Interest Rate and Home Price Swings

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By Rick Tobin

Historically, the #1 reason why home prices generally rise, remain flat, or fall is directly related to the latest 30-year fixed mortgage rates. This is true because the vast majority of home buyers need third-party funds from banks, credit unions, or mortgage professionals to purchase and sell their homes to new buyers who also usually need bank financing to cash the seller out.

Over the past 10 years, a very high percentage of mortgage loans used to acquire residential (one-to-four unit) properties have originated, directly or indirectly, from some form of government-owned, -backed, or -insured money, such as FHA (Federal Housing Administration), VA (U.S. Department of Veterans Affairs), USDA (U.S. Department of Agriculture for more rural properties), Fannie Mae, Ginnie Mac, and Freddie Mac in both the primary and secondary markets. Most of these same government-assisted mortgage programs allow buyers to purchase properties with as little as no money down to just 3.5% down payments. Many times, the seller and family members can credit the most or all of the closing costs or down payment requirements so that the buyer really has no money invested in the property.

To the buyer, the most important part of the purchase deal is related to qualifying for a very low 30-year fixed mortgage rate and an affordable monthly payment. When the interest rates are too high, then fewer buyers can qualify for properties. During these higher rate time periods, home prices typically stay neutral or fall in price as seen during past periods of deflation like back in the mid-1970s. As such, almost all “boom” (positive) or “bust” (negative) housing cycles are directly related to low or high rates of interest, so they tend to correlate or go hand-in-hand with one another.

Interest Rate History: 1971 – 2018

Between 1971 and 2018, 30-year fixed-rate mortgages have ranged between a low of 3.31% in 2012 to a high of 18.63% in 1981. Fixed-rate mortgages are still hovering near historical lows at present and in recent years. An estimated 60%+ of mortgage holders are paying fixed-rates on their residential owner-occupied properties somewhere within the 3.00% and 4.90% rate ranges as of 2015, per data released by Freddie Mac.

During this same 47-year timespan (1971 – 2018), the average 30-year fixed-rate mortgage was near 8.08%. This rate is almost double the average 30-year fixed-rate mortgage loan between 2010 and 2019. Because the ease of qualification and the affordability of mortgage loans is typically the most important factor behind a booming or busting housing market, the more recent 3% to 5% rate ranges over the past 10 years has helped fuel a stronger housing market with rapid appreciation rates as well.

Most often, owner-occupants are using some type of a government-backed or insured mortgage loan and / or secondary market investor to purchase their properties. These loans include FHA, VA, Fannie Mae, and Freddie Mac. The typical down payment ranges used to purchase these properties are very likely to average somewhere within the 0% to 3.5% down payment range. Many times, the seller provides a credit towards most of the closing costs and / or another family member assists with the down payment as a gift of some sort.

If so, a very high percentage of owner-occupied home buyers have purchased their homes with little to no money down out of their own pocket prior to qualifying for tax-deductible mortgage payments that were less than a nearby apartment to lease. Additionally, these same homeowners have boosted their overall net worth after the vast majority of residential properties have appreciated at significant annual percentage rates. In some cases, homes have double in value in less than five to seven years due to the combination of affordable mortgage loans, easier mortgage underwriting approval processes, and increasing demand for properties to purchase.

Source: Freddie Mac’s Primary Mortgage Market Survey (PMMS)

The Consumer Debt Anchor

With home mortgages, the primary collateral for the loan balance is the home itself. In the event of a future default, the lender can file a foreclosure notice and take the property back several months later. With automobile loans, the car dealership or current lender servicing the loan can repossess the car.

Homeowners often refinance their non-deductible consumer debt that generally have shorter terms, much higher interest rates, and no tax benefits most often into newer cash-out refinance mortgage loans that reduce their monthly debt obligations. While this can be wise for many property owners, it may be a bit risky for other property owners if they leverage their homes too much.

With credit cards, lenders don’t have any real collateral to protect their financial interests, which is why the interest rates can easily be double-digits about 10%, 20%, or 30% in annual rates and fees, regardless of any national usury laws that were meant to protect borrowers from being charged “unnecessarily and unfairly high rates and fees” as usury laws were originally designed to do when first drafted.

Zero Hedge has reported that 50% of Americans don’t have access to even $400 cash for an emergency situation. Some tenants pay upwards of 50% to 60% of their income on rent. A past 2017 study by Northwestern Mutual noted the following details in regard to the lack of cash and high credit card balances for upwards of 50% of young and older Americans today:

* 50% of Baby Boomers have basically no retirement savings.

* 50% of Americans (excluding mortgage balances) have outstanding debt balances (credit cards, etc.) of more than $25,000.

* The average American with debt has credit card balances of $37,000, and an annual income of just $30,000.

* Over 45% of consumers spend up to 50% of their monthly income on debt repayments that are typically near minimum monthly payments.

Rising Global Debt

According to a report released by IIF (Institute of International Finance) Global Debt Monitor, debt rose to a whopping $246 trillion in the 1st quarter of 2019. In just the first three months of 2019, global debt increased by a staggering $3 trillion dollar amount. The rate of global debt far outpaced the rate of economic growth in the same first quarter of 2019 as the total debt/GDP (Gross Domestic Product) ratio rose to 320%.

The same IIF Global Debt Monitor report for Q1 2019 noted that the debt by sector as a percentage of GDP as follows:

  • Households: 59.8%
  • Non-financial corporates: 91.4%
  • Government: 87.2%
  • Financial corporates: 80.8%

Rate Cuts and Negative Yields

As of 2019, there’s reportedly an estimated $13.64 trillion dollars worldwide that generates negative yields or returns for the investors who hold government or corporate bonds. This same $13.64 trillion dollar number represents approximately 25% of all sovereign or corporate bond debt worldwide.

On July 31, 2019, the Federal Reserve announced that they cut short-term rates 0.25% (a quarter point). Their new target range for its overnight lending rate is now somewhere within the 2% to 2.25% rate range. This is 25 basis points lower than their last Fed meeting decision reached on June 19th. This was the first rate cut since the start of the financial recession (or depression) in almost 11 years ago dating back to December 2008.

There are three additional Federal Reserve two-day meeting dates scheduled for 2019 that include:

  • September 17-18
  • October 29-30
  • December 10-11

It’s fairly likely that the Fed will cut rates one or more times at these remaining 2019 meeting dates. If so, short and long-term borrowing costs may move downward and become more affordable for consumers and homeowners. If this happens, then it may be a boost to the housing and financial markets for so long as the economy stabilizes in other sectors as well such as international trade, consumer spending and the retail sector, government deficit spending levels, and other economic factors or trends.

We shall see what happens between now and year-end in 2019 and beyond.

 

Rick Tobin

Rick Tobin has a diversified background in both the real estate and securities fields for the past 30+ years. He has held seven (7) different real estate and securities brokerage licenses to date, and is a graduate of the University of Southern California. Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), equity funds, and foreign money sources. You can visit Rick Tobin at RealLoans.com for more details.

Real Estate Investing With No Money Or Credit

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By Laura Alamery

So, you want to be your own boss and do not want to put a lot of start-up capital into your venture. You have been researching which business options might be best for you and keep reading about real estate wholesaling and other strategies that allow you to make a profit in real estate investing without putting any money down or having credit checks performed.

It is not too good to be true! There are a number of different directions that real estate can take, and the no money, no credit path has many options.

  • Wholesaling
  • Co-wholesaling
  • Subject To Sales
  • Seller Financing
  • Transactional

Excelling in each of these areas requires the proper knowledge, as well as the people skills necessary to grow your real estate investing business. Regardless of the real estate direction that is chosen, building solid connections with others in your community will grow your business faster than any other sales or marketing campaigns that exist.

What is Wholesaling?

Let’s start with the most important players involved in a real estate transaction. The seller, the buyer, and the person who facilitates the sale. Most commonly, the facilitator is a real estate agent. They list the property for the seller, or scout available properties for the buyer, and they most definitely need to be licensed by the state the transaction is taking place.

Real estate wholesalers act similarly, to an extent. Like agents, wholesalers are always on the lookout for sellers. Unlike agents, most wholesalers are looking for properties that are selling at a very serious discount, in order to resell it at a higher price and make a sizeable profit.

Wholesaling requires dedication and the people skills to build a comprehensive database of both sellers and buyers. And is a common niche for new (and veteran) real estate investors. The wholesaler finds the contract and either assigns the contract to a buyer at a higher price or has a double closing, meaning the wholesaler technically buys the property but then immediately resells it the same day.

Co-Wholesaling

Connecting with other wholesalers can expand both your customer list and your bank account. If you have a buyer looking for a specific property, a fellow wholesaler may have the perfect place. Generally, the wholesale fee is split between the two and both can profit from the sale.

Another advantage to co-wholesaling is that it opens your customer base to include more opportunities. Often times, wholesaling is where investors meet and connect to collaboratively purchase a property through a real estate investment trust (REIT). Working together can work wonders! Investment properties such as this are often large commercial buildings that significantly impact the community.

Subject To Sales

Subject to real estate transactions are the best option for those with no or bad credit. This agreement is between the seller and the wholesaler or investor. No down payments are made or credit checks performed, as the buyer ends up simply assuming the mortgage.

There are a few things to be aware of before entering into these types of deals. In the mortgage contract, the lender has the right to call the note due at any time, in full. Speaking with the bank before the transaction is a good idea to know where you stand going in.

Rarely does happen, as the lenders are simply happy that the loan is getting paid. This is a great example of why wholesalers are always looking for distressed properties. Homeowners have many reasons for needing to relinquish responsibility of their property. Wholesalers make the transition easy, as they already come with a list of buyers, the seller does not have to go through the hassle of listing and showing, and the sale usually happens quickly.

Seller Financing

Another great option that does not require money down or credit checks is when the seller will provide the financing. How this works is usually that the seller keeps the property in their name and the buyer simply pays the seller instead of the bank.

There is also usually an option for the buyer to make the purchase once they are in the position to make the down payment or get a mortgage of their own. Sellers like these kinds of sales because they have a steady stream of monthly income from the payments.

Transactional Funding

Here is where those relationships that you have been building are going to come into play. Bank loan officers are a necessity to wholesalers and their relationship should be as important as the buyers and sellers.

A great example of when transactional funding will come in handy are bank owned and short sale properties. These properties often sell at bargain prices and a substantial profit can be made. Unfortunately, these sellers do not allow assignment of the contract or double closings, and do require cash at the end of the deal.

Finding Your Place in the Real Estate Investing World

Real estate can be overwhelming and finding the niche that works best for you is important to maintaining a successful and lucrative business. Once the journey begins, so many doors will open with possibilities of avenues to pursue.

The options outlined here are some of the most common areas for new real estate investors. Once a few sales have taken place it will be easier to determine which speciality is right for you. A very big part of real estate investing is relying on your intuition and listening to where you feel most comfortable will only help build your business, portfolio, and bottom line.

Enlisting the help of experienced investors, and finding a mentor who wants to help, can catapult your business into the next level. There are so many things to learn when it comes to real estate, and while much of it is simply learning by experience, there are options to make it easier. The knowledge of those veteran investors and agents is invaluable and learning from their mistakes can save you many.

Start building your real estate investment portfolio with little to money down, with no credit checks, by following these noted strategies. And watch your business take off!

Are you FUNDABLE, or Do You Just Have a Good Score?

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Lenders only make money when they lend, right?

Well, you would’t know it from the way lenders keep borrowers in the dark about how to be a good borrower and qualify to borrow their money! You would think that lenders would be bending over backwards to teach, coach, and instruct borrowers on how to be a good borrower. We are simply told we need a good credit score.

As a result, anyone who wants to borrow money is obsessed with their credit score. The problem is borrowers have been led to believe that their credit scores are the chief determining factor to getting approved for credit—and it’s not true.

My intention in this article is to disclose some of the things I have learned over the last 25 years as a credit and funding expert. Many of these “secrets” revolve around what I call “fundability.” Fundability is far more than a credit score. Fundability is the composition and quality of your entire financial situation as represented by your credit “profile” such that a lender finds you attractive and desirable enough to extend you credit. As I have learned, fundability is measured by three major factors: credit score, credit profile quality, and underwriting criteria. Let’s take a look at each of one of them.

There are certain fundamental aspects of credit scoring that ARE important. The first of these is that your credit score, for it to be fundable, needs to be a FICO® credit score. Most borrowers are unaware of the difference between a FICO® credit score and what I call FAKE-O™ credit scores.

A FICO® credit score is a three digit score that is generated by filtering the data of one of the credit bureaus through a specific algorithm created by Fair Issac Company (FICO®). FICO® scores fall into two categories: the first is called an “unweighted” score and grades the raw data of your credit profile. This unweighted score is the score that lenders and creditors provide as part of their credit card offers. However, this score (even though it is a FICO® score) is NOT a score that is used by lenders to evaluate your fundability.

The second category of FICO® scores is what is called “industry-specific” scores. They are also know as “weighted” scores, because they are weighted for the particular industry where you are applying for credit. For example, if you’re looking to purchase a vehicle, the lender or dealership will be using FICO® software that weighs your previous auto loan reputation. If you have a good payment history, your score will be higher than your unweighted scores, but if you had a missed payment or repossession, then your auto score may be lower than your unweighted score. Industry-specific credit scores include auto scores, mortgage scores, credit card scores, etc.

So while you have been trained by the financial world to be score sensitive, no one has taught you the difference between FICO® and FAKE-O™ scores. If it does not have the FICO® registered trademark it is not a legitimate score—NO lender will lend on it. I hate (not really—just being polite) to inform all of you that the credit scores offered on sites like CreditKarma.com, etc. are FAKE-O™ scores and are not used by lenders to extend you credit. The best place to acquire your true FICO® credit scores is myFICO.com. It offers both unweighted and industry-specific scores. Another feature to the credit report you get from myFICO.com is that it also contains credit scores calculated using various versions of the FICO® scoring software so that you can see what the lenders see—regardless of which software version a lender uses.

Whaaaaa?

As with all software, there are versions that are more recent and and there are versions that are older. The challenge is that when you go to a lender and submit an application, you do not know what version of the FICO® software they are using. To add insult to injury, when you pull your myFICO®.com credit report, you will see that there can be as much as a 20 to 70 point difference between scores generated by the different software versions. And each version grades the exact same data on your credit profile!

What’s more disturbing still is that lenders do not educate borrowers about the complexities of credit so that they can make intelligent borrowing decisions. Of course, we are not schooled in these credit vagaries. We are told only to pay our bills and we’ll have a good credit score. The secret is that “paying your bills” on time is only one of 40 activities on your credit profile that FICO® measures. Once again, our ignorance of those other 39 criteria leaves us in mystery as to how to positively affect our fundability and our credit approvals.

The second contributing factor to your fundability is the quality of your credit profile. Your credit profile breaks down into five distinct areas: your identity, your revolving accounts portfolio, your installment loans portfolio, inquiries, and derogatory or negative indicators (late pays, collections, liens, judgments, and other types of score limiting data). Let’s take these one at a time.

Your personal credit identity is the single most important feature of a high-quality credit profile. Lenders, credit bureaus, and FICO® do not think of you as a person in the traditional sense. You are an identity—a data set that they can quantify and track. Since you were never taught how to correctly apply for credit, you probably applied using various versions of your name and different addresses. Since the credit bureaus collect every scrap of data you submit in your applications, they have a record of every version of your name, every address you’ve ever applied under (even Aunt Mae’s where you spent the summer). Credit bureaus do this so they can collect and merge all your data to better identify you. The bureaus have spent tens of millions in data development and management, when it seems to me that it would just be simpler for them to instruct borrowers how to establish a credit identity and use it consistently when borrowing. But alas, such is not the case. One of the first things you will see when you pull you’re myFICO.com credit report is the veritable mess of inconsistent information that is listed under your personal information section (credit identity). It is vital that you present a single, clear, and concise identity to your current creditors as well as any future lenders.

The second area that contributes to a high-quality credit profile is what I call your “revolving accounts portfolio.” This is the collection of all of your revolving accounts: credit cards, credit lines, charge cards, and HELOCs (home equity lines of credit). The most important score contribution to you’re revolving accounts portfolio is your balance to limit ratio (known in the industry as utilization), followed by the average age of your revolving accounts portfolio. Next priority is the quality of each individual account. Quality is defined by the “tier” of the lending institution and the contribution of the account to the quality of the profile. While I can’t go into great detail here, you need to know credit instrument quality ranges from Tier 1 banks and 100% contribution to Tier 4 lenders and 40% contribution. Until now, we were never trained on how to build a high-quality fundable credit profile and so many of us have low-value “junk” cards which show a lender a lack of credit sophistication.

The third area of a high-quality credit profile is your installment loan portfolio. As with your revolving account portfolio, you can have a Tier 1, 100% quality loan, and you can have a Tier 4, 40% quality loan. The quality of the loan contributes to or detracts from the quality of your credit profile and the quality of your credit profile determines your fundability.

The next contributor to a high-quality credit profile are your inquiries. Inquiries count against your credit score for 12 months, but what we were not told is that the inquiries count against underwriting and fundability for 24 months. FICO® and lender underwriting software downgrade your fundability significantly when you have too many inquiries. How many is too many? FICO® allows one inquiry per six months without a significant degradation of your credit score or fundability.

After one inquiry per six months, there is a steep point-loss curve as you incur more inquiries. Additionally the quality of the accounts you are applying for will impact your credit profile. Finance companies, mall store cards, and other low-grade credit instruments have a greater negative impact against your score than higher tiered credit instruments.

Finally, the most powerful negative contribution to your profile and fundability is the presence of derogatory accounts or other negative indicators. The credit repair industry has increased borrower awareness about the negative impact of bad credit. Unfortunately, credit repair is not a solution that will help your fundability. Credit repair companies offer a meager dispute letter writing campaign in the hopes of removing a few negative accounts. While the removal of these accounts may improve your score a little, it does not improve the essential nature of your fundability as we’ve described in this section—credit repair does not help you build a powerful FUNDABLE credit profile.

By definition credit repair strategies and those service providers who offer them, are completely ignorant of fundability and do not know how to create a credit profile that will contribute to credit approvals. In fact, most credit repair firms, in a feeble attempt to help their clients “rebuild” their credit, refer them to low-value junk credit instruments, etc. These junk cards pay referral fees so the credit repair company wins, but the clients take another hit to their credit. It is a travesty how much ignorance there is among organizations who say they are trying to help disadvantaged borrowers.

Let’s take a look now at the final fundability factor: underwriting. Underwriting software expands the requirements of fundability significantly. Since it is the lender that is actually extending the credit (and carrying all the risk), lenders have developed (in concert with FICO®) their own underwriting criteria and software.

Underwriting software takes into account credit score, income, debt load, current banking relationship (checking account, average daily balance, recency of last bounced check) and the 24 month look-back period. Underwriting software calculates behaviors over the preceding 24 months and measures it in a logarithmic scale. A borrower’s behavior over the last 24 months is the key indicator of what the borrower’s behavior will be for over the next 24 months. The 24-month look-back period cannot be underestimated in its importance to your fundability.

The next time you are at a cocktail party or social gathering and someone tries to dazzle you with their credit savvy, politely interrupt them and ask them to share their understanding of ANY of the topics you have learned in this article. When they stutter and hum and ha, overwhelm them with all your knowledge about fundability!

Every borrower in this country, and every individual in the upcoming generation needs to learn what we have reviewed here. We cannot remain in our ignorance. We cannot be “at effect” of these billion-dollar organizations who not-so-secretly profit from our ignorance. We need to turn the tables and make ourselves knowledgeable AND fundable. If knowledge is power, then applied knowledge is a superpower.

If you would like to know more about Credit Funding Optimization, go to CreditSense.com/frequently-asked-questions. We also have an exhaustive YouTube channel: YouTube.com/Creditsense. Take a moment and review our website or call us at 801.438.9090. You will find these resources available nowhere else. Read, study, watch, and get empowered with the knowledge that will transform your financial world. And for most of us, when we transform our financial world, the rest of our lives will significantly improve. CreditSense.com offers the only Credit Funding Optimization in existence. It is the only integrated process that optimizes your credit score, your credit profile quality, and your underwriting capacity so that you can become FUNDABLE.

Sincerely,

Merrill Chandler, CEO and Chief Strategist