program can be used to finance just about any property in today's market, especially with declining home values and the recently increased FHA loan limits. According to the “Eligible Activities” section of HUD's web page http://www.hud.gov/ the extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor to virtual reconstruction with a minimum repair cost requirement of $5,000.00.

A home that has been demolished or will be demolished for reconstruction is eligible as long as the existing foundation system remains in place.

 A residential property that also has non-residential uses (Mixed-use) is eligible as long as the non-residential portion does not exceed 25% of the overall structure; A multi-unit (Small apartment building with 5 or more units) is eligible as long as the building will be converted to a one-to four-unit structure.

Let your Realtor know exactly what kind of home you’re looking for just as you would have done if you were going to utilize a conventional or sub-prime loan program. Be confident that under the Section 203(k) program you have a much wider variety of housing options to choose from.

Here’s why: Providing you agree with the premise that most houses over one year old probably needs at least $5,000.00 worth of repairs pursuant to a contractor’s estimate, then 95% of one – to four – unit properties available for sale should qualify.

This means that if you decide on a specific home in a given area that you want to own, you should be able to aquire that home with Section 203(k) financing.

If however you cannot locate the right one or two unit home in the location of your choice and there is instead a three or four unit structure available, this program gives you the flexibility to go forward with the purchase and convert the three or four unit to a one or two unit and you'll have full supervisory powers over how your new home will be completed.

You control what your living quarters will look like. That’s one of the best features of this program. Any house can be made into your dream home. Literally!

Complete an application for a Section 203(k) loan when you're sufficiently satisfied that you have completed your own research because one of the great features about this program is that - in accordance with information published on the HUD page - “all persons who can make the monthly mortgage payments are eligible to apply” as long as that person intends to occupy the property as a primary residence.

Based upon this information one could conclude that borrowers who qualified for conventional mortgages would also qualify for Section 203(k) mortgage loans without the higher up-front costs, and those who qualified for sub-prime mortgages could simply gather up their earnings documents and apply, because the down-payment (3% minimum), although HUD did not cover this requirement on their page, and the credit issues - which may have been ligitimate reasons to seek sub-prime financing in the past - are quite manageable under this program.

When you consider the following improvements permitted with Section 203(k) financing, you can readily accept the premise that $5,000.00 in repairs should not be difficult to find in order to qualify the house for this program:

Structural alterations and reconstruction, modernization and improvements to the home’s functions elimination of health and safety hazards. Changes that improve appearance and eliminate obsolescence Reconditioning or replacing plumbing; installing a well and/or septic system

Adding or replacing roofing, gutters and downspouts, adding or replacing floors and/or floor treatments, major landscape work and site improvements, enhancing accessibility for a disabled person, making energy conservation improvements,

Notes:

HUD requires properties financed under this program to meet certain basic energy efficiency and structural standards.Applications must be submitted to the local HUD office through a FHA-approved lender
Repair costs estimates must be submitted by licensed, insured and – in some cases – bonded contractors unless the borrowers elect to complete the repairs by themselves. Special safeguards would be applied where borrower-completed repairs are concerned and HUD-Approved 203(k) Consultants must be engaged in order to complete the work write-up.

More onformation can be obtained at http://www.hud.gov/A HUD handbook, Rehab a Home with HUD’s 203(k), is available at website or by mail from HUD

This article was written by Tony "Javeton" Phillips. Tony is a mortgage professional specializing in commercial loans in the Northeast United States.

Next Post: Find out why the "Built-in" safeguards in the Section 203(k) program will work to prevent the kind of mortgage meltdown which we recently experienced.

Visit this www.c-loans.com for commercial mortgage info or email Tony at:  tony53p@hotmail.com or
highview22@comcast.net

 Javeton Tony

 

Hi, I thought it might be kind of interesting to introduce myself to the internet community on this site with the hope and expectation that as I continue to strive toward a better understanding of the community and it's residents, I will have developed some friendships and affiliations along the way.   

What best describes me? Tony is the name that most of my friends call me. Some of 'em call me other things but what are friends for? So who is Tony? Well, I'm a family man with three beautiful daughters, three terrific grand children and the love of my life; my unbelievably wonderful soulmate and wife. Her participation in our family falls into the 'cannot-do-without' category, so I guess she can be described as the "linchpin" that keeps our family together. Inevitably that family will continue to grow without our direct participation and I'm going to enjoy watching it happen. As testament to that ideal, I just witnessed two of the younger members of the family achieve their respective karate degreed belts today and couldn't have been more proud and jubilant at the same time.

 My role in the family is one big combination of some little parts: Provider, worrier, disciplinarian, consoler, comedian, part-time teacher, big bear to grand-kids, etc. I'm Dad, the original ATM, according to the front of some T-Shirts. I'm a little complicated at times but who isn't in their own way?

My objective is to seek, find and distribute as much joy and happiness I can this holiday season. Good tidings come in many different ways and you can rest assured that each one of us will welcome our share in our own unique fashion on this holiday and for holidays to come.

Make this the very best holiday possible. Be well and Stay healthy! 

Javeton Tony