As the credit risk increases at all spectrum, and more lenders going out of business, guess what? You and I will be paying much higher interest rates.

I just checked out the mortgage rates offered by the two cheapest mortgage sources that I relied on (only for quoting purpose):
Mtgcapital.com: 15 years fixed at 6.000%, 30 years fixed at 6.375%. Lender’s fee is $1250.
Absolute Mortgage: 15 years fixed at 6.125%, 30 years fixed at 6.375%. Lender’s fee is $399, and both are zero points.
The above rate is based on ^TNX or 10 year treasury at 4.77%, and ^TYX or 30 year treasury at 4.92%.

You won’t find out the effects of increased risk premium + decreased competitions if you don’t have a history. Fortunately, I had a previous post with the exact information that I need:

at Mortgage Capital.com:
1. 30 years fixed: 5.75% APR.
2. 15 years fixed: 5.5% APR.

Both are zero points, $1250 lender’s fee.

at Absolute Mortgage:
1. 30 years fixed: 5.75% APR.
2. 15 years fixed: 5.5% APR.

Both are 0.125 points, $399 lender’s fee (lower interest and/or lower fees). When you make a loan as big as 680K (exceeding conventional conforming loan of $417K already), the 0.125 point will cost you more fees compared to MtgCapital. Therefore, Absolute Mortgage should be cheaper in all cases.

The above rates are quoted when 10 year treasury yield was at 4.509% and 30 year treasury was at 4.65%

So let’s see how much more expensive you need to pay now. From mtgcapital.com, it appears that every 0.50 point will give you 1/8 lower in interest rate. I’m going to use that to adjust the interest rates wherever applicable. The 10 year treasury was 0.261% lower and 30 year treasury was 0.27% lower.

So at mtgcapital.com, the 15 years fixed is now (6.00% – 5.5% – 0.261%) = 0.239% more expensive. The 30 years fixed is now (6.375% – 5.75% – 0.27%) = 0.355% more expensive.

At absolute mortgage, the 15 years fixed is now (6.125% – 5.5% – 0.261% – 1/8% * 0.125/0.5) = 0.333% more expensive. The 30 years fixed is now (6.375% – 5.75% – 0.27% – 1/8% * 0.125/0.5) = 0.352% more expensive.

Conclusion: you and I will be paying about 0.25% to 0.35% more in interest rate for the same loan as before. On the 30 years, the risk premium is higher now also because there is a yield curve steepening effect. If Fed starts to cut interest rates, it may pin down the lower end of the curve, but the longer end (15 and 30 years fixed) may or may not come down in relative terms. Until the inflation appears subdued, the longer end will not come down as much.

Good luck to anyone who wants to get a loan, or refinance their ARM time bomb.

The two Bear Stearn hedge funds are facing liquidation by Merrill Lynch, JP Morgan, etc. While Bear Stearn and all the brokers try to avoid a fire sale of these CDO and subprime loans, someone will need to eat up the loss. What’s more important is that these illiquid CDO if being valued at the market price will most likely be a lot lower than being marked on the books of various hedge funds and brokerage houses. That is not a pretty sight. In the meantime, credit rating agency is taking their down grades slowly but inevitably. If you have funds in such hedge fund, you should redeem your shares ASAP by enjoying a higher falsely marked NAV. By the way, investors can no longer redeem their funds in the Bear Stearn hedge funds. The capital has been locked up since May.

While everyone on Wallstreet is hoping that the subprime loans will recover by delaying the inevitable and postponing the revaluation, you just cannot squeeze a person without sufficient income and without asset and hope to get your money back. You can lock these liars on loans up or threaten them, but no money means no money. Now that housing market is stagnant or falling, the Ponzi scheme of refinancing can no longer continue. With more mortgage resets coming later this year after September, more “subprime” loan supply will come if they can materialize at all.

Eventually someone will be stuck with losses. Make sure it’s not you.

Thanks to the latest genius or scammers (whichever you choose), now you can improve your FICO score by renting other people’s credit. Some people even get a monthly income of a couple of thousand dollar by renting out their credit cards. Boy, that’s some 10X than I am making from my blog.

In fact, I have never really fully caught up with the idea of FICO score. Scoring your credit worthiness based on your past payment history? To me, the capacity to repay is equally if not more important than the past payment history. Without considering the capacity to repay is simply asking for trouble. These days I can’t believe the credit lines that credit card companies are giving out. It is almost an invitation to convert your FICO score to junk by running up tremendous debt. If I simply add up all the credit lines that I have, it probably amounts to more than $50,000 dollars. But I don’t think my income level can afford such a high debt.

In any case, you can rent out your credit cards at www.addatradeline.com and www.seasonedtradelines.com if you are interested. But I won’t be renting out mine for sure.

A coincidence on the location of addatradeline.com and many other major subprime lenders all in Orange county, California?? Looks to me that it’s the perfect combination to scam the bank legally.

I cannot believe how dare these government officials to use the taxpayers’ money (my annual $20000 to $50000 tax contribution included) to “save” these subprime homeowners from foreclosure. Why don’t they give me a free two loan points on the loan or the cash back to me for buying a home? America is about fairness, but it has all but disappeared in these callings for help.

If you cannot afford to buy a home, then you should not buy to drive up the prices further. Such bailouts are unethical and unfair. It creates moral hazards where speculation is encouraged and prudence is thrown out of window (well, actually this is probably not the first time nor will be the last time). American society has been getting more speculative and materialistic as a result. Being a diligent saver or conservative often gets you nowhere. These subprime borrowers and lenders who have taken excessive risks are not punished but rather rewarded by big gains before blow-up, and then (plan/hope to be) compensated by taxpayers’ money later. In the name of “saving home”, government officials are trying to please these constituents and sounding politically correct.

In all these blowups, government officials even dare to make the investors legally responsible for the entire mess. These investors who provided all the money to make everything possible, will be the biggest losers among all. Once the homes go into default and foreclosure with negative equity, the bond investors will not only lose interest but also principal. And now Chairman (of House Financial Services Committee) Barney Frank, D-Mass., and Spencer Bachus, R-Ala., want to hold bond investors legally responsible. If such legislation passes, it will dramatically make the mortgage-back bonds to be a lot more expensive, making the homes be even less affordable.

Out of all politician in the USA I like Ron Paul the best. He is the only one who sticks to the original spirit of US constitution and can stop the government getting bigger and bigger in increasing the burden on everyone else in the private sector. I will definitely vote for him when/if he runs for president in 2008.

Here is some of the latest real estate headline news:

1. Home builders’ confidence falls to 16 years low.

2. Notice of defaults in California up by 23% from last quarter, and up by 148% from last year.

3. New Century goes bankrupt, slimming down from 6000+ employees down to 100+ people, right at Irvine, Orange county, the center of the mortgage fraud so to speak (Impac, Ameriquest, Resmae, Option One are all here).

4. California new home sales down 37% on an annual basis. Slowest total March sale since 1997. You got to remember one thing that if the absolute number of sale is worst than 1997, it is actually much worse than 1997. In these 10 years, California has been growing population at about 1.5% annually. Normalizing the real estate sale by population, the sale would actually be 14% worse.

I have been saying that the bottom of the bubble zone of real estate won’t come until after 2009/2010, which I have arrived by adding 5 years (before negative ARM gets fully amortized) to 2004/2005, plus 1 extra year of time delay for a home to go through the entire foreclosure process. Jim Puplava said in his online radio that he expects the bottom to come at about mid-2008. I personally think that real estate market is still in the denial stage, where sellers are not willing to drop price. That attitude will really take time to change, until the home owner/mortgage holders get burned through monthly negative cashflow for an extended period like 1 to 2 years. If the amount of price drop is more than 2 years worth of the negative cashflow, sellers are more likely to hold out than cutting price.

I didn’t need a chart to convince myself, but above (click to enlarge) is the mortgage resetting “map” going forward. As you can see, the subprime mortgages are not flushed out yet and coming to reset in volume later this year. The next bigger wave is the 5-year period from the loan origination, which will come in 2010 through 2012 for the option ARM. If you use 9 to 12 months for the foreclosure process, the real estate market is likely to have a small break in 2010 before getting hit by mortgage reset again.

I think that the only way to stop the housing deflation is through inflation of everything else. I expect the real inflation (not the one published by government) to stay above normal for an extended period.

Unless you are not refinancing your loan for at least three years, paying points almost always never make any sense.

I created the following Excel spreadsheet (click here to download the excel) to calculate the money you pay for point after adjusting for tax and inflation:

Pretty much any number you enter from the available lenders, you won’t break even after at least 2 years. However, for 7+ years, it will make sense to pay points.

I hope you find it useful.

A couple of months ago, Absolute Mortgage was offering really cheap purchase mortgage at the rate of 0.25% to 0.375% lower than MOST cheapest companies offered on the bankrate.com. It was so amazingly cheap that now it’s not available anymore. I guess they are done with enough “publicity” from bankrate.com. They no longer advertise their rate there, but also adjusted their rates to be about 1/8 % cheaper than the lowest ones at bankrate.com. Great deals don’t last forever. The rates advertised on their site are only for purchase. Refinanced terms may be 1/8 % higher, depending on the borrower’s qualification.

Well, if you are purchasing/refinancing, it doesn’t hurt to check Absolute Mortgage out.

Here is the comparison of two internet mortgage companies that I’ve found to be the most economical:
Click here for the current rate at Mortgage Capital.com:

30 years fixed: 5.75% APR.

15 years fixed: 5.5% APR.

Both are zero points, $1250 lender’s fee.

Click here for the current rate at Absolute Mortgage:

30 years fixed: 5.75% APR.

15 years fixed: 5.5% APR.

Both are 0.125 points, $399 lender’s fee (lower interest and/or lower fees). When you make a loan as big as 680K (exceeding conventional conforming loan of $417K already), the 0.125 point will cost you more fees compared to MtgCapital. Therefore, Absolute Mortgage should be cheaper in all cases.

The above rates are quoted when 10 year treasury yield was at 4.509% and 30 year treasury was at 4.65%

Best luck. And if you can find a better rate, or you can beat this fixed rate on a zero point, fee ~ $1000 (and preferably less than $700), please don’t hesitate to leave a comment here.

Posted by “Frugal” at My 1st Million At 33.com

I found this quantitative matrix for the lending mortgage interest rate as a function of your FICO score and the LTV (Loan-To-house-Value) ratio. I have saved a copy here just in case the link is no longer available.

The matrix (in A1) makes total sense to me. If I am a mortgage investor, the mortgage interest rate should be dependent on the risk that I would take, which could be roughly measured by FICO & LTV. Although I don’t really understand the difference between A1, A2, B1, B2 tables, the more important message to take home here is that if your lender is not giving you a better interest rate on a lower LTV, your case is probably adding to his or her bottomline. For a FICO of 700, there is a 0.30% interest rate difference between 80% LTV and 65% LTV. A 0.30% on the mortgage rate can translate into a lot of “current” money.

By the way, this matrix is from the recently bankrupt ResMae on 2/13/07. This subprime lender was asked to swallow back $300 million loans purchased by Merril Lynch. Time after time, lenders just don’t realize that you cannot make a deadbeat to pay up when he just doesn’t have any money. You can sue and win, but you will simply lose more money in legal fees.

On the last note, I don’t know whether these lenders who use this matrix has ever thought of the “monetary value” of a FICO score. Anything that you can “quantify” (like a FICO score) you can fake too. Between walking away from a upside down loan worth of $100K and a perfect FICO score, which one would you choose? Despite my strong ethical sense, when $100K increases to one million dollar, I think I may walk away too. If I do that, I would have just “quantified” the monetary value of my ethics/FICO score, worth of a million dollar unpaid debt.

In reality, you can almost always put a monetary value to everything (sorry to be a little cynical here). But of course, I’m glad that my ethics won’t put myself in this situation of owing 1 million today’s dollar of mortgage in the first place.

I do hope that the “monetary value” of my ethics will grow bigger as I grow. But I do know for a fact that when given a real choice, the “monetary value” of people’s ethics is smaller than both the creditor or the debtor thinks. At least, I think this applies to me.

Fremont General just announced that they will not do piggyback loans (80/20). It’s another proof of LTV is a better safeguard than FICO scores.

Let’s assume that you have built a sufficient buffer of emergency cash fund (see Cash Management: How Much For Your Emergency Cash Fund). When you have extra monthly cash, should you pay down the balance of your mortgage or invest them into other things?

There are very opinionated people on both sides of this issue. People who are investment gurus in either real estate or stock markets, or unflinching bulls will always advise not to pay down any of your mortgage balance. The more conservative people will always advise to pay down your mortgage and become debt-free if you can. I’m in the more conservative camp, but in general, I will also advise you NOT to pay down your mortgage.

A mortgage is essentially a SHORT position in bond market. Instead of buying a bond and receiving interests on it, you are paying interests on a bond. In respect to Modern Portfolio Theory, your amount of mortgage should count directly against any of your bond allocation. Let’s say if you have $100K in bond, and you have $100K in mortgage, it’s roughly the same as if you don’t have any position in bonds. What’s different in this scenario from having no mortgage and bond at all is that having a mortgage is a leverage action. It is a leverage using your real estate holding. A leverage expands your total size of portfolio using borrowed money.

Given my economic outlook on a heightened inflation going forward, bonds would not be a very good investment (you could read my bond investing series, and my Reasons for Not Investing in Bonds). Certainly, if I don’t like bonds, then SHORTing bonds should be good by default. Therefore, I would advise you NOT to pay down extra for your mortgage in general. Besides, because of inflation, your home is usually your best investment (mainly due to having a mortgage).

However, one thing is obvious. If you have a lot of cash (or bond) that are earning less than your mortgage interest rate, it is obviously a losing deal not to pay down your mortgage. Supposed that you have a mortgage balance that is at 6.25%, and have side cash or bonds lying around earning 5.00%, you are essentially paying an interest expense of 1.25% for having your money in a much more liquid and accessible form. I do believe in the value of having sufficient cash for your emergency needs. But you definitely don’t want to over do it.

I see many financial sites or articles suggesting that one should pay down their debt so that when the economy goes into recession, or deflationary forces are upon us, the house will not go into foreclosure due to miss of the payments. That seemingly makes sense. Except that why would you want to make payments on something that may have a value less than your loan size if housing value also goes down (let’s forget about money ethics for a moment). In a recession, if you could walk away from your loan without triggering deficiency judgment (especially in the event of a job loss), it is probably better for you not to pay down your mortgage so that you could potentially walk away with less loss (and make sure that your money deposits are not at the same bank/institution who owns your mortgage). NOTE: this is just by number-crunching, without any consideration to your long term credit and your own ethics.

Therefore, in both inflation and deflation scenarios, it is very likely that it is better for you NOT to pay down your mortgage. Of course, there are other reasons not related to economy, such as legal reasons and insurance. I will not discuss them here, since they are more obvious than the debate on inflation/deflation.

Does that mean that there is no value of paying down your mortgage? If you can invest in something that has higher return than your mortgage, certainly you should invest. The tough part is to get such return with less risk & volatility. After all, you could have paid something off your mortgage debt. But when your investments don’t work out, your debt obligation still remains as onerous. What one should do is carefully look at the entire picture of one’s net worth and portfolio composition. I will answer the decision between investing and paying down mortgage in a more quantitative way in my future post on Cash Management: Refinance or Accumulate Home Equity?

A short post for recent bad deals for morons or people who have too much money to waste, and some goodies:

Good deal

• Bank of America is providing free online stock trades for any clients who deposit $25,000 dollars, reviving the www.freetrade.com once provided by Ameritrade.
• AlexsCoupons.com providing coupons to over 1000 online stores. It seems to be a quite popular site with quite high alexa ranking. About 7000-10,000 people everyday visit Alex’s Coupons to save thousands of dollars. Furthermore, the site owner recently donate $2000 to Starlight Starbright Children’s Foundation. Quite a honorable deed, and probably not the first time from what I can find.

Bad deal (at CountryWide Financials)
Mortgage quotes on Thursday Oct 12, 2006, for refinancing from CountryWide. 30 year fixed at 6.25% rate, 1.0% loan point for 70% LTV (Loan-to-Value) ratio. 15 year fixed at 6.00% rate, 1 loan point for 70% LTV ratio, with unspecified lender fee (didn’t bother to ask).

This compares to Mortgage Capital Associates., providing 30 year fixed at just 0.75% loan point with an okay lender fee of $1250 (was $950 3 years ago, lowest I’ve seen is about $650) at an interest rate of 5.875%. The 15 year fixed is at interest rate of 5.375% of 1.0% loan point.

By the way, paying loan point is usually a stupid idea unless you intend to keep the loan (and not selling your property) for very long time. I’m quoting 1.0% point only because CountryWide by default charges 1.0% point to fatten their pocket while at the same time advertising a seemingly “competitive” rate. Compared to Mortgage Capital, 15 year fixed at CountryWide is 0.625% higher in interest rate (or 11.6% higher), and 30 year fixed is about 0.375% higher (or 6.4% higher). Please do remember that every 1/8 of interest rate worth a LOT more for a longer term loan. That’s the only reason that 30 year fixed seems to have less premium, while in reality, you are probably paying the same 11.6% extra over Mortgage Capital. In terms of actual current dollars (in points), you are probably paying about $5000 for a $300K loan at CountryWide comparing to Mortgage Capital. And all those $5000 goes into CountryWide’s pocket, instead of going towards your retirement or college fund. Maybe they think some 10 (?) hours of loan processing is worth at $500 per hour rate.

You can comparison-shop further at bankrate.com, but do pay attention to the Lender Fee that they will charge (the rest “should” be third-party fee), and sanity-check the customer service experiences at www.bbb.org, and by Google Search with “XXX complaint” or “XXX problem”.

P.S. I personally have not applied to any of the above services. They are merely price quotes, and do not reflect my endorsement to their customer services.