There is a difference, Mr. President between spending and investing.

Adjustable Rate Mortgages can and do adjust payments downward. This is not uncommon given the low Treasury and LIBOR rates.

A large number of loan defaults are Sub-prime Loans; but a significant number are not. They include borrowers that have (had) good credit that the borrowers themselves overextended, of their own free (enterprise) will. Bankers accomodated, they did not coerce.

We would like to think that the worst is over. Certainly, we have seen a lot of trouble; but the residual of the current problems that are racking the market will be with us for a long time.

More than many know, we have modeled our finances after Biblical principals. Specifically, there was a time when every seven years, debtors were forgiven their obligations, and essentially given a clean slate.

The American homeowner has achieved this “Year of Jubilee” by means of selling their homes, and using the equity to pay off their consumer debt, make a down payment on another (larger) home, and repeat the cycle.

A typical first-time homebuyer owns their home for 3 years- the average move-up buyer? You may have guessed: 7 years.

So, what of our market today with no equity in homes and consumer debt rising? No Jubilee.

My goal as a financial planner is to build a comprehensive plan to equity, debt, and risk in the form of a balanced budget for my clients. The balance in the budget is not simply income/outgo (critical first stop!); but also short term/long term. We should enjoy (some woth more moderation) the lives we live today- but not to the exclusion of a sound retirement tomorrow.

In the coming years, in keeping up with the Jones we may find ourselves in the wrong neighborhood.

Watch for my 7 Step Program to Financial Recovery, coming to a blog near you soon.

Now is the time to shop.

Rates are bottoming also, as increasingly The Fed turns its focus toward inflation concerns.

Now is the time to shop.

First Stop – Pre-Approval

In busy markets the best practice of real estate agents is to have the prospective buyer speak with a Lender before seeing any property. First, this puts the buyer into the right price range for their budget; and second, it makes for a more efficient home search.

The real values in the market place are moving fast. Over priced homes where the seller is holding out and hanging on to a market-gone-by are the homes that are languishing and giving the impression of a sluggish market.

Unfortunately, some agents, (even with $4/gallon gas) are so excited to have a warm body in the car, that they skip the pre-approval process. This can end in much heartache when the home one falls in love with is beyond one’s loan qualification; or worse, down the road the payments overwhelm the new owner’s budget.

It’s simple to get pre-approved, with an actual loan approval based on income and credit. The rest of the qualifying is reviewed once a property is found and put under contract and appraised. This actually assists in the price negotiation, because the buyer is ready to move quickly to closing.

Next Stop – The American Dream

It’s not corny- owning your home gives you a sense of pride, security, and an investment foundation for the future.

It is a great time to look at real estate- just make sure you get the process in order to make sure your dream doesn’t turn into a nightmare.

Firstly, I am not trying to put myself out of business.

America, America. We have so much and we push each other for so much more. Not always in a good way.

Homeownership, of which I am a fan, has been turned into an exercise of Vanity for many. The goal is no longer to provide one adequate shelter and a hedge against inflation, but in the minds of many it is an outward display of one’s success. More often it is an outward display of the success we want others to think we have, whether we actually do is another question.

So, for outward appearances, we strap ourselves into this asset that is not liquid, can (and does) lose value, and we form emotional attachments to it. We do this to the exclusion of our long term financial wellbeing and more immediate risk management (adequate emergency cash and life insurance); not to mention the ability to tithe to our church or give to those truly less fortunate than ourselves.

I believe the problem arose with the invention of the combustion engine.

This was the invention that began the era of personal mobility. Sure we had the wheel- but the engine that was small and economically feasible enough for an individual multiplied the impact of the wheel exponentially. Now we get get away. Way away. The traditional family structure’s end; the disbursing of our moral and social accountability from the intimately familiar to the superficially seen.

Now we build and buy edifices to impress the hundreds of people who drive by our home and take notice. Or, they fly in for the weekend, and we pull it together long enough to entertain and showoff our success. Then Monday, it’s back to the bills and trying to make ends meet.

We are an enabling society. “If I don’t sell it to them, then someone else will”. And yet, each individual is still accountable for their own actions, despite all the attempts to blame others.

It is a great time to buy a home. Declining values in much of the country are essentially a price rollback to the late ’90′s. Mortgage rates are at historical lows.

A Recession is an economic correction that can be quite useful in getting people’s attention. Let’s hope that gas prices approaching $4.00 per gallon can slow down our combustion engines enough to return some reason to the way we decide to spend the resources that come our way.

Personally, I believe it is a great time for a qualified buyer to work with responsible professionals to secure adequate, even comfortable, housing to hedge against inflation; while advising that buyer to have a working budget, sufficient savings, proper levels of insurance, and a long-term savings plan to assure a successful retirement.

That’s just how I roll.

The good news is that the system fundamentally works. The bad news is that most of the news that is printed isn’t about that aspect, it’s about the sensational breakdowns that are “newsworthy”.

The fact is that there are adequate protections in place to inform the consumer. Likely, the protections have been over-developed and complicated as to compound the problem.

There are dusty stacks of pamphlets at offices across the country, and in peoples homes. They are produced by the writers at the FTC, HUD, and Treasury. When they are handed actually handed out, they land on top of a stack of no less than 18 other documents written in a language that most loan officers don’t even understand.

The current Good Faith Estimate (GFE), contains suffcient information (when it is complete and accurate) for a consumer to make a comparative decision. The flaws are not in the formulas, but in the explanations.

Since 2000, at least, many inexperienced, sales-driven loan originators have flooded the market. Relaxed guidelines and complicated loan programs made disclosure to the lay person a real challenge, even for those equipped with the knowledge to explain.

And, yes- those consumers who really didn’t want to be left out. If one lender wouldn’t, another would. The consumer could be coached, or unintentionally taught how to work the system. Without guilt or remorse, but with a sense of entitlement- that for many became outrage when they ended up in default.

Wall Street and their appetite for securitizations are culpable; there are those whose practices are driven by greed; there are those who naively believed what they were told. Some in each category didn’t know what they didn’t know (and still probably don’t). Some did.

Integrity isn’t required in any profession unfortunately, because society has made this too difficult to assess and ‘too expensive’ to pursue. Too bad, considering the long run costs.

Consumers should demand that they understand, and should not lack the discipline to stop a process they do not understand.

If a lender simply points to the lines on the page and explains the cost the problem is less.

Realistically, the time and effort to provide a $100,000 loan is not much different than a $1,000,000 loan. This, as a result of automation & operational efficiencies and low overhead allow my company to have a set revenue ($2,500 or 1% of the loan, whichever is less). To do this also requires a reasonable profit motivation, considering most companies seek 1.5-2.5% of the loan amount as there target revenue, unless they can get more.

The current GFE allows me to disclose this as an upfront fee, or as a “rebate” from the servicing lender to whom I sell the loan. This “rebate” is referred to as Yield Spread Premium (YSP), and appears as a non-cash item in the 800 Section of the GFE. It is non-cash, because the client doesn’t pay it in cash, it is paid out of the premium paid because the client takes a slightly higher interest rate, effectively financing the fee.

This isn’t complicated, but it is foreign to the typical consumer. It just requires that someone explain it in plain English when pointing to the page.

Oh, and telling the Truth.

Michael Noel is principal of American Home Financial, a licensed Florida Lender. Mr. Noel is one of only a few Certified Mortgage Consultants & Certified Mortgage Planners in the country, and has been helping clients make smart decisions about debt and equity for over 20 years.

As usual, The Truth is more complex.

In 1991, our economy was just bouncing back from a slow down and record high foreclosure rates. This is a foggy memory for most of us. Great times ensued.

Post 9/11, the financial markets were rocked and cash flooded the ever reliable real estate market. Over development and rising prices didn’t dissuade anyone. More product, buy more. Prices rise, flip and buy more. Anyone can play, no experience necessary.

Wall Street seized this opportunity to restore its capital appeal with Real Estate Investment Trusts (REITs) and mortgage-backed securities. Their ever-growing appetite required “new” mortgage instruments to accommodate more buyers- now securities analysts were authoring guidelines for mortgages, not just mortgage bankers.

The frenzy drove prices higher creating a large gap of affordability for the homeowner. More accommodations to draw more buyers and investors. More development; more rising prices.

Rising property values translated into higher tax revenues. Short-sighted politicians planned budgets as if the trend would continue spending the tax windfall on long term spending projects and new jobs.

Insurers raise rates. (Despite fewer storms in Florida for two years). Higher home values- more risk, more return.

Higher home prices, taxes and insurances costs translate into higher wages to attract and keep employees near business centers.

And we should have seen it coming.

Home appreciation rates were unsustainable. We know real estate is cyclical, and yet politicians chose to ignore this. Then when faced with cuts into programs launched during the euphoria, they have the unconscionable gall to use fear tactics, claiming cuts would have to come in Essential Services. Were we so under-protected in 2001? How could politicians budget for new arenas and levy taxes to pay for projects that prudent private sector investor would not touch with a 20-foot pole?

Greed and a lack of restraint have brought us to this place, not simply “sub-prime mortgages”. We live in larger homes than we need; we speculate in areas outside of our expertise; we choose to use the facts that support our arguments and special interests; we seek to profit in the moment and ignore the consequences.

The cure is not a bail-out that transfers the burden back to tax payers (tacit socialism). Unfortunately the cure is for us to fail. To rebound and rebuild. To take the losses, and pay the cost. The market will correct at a large cost to us all as we absorb the ripples that Greed has created, and Fairness will not preside over the process.

Now is the time to consider preventative measures without a doubt, but the market will purge the obvious perpetrators; we need to look at the factors outside of market forces that allow this situation to manifest. Incompetence in government has exacerbated this problem with irresponsible spending and lack of restraint. Many a homeowner would be far more able to afford the adjustment in their loan payment if taxes and insurance had not doubled over this period.

Ultimately the public needs to understand the responsibility that give to elected officials and hold them accountable. We must ask the questions and not be satisfied until we understand the answer. If they can’t give a clear explanation, they are not qualified to serve.

 Ultimately, we are responsible.

As usual, The Truth is more complex.

In 1991, our economy was just bouncing back from a slow down and record high foreclosure rates. This is a foggy memory for most of us. Great times ensued.

Post 9/11, the financial markets were rocked and cash flooded the ever reliable real estate market. Over development and rising prices didn’t dissuade anyone. More product, buy more. Prices rise, flip and buy more. Anyone can play, no experience necessary.

Wall Street seized this opportunity to restore its capital appeal with Real Estate Investment Trusts (REITs) and mortgage-backed securities. Their ever-growing appetite required “new” mortgage instruments to accommodate more buyers- now securities analysts were authoring guidelines for mortgages, not just mortgage bankers.

The frenzy drove prices higher creating a large gap of affordability for the homeowner. More accommodations to draw more buyers and investors. More development; more rising prices.

Rising property values translated into higher tax revenues. Short-sighted politicians planned budgets as if the trend would continue spending the tax windfall on long term spending projects and new jobs.

Insurers raise rates. (Despite fewer storms in Florida for two years). Higher home values- more risk, more return.

Higher home prices, taxes and insurances costs translate into higher wages to attract and keep employees near business centers.

And we should have seen it coming.

Home appreciation rates were unsustainable. We know real estate is cyclical, and yet politicians chose to ignore this. Then when faced with cuts into programs launched during the euphoria, they have the unconscionable gall to use fear tactics, claiming cuts would have to come in Essential Services. Were we so under-protected in 2001? How could politicians budget for new arenas and levy taxes to pay for projects that prudent private sector investor would not touch with a 20-foot pole?

Greed and a lack of restraint have brought us to this place, not simply “sub-prime mortgages”. We live in larger homes than we need; we speculate in areas outside of our expertise; we choose to use the facts that support our arguments and special interests; we seek to profit in the moment and ignore the consequences.

The cure is not a bail-out that transfers the burden back to tax payers (tacit socialism). Unfortunately the cure is for us to fail. To rebound and rebuild. To take the losses, and pay the cost. The market will correct at a large cost to us all as we absorb the ripples that Greed has created, and Fairness will not preside over the process.

Now is the time to consider preventative measures without a doubt, but the market will purge the obvious perpetrators; we need to look at the factors outside of market forces that allow this situation to manifest. Incompetence in government has exacerbated this problem with irresponsible spending and lack of restraint. Many a homeowner would be far more able to afford the adjustment in their loan payment if taxes and insurance had not doubled over this period.

Ultimately the public needs to understand the responsibility that give to elected officials and hold them accountable. We must ask the questions and not be satisfied until we understand the answer. If they can’t give a clear explanation, they are not qualified to serve.

 Ultimately, we are responsible.

1. “Alt A” loans are not Sub-prime loans. Thornburg for example is an “A” paper lender, caught in a break down of commercial paper markets. Has anyone asked them if their assets are performing? Talk about the actual relative performance of assets by risk grade instead of just saying, “mortgage meltdown”? Talk about specific relative mortgage segment performance: A-paper, Alt-A, Sub-prime, home equity, Jumbo prime paper (Thornburg)?
2. Our grandparents had little choice but to put down 20% because there was no risk-based pricing model based on credit like there is today. The Fannie and Freddie engines are working just fine. Today we can substitute good credit for cash and lending can be sound. American Home Mortgage, among others, invested heavily in the “exotic mortgages” that are often characterized as “sub-prime”. These loans were NOT 100% loan-to-value programs and required good credit borrowers (typically 680+ credit scores). The deferred interest potential is offset in a typical appreciation market of 5-6%, and required a minimum 5% down (115% growth cap), most 10% down (125% growth cap).
3. As an investment real estate is: non-liquid; has no guarantee of principal; and gives no rate of return on additional principal contributions. The only strengths are in tax advantages and leverage. Take those away and we are all better off renting.
4. These loans were not the product of booming real estate values per se. This is chicken and egg. The abuses of these were consumer responses to achieving a certain lifestyle. In other words, borrowers weren’t satisfied with moderate housing, so they went upscale with an “Option ARM” to keep up with the Jones. The borrower may have been coached, or the transactional mortgage broker (living from transaction to transaction with no regard for the client’s future) may have lied, but one read through the disclosures and the borrower would have an understanding or enough fear to ask questions. Yes, conspiracy. Title and Attorney Closing agents even do a quick overview of the note at closing. Do they see borrowers with glassy eyes signing these notes? Are they notarizing documents they don’t review or ask if the borrower understands? When these show up in court, will the authors of the Truth-in-Lending Act be named in the suit? Call it immediate gratification or greed or whatever you like from borrowers- this is not new behavior.
5. Legislators created permanent budgets on the cyclical rising property values and therefore taxes have created an affordability problem that is as much to blame in most markets as adjusting mortgage rates for defaults.
6. Insurance costs have contributed to rising home costs and have an impact on defaults.

I heard one analyst as if he were doing an exposé describing how he repeatedly asked lenders if the had relaxed their underwriting standards over the course of the last couple of years- “And they said they had not”. I’m hoping as an analyst he was fired, because one cursory look at the lender’s matrices over the course of two years would have clearly demonstrated they had.

By the way, let me describe a loan program to you. 10% down required, payment rate of 2.5%, with an actual note rate of 8%, so the potential to defer interest (add back to the loan balance) is 5.5%, but this can change as often as month an annualized basis. The loan can grow to 125% of the original balance over a 5-year period, when the loan is subject to recast. Your experts they are probably thinking “Option ARM”, one of those new exotic loans that sprang up during the roaring 2001-2005 real estate boom. They would be right; but, they would also be right if they were recalling the mid 1980’s and a loan called the “Flex”, that had been very popular during the days of 14-16% mortgage rates in the day that sparked a refinance wave back then. History repeats itself?

I’d like somebody to talk about the “perfect storm”, bubbles bursting, legislatures’ misappropriations and over-taxing while property and health insurance rates get out of control. And maybe get the “experts” to do some research, because as the Kia folks say, “the more you know, the less you don’t know”.