A New York Mortgae Planners View:

link to article

http://www.post-gazette.com/pg/07284/824509-68.stm

Affluent senior citizens tapping reverse mortgages for extra cash

Thursday, October 11, 2007

By Tim Grant, Pittsburgh Post-Gazette

Daniel Marsula / Post-Gazette

Reverse mortgages have been a popular tool for cash-strapped retirees, but wealthier folks are finding ways to use them, too.

With a mansion worth $21 million, a wealthy retiree near Philadelphia decided the most logical way to access that cash and improve his standard of living was to take out a reverse mortgage on the house and invest the money for more income.

"That's obviously an exception," said Douglas Ziegler, a reverse mortgage officer with Gateway Funding in Horsham, Montgomery County, who handled the transaction for a 64-year-old man. "It's not your typical loan."

Yet deals like that are becoming more common.

Once considered the option of last resort for poor retirees struggling to keep up with the cost of living, reverse mortgages are now growing in popularity with more affluent senior citizens.

Eric Declercq, managing director of the reverse mortgage unit for Countrywide Financial Corp., said the company had recently done two reverse mortgages for about $10 million each.

"We believe the future of reverse mortgages lies in improving the quality of life, freeing up cash for travel, leisure and investments," Mr. Declercq said.

A few of my Own Comments

You will see that The affluent will take a product thats designed to help the poor and twist a little and get more of it  then the poor for whom it was originally created. Don't they have  a way with money? (refer to my previous post)

Also Note in the article and I quote "that the affluent want to improve their standard of living uh" pretty intriguing! don't they already have enough money?  the answer is  that of course they have saved up allot in tax deferred vehicle's like IRA"s and 401K and the like they are just  looking for the Best way, less taxing, a way thats more for them and not for uncle sam!

Also note the at the very last line of the article where Mr Declercq is quoted he has the following priorities

Travel

Leisure

Investments. This explains why so many people are struggling financially!

Sincerely

Joel Silberstein

Mortgage Planner

Today while listening to the Ric Edelman's radio show a women called in. Apparently she was elderly and she owns 2 pieces of property one she currently lives in, and another an undeveloped piece of river front property and as large as 14 acres.

 Her question to Ric was that the house she lives desperately needs renovation and she is asking Ric if she can take out money from the other undeveloped property through a 1031 exchange.

Rick answered that 1031 exchange is merely a tax deferred method it takes all the money you get from the property you sell and rolls it into the new property therefore you will not have any money out of this transaction to renovate your home, therefore concluding that this strategy is not for her.

What I was starlet about was that he cut her short by answering what he did and elaborating on any other strategy therefore she might conclude from his answer that she should sell the property and incur a large capital gain and take part or the whole money (I don't know how big of a gain there is going to be) to renovate the property!

The problems I have with this is as follows

• Unnecessary tax to the government
• Taking an appreciating asset like Real estate and converting into a non appreciating asset that's analogous to buying an expensive Bentley for its stereo system that will be taken out.
• For Failing to show the client how to achieve greater financial comfort while holding onto the property and still achieve her objective of getting cash for the renovation of her other property

Now what would you professionals say about this conversation above?

I will follow up with my strategy in my next post!

Sincerely

Joel Silberstein

Mortgage planner

She approached me with an interesting question

should I pay for the house all cash or should get a mortgage since I making a nice profit of the house I am selling?

Now this is a Question we right away jump and say No don't pay for the house entirely all cash Just get a mortgage. after all this is what we sell our livelihood we are mortgage brokers our name will predict our answer!

But what is the right advise to the client?

What I answered to the client after taking every detail of her income and assets was, that  being that thats all the money she has, she should not dump all of it into the house. It will be very easy to put it all in there, but not as easy to retrieve it since she is retired. Now of course a reverse mortgage is always an option but how much she can take out will be determined based on life expectancy, and will not be a fast process!

Therefore I suggested to speak with a financial planner and to determine how much income she can realistically generate with the cash she has on hand, and based on that to determine how much of a conventional mortgage can she support with her total income.

What we will have accomplished

1) We have access to the money and principle at all times.

2) if the house goes down in value she still has her capital

3) We just reduced her tax liability on her total income since she has mortgage interest to deduct.

Sincerely

Joel Silberstein

PS. Of course there are other ways but I just wanted to point out this strategy

Finding solutions for our clients that is the key and not merely quoting Rates!

A lady called me up last week and she wants to get Pre-Qualified for a mortgage. She selling her house and buying another for a little less since they cannot afford the mortgage.

Looking into the situation a little further I came up With an entire different picture.

She has an interest only mortgage now and she is barley making the full payments on it. Her income is $2600 a month and the mortgage liability is about $3500.

I mentioned to the client that she will not qualify for a mortgage she is looking to get since her income is to low. So I got response something like this

Can you do a NO DOC Loan?

NO DOC In No Solution for not having any income.

I get that allot from clients that self prescribe themselves solutions that are in no way a solution just a temporary band aid. Like refinancing into an option arm program to hibernate from the mortgage payments.

No I said to my client, you cannot pay more then 42% of your monthly Income. income can be supplemented by having a rental income but you cannot go above that line Either no doc or full Doc.

However if you are above 62 years old you can qualify for a reverse mortgage and can have a mortgage without any payment for as long as you live in the house. you can have that on a purchase and on a refinance.

Wow the client said I never heard of that!

Some Buyers who own mult family property are getting paid cash and not reporting it therefore saving on taxes.

This is a huge mistake!

First of all it is against the law,

And second of all, your building is only worth according to the income it yields. if it yields less (according to what you report) it is worth less! Any commercial mortgage lender will give you a mortgage only against the income of your property and not merely on the comparable. And in most cases the income on the property needs to be substantiated before the lender can determine how big of a loan the property can support.

the same disadvantage you might also have when selling the property, since any savvy buyer will ask to see the schedule E of your tax return to substantiate income and expenses you might not get the full value.

So we as real estate professionals or mortgage professionals we have to advise our clients to shoot straight and reap the benefits.

Look at the taxes you are paying as an investment in the value of your property!

Just a thought

Joel Silberstein

Last week 4 large lenders stepped up to the feds discount window and each borrowed 500 Millionon dollars, these banks are Bank of America, Citigroup, JP Morgan chase, and Wachovia. . 

The speculation is that their motive was largely symbolic and to calm the market. But what I am thinking is, that they jumped on an opportunity to create arbitrage. The normal discount window is 6.250%  and has to be repaid the following day. Here they are presented with a rate of 5.750% and can be repaid in 30 days now thats an opportunity!.

Banks know where to invest their money for a quick profit, and are in the business of borrowing money for less lending money for higher interest so to create a little spread between their expanse and their income and thats called arbitrage!

Now I think we can learn this practice from banks on how to do this ourselves!

Call Me so I can send you some litrature as to how to go about it

Sincerely

Joel Silberstein

Good after noon My friend's

 Having read my mentor's Tim Davis blog today where he wrote about whom responsability it is for this mess we are in. Tim assigns some or all responsibility to the consumer.

I agree with him but we cannot exclude the mortgage broker entirely who where supposed to inform their clients about the challenges down the road, and how the loan will preform in a few years from now and not just merely quoting rates, a trade that true mortgage planner's are conforming too.

 Furthermore, the banks who shut their doors they all originated Loans which no body in their right mind  would lend their own money on. 

A little more on that note, I spoke to an account representative today at Bank a. Bank a (as I would like to call them here)was the lender who used to buy all the loans from ABC and bank of Arizona and securitize those loans on the secondary market. When Lehman declined to continue to buy them toward's the end of this market as we know it,  thats when ABC and the like shut their doors.

But whats really interesting is, that Bank a is still in business and still originating no doc loans and stated stated loans and still doing most of what they used to do prior to this meltdown and for not so much higher rates. Their philosophy was, we do them but we need to add risk into the equation and they did. they did not dominate the market because they where always more expensive then ABC on the wholesale Level but guess what, they are still around!

Bottom line, Dont trade in your principals and ethics for greed, because greed tends to loose and then you can be left without anything so keep your principles and ethics.

Wow I cant belive I wrote that

Sincerely Yours  Joel Silberstein

Here is a different twist to the Adapting Mortgage Market (I refuse to call it Mortgage Meltdown Look at my previous post) Bank of Arizona is Shutting down their Wholesale Division and keeping their retail division open. Below is a email I got from them today

"Due to continued uncertain market conditions, effective as of 1 pm EDT (10am PDT) today, August 21, 2007, 1st National Bank of Arizona (FNBA) will focus on Retail originations and has suspended Wholesale and Correspondent originations.

Wholesale and Correspondent locks received prior to 1 pm EDT (10am PDT) today, August 21, 2007 will be honored.

Requests for Edits or Extensions to locks after 1 pm EDT (10 am PDT) today, August 21, 2007 will NOT be accepted.

FNBA Secondary Department "

This showe's us that Lenders are aiming to cut out the secondary market altogether and shift a little more responsibility onto the Mortgage Originator or Mortgage Broker. Quality and quality only  this is the new mantra,

Sincerely Yours

Joel Silberstein

your Trusted Mortgage Planner

German banks are facing possible liquidity crisis as well. Rumors that a large British insurance company was also forced to borrow from the Bank of Englend discount window ,sent investors on a quality bond buying spree,Making the bond market hotter and in turn benefiting the consumer with lower mortgage rates.

Amazing! it is a global market out there, and we have investors who buy our bonds not only here in the USA, but abroad too! And despite of all the so called liquidity, mortgage crisis, or so called meltdown they still have an appetite to invest in our markets. So I would change the term Mortgage meltdown, to Adapting Mortgage Market!  This you will not hear in the media.

Sincerely

Joel Silberstein

Hi Guys

It seems that the mortgage meltdown is imminent and unavoidable. Reputable lenders closing right and left like Greenpoint who just announced that they will shut down their operation for new applications but keeping their commercial branch open.

Another lender that shut its doors last week was First Magnus, a Great alt A Lender with great Products. What is sad about it is the way mortgage brokers and realtors on the front end are feeling the squeeze. Especially painful is when you already got your approval and it is scheduled to close in 24 hours and then you hear the lender is shutting their doors and will not honor their prior commitments.

It seems almost like betrayal, a company going under and taking their profit with them and ignoring the poor borrowers and brokers who are desperately looking out for their closing.

But knowledge of how the secondary market operates will shed some light and give us some answers as to why lenders that go out of business behave that way.

When a ABC or first Magnus originated a mortgage, the way it worked was They produced a commitment based on the standard guidelines. Then closed the loan using their warehouse line of credit, and after 2 weeks or a month took their entire pool of loans and went to the secondary market and sold their loans for a profit and then Paid back their lines of credit which they have with various creditors who are them self's mortgage lenders. What happened was, that when ABC got their loans together and brought them to the secondary market, the investors Didn't wont to buy them especially if they where low rates for a No doc like 6.5% or Interest only on a 1,200,000 loan. Their excuse was that the real estate market is declining, home equity is going down, and default's and foreclosure rates are up. And it will end up being that the lender has no security, since equity in houses are going down the loans against those properties is now greater that the house value. In the event of foreclosure, the investor who purchased this loan will not see his money back. So when ABC came to the market the investors argued for higher Rates. But since the Loan where already Funded by ABC's Line of credit (which by the way hade to be repaid right?) the couldn't sell it for their full value but for a discount price.Therefore they couldn't pay back their lines the full amount ending up losing Millions of dollars. The straw that broke the camels back was the creditors of those lines called in their margins. Now what do you expect ABC do with The Loans They have in process which are still in commitment stage and not yet closed ?. Or even the loans that did closed today or yesterday but they still didn't fund at the low 6.5 % Rate. Should they fund them and loose additional Millions of dollars? Hell No. So they had no choice but to reject them and to close shop.

But countrywide and the like, who are big Depository Banks and Financial Institutions who had the capital withstood the storm and shelled out the difference and stomached the loss. But that didn't come by so easy, they where squeezed into a tight Liquid Crisis. that could have resulted into a situation that if large group of depositors where to take out their money  for a short time from their accounts, countrywide would have hade a real issue. At any other day a case like this plays' out, Banks will borrow from each other and pay interest on that loan and the usually have a short window to payback like 24 Hours. This is called the discount window or discount rate. But in the current liquidity squeeze that many banks found them self's in a situation like that would have been too much to bear. Therefore The Federal reserve board of New York and San Francisco stepped up and applied with the Board of governors of the Federal Reserve, to lower the discount Window from 6.250% to 5.750% and additionally to extend the term of the loan from overnight, to 30 days. So that large banks like countrywide can borrow from the feds at lower rates and Payback in 30 days and in the mean time catch up on their liabilities to other banks and to remain liquid in this time of need.

How complex is the lending sector and what great back up systems are available in the US by our government truly amazing! But what this is telling us is, that when the market is going through a credit tightening and guidelines change, banks will need to have more equity and more liquidity to keep afloat. But as far as mortgages are concerned they are here to stay. Yes it is changing and change is good, just like it changed in the past and we hope that it does in the future.

I hope that this clarifies a little about what's going on out there, and especially now is important to be working with a Mortgage Planner who has a finger on the pulse of the market, and not just any Mortgage Broker who only offers low rates but offers no Market Knowledge!

Talk with you soon

Sincerely

Joel Silberstein