With my new fat mortgage, I’m considering whether to also take out a Home Equity Line of Credit (HELoC). This is not a home equity loan where you take out a lump sum at a fixed rate, but is a line of credit usually at a variable rate. I think of it as a credit card that is secured by my house (!). I don’t plan on actually using it, but I think it might nice to have around as long as the upfront costs to me are minimal. Here’s why:
Safety Net / Emergency Funds
Although having adequate emergency funds in cash is always preferable, it is nice to know that you have a HELOC as a backup in case of prolonged job loss or health problems. It’s always better to line up credit ahead of time while you have good credit rather than when you are already desperate. Using a HELOC can be preferable over paying sky-high credit card interest or falling behind bills (late fees, damaged credit score). Ironically, you might even use it to temporarily keep current on your mortgage to avoid penalties or even foreclosure. Let’s hope not.
Cheap and Flexible
The nice thing about a HELOC with no fees is that if you don’t take any money out, you don’t pay anything. And because the money is secured by your home, this assurance makes your interest rate relatively low. The rate is usually close to the WSJ Prime rate, which is currently 6% APR. On top of that, your interest paid might even be tax-deductible.
The interest is accrued daily, which makes it good for quick loans. So if you do need to take out $10,000 on short notice and you don’t have the cash on hand, using a HELOC might be the most economical way to do it. At 6%, your interest owed on $10,000 is only $1.64 a a day. Of course, for many folks this convenience might just provide too much temptation. All debt can turn into a double-edged sword. Know thyself, is all I can say.
Tool for Credit Card Profit Games
Here’s a trick to go along with making money with 0% balance transfers that is a good example of that flexibility. With certain credit card issuers it can be difficult to turn your balance transfer into cash in your pocket, especially when you have no existing balances. But here’s an example of how to use your HELOC to extract $10,000:
Request a balance transfer from your 0% APR credit card for $10,000 directly to your HELOC. Since this is loan they won’t mind at all.
Shortly before the balance transfer is scheduled to arrive, write a check for $10,000 from the HELOC to your interest-bearing bank account. Now you have created a temporary $10,000 debt at 6% and $10,000 bank balance earning ~4% (minus some possible lost days of interest).
When the balance transfer payment arrives a fews days to a week later, your HELOC debt will be paid off.
A week’s worth of interest at 6% APR ion $10,000 is only $11.50. And that is partially countered by interest earned in your savings account.
Voila! For around ten bucks, you now have $10,000 at 0% APR in your bank account to do as you wish.
Finding a HELOC - What To Look Out For
Now, I don’t want a home equity line if it’s going to cost me a bundle. Here’s a quick rundown of important factors when looking for a HELOC, based on an article by the Mortgage Professor.
Introductory rate and period. Temporary teaser rate to suck you in.
Margin. This is usually how your non-teaser interest rate is determined, relative to the Prime rate.
Minimum draw. How long can you take money out?
Required average balance. Do you have to take some money out?
Upfront lender fees. These days, you should be able to eliminate these.
Upfront third party fees. Harder to get waived, but try.
Annual fee. Just say no, again. Sometimes only waived for first year.
Cancellation fee. Many have these, I guess so you don’t bail and go to another bank. This is especially the case if they waive all the upfront costs above, since they are losing money on you so far. As long as you can keep your balance at $0 with no fees, just keep it open and don’t use it.
I see a lot of competition out there now that rates are low, so definitely shop around. As a data point, I just saw a special offer from Bank of America for a no closing cost, no application fee, no annual fee HELOC. Don’t forget to try your local credit unions as well.
Sunday, July 6, 2008
The difference between home equity loan and home line of credit.
Once you have built up equity in your home, you have the privilege of applying for a home equity line of credit, which allows you to borrow the money you need.
Most financial insititutions ( banks, savings and loans ) have entered the home equity market, so you have plenty of options when you shop for the best loan.
In effect, a home equity loan is a second mortgage on your home. You usually get a line of credit up to 70 percent or 80 percent of the appraised value of your home, minus whatever you still owe on your first mortgage.
For example, if your home is worth $100,000 and you owe $20,000 on your mortgage, you might receive a home equity line of credit for $60,000 because your lender would subtract your $20,000 owed on the first mortgage from your $80,000 worth of equity.
You will qualify for a loan not only on the value of your home but also on your creditworthiness. For instance you must prove that you have a regular source of income to repay a home equity loan.
The difference between the two kind of credits is easy: the home equity loan has a fixed rate and the home equity line of credit has a rate that fluctuate and it's better indicate to consolidate other debts than the credit cards.
The home equity line of credit is an " on demand" source of funds that you can access and pay back as needed.
You only pay interest if you carry a balance because these line of credits are essentially a revolving line of credit, like a credit card but with a much lower rate because the line of credit is secured by your home.
Like other mortgages, the home equity loan requires you to go through an elaborate process to qualify for an open line of credit. You will usually need a home appraisal and must pay legal and application fees and closing costs.
Because a home equity loan is backed by your home as collateral, it is considered more secure by lenders than unsecured debt, such as credit card debt. Further, because the loans are less risky for banks, you benefit by paying a much lower interest rate than you would on credit cards or most other kinds of loans.
Home equity loans can therefore offer extremely attractive rates when the prime interest rate is low, but subject you to much higher interest costs if the prime shoots up.
You can tap the credit line simply by writing a check, and you can pay back the loan as quickly or as slowly as you like, as long as you meet the minimum payment each month.
Most financial insititutions ( banks, savings and loans ) have entered the home equity market, so you have plenty of options when you shop for the best loan.
In effect, a home equity loan is a second mortgage on your home. You usually get a line of credit up to 70 percent or 80 percent of the appraised value of your home, minus whatever you still owe on your first mortgage.
For example, if your home is worth $100,000 and you owe $20,000 on your mortgage, you might receive a home equity line of credit for $60,000 because your lender would subtract your $20,000 owed on the first mortgage from your $80,000 worth of equity.
You will qualify for a loan not only on the value of your home but also on your creditworthiness. For instance you must prove that you have a regular source of income to repay a home equity loan.
The difference between the two kind of credits is easy: the home equity loan has a fixed rate and the home equity line of credit has a rate that fluctuate and it's better indicate to consolidate other debts than the credit cards.
The home equity line of credit is an " on demand" source of funds that you can access and pay back as needed.
You only pay interest if you carry a balance because these line of credits are essentially a revolving line of credit, like a credit card but with a much lower rate because the line of credit is secured by your home.
Like other mortgages, the home equity loan requires you to go through an elaborate process to qualify for an open line of credit. You will usually need a home appraisal and must pay legal and application fees and closing costs.
Because a home equity loan is backed by your home as collateral, it is considered more secure by lenders than unsecured debt, such as credit card debt. Further, because the loans are less risky for banks, you benefit by paying a much lower interest rate than you would on credit cards or most other kinds of loans.
Home equity loans can therefore offer extremely attractive rates when the prime interest rate is low, but subject you to much higher interest costs if the prime shoots up.
You can tap the credit line simply by writing a check, and you can pay back the loan as quickly or as slowly as you like, as long as you meet the minimum payment each month.
How A Home Equity Line Of Credit Can Help Your Finances
by Thomas Erikson -
A bag justness distinction of assign unlocks your home’s continuance so it crapper impact for you. Owning your bag crapper wage you with a business inventiveness that crapper support you with your business needs.
Since justness is the continuance of your bag harmful the remaining mortgage outstanding, you haw be movement on the change that you crapper ingest to meliorate your business situation, renew your bag or go on that pass you’ve ever dreamed of.
Why Would You Want a Home Equity Line of Credit?
A distinction of assign is not same a exemplary provide which provides a amass assets of money to you and then begins charging you welfare at a immobile appraise until repaid. Instead, it acts same revolving assign (much same your assign card). You exclusive ingest as such or as lowercase as you poverty and you exclusive clear welfare on the turn you hit used. Also, same a assign card, when the debt is repaid you ease hit admittance to the credit. In contrast, with a exemplary loan, you would be stipendiary welfare on the flooded turn of the loan. And when a provide is stipendiary off, you no individual hit that assign acquirable to you – you would hit to reapply for a newborn loan.
The essential feature of a bag justness distinction of assign is providing you greater plasticity at accessing assign with the small cost. Not exclusive crapper you admittance the assign exclusive as you requirement it, but your monthly payments emit exclusive the equilibrise you used. So the inferior you ingest of it, the modify your payment. Some lines of assign order you to exclusive the welfare as the peak payment. This feature crapper be adjuvant when assets are tight. (Be careful, it takes develop not to ingest this feature to render outlay habits).
A bag justness distinction of assign is enthusiastic when you don't hit a super immobile turn to clear in digit place. While you crapper encounter whatever uses for your distinction of credit, here are whatever more ordinary reasons for obtaining a bag justness distinction of credit.
Consolidate Debt
One of the more essential uses for your bag justness distinction of assign is to consolidate debt. You crapper decimate the pronounce of binary bills and also obtain a more approbatory welfare appraise or set benefit.
Second Mortgage
You haw become crossways a instance when you encounter your mortgage welfare appraise higher than your bag justness distinction of credit’s welfare rate. If that is the case, then using your distinction of assign to clear soured the existing mortgage for meliorate welfare rates makes sense.
Home Renovations, Additions
You haw ingest your distinction of assign for renovating or antiquity that newborn constituent to your home. You clear inferior welfare than you would if you utilised a assign bill and that makes it a owlish business choice.
When Should You Not Use a Home Equity Line of Credit?
Before making precipitous decisions with your newborn institute money source, it’s essential to appraise the added risk.
Some debts hit features that you haw not be entitled to if you alter them to an justness distinction of credit. A amend warning is your enrollee loans. They are person to primary conditions that if denaturized by you, crapper outlay you. You requirement to analyse into your enrollee provide cost and conditions before considering agitated them.
With the feature to clear exclusive the welfare you haw demand the requirement to clear soured the debt and modify up stipendiary exclusive the welfare for a daylong time. When this happens, you modify up owing for items that hit forfeited their continuance over time. It makes more business significance to refrain using your distinction of assign to acquire items that decrease and pore on items that module process in continuance naked time. Also, attain plans to clear soured the debt apace for the most advantage.
Lines of assign verify plus of underway baritone welfare rates which effectuation they are person to fluctuating welfare rates. If you requirement large finance that module verify a daylong instance to clear off, you haw encounter that lawful loans protect you better. A immobile appraise provide crapper wage example of nous lettered that your monthly payments are not feat to process as welfare rates go up.
Using your assets sagely crapper provide you enthusiastic comfort and freedom. Before attractive on some business obligations it is essential to see the risks as substantially as the benefits.
Thomas Erikson is co-founder of www.your-debt-consolidation-loan.com which provides home justness distinction of credit aggregation and solutions.
Article Directory: Article Dashboard
Summary : A bag justness distinction of assign unlocks your home’s continuance so it crapper impact for you. Owning your bag crapper wage you with a business inventiveness that crapper support you with your business needs. Since justness is the continuance of your bag harmful the remaining mortgage outstanding, you haw be movement on the change that you crapper ingest to meliorate your business situation, renew your bag or go on that pass you’ve ever dreamed of. Why Would You Want a Home Equity Line of Credit? A lin...
A bag justness distinction of assign unlocks your home’s continuance so it crapper impact for you. Owning your bag crapper wage you with a business inventiveness that crapper support you with your business needs.
Since justness is the continuance of your bag harmful the remaining mortgage outstanding, you haw be movement on the change that you crapper ingest to meliorate your business situation, renew your bag or go on that pass you’ve ever dreamed of.
Why Would You Want a Home Equity Line of Credit?
A distinction of assign is not same a exemplary provide which provides a amass assets of money to you and then begins charging you welfare at a immobile appraise until repaid. Instead, it acts same revolving assign (much same your assign card). You exclusive ingest as such or as lowercase as you poverty and you exclusive clear welfare on the turn you hit used. Also, same a assign card, when the debt is repaid you ease hit admittance to the credit. In contrast, with a exemplary loan, you would be stipendiary welfare on the flooded turn of the loan. And when a provide is stipendiary off, you no individual hit that assign acquirable to you – you would hit to reapply for a newborn loan.
The essential feature of a bag justness distinction of assign is providing you greater plasticity at accessing assign with the small cost. Not exclusive crapper you admittance the assign exclusive as you requirement it, but your monthly payments emit exclusive the equilibrise you used. So the inferior you ingest of it, the modify your payment. Some lines of assign order you to exclusive the welfare as the peak payment. This feature crapper be adjuvant when assets are tight. (Be careful, it takes develop not to ingest this feature to render outlay habits).
A bag justness distinction of assign is enthusiastic when you don't hit a super immobile turn to clear in digit place. While you crapper encounter whatever uses for your distinction of credit, here are whatever more ordinary reasons for obtaining a bag justness distinction of credit.
Consolidate Debt
One of the more essential uses for your bag justness distinction of assign is to consolidate debt. You crapper decimate the pronounce of binary bills and also obtain a more approbatory welfare appraise or set benefit.
Second Mortgage
You haw become crossways a instance when you encounter your mortgage welfare appraise higher than your bag justness distinction of credit’s welfare rate. If that is the case, then using your distinction of assign to clear soured the existing mortgage for meliorate welfare rates makes sense.
Home Renovations, Additions
You haw ingest your distinction of assign for renovating or antiquity that newborn constituent to your home. You clear inferior welfare than you would if you utilised a assign bill and that makes it a owlish business choice.
When Should You Not Use a Home Equity Line of Credit?
Before making precipitous decisions with your newborn institute money source, it’s essential to appraise the added risk.
Some debts hit features that you haw not be entitled to if you alter them to an justness distinction of credit. A amend warning is your enrollee loans. They are person to primary conditions that if denaturized by you, crapper outlay you. You requirement to analyse into your enrollee provide cost and conditions before considering agitated them.
With the feature to clear exclusive the welfare you haw demand the requirement to clear soured the debt and modify up stipendiary exclusive the welfare for a daylong time. When this happens, you modify up owing for items that hit forfeited their continuance over time. It makes more business significance to refrain using your distinction of assign to acquire items that decrease and pore on items that module process in continuance naked time. Also, attain plans to clear soured the debt apace for the most advantage.
Lines of assign verify plus of underway baritone welfare rates which effectuation they are person to fluctuating welfare rates. If you requirement large finance that module verify a daylong instance to clear off, you haw encounter that lawful loans protect you better. A immobile appraise provide crapper wage example of nous lettered that your monthly payments are not feat to process as welfare rates go up.
Using your assets sagely crapper provide you enthusiastic comfort and freedom. Before attractive on some business obligations it is essential to see the risks as substantially as the benefits.
Thomas Erikson is co-founder of www.your-debt-consolidation-loan.com which provides home justness distinction of credit aggregation and solutions.
Article Directory: Article Dashboard
Summary : A bag justness distinction of assign unlocks your home’s continuance so it crapper impact for you. Owning your bag crapper wage you with a business inventiveness that crapper support you with your business needs. Since justness is the continuance of your bag harmful the remaining mortgage outstanding, you haw be movement on the change that you crapper ingest to meliorate your business situation, renew your bag or go on that pass you’ve ever dreamed of. Why Would You Want a Home Equity Line of Credit? A lin...
Taking advantage of convertible home equity lines of credit
Home equity lines of credit (HELOCs) have lately been maligned with unsustainable mortgage equity withdrawal (MEW) financing such essentials as two-week long vacations, German-imported vehicles, requisite granite counter tops and travertine flooring; however, HELOCs are a useful and important financial vehicle available to home owners. Their importance escalates in times of tightening credit and stable/declining home values. In this three part series we examine some of the important features that home equity lines of credit offer to homeowners as part of a strategic home financing plan. We’ll examine the following three features in this series:
Convertible HELOCs
True no-cost HELOCs
Equity protection & repositioning
Today, we’ll look at the important role that convertible home equity lines of credit can play in helping reduce monthly mortgage payments as well as protect against the payment shock so often associated with adjustable rate mortgages. If you are a luxury property owner or a Realtor who services the luxury market-be sure to read to the end for my Two Gems of Convertible HELOCs that are just for you.
Home Equity Lines of Credit BASICS
Before we get in to the important features we need to first cover some basic ground for those that are not entirely familiar with home equity lines of credit. A HELOC is a loan secured by your home that differs from a traditional home loan in the following ways:
It is tied to the prime interest rate, which means the interest rate can fluctuate up and down as the prime rate changes. Prime is tied to the Fed Funds rate; which dictate the short-term interest rates available on debt such as HELOCs, credit cards, and other short-term debt.
HELOCs are made up of two parts, the “line amount” which is the amount of money that you can borrow on the HELOC; and the “draw amount” which is the amount of money you initially borrow when you open the HELOC.
You can withdraw money for a set period of time after opening the line (usually 10-15 years) at any point via a credit card or checks tied to your HELOC up to the approved line amount.
You only pay interest on the amount borrowed, regardless of the line amount. With a traditional mortgage you begin paying interest on the entire amount right away.
Your minimum monthly payments are initially calculated as interest only for the first ten years. This allows you to either pay down the line, or simply make the interest payments to keep the line in good standing.
HELOCs are usually based on a 25 year repayment term. The first 10 years are interest only, the remaining 15 years principal and interest are owed to pay off the line.
May be convertible to a fixed rate mortgage one or more times during the life of the loan term. A small fee may be charged to convert.
Home equity lines of credit are often used as an alternative to a second mortgage. In the industry we refer to them 2nd liens or being in “2nd position” to refer to their subordinate position to the primary “1st” mortgage. However, HELOCs can also be used in first position, as an alternative to first mortgage products.
Convertible Home Equity Lines of Credit
A convertible HELOC refers to a home equity line of credit product that can be converted from an adjustable rate HELOC in to a fixed-rate mortgage. While each bank offers a slightly different type of convertible product most have similar characteristics.
Can convert from HELOC tied to the ever-adjusting prime interest rate to a fixed-rate mortgage (typically 30-year fixed).
Can continue to use remaining credit available above and beyond the fixed amount.
Done over the phone with a customer service representative, the conversion goes in to effect immediately.
No additional qualifying is required. No underwriting, credit review or asset/income documentation needed.
A small fee (~$250) may or may not be charged for the conversion.
Multiple conversions may be allowed. Common conversion allowances are 1, 2, and 5 times.
Conversion is to the prevailing fixed interest rate available through the bank (or some rate based on the prevailing rate + a premium for conversion).
Questions to Ask Before Committing to a Convertible HELOC
Is there a charge for converting to a fixed-rate mortgage? What is that cost?
Is there an ability to continue to use the remaining credit available on the line after a conversion?
Is the conversion to a 30-year fixed term?
Is the payment on the converted line interest only or principle and interest?
How many times can I convert?
How often can I convert?
Some Typical Uses of Convertible HELOCs
Scenario 1
People use a convertible HELOC to complete a very specific project that may take time to accomplish. Consider a lengthy home improvement project. By taking a 2nd mortgage, you receive all the money from the financing immediately and begin paying interest on that amount from day one. This is not the most desirable outcome for a large-scale renovation or remodel. If you undertake a significant addition to your home you need time to go through the planning, permitting and specification phase of the project before building actually commences. This process often takes many months.
If you are planning on financing this upfront work with money from your home equity using a second mortgage would require you to pay interest on the full amount borrowed. With a HELOC you can draw little amounts at a time to pay for related expenses. Interest is only owed on the money borrowed.
In these types of situations a HELOC may save you money over the long run, as you are only charged interest on the money you borrow. However, once the project is complete and you anticipate no future withdrawals on your HELOC; converting to a fixed-rate allows you to keep your monthly payments fixed for the duration of the repayment period. This removes your exposure to jumps in the prime interest rate, and the concomitant increases in monthly payments.
Scenario 2
People also convert their HELOCs in to a fixed-rate loan once they’ve used the balance of their home equity line. Similar to the end state of scenario 1, once the HELOC is tapped out it makes sense to protect yourself from the exposure of rising interest rates. Converting the HELOC to a fixed-rate loan accomplishes that nicely.
Scenario 3
If interest rates begin to rise quickly and you have no current need for your equity line, converting to a fixed-rate loan can create dramatic monthly savings when compared to letting the interest rate float. This strategy makes sense usually under the following conditions:
You have multiple conversions available on your line.
You are able to continue to use the line after converting the currently-owed balance to a fixed-rate
If your line has these options, then converting the currently-owed balance to a fixed rate can provide you with stable monthly payments, while still maintaining access to your equity for future expenses.
Using the Convertible HELOC as a First Mortgage
Here is where convertible HELOCs get interesting; especially in a higher-rate environment like the one we are currently facing in the housing market. Let’s take the specific example of a home owner who maintains a property worth $1,000,000; a common scenario along the California coast. If they purchased the home within the last five years, or have refinanced in the last five years, they more-than-likely hold some type of jumbo, Alt-A 1st mortgage (or 1st and 2nd combo). Jumbo mortgages are anything over $417,000, the conforming limits for Fannie Mae and Freddie Mac purchase. Alt-A mortgages had low rates and loose qualifying guidelines during the past five years, making it easy for people owning expensive properties to find inexpensive financing. The mortgage market has changed dramatically in the last few months.
The current mortgage market for jumbo and Alt-A loans has been priced with a much higher premium to interest rate lately as the secondary mortgage market has balked at high-balance home loans. A jumbo loan in 2005 that was 6% is now 8% - a huge increase when considering the large loan amounts associated with high-end properties. On a million-dollar loan this change represents a 23% increase to the monthly payment. This has effectively locked high-end property owners out of the refinance or purchase markets.
It is especially painful to jumbo loan holders who are also in adjustable rate mortgages (ARMs) coming in to their adjustment period. Many Alt-A loans were mid-term ARMs with 3, 5 and 7 year terms. These loans face pricey payment adjustment schedules which can make a once affordable mortgage quickly unaffordable.
Here is where our friend the convertible HELOC comes in to play. Home owners facing the specter of an ARM reset in a jumbo loan can use the convertible HELOC in two ways to help reduce their mortgage payments. I call these the Two Gems of Convertible HELOCs.
Gem 1
Take the HELOC in first position as a 1st mortgage. Some convertible HELOCs convert to a much lower interest rate than their 1st mortgage jumbo competitors. Ask your mortgage professional what the going rate is on the converted loan and you may be surprised to find that it is nearly a full point lower than the going jumbo interest rate on the same loan. Continuing our $1,000,000 loan example from above; this 1% interest rate difference results in a 9% monthly payment savings. This savings can be the difference between affordable mortgage option and unaffordable mortgage option.
The reason this exists is that some HELOCs convert to the going 30-year fixed rate, regardless of other factors. Now this type of program is not available at every bank, if you can find a bank that does-you now have a viable jumbo loan alternative to the pricey 1st mortgage products available today.
This does carry some caveats. You must understand the conversion options, the rate that you’d be converting to, and any other limitations prior to signing on for the HELOC. Some banks make their conversions overly expensive to keep this type of financing from cannibalizing their jumbo loan financing pipeline. You also need to understand that you may have to carry the higher interest rate of the HELOC for a period of up to a week after signing loan documents. This requires that you have a very trusting relationship with the mortgage professional you work with; and that you verify all aspects of the HELOC documents carefully to ensure your conversion options match what you discussed during the loan process.
Gem 2
Instead of taking the whole loan balance as a 1st position HELOC, take a conforming 1st mortgage up to $417,000 and then take the remaining as a convertible HELOC. Once you sign the loan documents you can convert the HELOC to a fixed rate and achieve a blended interest rate (the effective interest rate of your 1st and 2nd mortgage combined) that can also be up to a point lower than the going jumbo loan rate.
In order to calculate the blended rate of the two mortgages use the following equations:
(1st Mortgage / Total Mortgage Amount) x 1st mortgage interest rate = Rate 1
(2nd Mortgage / Total Mortgage Amount) x 2nd mortgage interest rate = Rate 2
Rate 1 + Rate 2 = Blended Rate
An example:
1st Mortgage: $417,000
2nd Mortgage: $583,000
1st Mortgage rate: 6.5%
2nd Mortgage rate (after conversion): 8.5%
(417,000 / 1,000,000) x 6.5 = 2.71%
(583,000 / 1,000,000) x 8.5 = 4.96%
Blended rate: 7.67%
Conclusion
The convertible HELOC is an important financial tool for any homeowner; especially homeowners who are in jumbo loan products. As detailed in the example above a convertible HELOC can provide an avenue of lower-cost financing than the current Alt-A and jumbo loan markets currently offer. There are some definite caveats so it is important that you speak with a mortgage professional who can expertly match your current financing needs with the best combination of products available on the market today.
Convertible HELOCs
True no-cost HELOCs
Equity protection & repositioning
Today, we’ll look at the important role that convertible home equity lines of credit can play in helping reduce monthly mortgage payments as well as protect against the payment shock so often associated with adjustable rate mortgages. If you are a luxury property owner or a Realtor who services the luxury market-be sure to read to the end for my Two Gems of Convertible HELOCs that are just for you.
Home Equity Lines of Credit BASICS
Before we get in to the important features we need to first cover some basic ground for those that are not entirely familiar with home equity lines of credit. A HELOC is a loan secured by your home that differs from a traditional home loan in the following ways:
It is tied to the prime interest rate, which means the interest rate can fluctuate up and down as the prime rate changes. Prime is tied to the Fed Funds rate; which dictate the short-term interest rates available on debt such as HELOCs, credit cards, and other short-term debt.
HELOCs are made up of two parts, the “line amount” which is the amount of money that you can borrow on the HELOC; and the “draw amount” which is the amount of money you initially borrow when you open the HELOC.
You can withdraw money for a set period of time after opening the line (usually 10-15 years) at any point via a credit card or checks tied to your HELOC up to the approved line amount.
You only pay interest on the amount borrowed, regardless of the line amount. With a traditional mortgage you begin paying interest on the entire amount right away.
Your minimum monthly payments are initially calculated as interest only for the first ten years. This allows you to either pay down the line, or simply make the interest payments to keep the line in good standing.
HELOCs are usually based on a 25 year repayment term. The first 10 years are interest only, the remaining 15 years principal and interest are owed to pay off the line.
May be convertible to a fixed rate mortgage one or more times during the life of the loan term. A small fee may be charged to convert.
Home equity lines of credit are often used as an alternative to a second mortgage. In the industry we refer to them 2nd liens or being in “2nd position” to refer to their subordinate position to the primary “1st” mortgage. However, HELOCs can also be used in first position, as an alternative to first mortgage products.
Convertible Home Equity Lines of Credit
A convertible HELOC refers to a home equity line of credit product that can be converted from an adjustable rate HELOC in to a fixed-rate mortgage. While each bank offers a slightly different type of convertible product most have similar characteristics.
Can convert from HELOC tied to the ever-adjusting prime interest rate to a fixed-rate mortgage (typically 30-year fixed).
Can continue to use remaining credit available above and beyond the fixed amount.
Done over the phone with a customer service representative, the conversion goes in to effect immediately.
No additional qualifying is required. No underwriting, credit review or asset/income documentation needed.
A small fee (~$250) may or may not be charged for the conversion.
Multiple conversions may be allowed. Common conversion allowances are 1, 2, and 5 times.
Conversion is to the prevailing fixed interest rate available through the bank (or some rate based on the prevailing rate + a premium for conversion).
Questions to Ask Before Committing to a Convertible HELOC
Is there a charge for converting to a fixed-rate mortgage? What is that cost?
Is there an ability to continue to use the remaining credit available on the line after a conversion?
Is the conversion to a 30-year fixed term?
Is the payment on the converted line interest only or principle and interest?
How many times can I convert?
How often can I convert?
Some Typical Uses of Convertible HELOCs
Scenario 1
People use a convertible HELOC to complete a very specific project that may take time to accomplish. Consider a lengthy home improvement project. By taking a 2nd mortgage, you receive all the money from the financing immediately and begin paying interest on that amount from day one. This is not the most desirable outcome for a large-scale renovation or remodel. If you undertake a significant addition to your home you need time to go through the planning, permitting and specification phase of the project before building actually commences. This process often takes many months.
If you are planning on financing this upfront work with money from your home equity using a second mortgage would require you to pay interest on the full amount borrowed. With a HELOC you can draw little amounts at a time to pay for related expenses. Interest is only owed on the money borrowed.
In these types of situations a HELOC may save you money over the long run, as you are only charged interest on the money you borrow. However, once the project is complete and you anticipate no future withdrawals on your HELOC; converting to a fixed-rate allows you to keep your monthly payments fixed for the duration of the repayment period. This removes your exposure to jumps in the prime interest rate, and the concomitant increases in monthly payments.
Scenario 2
People also convert their HELOCs in to a fixed-rate loan once they’ve used the balance of their home equity line. Similar to the end state of scenario 1, once the HELOC is tapped out it makes sense to protect yourself from the exposure of rising interest rates. Converting the HELOC to a fixed-rate loan accomplishes that nicely.
Scenario 3
If interest rates begin to rise quickly and you have no current need for your equity line, converting to a fixed-rate loan can create dramatic monthly savings when compared to letting the interest rate float. This strategy makes sense usually under the following conditions:
You have multiple conversions available on your line.
You are able to continue to use the line after converting the currently-owed balance to a fixed-rate
If your line has these options, then converting the currently-owed balance to a fixed rate can provide you with stable monthly payments, while still maintaining access to your equity for future expenses.
Using the Convertible HELOC as a First Mortgage
Here is where convertible HELOCs get interesting; especially in a higher-rate environment like the one we are currently facing in the housing market. Let’s take the specific example of a home owner who maintains a property worth $1,000,000; a common scenario along the California coast. If they purchased the home within the last five years, or have refinanced in the last five years, they more-than-likely hold some type of jumbo, Alt-A 1st mortgage (or 1st and 2nd combo). Jumbo mortgages are anything over $417,000, the conforming limits for Fannie Mae and Freddie Mac purchase. Alt-A mortgages had low rates and loose qualifying guidelines during the past five years, making it easy for people owning expensive properties to find inexpensive financing. The mortgage market has changed dramatically in the last few months.
The current mortgage market for jumbo and Alt-A loans has been priced with a much higher premium to interest rate lately as the secondary mortgage market has balked at high-balance home loans. A jumbo loan in 2005 that was 6% is now 8% - a huge increase when considering the large loan amounts associated with high-end properties. On a million-dollar loan this change represents a 23% increase to the monthly payment. This has effectively locked high-end property owners out of the refinance or purchase markets.
It is especially painful to jumbo loan holders who are also in adjustable rate mortgages (ARMs) coming in to their adjustment period. Many Alt-A loans were mid-term ARMs with 3, 5 and 7 year terms. These loans face pricey payment adjustment schedules which can make a once affordable mortgage quickly unaffordable.
Here is where our friend the convertible HELOC comes in to play. Home owners facing the specter of an ARM reset in a jumbo loan can use the convertible HELOC in two ways to help reduce their mortgage payments. I call these the Two Gems of Convertible HELOCs.
Gem 1
Take the HELOC in first position as a 1st mortgage. Some convertible HELOCs convert to a much lower interest rate than their 1st mortgage jumbo competitors. Ask your mortgage professional what the going rate is on the converted loan and you may be surprised to find that it is nearly a full point lower than the going jumbo interest rate on the same loan. Continuing our $1,000,000 loan example from above; this 1% interest rate difference results in a 9% monthly payment savings. This savings can be the difference between affordable mortgage option and unaffordable mortgage option.
The reason this exists is that some HELOCs convert to the going 30-year fixed rate, regardless of other factors. Now this type of program is not available at every bank, if you can find a bank that does-you now have a viable jumbo loan alternative to the pricey 1st mortgage products available today.
This does carry some caveats. You must understand the conversion options, the rate that you’d be converting to, and any other limitations prior to signing on for the HELOC. Some banks make their conversions overly expensive to keep this type of financing from cannibalizing their jumbo loan financing pipeline. You also need to understand that you may have to carry the higher interest rate of the HELOC for a period of up to a week after signing loan documents. This requires that you have a very trusting relationship with the mortgage professional you work with; and that you verify all aspects of the HELOC documents carefully to ensure your conversion options match what you discussed during the loan process.
Gem 2
Instead of taking the whole loan balance as a 1st position HELOC, take a conforming 1st mortgage up to $417,000 and then take the remaining as a convertible HELOC. Once you sign the loan documents you can convert the HELOC to a fixed rate and achieve a blended interest rate (the effective interest rate of your 1st and 2nd mortgage combined) that can also be up to a point lower than the going jumbo loan rate.
In order to calculate the blended rate of the two mortgages use the following equations:
(1st Mortgage / Total Mortgage Amount) x 1st mortgage interest rate = Rate 1
(2nd Mortgage / Total Mortgage Amount) x 2nd mortgage interest rate = Rate 2
Rate 1 + Rate 2 = Blended Rate
An example:
1st Mortgage: $417,000
2nd Mortgage: $583,000
1st Mortgage rate: 6.5%
2nd Mortgage rate (after conversion): 8.5%
(417,000 / 1,000,000) x 6.5 = 2.71%
(583,000 / 1,000,000) x 8.5 = 4.96%
Blended rate: 7.67%
Conclusion
The convertible HELOC is an important financial tool for any homeowner; especially homeowners who are in jumbo loan products. As detailed in the example above a convertible HELOC can provide an avenue of lower-cost financing than the current Alt-A and jumbo loan markets currently offer. There are some definite caveats so it is important that you speak with a mortgage professional who can expertly match your current financing needs with the best combination of products available on the market today.
5 Ways to Use Your Home Equity Line of Credit
For most of us our home is our most valuable asset. When a large financial need arises, you can make this asset work for you by securing a home equity loan or line of credit. There are several benefits of a home equity line of credit. For example, this type of loan gives you access to a lump sum of cash for big ticket expenses like home renovations, the purchase of a car or college education. In many cases, the interest is tax deductible.
Sponsors (article continues below)
Home equity loans and lines of credit offer you the flexibility you need to meet a variety of financial needs. If you have an ongoing project or are not entirely sure how much your project will require, you might apply for a home equity line of credit. You can access loan funds via check or a special debit card as the need arises. If the project expenses are more fixed you may choose a home equity loan, which makes available a one time lump sum that can be used for any of a number of expenses. Following are some of the most popular uses for your home equity loan.
* Bill consolidation - credit card spending is on the rise. In fact, in recent years spending has outpaced saving and the average American carries nearly $10,000 in credit card debt. Using a home equity loan to bring your credit cards to a zero balance can save you thousands of dollars, especially when you consider how much interest you might accrue paying only the minimum on high balances each month. If you choose a home equity loan to pay off your credit cards be very careful to then use cash for most or all of your expenses. If not, you might find yourself with the burden of paying new credit card debts in addition to loan payments. Don't forget a home equity loan is secured by your home. If you fail to repay the loan as agreed you run the risk of foreclosure.
* Education - Most parents want to help their children meet educational expenses, but let's face it, with so many other expenses it can be tough. A home equity loan or line of credit gives you access to the money you need to help your with tuition and other educational expenses.
* Renovation or remodeling projects - Your home is probably your greatest investment. A home equity loan or line of credit can help you protect and build on your home's value by completing renovations. Your loan can also make it possible to add that second bathroom or home theatre you have been dreaming of, or even that gourmet kitchen.
* Travel - The vacation of a lifetime awaits. Perhaps you have always dreamed of traveling to Africa or China. Your home can be your ticket. Home equity loans can be used for just about anything you can imagine and the trip you have always dreamed of may be the perfect way to celebrate a 50th birthday or silver anniversary.
* Buy a new car - Using a home equity loan can actually save you money when buying a car. A home equity loan can make it possible for you to approach the dealer with the full amount of the sticker price in hand giving you more power to negotiate and retain incentives. You may also save significantly off of dealer financing interest rates.
Home equity lines of credit make it financially possible to do more of the things that are important to you. These loans can be an important part of building a strong financial foundation for you and your family. But you must proceed with caution. Home equity loans are secured by your home. If you fail to honor the terms of the loan agreement, the lender may exercise the legal option of repossessing your property to cure the default. You could lose your home in as little as 5 weeks in some states. It is important to have a repayment plan you are comfortable with and to understand the laws in your state before you agree to the loan terms. A home equity loan should help you improve your financial picture, not risk homelessness.
Sponsors (article continues below)
Home equity loans and lines of credit offer you the flexibility you need to meet a variety of financial needs. If you have an ongoing project or are not entirely sure how much your project will require, you might apply for a home equity line of credit. You can access loan funds via check or a special debit card as the need arises. If the project expenses are more fixed you may choose a home equity loan, which makes available a one time lump sum that can be used for any of a number of expenses. Following are some of the most popular uses for your home equity loan.
* Bill consolidation - credit card spending is on the rise. In fact, in recent years spending has outpaced saving and the average American carries nearly $10,000 in credit card debt. Using a home equity loan to bring your credit cards to a zero balance can save you thousands of dollars, especially when you consider how much interest you might accrue paying only the minimum on high balances each month. If you choose a home equity loan to pay off your credit cards be very careful to then use cash for most or all of your expenses. If not, you might find yourself with the burden of paying new credit card debts in addition to loan payments. Don't forget a home equity loan is secured by your home. If you fail to repay the loan as agreed you run the risk of foreclosure.
* Education - Most parents want to help their children meet educational expenses, but let's face it, with so many other expenses it can be tough. A home equity loan or line of credit gives you access to the money you need to help your with tuition and other educational expenses.
* Renovation or remodeling projects - Your home is probably your greatest investment. A home equity loan or line of credit can help you protect and build on your home's value by completing renovations. Your loan can also make it possible to add that second bathroom or home theatre you have been dreaming of, or even that gourmet kitchen.
* Travel - The vacation of a lifetime awaits. Perhaps you have always dreamed of traveling to Africa or China. Your home can be your ticket. Home equity loans can be used for just about anything you can imagine and the trip you have always dreamed of may be the perfect way to celebrate a 50th birthday or silver anniversary.
* Buy a new car - Using a home equity loan can actually save you money when buying a car. A home equity loan can make it possible for you to approach the dealer with the full amount of the sticker price in hand giving you more power to negotiate and retain incentives. You may also save significantly off of dealer financing interest rates.
Home equity lines of credit make it financially possible to do more of the things that are important to you. These loans can be an important part of building a strong financial foundation for you and your family. But you must proceed with caution. Home equity loans are secured by your home. If you fail to honor the terms of the loan agreement, the lender may exercise the legal option of repossessing your property to cure the default. You could lose your home in as little as 5 weeks in some states. It is important to have a repayment plan you are comfortable with and to understand the laws in your state before you agree to the loan terms. A home equity loan should help you improve your financial picture, not risk homelessness.
What Is A Home Equity Line of Credit?
What Is A Home Equity Line of Credit?
[May 16, 2008.]
Home owners have several options open to them when they find themselves in need of cash. Since the home is one of the greatest assets anyone will ever have these options often involve using the home as collateral for the loan. These loans come in different forms and are called by different names depending on the area and location.
One of these loans is the Home Equity Line of Credit which is quickly replacing mortgages as a way of securing a loan. The reason for this shift is that Home Equity Line of Credit looks a bit better on Credit Reports then mortgages. Home Equity Lines of Credit work much in the same way as home mortgages or deeds of trust. In both cases the home owner takes a loan out from a bank or other institution which places a lien on the property. The only real difference is that the home owner does not get the total sum of the loan upfront. Instead, the home owner will be able to take out increments of the total loan amount during the term of the loan. Many compare this with a credit card expect that the home has a lien placed upon it and if you are unable to pay the loan back then the property will undergo foreclosure.
To determine your credit limit for the Home Equity Line of Credit the lender will look at your financial history including your credit report and rating. They will also review your income, assets, and whatever debt you may already have. When approved, you and the lender will get together to draw up a plan which will include what the credit limit will be and how long the draw period will be. The interest rate on the Home Equity Line of Credit is often based on the Annual Percentage Rate and is usually not fixed so it is pretty much guaranteed to go up on occasion. There will be limitations and restrictions placed on the line of credit such as when and how much you can draw on it so be sure to understand the terms and conditions fully.
Reasons for taking a Home Equity Line of Credit are similar to the reasons why people take out mortgages. The most popular reason is emergencies such as sudden illnesses or home repairs as a result from floods or other natural disasters. Other reasons include car repairs, educational purposes, weddings, and even vacations.
Repayment of the Home Equity Line of Credit can take place during the life of the loan or in one lump sum at the end of the period. During the life of the loan it is possible that you will only be required to pay the interest every month. While this may have short term benefits you must remember that at the end you are responsible for paying off the entire loan. Take this into consideration as you think about whether or not you should use a line of credit to pay for expenses. You will also need to be aware that the interest rates are variable and will change during the life of the loan this will mean an increase in the monthly payments. If you are unable to pay the loan off you will loose your home.
Home Equity Line of Credit is a great option for anyone that may not need a huge sum of money upfront or that would rather not have the stigma of a mortgage on their credit report. Whatever the case you will need to keep up with the monthly payments just like with any other loan or you run the risk of loosing your home.
[May 16, 2008.]
Home owners have several options open to them when they find themselves in need of cash. Since the home is one of the greatest assets anyone will ever have these options often involve using the home as collateral for the loan. These loans come in different forms and are called by different names depending on the area and location.
One of these loans is the Home Equity Line of Credit which is quickly replacing mortgages as a way of securing a loan. The reason for this shift is that Home Equity Line of Credit looks a bit better on Credit Reports then mortgages. Home Equity Lines of Credit work much in the same way as home mortgages or deeds of trust. In both cases the home owner takes a loan out from a bank or other institution which places a lien on the property. The only real difference is that the home owner does not get the total sum of the loan upfront. Instead, the home owner will be able to take out increments of the total loan amount during the term of the loan. Many compare this with a credit card expect that the home has a lien placed upon it and if you are unable to pay the loan back then the property will undergo foreclosure.
To determine your credit limit for the Home Equity Line of Credit the lender will look at your financial history including your credit report and rating. They will also review your income, assets, and whatever debt you may already have. When approved, you and the lender will get together to draw up a plan which will include what the credit limit will be and how long the draw period will be. The interest rate on the Home Equity Line of Credit is often based on the Annual Percentage Rate and is usually not fixed so it is pretty much guaranteed to go up on occasion. There will be limitations and restrictions placed on the line of credit such as when and how much you can draw on it so be sure to understand the terms and conditions fully.
Reasons for taking a Home Equity Line of Credit are similar to the reasons why people take out mortgages. The most popular reason is emergencies such as sudden illnesses or home repairs as a result from floods or other natural disasters. Other reasons include car repairs, educational purposes, weddings, and even vacations.
Repayment of the Home Equity Line of Credit can take place during the life of the loan or in one lump sum at the end of the period. During the life of the loan it is possible that you will only be required to pay the interest every month. While this may have short term benefits you must remember that at the end you are responsible for paying off the entire loan. Take this into consideration as you think about whether or not you should use a line of credit to pay for expenses. You will also need to be aware that the interest rates are variable and will change during the life of the loan this will mean an increase in the monthly payments. If you are unable to pay the loan off you will loose your home.
Home Equity Line of Credit is a great option for anyone that may not need a huge sum of money upfront or that would rather not have the stigma of a mortgage on their credit report. Whatever the case you will need to keep up with the monthly payments just like with any other loan or you run the risk of loosing your home.
Monday, June 2, 2008
Should You Get A Home Equity Loan When Refinancing?
Among the most economical lending solution available today are home equity loans and home equity lines of credit. Depending on your personal financial situation, some of the interest can be used as a tax deduction. They are generally flexible and generally offer you the best rates available. There are a lot of advantages to a home equity loan. However, be sure to refinance with extreme caution.
There are two different types of home equity loans. The actual loan usually has a fixed rate with a precise period of time in which the loan needs to be paid off. Also fixed is the payment. This type of loan is ideal for someone who has a precise amount in mind. When consolidating your debts, such as student loans, credit cards, car loans or doing some home improvements, a homeowner will obtain a home equity loan to consolidate their entire payments inro one easy to pay bill. Often times, this creates a lower overall monthly payment.
A more flexible option is a home equity line of credit. This is an open ended loan meaning the payment and rate usually tends to be lower and is variable. A line of credit is generally used like a credit card, with tax benefits. Interest is only paid on the portion of the line you use. The rest is available for when and if you need it. Whenever you make a payment, that portion that is applied to the principle and is then available to use again if need be. Some lenders will offer a card for easier access. This option is great for when you do need to use the money immediately or would like to have the flexibility to keep using the money without going through the loan process over and over again.
If you have equity left over, when you refinance your current mortgage, often times you will be offered a home equity line of credit or home equity loan. If you have other debts that are above and beyond your original mortgage, a good way to go is a home equity loan. You are probably wondering why you wouldn’t include all of your debt in your original loan. Well, often times, in order to keep the loan amounts under 80%, debt is split into two different loans. This allows people to take advantage of the best rate available. If you are able to keep the loan amount under 80% of the home appraisal value, then you can easily avoid paying Private Mortgage Insurance, or PMI.
Whenever you do not have a need for a second loan when you are refinancing, you can then just put the money towards a line of credit. It is a good thing to have, should an emergency arise. When the need arises, the money is ready for you to use. This will save you the hassle of going through the entire loan process time and time again.
Another great benefit is the loan company can simply use the same credit inquiry for this loan that they used for the first loan. One note of precaution though, a line of credit usually has an annual fee attached to it. Be sure to ask your bank about specials they may be running in order to offset the cost. Sometimes they are willing to negotiate with you so that you will take the offer.
As you can clearly see, there are a lot of benefits to both a home equity loan and a home equity line of credit. Before making a decision, be sure to weigh all of your options. So that you are able to make a more informed decision, talk about the cost and ask if there are any hidden fees
Joshua Suffie is the expert behind the website www.refinancingright.com http://www.refinancingright.com Mortgages are a cut throat industry. Our information will give you the upfront knowledge to deal competently with mortgage brokers and get the best deal possible. Our site is www.refinancingright.com http://www.refinancingright.com
Technology News
Heavy Equipment & Trailers
Oregon Hotels & Motels
Clifford the Big Red Dog Childrens Toys
Televisions CRT Projection TVs Sale
Computer Mice, Computer Mouses
This entry was posted on Sunday, June 1st, 2008 at 9:20 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
There are two different types of home equity loans. The actual loan usually has a fixed rate with a precise period of time in which the loan needs to be paid off. Also fixed is the payment. This type of loan is ideal for someone who has a precise amount in mind. When consolidating your debts, such as student loans, credit cards, car loans or doing some home improvements, a homeowner will obtain a home equity loan to consolidate their entire payments inro one easy to pay bill. Often times, this creates a lower overall monthly payment.
A more flexible option is a home equity line of credit. This is an open ended loan meaning the payment and rate usually tends to be lower and is variable. A line of credit is generally used like a credit card, with tax benefits. Interest is only paid on the portion of the line you use. The rest is available for when and if you need it. Whenever you make a payment, that portion that is applied to the principle and is then available to use again if need be. Some lenders will offer a card for easier access. This option is great for when you do need to use the money immediately or would like to have the flexibility to keep using the money without going through the loan process over and over again.
If you have equity left over, when you refinance your current mortgage, often times you will be offered a home equity line of credit or home equity loan. If you have other debts that are above and beyond your original mortgage, a good way to go is a home equity loan. You are probably wondering why you wouldn’t include all of your debt in your original loan. Well, often times, in order to keep the loan amounts under 80%, debt is split into two different loans. This allows people to take advantage of the best rate available. If you are able to keep the loan amount under 80% of the home appraisal value, then you can easily avoid paying Private Mortgage Insurance, or PMI.
Whenever you do not have a need for a second loan when you are refinancing, you can then just put the money towards a line of credit. It is a good thing to have, should an emergency arise. When the need arises, the money is ready for you to use. This will save you the hassle of going through the entire loan process time and time again.
Another great benefit is the loan company can simply use the same credit inquiry for this loan that they used for the first loan. One note of precaution though, a line of credit usually has an annual fee attached to it. Be sure to ask your bank about specials they may be running in order to offset the cost. Sometimes they are willing to negotiate with you so that you will take the offer.
As you can clearly see, there are a lot of benefits to both a home equity loan and a home equity line of credit. Before making a decision, be sure to weigh all of your options. So that you are able to make a more informed decision, talk about the cost and ask if there are any hidden fees
Joshua Suffie is the expert behind the website www.refinancingright.com http://www.refinancingright.com Mortgages are a cut throat industry. Our information will give you the upfront knowledge to deal competently with mortgage brokers and get the best deal possible. Our site is www.refinancingright.com http://www.refinancingright.com
Technology News
Heavy Equipment & Trailers
Oregon Hotels & Motels
Clifford the Big Red Dog Childrens Toys
Televisions CRT Projection TVs Sale
Computer Mice, Computer Mouses
This entry was posted on Sunday, June 1st, 2008 at 9:20 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Sunday, June 1, 2008
Shift to Reverse
By Donald Jay Korn
June 1, 2008
¦AdvertisementAs the population ages, financial planning is moving from the age of accumulation into the dawn of distribution. Planners explore the nuances of how to tap a portfolio in retirement. Insurance companies promote the virtues of immediate annuities as a way to lock in lifelong cash flow.
Insurers are now searching for alternative ways to turn equity into income, and some are turning to a product that many planners have previously ignored: reverse mortgages. Despite the housing downturn, many major insurers see these mortgages as the next sure thing. MetLife Bank added reverse mortgages to its product portfolio in 2007. Early in 2008, the company acquired EverBank Reverse Mortgage (formerly BNY Mortgage, when it was co-owned by the Bank of New York).
"We expect to see a growing market for reverse mortgages," predicts Dan DeKeizer, vice-president of MetLife Retirement Strategies Group. "Baby boomers, who are moving into their retirement years now, are used to looking to home equity to maintain their lifestyle."
Growth Spurt
Recent statistics on reverse mortgages may help explain why MetLife is so upbeat. "About 85% of reverse mortgages are home equity conversion mortgages, known as HECMs, which are guaranteed by the federal government," says Tyler Kraemer of Kraemer, Kendall & Benson, a law firm in Colorado Springs, Colo. The number of reported HECMs grew from a minuscule 7,800 in fiscal 2001 to 107,000 in fiscal 2007. For the first half of fiscal 2008 (through March), while housing values fell and credit markets staggered, HECMs maintained the record pace of 2007, with 55,000 approvals. Of all HECMs now outstanding, 73% were issued since October 2005.
Current market developments may take reverse mortgage numbers to new highs, according to Kraemer, who is co-author, with his wife, Tammy Kraemer, of The Complete Guide to Reverse Mortgages: Turn Your Home Equity into Instant Income! "Traditional lenders are focusing more marketing energy on reverse mortgages as an alternative to the traditional mortgage market, which is in a slump," he says.
In addition, in today's market seniors who might have sold a house to raise cash may not be able to get the price they expected from the sale. "Such homeowners are more likely to consider a reverse mortgage," Kraemer says. "Rising healthcare costs also increase the need for reverse mortgages, as does the poor financial performance of many people's retirement accounts in today's difficult stock market environment."
Red Flags
As demand for reverse mortgages increases, along with lenders' marketing efforts, many planners express caution and skepticism. "Reverse mortgages have enormous fees and should probably be avoided when possible," says Bobbie Munroe, who heads Fraser Financial in Atlanta. Nevertheless, she is now working with a client who might take out a reverse mortgage in the future.
John LeBlanc, a principal at Back Bay Financial Group in Boston, agrees that reverse mortgages are expensive. In addition, he says, "the amount that you can obtain is generally smaller than consumers expect, especially in the Northeast, where the amount a person can borrow is relatively small in relation to the value of the property."
With a HECM, the property value on which a home loan can be based is capped at $362,790 or lower, depending on location. Moreover, Kraemer points out, "today's lower home values mean lower loan amounts, because one of the factors in determining the amount of a reverse mortgage loan is the appraised value of the home."
To help decide whether a reverse mortgage makes sense, planners and borrowers need to know the basics. Reverse mortgages are secured by the equity in a principal residence. They may be taken as a lump sum, a line of credit or a stream of payments. "We are seeing many hybrid loans," DeKeizer says. "A borrower will take out some cash to pay off debts, bills and so on. The balance of the loan might be set up as a line of credit that grows over time."
Federally backed HECMs, the most common reverse mortgages, are available to homeowners who are 62 and older. Borrowers must have a home that is debt-free or nearly so in order to get these loans.
"HECMs are adjustable-rate, non-recourse loans that do not need to be repaid until the last surviving borrower dies, moves out or sells the home," Kraemer says. That's true even if the loan balance exceeds the home's value, he adds.
In some arrangements, cash flow will continue as long as the borrower is alive and occupying the home. The loan plus accumulated interest must be repaid when the owner dies or moves out of the house. In the majority of cases, the family will sell the home to raise cash for repayment.
Serving Septuagenarians
Given those ground rules, which clients might benefit from a reverse mortgage? Many experts feel the ideal reverse-mortgage candidate is someone in his or her mid-seventies who has substantial equity, plans to remain in the home for at least five years, and has no other source of needed cash Kraemer says.
Indeed, Munroe remembers discussing reverse mortgages with a 76-year-old client who lives with her 94-year-old partner in a $200,000 home that she owns free and clear. "The boyfriend pays her $1,400 a month for rent," Munroe explains. "My client's only other assets are a small annuity and a small amount of investments, while her only other income is a modest Social Security check. So when the boyfriend dies, she will be hard-pressed for income."
According to Munroe, the client had been approached by a reverse-mortgage salesman who was going door to door. "Thankfully she wasn't taken in and didn't sign on the dotted line right then and there," Munroe says. "For her, though, a reverse mortgage at some point in the future might be a good solution."
For now, things are on hold for Munroe's client; she doesn't need the money yet and isn't sure that she'll stay in her home much longer. She'll probably make a more lasting housing decision in the next few years.
"The current home is on multiple levels, so a change is probably in the works at some point," Munroe explains. "However, before we do anything, she will need to decide exactly what she does want in terms of housing."
Munroe would like to see this client wait until age 80 before taking a reverse mortgage. "Her payment would be higher then," she says. "At that time, we'll compare the benefits of the reverse mortgage versus selling and using the capital to pay rent and provide income."
This client's family has a history of longevity; her mother was 104 when she died. Since it's not unlikely that the client will live past her average life expectancy, a reverse mortgage with lifetime payouts may work well.
"Before choosing a reverse mortgage, we will certainly shop around for fees, payout and the company's ability to make the payments," Munroe says. "Hopefully, terms and conditions will become more consumer-friendly in the intervening years."
It's Better to Wait
Reverse mortgages are similar to immediate annuities in this respect: The longer one waits before originating the arrangement, the greater the amount of annual cash flow.
"An 80-year-old woman contacted me concerning using a reverse mortgage," says Carol Friedhoff, who heads Savvy Outcomes, a planning firm in Columbus, Ohio. "Her husband had died recently, and her income was cut in half due to pension and Social Security reductions. She wanted to live in her home for at least 10 more years and did not need to pass the home to her family."
After conferring with Friedhoff, this client chose to look into a Fannie Mae reverse mortgage. "With about $300,000 of equity in the home, she would receive approximately $800 per month," Friedhoff says. "Her adjustable rate would be 6% now, and her fees would be less than 4% of appraised value. When I spoke with this client recently, she told me she was planning to move forward with the reverse mortgage."
According to government statistics, the average age of HECM borrowers is 73. DeKeizer says that number may come down as boomers retire and tap home equity via reverse mortgages, but for now these loans tend to go to homeowners who are well into their Medicare years.
Scam Prevention
Products aimed at the elderly seem to lure predators, and that applies to reverse mortgages. "If you are interested in a reverse mortgage, beware of scam artists that charge thousands of dollars for information that is free from HUD," the U.S. Department of Housing & Urban Development warns elderly homeowners.
"Overly aggressive marketing by some lenders has led to situations in which seniors have been pressured into making bad decisions," Kraemer says. "As a result, regulators are starting to talk about the need to maintain and enhance existing consumer safeguards." Currently, he says, would-be borrowers must meet with a HUD-approved counselor before applying for a HECM.
Not only regulators but also legislators are eyeing reverse mortgages. Kraemer reports that both houses of Congress have passed versions of a bill that will replace the county-by-county loan limits with a single national loan limit, eliminate the cap on the number of HECMs that the Federal Housing Administration is authorized to insure, authorize HECMs for home purchase, broaden the types of qualifying properties, and limit HECM origination fees. Kraemer expects the House and Senate to finalize the bill soon.
These new regulations could be major changes, especially the idea that reverse mortgages can be used to purchase new homes, rather than requiring borrowers to age in place. "This provision, along with raising the loan limits and eliminating the cap on the number of HECMs that can be originated each year, will expand the market for reverse mortgages," Kraemer says. Limiting origination fees may also make the loans more appealing to borrowers.
All of these trends are converging to bring reverse mortgages into the mainstream—and into financial planners' potential plans for retired clients. But, warns Kraemer, "the planning that's involved in deciding whether a reverse mortgage is right for someone is surprisingly complex. You need to consider the origination fees as well as monthly servicing fees, the estimated term of the loan or the life span of the borrower, the borrower's financial needs over that time, the interest rate, the available loan amount and how the loan proceeds will be used."
A Fallback Income Stream
What's more, a reverse mortgage need never be consummated to play a valuable role in financial planning. Just the idea that one is available can keep clients on a recommended route.
"I remind my older, retired clients that they need to continue to bear the risks of the stock market with some of their retirement capital," says John Smartt, a CPA and RIA in Knoxville, Tenn. "I also tell them that if stocks go down and stay down for years, they will have two aces in the hole. The first ace is a reverse mortgage. Although a reverse mortgage will have high initial fees, there is no repayment obligation, and the money received won't be subject to taxes."
The second ace, according to Smartt, is an immediate annuity. As with reverse mortgages, the older a client is when making this arrangement, the more income he or she will receive. "This explanation helps clients to feel more comfortable taking stock market risk, even when-as in the past six months-stock markets don't look or act positively," Smartt says. "If it gets them off the sidelines, that's a positive outcome."
So far, Smartt says, stock markets have not dropped far enough or stayed down long enough that his clients have had to play these aces. Nevertheless, knowing they are there may enable people to stick with stocks long enough to realize the long-term performance that equities historically have provided.
June 1, 2008
¦AdvertisementAs the population ages, financial planning is moving from the age of accumulation into the dawn of distribution. Planners explore the nuances of how to tap a portfolio in retirement. Insurance companies promote the virtues of immediate annuities as a way to lock in lifelong cash flow.
Insurers are now searching for alternative ways to turn equity into income, and some are turning to a product that many planners have previously ignored: reverse mortgages. Despite the housing downturn, many major insurers see these mortgages as the next sure thing. MetLife Bank added reverse mortgages to its product portfolio in 2007. Early in 2008, the company acquired EverBank Reverse Mortgage (formerly BNY Mortgage, when it was co-owned by the Bank of New York).
"We expect to see a growing market for reverse mortgages," predicts Dan DeKeizer, vice-president of MetLife Retirement Strategies Group. "Baby boomers, who are moving into their retirement years now, are used to looking to home equity to maintain their lifestyle."
Growth Spurt
Recent statistics on reverse mortgages may help explain why MetLife is so upbeat. "About 85% of reverse mortgages are home equity conversion mortgages, known as HECMs, which are guaranteed by the federal government," says Tyler Kraemer of Kraemer, Kendall & Benson, a law firm in Colorado Springs, Colo. The number of reported HECMs grew from a minuscule 7,800 in fiscal 2001 to 107,000 in fiscal 2007. For the first half of fiscal 2008 (through March), while housing values fell and credit markets staggered, HECMs maintained the record pace of 2007, with 55,000 approvals. Of all HECMs now outstanding, 73% were issued since October 2005.
Current market developments may take reverse mortgage numbers to new highs, according to Kraemer, who is co-author, with his wife, Tammy Kraemer, of The Complete Guide to Reverse Mortgages: Turn Your Home Equity into Instant Income! "Traditional lenders are focusing more marketing energy on reverse mortgages as an alternative to the traditional mortgage market, which is in a slump," he says.
In addition, in today's market seniors who might have sold a house to raise cash may not be able to get the price they expected from the sale. "Such homeowners are more likely to consider a reverse mortgage," Kraemer says. "Rising healthcare costs also increase the need for reverse mortgages, as does the poor financial performance of many people's retirement accounts in today's difficult stock market environment."
Red Flags
As demand for reverse mortgages increases, along with lenders' marketing efforts, many planners express caution and skepticism. "Reverse mortgages have enormous fees and should probably be avoided when possible," says Bobbie Munroe, who heads Fraser Financial in Atlanta. Nevertheless, she is now working with a client who might take out a reverse mortgage in the future.
John LeBlanc, a principal at Back Bay Financial Group in Boston, agrees that reverse mortgages are expensive. In addition, he says, "the amount that you can obtain is generally smaller than consumers expect, especially in the Northeast, where the amount a person can borrow is relatively small in relation to the value of the property."
With a HECM, the property value on which a home loan can be based is capped at $362,790 or lower, depending on location. Moreover, Kraemer points out, "today's lower home values mean lower loan amounts, because one of the factors in determining the amount of a reverse mortgage loan is the appraised value of the home."
To help decide whether a reverse mortgage makes sense, planners and borrowers need to know the basics. Reverse mortgages are secured by the equity in a principal residence. They may be taken as a lump sum, a line of credit or a stream of payments. "We are seeing many hybrid loans," DeKeizer says. "A borrower will take out some cash to pay off debts, bills and so on. The balance of the loan might be set up as a line of credit that grows over time."
Federally backed HECMs, the most common reverse mortgages, are available to homeowners who are 62 and older. Borrowers must have a home that is debt-free or nearly so in order to get these loans.
"HECMs are adjustable-rate, non-recourse loans that do not need to be repaid until the last surviving borrower dies, moves out or sells the home," Kraemer says. That's true even if the loan balance exceeds the home's value, he adds.
In some arrangements, cash flow will continue as long as the borrower is alive and occupying the home. The loan plus accumulated interest must be repaid when the owner dies or moves out of the house. In the majority of cases, the family will sell the home to raise cash for repayment.
Serving Septuagenarians
Given those ground rules, which clients might benefit from a reverse mortgage? Many experts feel the ideal reverse-mortgage candidate is someone in his or her mid-seventies who has substantial equity, plans to remain in the home for at least five years, and has no other source of needed cash Kraemer says.
Indeed, Munroe remembers discussing reverse mortgages with a 76-year-old client who lives with her 94-year-old partner in a $200,000 home that she owns free and clear. "The boyfriend pays her $1,400 a month for rent," Munroe explains. "My client's only other assets are a small annuity and a small amount of investments, while her only other income is a modest Social Security check. So when the boyfriend dies, she will be hard-pressed for income."
According to Munroe, the client had been approached by a reverse-mortgage salesman who was going door to door. "Thankfully she wasn't taken in and didn't sign on the dotted line right then and there," Munroe says. "For her, though, a reverse mortgage at some point in the future might be a good solution."
For now, things are on hold for Munroe's client; she doesn't need the money yet and isn't sure that she'll stay in her home much longer. She'll probably make a more lasting housing decision in the next few years.
"The current home is on multiple levels, so a change is probably in the works at some point," Munroe explains. "However, before we do anything, she will need to decide exactly what she does want in terms of housing."
Munroe would like to see this client wait until age 80 before taking a reverse mortgage. "Her payment would be higher then," she says. "At that time, we'll compare the benefits of the reverse mortgage versus selling and using the capital to pay rent and provide income."
This client's family has a history of longevity; her mother was 104 when she died. Since it's not unlikely that the client will live past her average life expectancy, a reverse mortgage with lifetime payouts may work well.
"Before choosing a reverse mortgage, we will certainly shop around for fees, payout and the company's ability to make the payments," Munroe says. "Hopefully, terms and conditions will become more consumer-friendly in the intervening years."
It's Better to Wait
Reverse mortgages are similar to immediate annuities in this respect: The longer one waits before originating the arrangement, the greater the amount of annual cash flow.
"An 80-year-old woman contacted me concerning using a reverse mortgage," says Carol Friedhoff, who heads Savvy Outcomes, a planning firm in Columbus, Ohio. "Her husband had died recently, and her income was cut in half due to pension and Social Security reductions. She wanted to live in her home for at least 10 more years and did not need to pass the home to her family."
After conferring with Friedhoff, this client chose to look into a Fannie Mae reverse mortgage. "With about $300,000 of equity in the home, she would receive approximately $800 per month," Friedhoff says. "Her adjustable rate would be 6% now, and her fees would be less than 4% of appraised value. When I spoke with this client recently, she told me she was planning to move forward with the reverse mortgage."
According to government statistics, the average age of HECM borrowers is 73. DeKeizer says that number may come down as boomers retire and tap home equity via reverse mortgages, but for now these loans tend to go to homeowners who are well into their Medicare years.
Scam Prevention
Products aimed at the elderly seem to lure predators, and that applies to reverse mortgages. "If you are interested in a reverse mortgage, beware of scam artists that charge thousands of dollars for information that is free from HUD," the U.S. Department of Housing & Urban Development warns elderly homeowners.
"Overly aggressive marketing by some lenders has led to situations in which seniors have been pressured into making bad decisions," Kraemer says. "As a result, regulators are starting to talk about the need to maintain and enhance existing consumer safeguards." Currently, he says, would-be borrowers must meet with a HUD-approved counselor before applying for a HECM.
Not only regulators but also legislators are eyeing reverse mortgages. Kraemer reports that both houses of Congress have passed versions of a bill that will replace the county-by-county loan limits with a single national loan limit, eliminate the cap on the number of HECMs that the Federal Housing Administration is authorized to insure, authorize HECMs for home purchase, broaden the types of qualifying properties, and limit HECM origination fees. Kraemer expects the House and Senate to finalize the bill soon.
These new regulations could be major changes, especially the idea that reverse mortgages can be used to purchase new homes, rather than requiring borrowers to age in place. "This provision, along with raising the loan limits and eliminating the cap on the number of HECMs that can be originated each year, will expand the market for reverse mortgages," Kraemer says. Limiting origination fees may also make the loans more appealing to borrowers.
All of these trends are converging to bring reverse mortgages into the mainstream—and into financial planners' potential plans for retired clients. But, warns Kraemer, "the planning that's involved in deciding whether a reverse mortgage is right for someone is surprisingly complex. You need to consider the origination fees as well as monthly servicing fees, the estimated term of the loan or the life span of the borrower, the borrower's financial needs over that time, the interest rate, the available loan amount and how the loan proceeds will be used."
A Fallback Income Stream
What's more, a reverse mortgage need never be consummated to play a valuable role in financial planning. Just the idea that one is available can keep clients on a recommended route.
"I remind my older, retired clients that they need to continue to bear the risks of the stock market with some of their retirement capital," says John Smartt, a CPA and RIA in Knoxville, Tenn. "I also tell them that if stocks go down and stay down for years, they will have two aces in the hole. The first ace is a reverse mortgage. Although a reverse mortgage will have high initial fees, there is no repayment obligation, and the money received won't be subject to taxes."
The second ace, according to Smartt, is an immediate annuity. As with reverse mortgages, the older a client is when making this arrangement, the more income he or she will receive. "This explanation helps clients to feel more comfortable taking stock market risk, even when-as in the past six months-stock markets don't look or act positively," Smartt says. "If it gets them off the sidelines, that's a positive outcome."
So far, Smartt says, stock markets have not dropped far enough or stayed down long enough that his clients have had to play these aces. Nevertheless, knowing they are there may enable people to stick with stocks long enough to realize the long-term performance that equities historically have provided.
Cassidy: How Silicon Valley families are downsizing their lives
By Mike Cassidy
Mercury News
We're past the whining and the gallows humor. This is real now.
Food, gas, you name it - it all gets more expensive by the day. At every income level, save perhaps the very rich, the pain is radiating far beyond the family Quicken ledger.
We've all read the stories about people trading SUVs for hybrids or selling their jewelry on eBay or cutting back on juicy steaks. That's the surface stuff - the chit-chat on the fringes of a conversation that is much deeper and going on all around us.
For the past month, I've been talking to families and individuals about how rising prices and falling home values are changing their lives. It turns out the Big Squeeze of 2008 is prompting not only changes in lifestyle but changes in thinking, too. What have we done with our lives? Why these choices? Did I pick the right career? The right place to live in the country or the world?
Everything is shifting
It all lined up for landscape architect Dirk Moyer and his wife, Katie Miller, back in 2005.
Miller was working her dream job at Stanford University, providing technology research and support for the School of Education. Moyer was running his own business, and the couple had just followed the conventional Silicon Valley wisdom by buying as much house as they could in Menlo Park.
They ended up with a 1,200-square-foot fixer-upper on busy Willow Road. Moyer and Miller, both 43, took on a big
mortgage and a home-equity line of credit to help with the rehab. They tightened the family budget - eliminating subscriptions and health-club memberships.
And then they watched as the economy stumbled, Moyer's business slumped and, most recently, Stanford gave Miller notice that her 80-percent-time job would be slashed to half-time.
"So we did 'Austerity 2006,' " Miller says, "and here we are in 2008 and looking to cut costs more."
There is something about this downturn that seems unfair - as if families made reasonable plans and took fiscal precautions, only to have an invisible hand raise the bar. It is not always a question of survival - though for some it is - but of discovering that working hard at good jobs is no longer enough to guarantee a comfortable life.
Miller and Moyer - who have a son, Sean, 6, and a daughter, Louisa, 4 - had already been drawing on a family inheritance that provided retirement and rainy-day savings - money that was meant to grow for the future. Spending it today feels imprudent, Miller says, and irresponsible.
Moyer says the family's income was just under $120,000 last year. The cut in Miller's hours will cost the family about $20,000.
It's easy to sit back and say they've got plenty - 100K, nice house, cute kids. And Miller and Moyer both talk repeatedly about how fortunate they are.
"Most people would laugh. What do you want?" Moyer hears them ask. "It just feels like we're chasing this American dream that's not really a dream. It's more like a nightmare."
Think of it this way: Moyer and Miller built a life based on Moyer's business as it was and Miller's hours as they were. Their life aspirations were fairly stock: Get married, have kids, buy a house. And now, everything is shifting underneath them.
"We're spending more than we're making, even with two good-paying jobs," Moyer says. "The math doesn't work."
In an odd way the bad math has given Miller and Moyer the freedom to re-examine almost everything they've done. The cockeyed calculus has led to big questions, chief among them: What the hell are we doing?
"A lot of the economic pressures that we in particular are under," Moyer says, "are self-imposed: the home we own, the cars we drive and the fact that we both have to work in order to support that, which means we have to have day care."
For Miller and Moyer, it's gone way past cutting out Whole Foods, buying less meat, considering ways to cut back on day care, consolidating errands. They are contemplating the "no-fear option": Sell the house and take to the road in a camper. Spend months traveling nationwide looking for a new home and then take the time to find jobs there.
"Quite frankly," Moyer says, "I'm ready for exploring the options.
"Staying put is still one," he says, "but I think it's becoming less of one."
Tipping point
I didn't set out to find the most desperate cases in economic hard times. Instead, I talked with people in diverse circumstances to get a sense of what sort of options they were considering in the face of uncertainty.
And what I found was a tipping point, a world where the price of beans is not the real issue, but rather a trigger for families who have much bigger questions on their minds.
I think of the single mother of four who opted for a home birth with no midwife in part to save on medical expenses.
"A lot of our medical care I've brought home," says Celestia Brown, a Berryessa neighborhood resident who's alternated between public assistance and work as a personal assistant. "I use the Internet a lot."
Or Sal and Michelle Alaimo, San Jose parents who don't believe in handouts, but would sure take one if it would mean their kids could again join the sports leagues they used to play in.
"All their friends do it," says Sal Alaimo, a butcher who picks up shifts between duties as a stay-at-home dad.
And even those well beyond middle class, like computer scientists Radha Chandika and Ravi Duvvuri, are discovering they've got it good, but not nearly as good as they once had it. Chandika and her husband, Duvvuri, moved to Silicon Valley in 1994 and joined the successful tech crowd.
By early 2007, they had two kids and a house in Cupertino. Duvvuri was a software architect at Blue Coat Systems, and Chandika was a software engineer at Google. Their household income was about $300,000.
Duvvuri left his job to start an Indian social-networking company with a friend and former business partner, reducing the family income by about half. He says he would have done it no matter the economic conditions, but with rising prices the family has cut spending more than they anticipated.
Duvvuri, who draws no salary, says he's concluded the Bay Area is no place to live as a family on one income. At the end of the year, he and Chandika plan to move their family back to India, where their lives and prospects will be better.
"I have more reasons to go back," he says, "than to stay."
But more than all that, the Big Squeeze has Chandika and Duvvuri thinking about how lucky they are and how difficult tough times must be for those who have much less.
Not enough hours
The increasing cost of food and fuel have Pablo Buenrostro and Victoria Aguirre grappling in a very real way with the idea that there are simply not enough hours in the day.
Buenrostro picked up a second job in February to try to keep up with increasing expenses. He typically works 12-plus-hour days, six days a week in the meat departments of two area groceries. The couple rents an addition to Aguirre's parents' house, where they live with their 14-month-old daughter. But they are still falling behind.
Sitting on the family's front porch as her mother, Maria Aguirre, grills beef for dinner, Victoria Aguirre says maybe Buenrostro will have to find a third job.
"How?" her mother asks. "The day only has 24 hours."
There aren't many expenses to cut when you don't spend much in the first place. So the knee-jerk solution is more time at work and more time apart.
"We hardly see each other now that he has a second job," Victoria Aguirre says. "On the weekend, I only see him between jobs."
Like many young couples, Buenrostro, 23, and Aguirre, 21, have dreams - a better life, a place of their own, a happy and healthy child. With that in mind, Aguirre spends her days taking accounting classes at the Center for Employment Training in San Jose.
And so in the afternoon when Buenrostro comes home between jobs, Aguirre is at school. When Buenrostro comes home after his evening shift, his baby is asleep.
"Hopefully, after I graduate and get my certificate and get a good job," Aguirre says, "as a family we'll be more stable."
Their struggle is a heroic one. More jobs, more education. They are ready to do what they have to do to make it. But sometimes it's hard to figure out just what it is they should do.
"We don't know right now a solution," Aguirre says.
In the meantime, the family is living on about $29,000 a year. They rely on the food bank at the Center for Employment Training and Aguirre's parents help with food and gas. Her parents also care for the baby, a girl named after Victoria, when her mother is at school and her father is working.
"My husband, he feels bad," Aguirre says. "He says, 'I wish we could pay your mom,' but we can't."
Aguirre has become an incredibly careful shopper. She knows where all the bargains are: It's FoodMaxx for milk, Lucky Seven for eggs, produce and soda - unless soda is on sale at Mercados Suvianda.
Buenrostro says his gas costs have increased by $100 a month for his commute to the Mi Pueblo in Hayward. He's started going longer between haircuts and has stopped sending money to his mother in Mexico as frequently as he once did. The couple now hauls the family's cans and bottles to recyclers to collect the deposit.
"He has a lot of pride," Maria Aguirre says of her son-in-law. "He has to take care of his family."
And so Buenrostro takes care of the family he never sees. It's just one more sliver of heartbreak in the face of the Big Squeeze of 2008.
--------------------------------------------------------------------------------
Read Mike Cassidy's Loose Ends blog at blogs.mercurynews.com/cassidy. Contact him at mcassidy@ mercurynews.com. or (408) 920-5536.
Mercury News
We're past the whining and the gallows humor. This is real now.
Food, gas, you name it - it all gets more expensive by the day. At every income level, save perhaps the very rich, the pain is radiating far beyond the family Quicken ledger.
We've all read the stories about people trading SUVs for hybrids or selling their jewelry on eBay or cutting back on juicy steaks. That's the surface stuff - the chit-chat on the fringes of a conversation that is much deeper and going on all around us.
For the past month, I've been talking to families and individuals about how rising prices and falling home values are changing their lives. It turns out the Big Squeeze of 2008 is prompting not only changes in lifestyle but changes in thinking, too. What have we done with our lives? Why these choices? Did I pick the right career? The right place to live in the country or the world?
Everything is shifting
It all lined up for landscape architect Dirk Moyer and his wife, Katie Miller, back in 2005.
Miller was working her dream job at Stanford University, providing technology research and support for the School of Education. Moyer was running his own business, and the couple had just followed the conventional Silicon Valley wisdom by buying as much house as they could in Menlo Park.
They ended up with a 1,200-square-foot fixer-upper on busy Willow Road. Moyer and Miller, both 43, took on a big
mortgage and a home-equity line of credit to help with the rehab. They tightened the family budget - eliminating subscriptions and health-club memberships.
And then they watched as the economy stumbled, Moyer's business slumped and, most recently, Stanford gave Miller notice that her 80-percent-time job would be slashed to half-time.
"So we did 'Austerity 2006,' " Miller says, "and here we are in 2008 and looking to cut costs more."
There is something about this downturn that seems unfair - as if families made reasonable plans and took fiscal precautions, only to have an invisible hand raise the bar. It is not always a question of survival - though for some it is - but of discovering that working hard at good jobs is no longer enough to guarantee a comfortable life.
Miller and Moyer - who have a son, Sean, 6, and a daughter, Louisa, 4 - had already been drawing on a family inheritance that provided retirement and rainy-day savings - money that was meant to grow for the future. Spending it today feels imprudent, Miller says, and irresponsible.
Moyer says the family's income was just under $120,000 last year. The cut in Miller's hours will cost the family about $20,000.
It's easy to sit back and say they've got plenty - 100K, nice house, cute kids. And Miller and Moyer both talk repeatedly about how fortunate they are.
"Most people would laugh. What do you want?" Moyer hears them ask. "It just feels like we're chasing this American dream that's not really a dream. It's more like a nightmare."
Think of it this way: Moyer and Miller built a life based on Moyer's business as it was and Miller's hours as they were. Their life aspirations were fairly stock: Get married, have kids, buy a house. And now, everything is shifting underneath them.
"We're spending more than we're making, even with two good-paying jobs," Moyer says. "The math doesn't work."
In an odd way the bad math has given Miller and Moyer the freedom to re-examine almost everything they've done. The cockeyed calculus has led to big questions, chief among them: What the hell are we doing?
"A lot of the economic pressures that we in particular are under," Moyer says, "are self-imposed: the home we own, the cars we drive and the fact that we both have to work in order to support that, which means we have to have day care."
For Miller and Moyer, it's gone way past cutting out Whole Foods, buying less meat, considering ways to cut back on day care, consolidating errands. They are contemplating the "no-fear option": Sell the house and take to the road in a camper. Spend months traveling nationwide looking for a new home and then take the time to find jobs there.
"Quite frankly," Moyer says, "I'm ready for exploring the options.
"Staying put is still one," he says, "but I think it's becoming less of one."
Tipping point
I didn't set out to find the most desperate cases in economic hard times. Instead, I talked with people in diverse circumstances to get a sense of what sort of options they were considering in the face of uncertainty.
And what I found was a tipping point, a world where the price of beans is not the real issue, but rather a trigger for families who have much bigger questions on their minds.
I think of the single mother of four who opted for a home birth with no midwife in part to save on medical expenses.
"A lot of our medical care I've brought home," says Celestia Brown, a Berryessa neighborhood resident who's alternated between public assistance and work as a personal assistant. "I use the Internet a lot."
Or Sal and Michelle Alaimo, San Jose parents who don't believe in handouts, but would sure take one if it would mean their kids could again join the sports leagues they used to play in.
"All their friends do it," says Sal Alaimo, a butcher who picks up shifts between duties as a stay-at-home dad.
And even those well beyond middle class, like computer scientists Radha Chandika and Ravi Duvvuri, are discovering they've got it good, but not nearly as good as they once had it. Chandika and her husband, Duvvuri, moved to Silicon Valley in 1994 and joined the successful tech crowd.
By early 2007, they had two kids and a house in Cupertino. Duvvuri was a software architect at Blue Coat Systems, and Chandika was a software engineer at Google. Their household income was about $300,000.
Duvvuri left his job to start an Indian social-networking company with a friend and former business partner, reducing the family income by about half. He says he would have done it no matter the economic conditions, but with rising prices the family has cut spending more than they anticipated.
Duvvuri, who draws no salary, says he's concluded the Bay Area is no place to live as a family on one income. At the end of the year, he and Chandika plan to move their family back to India, where their lives and prospects will be better.
"I have more reasons to go back," he says, "than to stay."
But more than all that, the Big Squeeze has Chandika and Duvvuri thinking about how lucky they are and how difficult tough times must be for those who have much less.
Not enough hours
The increasing cost of food and fuel have Pablo Buenrostro and Victoria Aguirre grappling in a very real way with the idea that there are simply not enough hours in the day.
Buenrostro picked up a second job in February to try to keep up with increasing expenses. He typically works 12-plus-hour days, six days a week in the meat departments of two area groceries. The couple rents an addition to Aguirre's parents' house, where they live with their 14-month-old daughter. But they are still falling behind.
Sitting on the family's front porch as her mother, Maria Aguirre, grills beef for dinner, Victoria Aguirre says maybe Buenrostro will have to find a third job.
"How?" her mother asks. "The day only has 24 hours."
There aren't many expenses to cut when you don't spend much in the first place. So the knee-jerk solution is more time at work and more time apart.
"We hardly see each other now that he has a second job," Victoria Aguirre says. "On the weekend, I only see him between jobs."
Like many young couples, Buenrostro, 23, and Aguirre, 21, have dreams - a better life, a place of their own, a happy and healthy child. With that in mind, Aguirre spends her days taking accounting classes at the Center for Employment Training in San Jose.
And so in the afternoon when Buenrostro comes home between jobs, Aguirre is at school. When Buenrostro comes home after his evening shift, his baby is asleep.
"Hopefully, after I graduate and get my certificate and get a good job," Aguirre says, "as a family we'll be more stable."
Their struggle is a heroic one. More jobs, more education. They are ready to do what they have to do to make it. But sometimes it's hard to figure out just what it is they should do.
"We don't know right now a solution," Aguirre says.
In the meantime, the family is living on about $29,000 a year. They rely on the food bank at the Center for Employment Training and Aguirre's parents help with food and gas. Her parents also care for the baby, a girl named after Victoria, when her mother is at school and her father is working.
"My husband, he feels bad," Aguirre says. "He says, 'I wish we could pay your mom,' but we can't."
Aguirre has become an incredibly careful shopper. She knows where all the bargains are: It's FoodMaxx for milk, Lucky Seven for eggs, produce and soda - unless soda is on sale at Mercados Suvianda.
Buenrostro says his gas costs have increased by $100 a month for his commute to the Mi Pueblo in Hayward. He's started going longer between haircuts and has stopped sending money to his mother in Mexico as frequently as he once did. The couple now hauls the family's cans and bottles to recyclers to collect the deposit.
"He has a lot of pride," Maria Aguirre says of her son-in-law. "He has to take care of his family."
And so Buenrostro takes care of the family he never sees. It's just one more sliver of heartbreak in the face of the Big Squeeze of 2008.
--------------------------------------------------------------------------------
Read Mike Cassidy's Loose Ends blog at blogs.mercurynews.com/cassidy. Contact him at mcassidy@ mercurynews.com. or (408) 920-5536.
Know pros, cons before signing reverse mortgage for extra cash
By Carrie Schwab Pomerantz
Money & You
With all the news about the housing crises, loan defaults and home foreclosures, borrowers are definitely becoming aware of the pitfalls of overextending themselves. I'm continuously receiving questions about the best way to approach a mortgage and how handling debt, particularly mortgage debt, fits into an overall financial plan.
TodayThis WeekSportsCommentsPolice seek 3 men in abduction, attack at...
OSU pitcher Andrew Oliver out
Toddler dies after fall into swimming pool...
A&M star awaiting her due
Alligator found outside Shawnee restaurant
Grieving father had a bad feeling about trip...
Thief steals Edmond woman's wallet from...
Woman dies after hit-and-run accident in...
Plane makes emergency landing in Logan County
What promise does Ohio hold for autistic boy...
8 twisters: big storms, small toll
Mourners remember Jack Mildren
Drowning victim's body found at Arcadia Lake
Aubrey McClendon tells how to make $100,000
Charges against OU signee Jarboe reduced
OU baseball team makes NCAA Tournament
Chesapeake Energy scraps new W.Va. headquarters
Projected Sooners' TV schedule
Recovering from fire-pit burns, city boy has...
Seedings leave the Cowboys disappointed
OSU pitcher Andrew Oliver out
A&M star awaiting her due
Kellen Sampson hired as graduate assistant
Frankly, Cowboys' coach darned good
Softball's super fans
Stoops expects Jarboe to be on roster after...
Sooners beat Vandy to bolster their case
Aggies take advantage of error again
Drownings take 4 lives in 3 days
WCWS Notebook: Getting 'Pearl'sonal
Josh Jarboe coming to Norman
What promise does Ohio hold for autistic boy...
Seattle wants results of survey excluded...
Partisan divide: Invitation out of Obama's...
Charges against OU signee Jarboe reduced
What do you do in Oklahoma for action and...
Where do you shop for groceries?
Fueling frustration
Wagoner's Gus Jones commits to OU
Alligator found outside Shawnee restaurant
View More Most Popular Categories... One question that seems to be coming up more frequently is whether a reverse mortgage makes sense for older homeowners who want to increase cash flow. Apparently, reverse mortgages — first introduced in 1988 — are becoming increasingly popular. According to an AARP study, consumer awareness is up and the median age for borrowers is down from 76 to 73. And as the boomer generation reaches 62, the age of eligibility, the market for reverse mortgages is expected to increase dramatically.
On the surface, a reverse mortgage can seem like a low-risk way for homeowners to tap into their equity for retirement needs, long-term care costs, or even to avoid foreclosure. Dig a little deeper and you'll find there are many factors to consider, from high fees to family inheritance issues. If you or someone you're close to is thinking about a reverse mortgage, I strongly suggest you start with these general facts and carefully consider the pros and cons before making a decision.
The upside
A reverse mortgage is a loan against your home that you don't have to pay back as long as you live there. Instead of making payments to a lender, the lender pays you. Since the money you receive is a loan, not income, it's income tax-free.
The amount you qualify for depends on your age (you must be at least 62), the interest rate and, of course, the equity you have in your home. Other factors include the location of your home and the borrowing limits set by vendors. But all things being equal, the older you are when you take out the loan, the more money you can receive.
You can take the cash from a reverse mortgage in a lump sum, monthly payments, a standby line of credit or a combination of all three, and you don't have to repay the loan as long as you live in the house. If you move - whether you sell or keep your home and rent it out - or when you die, the reverse mortgage loan must be paid off. However, the amount owed, including interest, will never exceed the value of the house. If there's any money left over, say your house appreciates faster than the cost of the reverse mortgage, you or your estate can keep the difference.
Sounds pretty good so far, right? So what's the catch?
The downside
One of the biggest drawbacks to a reverse mortgage is cost. The upfront closing costs and loan origination fees can be 8 percent to 10 percent of the loan limit. That's equivalent to paying 8 to 10 points on a conventional mortgage loan.
Plus, it's important to realize that, even though you don't have to repay the loan until you leave the house, you're still incurring debt. If your home value appreciates fast enough — a big "if” these days — that appreciation could offset some of your borrowing costs. But in most cases the amount you owe (your loans plus interest) grows over time, while your equity declines. And don't forget that you're still responsible for the ongoing costs of maintenance, insurance and real estate taxes.
Another possible drawback is family disharmony. Do the kids expect to inherit the house? If so, they might be upset to discover the bank owns a substantial portion, or even all, of your home. Be sure to talk to your heirs if you plan to take out a reverse mortgage. Granted, they'll want what's best for you in the long run, but it's always wise to avoid surprises.
The alternatives
A reverse mortgage should never be the centerpiece of your retirement plan, but it can make sense for some people. For instance, if you're older, intend to remain in your home for a long time and have limited retirement savings, it could be a good way to supplement your income. It also may serve as a viable option for cash-strapped seniors who might otherwise be forced to leave their homes.
If you or a loved one decides the benefits of a reverse mortgage outweigh the drawbacks, you have a few choices for loans. The loan limits and fees vary by provider, so be sure to research them thoroughly. Options to explore include:
•Federally Insured Home Equity Conversion Mortgage: This loan is insured by the U.S. government. Loan limits vary by county and currently range from $200,160 to $362,790.
•Fannie Mae "Home Keeper” Mortgage: Also federally insured, it offers a higher loan limit than an HECM, currently up to $417,000.
•A private lender: Costs may be higher, but you may be able to get a larger loan.
Reverse mortgages aren't for everyone. In fact, because they're often considered a "financial tool of last resort,” it pays to explore other ways to generate cash from your home. A home equity line of credit might be a practical alternative. Even though you'll have to repay the loan.
Money & You
With all the news about the housing crises, loan defaults and home foreclosures, borrowers are definitely becoming aware of the pitfalls of overextending themselves. I'm continuously receiving questions about the best way to approach a mortgage and how handling debt, particularly mortgage debt, fits into an overall financial plan.
TodayThis WeekSportsCommentsPolice seek 3 men in abduction, attack at...
OSU pitcher Andrew Oliver out
Toddler dies after fall into swimming pool...
A&M star awaiting her due
Alligator found outside Shawnee restaurant
Grieving father had a bad feeling about trip...
Thief steals Edmond woman's wallet from...
Woman dies after hit-and-run accident in...
Plane makes emergency landing in Logan County
What promise does Ohio hold for autistic boy...
8 twisters: big storms, small toll
Mourners remember Jack Mildren
Drowning victim's body found at Arcadia Lake
Aubrey McClendon tells how to make $100,000
Charges against OU signee Jarboe reduced
OU baseball team makes NCAA Tournament
Chesapeake Energy scraps new W.Va. headquarters
Projected Sooners' TV schedule
Recovering from fire-pit burns, city boy has...
Seedings leave the Cowboys disappointed
OSU pitcher Andrew Oliver out
A&M star awaiting her due
Kellen Sampson hired as graduate assistant
Frankly, Cowboys' coach darned good
Softball's super fans
Stoops expects Jarboe to be on roster after...
Sooners beat Vandy to bolster their case
Aggies take advantage of error again
Drownings take 4 lives in 3 days
WCWS Notebook: Getting 'Pearl'sonal
Josh Jarboe coming to Norman
What promise does Ohio hold for autistic boy...
Seattle wants results of survey excluded...
Partisan divide: Invitation out of Obama's...
Charges against OU signee Jarboe reduced
What do you do in Oklahoma for action and...
Where do you shop for groceries?
Fueling frustration
Wagoner's Gus Jones commits to OU
Alligator found outside Shawnee restaurant
View More Most Popular Categories... One question that seems to be coming up more frequently is whether a reverse mortgage makes sense for older homeowners who want to increase cash flow. Apparently, reverse mortgages — first introduced in 1988 — are becoming increasingly popular. According to an AARP study, consumer awareness is up and the median age for borrowers is down from 76 to 73. And as the boomer generation reaches 62, the age of eligibility, the market for reverse mortgages is expected to increase dramatically.
On the surface, a reverse mortgage can seem like a low-risk way for homeowners to tap into their equity for retirement needs, long-term care costs, or even to avoid foreclosure. Dig a little deeper and you'll find there are many factors to consider, from high fees to family inheritance issues. If you or someone you're close to is thinking about a reverse mortgage, I strongly suggest you start with these general facts and carefully consider the pros and cons before making a decision.
The upside
A reverse mortgage is a loan against your home that you don't have to pay back as long as you live there. Instead of making payments to a lender, the lender pays you. Since the money you receive is a loan, not income, it's income tax-free.
The amount you qualify for depends on your age (you must be at least 62), the interest rate and, of course, the equity you have in your home. Other factors include the location of your home and the borrowing limits set by vendors. But all things being equal, the older you are when you take out the loan, the more money you can receive.
You can take the cash from a reverse mortgage in a lump sum, monthly payments, a standby line of credit or a combination of all three, and you don't have to repay the loan as long as you live in the house. If you move - whether you sell or keep your home and rent it out - or when you die, the reverse mortgage loan must be paid off. However, the amount owed, including interest, will never exceed the value of the house. If there's any money left over, say your house appreciates faster than the cost of the reverse mortgage, you or your estate can keep the difference.
Sounds pretty good so far, right? So what's the catch?
The downside
One of the biggest drawbacks to a reverse mortgage is cost. The upfront closing costs and loan origination fees can be 8 percent to 10 percent of the loan limit. That's equivalent to paying 8 to 10 points on a conventional mortgage loan.
Plus, it's important to realize that, even though you don't have to repay the loan until you leave the house, you're still incurring debt. If your home value appreciates fast enough — a big "if” these days — that appreciation could offset some of your borrowing costs. But in most cases the amount you owe (your loans plus interest) grows over time, while your equity declines. And don't forget that you're still responsible for the ongoing costs of maintenance, insurance and real estate taxes.
Another possible drawback is family disharmony. Do the kids expect to inherit the house? If so, they might be upset to discover the bank owns a substantial portion, or even all, of your home. Be sure to talk to your heirs if you plan to take out a reverse mortgage. Granted, they'll want what's best for you in the long run, but it's always wise to avoid surprises.
The alternatives
A reverse mortgage should never be the centerpiece of your retirement plan, but it can make sense for some people. For instance, if you're older, intend to remain in your home for a long time and have limited retirement savings, it could be a good way to supplement your income. It also may serve as a viable option for cash-strapped seniors who might otherwise be forced to leave their homes.
If you or a loved one decides the benefits of a reverse mortgage outweigh the drawbacks, you have a few choices for loans. The loan limits and fees vary by provider, so be sure to research them thoroughly. Options to explore include:
•Federally Insured Home Equity Conversion Mortgage: This loan is insured by the U.S. government. Loan limits vary by county and currently range from $200,160 to $362,790.
•Fannie Mae "Home Keeper” Mortgage: Also federally insured, it offers a higher loan limit than an HECM, currently up to $417,000.
•A private lender: Costs may be higher, but you may be able to get a larger loan.
Reverse mortgages aren't for everyone. In fact, because they're often considered a "financial tool of last resort,” it pays to explore other ways to generate cash from your home. A home equity line of credit might be a practical alternative. Even though you'll have to repay the loan.
Saturday, May 31, 2008
Response From the FTC: Citibank
Here's the response I received to my complaint to the FTC about Citibank cancelling my home equity line of credit.
Guess I won't hold my breath waiting for help from these folks. My immediate response to this message? 1. Self-serving. ("See how wonderful we are?") 2. Doesn't sound like they act on only one complaint--they wait to see a "pattern." Lame, lame, lame.
So if you have had a HELOC cancelled, e-mail the FTC and complain!
Dear Jeanne Sather:
Thank you for recent correspondence. The Federal Trade Commission acts in the public interest to stop business practices that violate the laws it enforces. Letters from consumers and businesses are very important to the work of the Commission. They are often the first indication of a problem in the marketplace and may provide the initial evidence to begin an investigation. The Commission does not resolve individual complaints. The Commission can, however, act when it sees a pattern of possible violations developing.
The information you have provided will be recorded in our complaint retention system. This computerized system enables us to identify questionable business practices that are generating numerous complaints and may be in violation of the law.
Thank you for providing information that may be used to develop or support Commission enforcement initiatives.
Sincerely yours,
Consumer Response Center
Guess I won't hold my breath waiting for help from these folks. My immediate response to this message? 1. Self-serving. ("See how wonderful we are?") 2. Doesn't sound like they act on only one complaint--they wait to see a "pattern." Lame, lame, lame.
So if you have had a HELOC cancelled, e-mail the FTC and complain!
Dear Jeanne Sather:
Thank you for recent correspondence. The Federal Trade Commission acts in the public interest to stop business practices that violate the laws it enforces. Letters from consumers and businesses are very important to the work of the Commission. They are often the first indication of a problem in the marketplace and may provide the initial evidence to begin an investigation. The Commission does not resolve individual complaints. The Commission can, however, act when it sees a pattern of possible violations developing.
The information you have provided will be recorded in our complaint retention system. This computerized system enables us to identify questionable business practices that are generating numerous complaints and may be in violation of the law.
Thank you for providing information that may be used to develop or support Commission enforcement initiatives.
Sincerely yours,
Consumer Response Center
Tough Assignment: Find College Loans
By ROBERT TOMSHO
June 1, 2008
College students and their parents are scrambling to line up student loans for the fall amid fears that the broader credit crisis might put the squeeze on such lending.
How bad could it be? That depends on what kind of loan you're looking for.
Late last month, the Bush administration took a big step toward heading off problems with federally guaranteed student loans made by banks and other private-sector lenders. Using authority recently granted by Congress, the federal government plans to purchase and invest in such loans, freeing up capital so lenders can make new loans.
But this initiative -- which will last only one school year -- isn't a fix-all for a complex loan market that is hard to sort out even in the best of economic times. For instance, loans not backed by the government could still be in short supply.
Here's a guide to the different kinds of student loans:
Backing from Uncle Sam
The federal government is the biggest player in the market, having made or guaranteed about $109.4 billion in student loans during the 2007-2008 school year. The debt includes Stafford loans for undergraduates, PLUS loans for parents and graduate students and consolidation loans for graduates who want to combine and refinance previous loans. Borrowers get these federal loans through one of two channels.
Under the "direct loan" program -- which accounted for about 16% of federal student loans during the current school year -- students and families borrow directly from the government, with colleges doing some of the initial paperwork.
The catch is that your college has to participate in the direct loan program for you to apply. About 1,050 schools are active direct loan schools; another 800 or so have direct loan authority but don't use it.
The direct loan program has not been in jeopardy during the current credit crunch. In fact, seeking certainty for their students, more than 280 schools have applied to join it this year.
The concerns have revolved around the government's other lending channel, the Federal Family Education Loan Program, or FFELP, which is used by about 4,500 schools. About 7.5 million borrowers took out more than $91.8 billion in FFELP loans during the current school year.
Under FFELP, banks and other private-sector lenders make the loans and the government guarantees up to 97% of their value, so that a lender takes on very little risk if a borrower defaults. To encourage lenders to take part, the government also pays them a subsidy on each loan.
Those subsidies have been one source of trouble. Last fall, Congress cut them roughly in half, in the aftermath of ethics scandals and investigations involving lenders' financial ties to schools.
While their profits from subsidies were being clipped, lenders were facing problems on another front. Most FFELP lenders package some or all of their student loans into securities that they sell to investors, which generates cash they can use to make more loans.
In normal economic times, those so-called asset-backed securities, or ABSs, seemed like a good investment bet given that they contained student loans guaranteed against default by the U.S government.
But in recent years, lenders have also been marketing ABSs containing subprime mortgages made to borrowers with poor credit histories. As that market collapsed in a wave of foreclosures, investors began backing away from all kinds of ABSs, including those containing FFELP loans.
Help for FFELP
Early this year, lenders large and small began either curtailing or ending their participation in FFELP, saying they could no longer make such loans at a profit. SLM, commonly known as Sallie Mae and the nation's largest student lender, was threatening to pull out of FFELP but opted to remain after the Bush administration unveiled its liquidity plan on May 20.
Most observers think the plan will stem the exodus of FFELP lenders and ensure that there won't be any major shortages of those loans for the fall.
Areas of Concern
The biggest area of concern for the fall is alternative student loans, which don't involve the federal government and are strictly between the borrower and the lender.
Though they typically involve higher interest rates and fewer consumer protections, alternative loans have taken off in recent years as lending limits on some federal loan programs have failed to keep up with college costs. Families took out an estimated $17.1 billion in alternative loans in 2006-2007, up from $1.57 billion a decade earlier, according to the latest figures from the College Board.
Like FFELP loans, many alternative loans are packaged into ABSs, for which there is little demand. In April, Bank of America, a major lender, said it would stop making alternative loans.
Some people believe the government's plan to buy some FFELP loans from lenders will reassure private investors and make them more likely to buy ABSs containing government-backed and maybe also private student loans.
Meanwhile, the private lenders have been tightening credit standards and boosting interest rates.
Credit agencies rate consumer creditworthiness on a 300-to-850 point scale known as a FICO score. Mark Kantrowitz, publisher of FinAid.org, a financial aid Web site, says borrowers with scores in the 620-point range used to be able to get an alternative loan. This year, some lenders will require at least 700 points, he says.
In hard economic times, foreclosures and bankruptcies could also create problems for parents trying to land a federal PLUS loan, which involves a credit check. And parents accustomed to tapping into home equity lines of credit to help pay for college may have to seek other sources, such as alternative loans.
June 1, 2008
College students and their parents are scrambling to line up student loans for the fall amid fears that the broader credit crisis might put the squeeze on such lending.
How bad could it be? That depends on what kind of loan you're looking for.
Late last month, the Bush administration took a big step toward heading off problems with federally guaranteed student loans made by banks and other private-sector lenders. Using authority recently granted by Congress, the federal government plans to purchase and invest in such loans, freeing up capital so lenders can make new loans.
But this initiative -- which will last only one school year -- isn't a fix-all for a complex loan market that is hard to sort out even in the best of economic times. For instance, loans not backed by the government could still be in short supply.
Here's a guide to the different kinds of student loans:
Backing from Uncle Sam
The federal government is the biggest player in the market, having made or guaranteed about $109.4 billion in student loans during the 2007-2008 school year. The debt includes Stafford loans for undergraduates, PLUS loans for parents and graduate students and consolidation loans for graduates who want to combine and refinance previous loans. Borrowers get these federal loans through one of two channels.
Under the "direct loan" program -- which accounted for about 16% of federal student loans during the current school year -- students and families borrow directly from the government, with colleges doing some of the initial paperwork.
The catch is that your college has to participate in the direct loan program for you to apply. About 1,050 schools are active direct loan schools; another 800 or so have direct loan authority but don't use it.
The direct loan program has not been in jeopardy during the current credit crunch. In fact, seeking certainty for their students, more than 280 schools have applied to join it this year.
The concerns have revolved around the government's other lending channel, the Federal Family Education Loan Program, or FFELP, which is used by about 4,500 schools. About 7.5 million borrowers took out more than $91.8 billion in FFELP loans during the current school year.
Under FFELP, banks and other private-sector lenders make the loans and the government guarantees up to 97% of their value, so that a lender takes on very little risk if a borrower defaults. To encourage lenders to take part, the government also pays them a subsidy on each loan.
Those subsidies have been one source of trouble. Last fall, Congress cut them roughly in half, in the aftermath of ethics scandals and investigations involving lenders' financial ties to schools.
While their profits from subsidies were being clipped, lenders were facing problems on another front. Most FFELP lenders package some or all of their student loans into securities that they sell to investors, which generates cash they can use to make more loans.
In normal economic times, those so-called asset-backed securities, or ABSs, seemed like a good investment bet given that they contained student loans guaranteed against default by the U.S government.
But in recent years, lenders have also been marketing ABSs containing subprime mortgages made to borrowers with poor credit histories. As that market collapsed in a wave of foreclosures, investors began backing away from all kinds of ABSs, including those containing FFELP loans.
Help for FFELP
Early this year, lenders large and small began either curtailing or ending their participation in FFELP, saying they could no longer make such loans at a profit. SLM, commonly known as Sallie Mae and the nation's largest student lender, was threatening to pull out of FFELP but opted to remain after the Bush administration unveiled its liquidity plan on May 20.
Most observers think the plan will stem the exodus of FFELP lenders and ensure that there won't be any major shortages of those loans for the fall.
Areas of Concern
The biggest area of concern for the fall is alternative student loans, which don't involve the federal government and are strictly between the borrower and the lender.
Though they typically involve higher interest rates and fewer consumer protections, alternative loans have taken off in recent years as lending limits on some federal loan programs have failed to keep up with college costs. Families took out an estimated $17.1 billion in alternative loans in 2006-2007, up from $1.57 billion a decade earlier, according to the latest figures from the College Board.
Like FFELP loans, many alternative loans are packaged into ABSs, for which there is little demand. In April, Bank of America, a major lender, said it would stop making alternative loans.
Some people believe the government's plan to buy some FFELP loans from lenders will reassure private investors and make them more likely to buy ABSs containing government-backed and maybe also private student loans.
Meanwhile, the private lenders have been tightening credit standards and boosting interest rates.
Credit agencies rate consumer creditworthiness on a 300-to-850 point scale known as a FICO score. Mark Kantrowitz, publisher of FinAid.org, a financial aid Web site, says borrowers with scores in the 620-point range used to be able to get an alternative loan. This year, some lenders will require at least 700 points, he says.
In hard economic times, foreclosures and bankruptcies could also create problems for parents trying to land a federal PLUS loan, which involves a credit check. And parents accustomed to tapping into home equity lines of credit to help pay for college may have to seek other sources, such as alternative loans.
Are Borrowers Free to Lie?
Lender Held Responsible for Vetting Data on Home Loan
By AMIR EFRATI
May 31, 2008; Page B2
In a ruling that backs borrowers even when they have lied on loan applications, a federal bankruptcy judge held that borrowers who inflated their income to get a loan don't have to pay back a bank because the lender should have noticed a "red flag" about the deceit.
The case, which the Oakland, Calif., judge called "a poster child for some of the practices that have led to the current crisis in our housing market," places responsibility on the lender for vetting information in loan applications.
Inaccuracies in loan documents have emerged as a factor behind the current wave of foreclosure and bankruptcy actions. Mortgage experts say some applications were riddled with inflated credit and income scores that allowed borrowers to qualify for loans that should have been out of their reach.
The Oakland case highlights a debate that has emerged over whether responsibility for homeowners' woes should fall to lenders or borrowers. In the May 23 ruling following a trial, U.S. Bankruptcy Judge Leslie J. Tchaikovsky said that Cleveland-based National City Bank couldn't recover debt from a Pinole, Calif., couple who emerged from bankruptcy because the lender, which had funded the couple's home-equity line of credit, ignored a "red flag" in their loan application.
The borrowers "made a material false representation concerning their financial condition ... with knowledge of its falsity and the intent to deceive the bank," the court found. But the bank's reliance on those figures wasn't reasonable, the judge wrote. National City declined to comment.
One of the borrowers, Cecelia Hill, said in an interview: "I take full blame for living a lifestyle that we couldn't afford." Her family last year gave up the home, she says, which they had purchased some 20 years ago. They found themselves unable to make payments after having taken out additional debt, from National City, against the property. The lender that held the primary mortgage bought the home in a foreclosure sale.
"Under no circumstances did we intend to defraud anyone," she said. "And we signed a paper authorizing [National City] to call our employers and access our bank accounts, and they never did."
Mrs. Hill and her husband, Norman Hill, both 54 years old, work as a delivery driver and an employee for an auto-parts distributor, respectively. They signed two loan applications in 2006 incorrectly stating they earned about a combined $146,000 and, six months later, about $191,000 annually.
They claimed that their independent broker and the bank put the income figures into the applications without their knowledge and that they didn't read them before signing.
The judge, who said she didn't find the borrowers' argument to be credible, said even if they hadn't read the loan application, by signing it "they effectively made the representation" to the bank.
But the judge said that the income figures "would alert the reasonably prudent lender of the possibility that the information was inaccurate" and that the bank didn't follow its own guidelines, which required that it "evaluate the reasonableness of the stated income based on job type, tenure, and geographical location among other things."
Philip Stone, a Worcester, Mass., consumer-bankruptcy lawyer, said the nature of the case was unusual. Lenders typically don't try to collect debt from borrowers whose collateral has been sold. Still, he said "the ruling is significant because the judge is saying the lender has a responsibility to carry out an investigation of borrowers' financial condition." The couple represented themselves in defending the case, Mrs. Hill noted, saying she couldn't afford a lawyer.
By AMIR EFRATI
May 31, 2008; Page B2
In a ruling that backs borrowers even when they have lied on loan applications, a federal bankruptcy judge held that borrowers who inflated their income to get a loan don't have to pay back a bank because the lender should have noticed a "red flag" about the deceit.
The case, which the Oakland, Calif., judge called "a poster child for some of the practices that have led to the current crisis in our housing market," places responsibility on the lender for vetting information in loan applications.
Inaccuracies in loan documents have emerged as a factor behind the current wave of foreclosure and bankruptcy actions. Mortgage experts say some applications were riddled with inflated credit and income scores that allowed borrowers to qualify for loans that should have been out of their reach.
The Oakland case highlights a debate that has emerged over whether responsibility for homeowners' woes should fall to lenders or borrowers. In the May 23 ruling following a trial, U.S. Bankruptcy Judge Leslie J. Tchaikovsky said that Cleveland-based National City Bank couldn't recover debt from a Pinole, Calif., couple who emerged from bankruptcy because the lender, which had funded the couple's home-equity line of credit, ignored a "red flag" in their loan application.
The borrowers "made a material false representation concerning their financial condition ... with knowledge of its falsity and the intent to deceive the bank," the court found. But the bank's reliance on those figures wasn't reasonable, the judge wrote. National City declined to comment.
One of the borrowers, Cecelia Hill, said in an interview: "I take full blame for living a lifestyle that we couldn't afford." Her family last year gave up the home, she says, which they had purchased some 20 years ago. They found themselves unable to make payments after having taken out additional debt, from National City, against the property. The lender that held the primary mortgage bought the home in a foreclosure sale.
"Under no circumstances did we intend to defraud anyone," she said. "And we signed a paper authorizing [National City] to call our employers and access our bank accounts, and they never did."
Mrs. Hill and her husband, Norman Hill, both 54 years old, work as a delivery driver and an employee for an auto-parts distributor, respectively. They signed two loan applications in 2006 incorrectly stating they earned about a combined $146,000 and, six months later, about $191,000 annually.
They claimed that their independent broker and the bank put the income figures into the applications without their knowledge and that they didn't read them before signing.
The judge, who said she didn't find the borrowers' argument to be credible, said even if they hadn't read the loan application, by signing it "they effectively made the representation" to the bank.
But the judge said that the income figures "would alert the reasonably prudent lender of the possibility that the information was inaccurate" and that the bank didn't follow its own guidelines, which required that it "evaluate the reasonableness of the stated income based on job type, tenure, and geographical location among other things."
Philip Stone, a Worcester, Mass., consumer-bankruptcy lawyer, said the nature of the case was unusual. Lenders typically don't try to collect debt from borrowers whose collateral has been sold. Still, he said "the ruling is significant because the judge is saying the lender has a responsibility to carry out an investigation of borrowers' financial condition." The couple represented themselves in defending the case, Mrs. Hill noted, saying she couldn't afford a lawyer.
Friday, May 30, 2008
East West Bancorp at B. Riley & Company Annual Investor Conference - Final
Copyright: CCBN, Inc. and FDCH e-Media, Inc.
Source: FD (FAIR DISCLOSURE) WIRE
Wordcount: 4415
JOE GLADUE, ANALYST, B. RILEY & COMPANY: I guess we will get started. The next presenting company is East West Bancorp, and here with us is the CEO of East West, Dominic Ng, and Irene Oh.
DOMINIC NG, CEO, EAST WEST BANCORP: Good morning. It is great to be here, and this, in fact, is our first time that we participated in B. Riley investor conference. It is nice to be in Las Vegas. It is only an hour flight for us coming from Los Angeles. Anyway let me go ahead and get started.
Safe Harbor statement I have you read, and I don't have to talk too much about it. And let me just start with a history of East West Bank. The bank was established in January of 1973. It was at that time the first Savings and Loan to focus in Chinese-American community, and it was based in Chinatown Los Angeles. And since then, the bank continued to grow throughout the '80s, only focused in the Chinese American community in Los Angeles. And until 1991 I actually helped an investor from Asia to acquire East West in 1991 for $40 million. I spent 10 years at Deloitte & Touche, and then at that time after, I helped the investor to acquire East West Bank, and I joined the bank and became the CEO.
And right after the acquisition of East West Bank during 1991 and 1992, obviously everybody was aware that back at that time Southern California was going through some severe recession, and there were a lot of Savings and Loans who were basically taken over by the government. So we actually took the opportunity to acquire three thrifts from the RTC, and East West actually grew substantially from $600 million to over $1 billion within a few months. And then with the acquisitions of these thrifts from RTC, we have went from a Los Angeles-based thrift to become a statewide base thrift because we end up getting branches in San Francisco. And right after that I decided that because of the Chinese-American customers that we have, many of them are actually actively engaging in commercial banking business like international trade finance, and also many of them are also very interested in the acquisition of real estate such as apartment buildings and also commercial buildings. We decided that it would be more appropriate for East West to become a commercial bank versus just a thrift.
So in 1995 we changed our charter from a thrift to a commercial bank, and then in 1998 due to the Asian crisis, our investor that bought East West in 1991 decided that while East West was performing very, very well, but they have some liquidity issue in Asia, and it will be time for them to cash out East West with the American currency that can help to support their liquidity issue back in Asia.
So very quickly, I think in June of 1998 I went out and met with about 150 investors throughout the United States. Most of them are institutional investors, and we brought in $238 million and then bought the bank from the former investors. So it was a management buyout in 1998, and since then I think in February of 1999, we did ask for a registration and get all the stock traded on NASDAQ. And so we have been publicly traded since February 1999.
And since then, again the bank continued to grow, and our financial performance is growing very well, and in 2005 we exceeded $100 million in net income. In 2007 now we have surpassed $11 billion in assets.
So just a quick overview of the earnings per share growth of the last 10 years. In fact, this actually is 11 years here. We have 11 year consecutive record earnings at East West Bank. Compound annual growth rate is 27%. Had it not for the onetime assessment to pay for the government being a thrift back in the early '90s, we actually have an even longer record earnings record than what we have shown.
And if you just look at the past five year, three years, one year compounded annual growth, what we did here is that we look at all the banks over $750 million in market cap. There's not many in California because most of the big banks are headquartered elsewhere from California. But these are the banks that are all over $750 million in the market cap. What you notice is that we consistently, whether you are looking at five years or three years or one year, we consistently rank at the top compared with all these other peer banks that we compete and do business with in terms of earnings per share growth.
How we got the strong earnings per share growth for the last 11 years is because of our loan growth, deposit growth and also the asset growth. And then I think altogether combined help us to get to where we are today.
So East West Bank today in terms of our vision, when I first bought the bank for the investor back in 1991, I shared with them and I said this should not be just a Chinese bank focus in the Chinese community because not only the market will be too small for long-term future growth, but also we are ignoring a substantial advantage the East West have because of the Chinese knowledge. We were able to use that knowledge to share with mainstream customers and would create a niche for East West that most other mainstream banks cannot compete with us. And if we just focus on that niche, we will be able to bring in a lot of commercial customers from the mainstream who came to us not because of pricing, not because of credit terms, but who came to us simply because we have valued added service that can offer to them that they would not be able to find from other community banks, such as if some of them are looking at outsourcing in China, we will be able to help them in terms of making connections in China. Or if they are actually exporting or importing to China and they have issues about dealing with banks over in China, we have many corresponding banks that we can help them.
So these are the kind of advantage that we have, and in the same token, we have Chinese customers who are coming to the United States to acquire real estate. In fact, back in the early '90s, we are actively engaged with many Asian investors from Taiwan, Hong Kong, Indonesia, Malaysia and Singapore, buying just about every hotel in Los Angeles. And we were actually involved in that sort of like acquisitions in terms of providing consulting service to these Chinese customers. And because of that, a lot of the mainstream real estate players notice that since we have the connection with the equity source from Asia they better start thinking about doing business with us in order to tap into bad resources. And that has been very helpful for us.
So back in early '90, '91, we come up with the vision of East West Bank to be recognized as the premier bridge between East and West and acknowledged for delivering relationship-driven financial solutions to an increasingly diverse and sophisticated customer base. That was the vision then, and 16 years later we still have the same vision today. And I would imagine 15 years from now East West Bank will still be that bridge between the East and the West. Because that niche has worked out really well for us, and also so far not many banks are out there competing in this particular niche.
So we're now the second-largest bank headquartered in Southern California. We have $12 billion total assets, 70 branches in California and one in Houston, Texas. Why in Houston Texas? We bought a bank that happened to have one branch in Houston, Texas, and therefore, we inherited it. We have three greater China locations. A full-service branch that can take deposits and loans in Hong Kong and two rep offices, one in Beijing and one in Shanghai.
I talked about the strategic niche that we have in terms of financial bridge between East and West, and basically what we had done is that on the commercial banking side we have been making a great inroad in terms of getting more and more commercial clients from the mainstream. But we continue to have the leading market share within the Chinese market, particularly on the consumer banking side.
So again, we feel that the Chinese-American market is a high-value niche, mainly not just because that this particular segment of population are strong banking potential clients, but also because being the bridge between the East and West allows us to actually tap into plenty of mainstream business and offer a value-added service that the other banks cannot provide.
So because of their efforts, since 1995 once we became a commercial bank, as of today we have more than 60% of our commercial banking clients that actually came from mainstream through our active efforts of showcasing ourselves as the bridge between the East and the West.
So let me give you a snapshot of our loan portfolio as of December 31. Again, 48% of our portfolio are commercial real estate, and in terms of C&I and trade finance is about 20% in construction, 17% multifamily, 8% in single-family and consumer 7%.
In today's market everybody worries about subprime loans. So I do want to share with you we do not have one subprime loan. We have never made a subprime loan in East West, and also we do not have any of the exotic investments securities like CDOs and stuff like that that would require markdowns. So that in terms of East West is great.
How about consumer lending? Credit cards? Again, we have very very little credit card exposure. Most of the credit cards are outsourced to other parties. So we are literally have almost no exposure in the credit card area.
Home equity -- something that people are very concerned. Our maximum loan to value for home equity line of credit is 75% loan to value. So from that standpoint, it was I mean as of today, actually we have hardly any issues in the home equity line of credit.
So the concern that we have currently is mainly on the residential construction loans. You know, you look at 17%, two-thirds of that 17% comes from residential construction. And most people are worried about commercial real estate, and we have 40% of our portfolio in commercial real estate, and I will highlight that in the next few slides so that I can give you a better color in terms of where we are in our commercial real estate.
First, I want to share with you about asset quality. East West we went all the way back in 1992 because we felt it is very important for us to show not just the last five years of pristine asset quality, but we ought to go way back when California went through the toughest recession to show you where we are -- where we were comparing with their peers. We have all been always been consistently better than the peers in terms of lower nonperforming assets as a percentage of total assets.
Same thing for charge-offs. We've consistently outperformed our peers in both charge-offs and NPA.
Now why we were able to do that, because again consistently even though, we have a high exposure in real estate, remember back in the early '90s East West was actually a thrift. 100% of our loans were in real estate. But we had profit every single year from '91 through '95, and we never had any regulatory issues throughout the history of East West. It is because we have very prudent underwriting criteria for our real estate lending.
So even though real estate, commercial real estate is kind of like a four letter word right now in America, the fact is East West actually are very comfortable commercial real estate.
One of the reasons is that if you looked at the history and the loan to value, the average loan to value -- these are historical loan to value -- of our commercial real estate has 55%. Single-family, 58% average loan to value. That is what we hardly have any problems and any charge-offs at all in single-family. Multifamily is 62%. Construction is the one that I said that we have stressed at 69%.
Average loan size, not only the average value is low, but average loan size is also low. And again, commercial -- California real estate price is very high. It's not like, let's say, Mississippi or Louisiana, but still even with a high real estate price, you can tell -- average loan size only $1.2 million for our commercial real estate, $700,000 for multifamily and $415,000 for single-family, and construction is the only one at 2.6 relatively speaking still much lower than most of the portfolios you expect from other banks.
So let me drill down more for the commercial real estate. Over 90% of our commercial real estate loans are less than $3 million in price, and they have an average loan to value of 53%. Less than 10%, 275 loans only at our entire East West Bank portfolio out of the $4.2 billion of real estate portfolio. There's only 275 loans that are bigger than $3 million in size. And even for them to average, LTV is only 58%.
And now I have a more relevant chart here, which will show you why I'm comfortable with the LTV. For loans that are less than 50%, these are historical -- again historical loan to value. So many of them have principal paydowns for the last two years and also appreciation that I have not counted. These are historical loans to value at the date of origination. At less than 50%, we have 31% of our total loan population are less than 50% loan to value. 57% of these loans are less than 60% loan to value if you are looking at the cumulative column.
More than 97% of our loans are less than 75% loan to value. That is why we're so confident that commercial real estate -- first of all, in California commercial real estate had not really gone down much, despite the fact that Wall Street is out doing mark-to-market on securities due to liquidity reasons, and then they are marking down 15, 20%.
But California, Southern California, Northern California, the CRE price had not dropped much. But more than 97% of our commercial real estates are less than 75% loan to value. That is why we have plenty of cushion, and that is why I'm not too concerned about it.
Again, our portfolio is pretty diversified and all kinds of mix types, shopping centers, stores, office buildings, warehouses, etc. And geographic breakdown, 63% in Southern California, 23% in Northern California. And if I drill down to Southern California by City, of course, most of them in Los Angeles. And I drill down by zip code downtown, again Los Angeles has the lion's share by zipcode, and this map kind of gives you a flavor about where all the loans are.
The biggest concentration is in middle Los Angeles and then San Gabriel Valley, which is really our home court, and then you looked at the other areas, Orange County. That is one of the biggest concentrations that we have. And now for the drill down, we look at office building, we look at the submarket of office building. Again, we look at a geographic mix and see how many loans that we have in any of these subregions, and we look at the net adsorption rate in that region, and we look at the average gross rental rate. And then we look at how many new constructions are taking place in that area.
Source: FD (FAIR DISCLOSURE) WIRE
Wordcount: 4415
JOE GLADUE, ANALYST, B. RILEY & COMPANY: I guess we will get started. The next presenting company is East West Bancorp, and here with us is the CEO of East West, Dominic Ng, and Irene Oh.
DOMINIC NG, CEO, EAST WEST BANCORP: Good morning. It is great to be here, and this, in fact, is our first time that we participated in B. Riley investor conference. It is nice to be in Las Vegas. It is only an hour flight for us coming from Los Angeles. Anyway let me go ahead and get started.
Safe Harbor statement I have you read, and I don't have to talk too much about it. And let me just start with a history of East West Bank. The bank was established in January of 1973. It was at that time the first Savings and Loan to focus in Chinese-American community, and it was based in Chinatown Los Angeles. And since then, the bank continued to grow throughout the '80s, only focused in the Chinese American community in Los Angeles. And until 1991 I actually helped an investor from Asia to acquire East West in 1991 for $40 million. I spent 10 years at Deloitte & Touche, and then at that time after, I helped the investor to acquire East West Bank, and I joined the bank and became the CEO.
And right after the acquisition of East West Bank during 1991 and 1992, obviously everybody was aware that back at that time Southern California was going through some severe recession, and there were a lot of Savings and Loans who were basically taken over by the government. So we actually took the opportunity to acquire three thrifts from the RTC, and East West actually grew substantially from $600 million to over $1 billion within a few months. And then with the acquisitions of these thrifts from RTC, we have went from a Los Angeles-based thrift to become a statewide base thrift because we end up getting branches in San Francisco. And right after that I decided that because of the Chinese-American customers that we have, many of them are actually actively engaging in commercial banking business like international trade finance, and also many of them are also very interested in the acquisition of real estate such as apartment buildings and also commercial buildings. We decided that it would be more appropriate for East West to become a commercial bank versus just a thrift.
So in 1995 we changed our charter from a thrift to a commercial bank, and then in 1998 due to the Asian crisis, our investor that bought East West in 1991 decided that while East West was performing very, very well, but they have some liquidity issue in Asia, and it will be time for them to cash out East West with the American currency that can help to support their liquidity issue back in Asia.
So very quickly, I think in June of 1998 I went out and met with about 150 investors throughout the United States. Most of them are institutional investors, and we brought in $238 million and then bought the bank from the former investors. So it was a management buyout in 1998, and since then I think in February of 1999, we did ask for a registration and get all the stock traded on NASDAQ. And so we have been publicly traded since February 1999.
And since then, again the bank continued to grow, and our financial performance is growing very well, and in 2005 we exceeded $100 million in net income. In 2007 now we have surpassed $11 billion in assets.
So just a quick overview of the earnings per share growth of the last 10 years. In fact, this actually is 11 years here. We have 11 year consecutive record earnings at East West Bank. Compound annual growth rate is 27%. Had it not for the onetime assessment to pay for the government being a thrift back in the early '90s, we actually have an even longer record earnings record than what we have shown.
And if you just look at the past five year, three years, one year compounded annual growth, what we did here is that we look at all the banks over $750 million in market cap. There's not many in California because most of the big banks are headquartered elsewhere from California. But these are the banks that are all over $750 million in the market cap. What you notice is that we consistently, whether you are looking at five years or three years or one year, we consistently rank at the top compared with all these other peer banks that we compete and do business with in terms of earnings per share growth.
How we got the strong earnings per share growth for the last 11 years is because of our loan growth, deposit growth and also the asset growth. And then I think altogether combined help us to get to where we are today.
So East West Bank today in terms of our vision, when I first bought the bank for the investor back in 1991, I shared with them and I said this should not be just a Chinese bank focus in the Chinese community because not only the market will be too small for long-term future growth, but also we are ignoring a substantial advantage the East West have because of the Chinese knowledge. We were able to use that knowledge to share with mainstream customers and would create a niche for East West that most other mainstream banks cannot compete with us. And if we just focus on that niche, we will be able to bring in a lot of commercial customers from the mainstream who came to us not because of pricing, not because of credit terms, but who came to us simply because we have valued added service that can offer to them that they would not be able to find from other community banks, such as if some of them are looking at outsourcing in China, we will be able to help them in terms of making connections in China. Or if they are actually exporting or importing to China and they have issues about dealing with banks over in China, we have many corresponding banks that we can help them.
So these are the kind of advantage that we have, and in the same token, we have Chinese customers who are coming to the United States to acquire real estate. In fact, back in the early '90s, we are actively engaged with many Asian investors from Taiwan, Hong Kong, Indonesia, Malaysia and Singapore, buying just about every hotel in Los Angeles. And we were actually involved in that sort of like acquisitions in terms of providing consulting service to these Chinese customers. And because of that, a lot of the mainstream real estate players notice that since we have the connection with the equity source from Asia they better start thinking about doing business with us in order to tap into bad resources. And that has been very helpful for us.
So back in early '90, '91, we come up with the vision of East West Bank to be recognized as the premier bridge between East and West and acknowledged for delivering relationship-driven financial solutions to an increasingly diverse and sophisticated customer base. That was the vision then, and 16 years later we still have the same vision today. And I would imagine 15 years from now East West Bank will still be that bridge between the East and the West. Because that niche has worked out really well for us, and also so far not many banks are out there competing in this particular niche.
So we're now the second-largest bank headquartered in Southern California. We have $12 billion total assets, 70 branches in California and one in Houston, Texas. Why in Houston Texas? We bought a bank that happened to have one branch in Houston, Texas, and therefore, we inherited it. We have three greater China locations. A full-service branch that can take deposits and loans in Hong Kong and two rep offices, one in Beijing and one in Shanghai.
I talked about the strategic niche that we have in terms of financial bridge between East and West, and basically what we had done is that on the commercial banking side we have been making a great inroad in terms of getting more and more commercial clients from the mainstream. But we continue to have the leading market share within the Chinese market, particularly on the consumer banking side.
So again, we feel that the Chinese-American market is a high-value niche, mainly not just because that this particular segment of population are strong banking potential clients, but also because being the bridge between the East and West allows us to actually tap into plenty of mainstream business and offer a value-added service that the other banks cannot provide.
So because of their efforts, since 1995 once we became a commercial bank, as of today we have more than 60% of our commercial banking clients that actually came from mainstream through our active efforts of showcasing ourselves as the bridge between the East and the West.
So let me give you a snapshot of our loan portfolio as of December 31. Again, 48% of our portfolio are commercial real estate, and in terms of C&I and trade finance is about 20% in construction, 17% multifamily, 8% in single-family and consumer 7%.
In today's market everybody worries about subprime loans. So I do want to share with you we do not have one subprime loan. We have never made a subprime loan in East West, and also we do not have any of the exotic investments securities like CDOs and stuff like that that would require markdowns. So that in terms of East West is great.
How about consumer lending? Credit cards? Again, we have very very little credit card exposure. Most of the credit cards are outsourced to other parties. So we are literally have almost no exposure in the credit card area.
Home equity -- something that people are very concerned. Our maximum loan to value for home equity line of credit is 75% loan to value. So from that standpoint, it was I mean as of today, actually we have hardly any issues in the home equity line of credit.
So the concern that we have currently is mainly on the residential construction loans. You know, you look at 17%, two-thirds of that 17% comes from residential construction. And most people are worried about commercial real estate, and we have 40% of our portfolio in commercial real estate, and I will highlight that in the next few slides so that I can give you a better color in terms of where we are in our commercial real estate.
First, I want to share with you about asset quality. East West we went all the way back in 1992 because we felt it is very important for us to show not just the last five years of pristine asset quality, but we ought to go way back when California went through the toughest recession to show you where we are -- where we were comparing with their peers. We have all been always been consistently better than the peers in terms of lower nonperforming assets as a percentage of total assets.
Same thing for charge-offs. We've consistently outperformed our peers in both charge-offs and NPA.
Now why we were able to do that, because again consistently even though, we have a high exposure in real estate, remember back in the early '90s East West was actually a thrift. 100% of our loans were in real estate. But we had profit every single year from '91 through '95, and we never had any regulatory issues throughout the history of East West. It is because we have very prudent underwriting criteria for our real estate lending.
So even though real estate, commercial real estate is kind of like a four letter word right now in America, the fact is East West actually are very comfortable commercial real estate.
One of the reasons is that if you looked at the history and the loan to value, the average loan to value -- these are historical loan to value -- of our commercial real estate has 55%. Single-family, 58% average loan to value. That is what we hardly have any problems and any charge-offs at all in single-family. Multifamily is 62%. Construction is the one that I said that we have stressed at 69%.
Average loan size, not only the average value is low, but average loan size is also low. And again, commercial -- California real estate price is very high. It's not like, let's say, Mississippi or Louisiana, but still even with a high real estate price, you can tell -- average loan size only $1.2 million for our commercial real estate, $700,000 for multifamily and $415,000 for single-family, and construction is the only one at 2.6 relatively speaking still much lower than most of the portfolios you expect from other banks.
So let me drill down more for the commercial real estate. Over 90% of our commercial real estate loans are less than $3 million in price, and they have an average loan to value of 53%. Less than 10%, 275 loans only at our entire East West Bank portfolio out of the $4.2 billion of real estate portfolio. There's only 275 loans that are bigger than $3 million in size. And even for them to average, LTV is only 58%.
And now I have a more relevant chart here, which will show you why I'm comfortable with the LTV. For loans that are less than 50%, these are historical -- again historical loan to value. So many of them have principal paydowns for the last two years and also appreciation that I have not counted. These are historical loans to value at the date of origination. At less than 50%, we have 31% of our total loan population are less than 50% loan to value. 57% of these loans are less than 60% loan to value if you are looking at the cumulative column.
More than 97% of our loans are less than 75% loan to value. That is why we're so confident that commercial real estate -- first of all, in California commercial real estate had not really gone down much, despite the fact that Wall Street is out doing mark-to-market on securities due to liquidity reasons, and then they are marking down 15, 20%.
But California, Southern California, Northern California, the CRE price had not dropped much. But more than 97% of our commercial real estates are less than 75% loan to value. That is why we have plenty of cushion, and that is why I'm not too concerned about it.
Again, our portfolio is pretty diversified and all kinds of mix types, shopping centers, stores, office buildings, warehouses, etc. And geographic breakdown, 63% in Southern California, 23% in Northern California. And if I drill down to Southern California by City, of course, most of them in Los Angeles. And I drill down by zip code downtown, again Los Angeles has the lion's share by zipcode, and this map kind of gives you a flavor about where all the loans are.
The biggest concentration is in middle Los Angeles and then San Gabriel Valley, which is really our home court, and then you looked at the other areas, Orange County. That is one of the biggest concentrations that we have. And now for the drill down, we look at office building, we look at the submarket of office building. Again, we look at a geographic mix and see how many loans that we have in any of these subregions, and we look at the net adsorption rate in that region, and we look at the average gross rental rate. And then we look at how many new constructions are taking place in that area.
Consumers Lower Expectations on HELOCs
Customers are more satisfied with the process of getting a home-equity loan or line of credit than they were last year, but only because their expectations are much lower, according to a new survey.
A J.D. Power and Associates poll of 3,176 customers earlier this year found that overall customer satisfaction has risen to 780 on a 1,000-point scale, up 14 points from a year earlier. That's despite the fact that measures of service -- like length of approval process -- have remained consistent.
Customers simply expect more problems when they apply for such debt, due to ongoing troubles in the housing and mortgage markets, says Tim Ryan, senior research director of the finance and insurance practice at J.D. Power. At this point, many are just happy to obtain the loan, regardless of how long it takes or the frustrations they have to endure.
That's especially true since some homeowners already have "feelings of uncertainty toward property values and lenders," as Ryan puts it, or "associate the loan application process with hassle and frustration."
BankingMyWay.com offers a tool to search for the best rates on home-equity loans in your area. Rates have generally risen over the past week, especially in the Northeast. Local banks and credit unions can offer more competitive rates than major lenders.
Ryan suggests customers contact several lenders to get the most competitive interest rate and fee structure. Those who need to consolidate several existing loans may be able to work with their current lender to negotiate a favorable rate.
"Now may be an opportune time for homeowners who qualify to apply for a home equity product," says Ryan. However, homeowners with weaker credit or who are in areas where property values have declined sharply will probably have a "more difficult time qualifying for a home-equity product under the current circumstances."
A J.D. Power and Associates poll of 3,176 customers earlier this year found that overall customer satisfaction has risen to 780 on a 1,000-point scale, up 14 points from a year earlier. That's despite the fact that measures of service -- like length of approval process -- have remained consistent.
Customers simply expect more problems when they apply for such debt, due to ongoing troubles in the housing and mortgage markets, says Tim Ryan, senior research director of the finance and insurance practice at J.D. Power. At this point, many are just happy to obtain the loan, regardless of how long it takes or the frustrations they have to endure.
That's especially true since some homeowners already have "feelings of uncertainty toward property values and lenders," as Ryan puts it, or "associate the loan application process with hassle and frustration."
BankingMyWay.com offers a tool to search for the best rates on home-equity loans in your area. Rates have generally risen over the past week, especially in the Northeast. Local banks and credit unions can offer more competitive rates than major lenders.
Ryan suggests customers contact several lenders to get the most competitive interest rate and fee structure. Those who need to consolidate several existing loans may be able to work with their current lender to negotiate a favorable rate.
"Now may be an opportune time for homeowners who qualify to apply for a home equity product," says Ryan. However, homeowners with weaker credit or who are in areas where property values have declined sharply will probably have a "more difficult time qualifying for a home-equity product under the current circumstances."
Your Home - A Hidden Source Of Financing
by: News Canada
(NC)-Your home is more than just a place to hang your hat. In addition to being a source of pride and protection, it can be a valuable source of equity.
With interest rates still low, now may be a good time to consider a renovation, purchasing a new car or making some investments. The equity in your home may be able to help you secure the necessary funds to help you achieve your goals.
One way to access the equity in a home is to refinance the existing mortgage. This adds additional funds to the mortgage but it may yield a lower interest rate and lower monthly payments than a traditional loan. One caution, however; adding to your existing mortgage means it will take longer to pay it off. As a consequence, you will be paying more interest.
Another way to access the equity in your home is to open a line of credit that is secured against your home. Just as with refinancing, a line of credit may be available at an interest rate that is lower than a regular loan. In some cases, the interest rate on a line of credit can be as low as prime.
A line of credit gives you payment flexibility that is not available with a conventional mortgage. Not only do you have control over the length of the loan and how you repay it, you also have the flexibility to pay off the debt at anytime without penalty and you can control
the amount of payment you make each month - the minimum, as little as interest only, or as much as you can afford. The larger your monthly payment, the quicker you will pay off the line of credit and the lower your overall interest costs.
If minimizing the amount of interest you pay over the lifetime of the debt is important, then a secured line of credit may work for you. To qualify, you generally require 25 per cent equity built up in your home. Legal fees or registry fees may apply.
"If you are considering leveraging your home equity, you should meet with a qualified lending expert," says Terry Fitzpatrick, Vice-President, Bank of Montreal Consumer Lending. "A lending expert will explain your options, offer a variety of solutions, and help you make the best decision to suit your needs and your budget."
Information provided by Bank of Montreal. For more information visit www.bmo.com.
About The Author
News Canada provides a wide selection of current, ready-to-use copyright free news stories and ideas for Television, Print, Radio, and the Web.
News Canada is a niche service in public relations, offering access to print, radio, television, and now the Internet media, with ready-to-use, editorial "fill" items. Monitoring and analysis are two more of our primary services. The service supplies access to the national media for marketers in the private, the public, and the not-for-profit sectors. Your corporate and product news, consumer tips and information are packaged in a variety of ready-to-use formats and are made available to every Canadian media organization including weekly and daily newspapers, cable and commercial television stations, radio stations, as well as the Web sites Canadians visit most often. Visit News Canada and learn more about the NC services.
This article was posted on August 5, 2002
(NC)-Your home is more than just a place to hang your hat. In addition to being a source of pride and protection, it can be a valuable source of equity.
With interest rates still low, now may be a good time to consider a renovation, purchasing a new car or making some investments. The equity in your home may be able to help you secure the necessary funds to help you achieve your goals.
One way to access the equity in a home is to refinance the existing mortgage. This adds additional funds to the mortgage but it may yield a lower interest rate and lower monthly payments than a traditional loan. One caution, however; adding to your existing mortgage means it will take longer to pay it off. As a consequence, you will be paying more interest.
Another way to access the equity in your home is to open a line of credit that is secured against your home. Just as with refinancing, a line of credit may be available at an interest rate that is lower than a regular loan. In some cases, the interest rate on a line of credit can be as low as prime.
A line of credit gives you payment flexibility that is not available with a conventional mortgage. Not only do you have control over the length of the loan and how you repay it, you also have the flexibility to pay off the debt at anytime without penalty and you can control
the amount of payment you make each month - the minimum, as little as interest only, or as much as you can afford. The larger your monthly payment, the quicker you will pay off the line of credit and the lower your overall interest costs.
If minimizing the amount of interest you pay over the lifetime of the debt is important, then a secured line of credit may work for you. To qualify, you generally require 25 per cent equity built up in your home. Legal fees or registry fees may apply.
"If you are considering leveraging your home equity, you should meet with a qualified lending expert," says Terry Fitzpatrick, Vice-President, Bank of Montreal Consumer Lending. "A lending expert will explain your options, offer a variety of solutions, and help you make the best decision to suit your needs and your budget."
Information provided by Bank of Montreal. For more information visit www.bmo.com.
About The Author
News Canada provides a wide selection of current, ready-to-use copyright free news stories and ideas for Television, Print, Radio, and the Web.
News Canada is a niche service in public relations, offering access to print, radio, television, and now the Internet media, with ready-to-use, editorial "fill" items. Monitoring and analysis are two more of our primary services. The service supplies access to the national media for marketers in the private, the public, and the not-for-profit sectors. Your corporate and product news, consumer tips and information are packaged in a variety of ready-to-use formats and are made available to every Canadian media organization including weekly and daily newspapers, cable and commercial television stations, radio stations, as well as the Web sites Canadians visit most often. Visit News Canada and learn more about the NC services.
This article was posted on August 5, 2002
The Consumer Credit Counseling Service offers tips for surviving job loss
DURHAM, N.C. - It’s never a good time to lose your job. However, the current economic environment has resulted in business closures, downsizing and layoffs for many Americans. The unemployment rate hovers near 5 percent with recent graduates preparing to flood the market.
The Consumer Credit Counseling Service (CCCS) Raleigh and Durham offers the following tips for surviving a layoff, should one occur:
Allow yourself to be upset or even afraid. - These are natural reactions. However, should they become intense, be willing to seek professional help. Talking things through and hearing another person’s perspective can bring relief and restore your positive outlook.
Resist the urge to tell your boss what you truly think of him or her. - Remember, you may need him or her as a reference for a future job.
Take advantage of any assistance your workplace offers. - Many companies provide placement assistance, job retraining and severance packages. Make sure you are aware of all benefits offered.
Apply for any applicable government benefits. - Your HR representative at work will be a good resource.
Resist the urge to solve your problems by spending recklessly. - It may feel good for the moment, but the high of spending won’t equal the low of dealing with additional debt when there is no income.
Don’t be tempted to live off of your credit cards. - Someone with a good line of credit could actually support the family at the current standard of living by using credit, but there’s no guarantee a new position will materialize any time soon. One rule of thumb job counselors use is to expect one month of job search for each $10,000 of annual income you hope to replace. In other words, if you seek a $50,000 salary, it may take you five months to land that job.
Take a personal inventory. - Consider all assets, income and expenses. Hopefully, you will not have to liquidate any assets to survive, but it is good to know what you have to fall back on.
Drastic times call for drastic measures. - Nothing is off-limits. If necessary, consider selling the second car, or any recreational vehicles, real estate holdings, rental properties or jewelry.
After reviewing income versus debt obligations, - if there is not enough money to make ends meet, calculate how much is needed to meet the basic household living expenses. Your goal is to pay everyone, but if you must make a choice, keep your home-life stable by paying your rent or mortgage, utilities, childcare, insurance premiums, health care, food and keeping gas in the car.
Have a family meeting that includes the children. - You do not want people pulling in different directions, and a joint effort yields a greater result. Make cutbacks wherever possible, knowing that this austere lifestyle will only be temporary. Resolve to stop all non-essential spending immediately.
Tracking your spending is always a good idea, but when money is tight, it’s essential. - Write down every cent you spend. At the end of 30 days, review where the money went and make conscious decisions on where to cut back. You’ll be amazed by how much you can save and not even feel the pinch.
Contact your creditors to arrange lower payments. - Most major credit card issuers have in-house help programs. Explain your situation and what you are doing to resolve it. The creditor may be able to temporarily lower your monthly payment and reduce interest.
Call your mortgage lender or servicer and inform them of your situation. - Be prepared to provide them with documentation of the setback, and have a resolution plan in mind. Since the average consumer doesn’t know all of the loan modifications available, it is smart to first sit down with a certified housing counselor and map out a plan. This way, you will know that you have selected the option that is best suited to your situation.
“No one is immune to a layoff. Stalwarts of the American economy have laid off workers by the thousands. Financial setbacks are never easy, but with help, most can survive unscathed,” said Leslie Barber, Director of CCCS and Emergency Housing Assistance, with TFS. “Reaching out to a trained and certified credit counselor can be one of the smartest steps a person can take during times of financial distress.”
You do not have to solve your financial problems alone. CCCS Raleigh and Durham, a division of Triangle Family Services (TFS), is just a call or click away. To reach the certified credit counselor closest to you dial 919-821-0790 x307, or online go to http://www.tfsnc.org/ .
About Triangle Family Services
Triangle Family Services (TFS) is a local United Way agency helping families and children throughout the Triangle. Established in 1937, it is one of the oldest and most comprehensive nonprofits in the region. All of our services are confidential and nationally accredited by the Council on Accreditation. Through skilled and compassionate care, TFS annually helps more than 5,000 Triangle families and individuals achieve Financial Security, Family Safety, and Mental Health. For more information about Triangle Family Services, visit http://www.tfsnc.org/ .
About the NFCC
The National Foundation for Credit Counseling (NFCC), founded in 1951, is the nation’s largest and longest serving national nonprofit credit counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior and build capacity for its members to deliver the highest quality financial education and counseling services. NFCC members annually help more than two million consumers through close to 900 community-based offices nationwide. For free and affordable confidential advice through a reputable NFCC member, call1-800-388-2227, (en Español 1-800-682-9832) or visit http://www.nfcc.org.
The Consumer Credit Counseling Service (CCCS) Raleigh and Durham offers the following tips for surviving a layoff, should one occur:
Allow yourself to be upset or even afraid. - These are natural reactions. However, should they become intense, be willing to seek professional help. Talking things through and hearing another person’s perspective can bring relief and restore your positive outlook.
Resist the urge to tell your boss what you truly think of him or her. - Remember, you may need him or her as a reference for a future job.
Take advantage of any assistance your workplace offers. - Many companies provide placement assistance, job retraining and severance packages. Make sure you are aware of all benefits offered.
Apply for any applicable government benefits. - Your HR representative at work will be a good resource.
Resist the urge to solve your problems by spending recklessly. - It may feel good for the moment, but the high of spending won’t equal the low of dealing with additional debt when there is no income.
Don’t be tempted to live off of your credit cards. - Someone with a good line of credit could actually support the family at the current standard of living by using credit, but there’s no guarantee a new position will materialize any time soon. One rule of thumb job counselors use is to expect one month of job search for each $10,000 of annual income you hope to replace. In other words, if you seek a $50,000 salary, it may take you five months to land that job.
Take a personal inventory. - Consider all assets, income and expenses. Hopefully, you will not have to liquidate any assets to survive, but it is good to know what you have to fall back on.
Drastic times call for drastic measures. - Nothing is off-limits. If necessary, consider selling the second car, or any recreational vehicles, real estate holdings, rental properties or jewelry.
After reviewing income versus debt obligations, - if there is not enough money to make ends meet, calculate how much is needed to meet the basic household living expenses. Your goal is to pay everyone, but if you must make a choice, keep your home-life stable by paying your rent or mortgage, utilities, childcare, insurance premiums, health care, food and keeping gas in the car.
Have a family meeting that includes the children. - You do not want people pulling in different directions, and a joint effort yields a greater result. Make cutbacks wherever possible, knowing that this austere lifestyle will only be temporary. Resolve to stop all non-essential spending immediately.
Tracking your spending is always a good idea, but when money is tight, it’s essential. - Write down every cent you spend. At the end of 30 days, review where the money went and make conscious decisions on where to cut back. You’ll be amazed by how much you can save and not even feel the pinch.
Contact your creditors to arrange lower payments. - Most major credit card issuers have in-house help programs. Explain your situation and what you are doing to resolve it. The creditor may be able to temporarily lower your monthly payment and reduce interest.
Call your mortgage lender or servicer and inform them of your situation. - Be prepared to provide them with documentation of the setback, and have a resolution plan in mind. Since the average consumer doesn’t know all of the loan modifications available, it is smart to first sit down with a certified housing counselor and map out a plan. This way, you will know that you have selected the option that is best suited to your situation.
“No one is immune to a layoff. Stalwarts of the American economy have laid off workers by the thousands. Financial setbacks are never easy, but with help, most can survive unscathed,” said Leslie Barber, Director of CCCS and Emergency Housing Assistance, with TFS. “Reaching out to a trained and certified credit counselor can be one of the smartest steps a person can take during times of financial distress.”
You do not have to solve your financial problems alone. CCCS Raleigh and Durham, a division of Triangle Family Services (TFS), is just a call or click away. To reach the certified credit counselor closest to you dial 919-821-0790 x307, or online go to http://www.tfsnc.org/ .
About Triangle Family Services
Triangle Family Services (TFS) is a local United Way agency helping families and children throughout the Triangle. Established in 1937, it is one of the oldest and most comprehensive nonprofits in the region. All of our services are confidential and nationally accredited by the Council on Accreditation. Through skilled and compassionate care, TFS annually helps more than 5,000 Triangle families and individuals achieve Financial Security, Family Safety, and Mental Health. For more information about Triangle Family Services, visit http://www.tfsnc.org/ .
About the NFCC
The National Foundation for Credit Counseling (NFCC), founded in 1951, is the nation’s largest and longest serving national nonprofit credit counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior and build capacity for its members to deliver the highest quality financial education and counseling services. NFCC members annually help more than two million consumers through close to 900 community-based offices nationwide. For free and affordable confidential advice through a reputable NFCC member, call1-800-388-2227, (en Español 1-800-682-9832) or visit http://www.nfcc.org.
Subscribe to:
Comments (Atom)
