The market is great, what a time to buy! Oh wait, were we talking about houses?
The market is great, what a time to buy! Oh wait, were we talking about houses?
"Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
"And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion
Originally Posted by Mia M





According to some friends in the banking industry, under the new regulatory guidelines, the lender is ultimately looking for the following ...so when you say cash, does money pulled out from a refi count as cash?, if i can even get a refi, cause so far noone's agreed to even do that, i just don't get it, i got like 6 years of returns, assets, and good credit....
- writing a new / refi loan that does not exceed 80% of the CURRENT MARKET VALUE of the property.
- a borrower who has verifiable income sufficient to cover new / refi monthly mortgage payments in a worst case scenario versus future moves in interest rates and given the borrower's other existing financial commitments
- a property that is compliant with GSE mortgage 'resale' standards, so that the bank can 'pass on' the loan's default risk to FNM / FRE rather than being forced to hold the mortgage on the bank's own books.
So in terms of 'cash', if you are attempting to refi a home you already own, the ultimate amount of 'cash' you need is a function of the current market value of the property versus your current equity position in the mortgage. If this was a new purchase it would be 20%. If this is a refi, then the amount of 'cash' needed is a function of today's market price of the property versus today's equity position i.e. the remaining outstanding balance of your existing mortgage.
This is the area where a lot of recent property buyers are getting killed. If they bought the property 2 years ago at say a $500,000 peak price, and they did so via a 'piggyback' mortgage loan with 100% financing, then basically their outstanding mortgage balance 2 years later is still almost the entire amount say $490k (since almost the entire amount of their 2 years of mortgage payments were applied to interest). Now say that they live in an area where property values have only declined slightly, say by 10% - meaning that today's property value has dropped from $500k to $450k. Under the new regulatory guidelines, lenders are going to draw the lending line at 80% of that $450k or $360k as the maximum amount of a refi loan they are willing to write. So in order to obtain a refi of the original $500k 'piggyback' mortgage loan, the homeowner needs to pony up 'cash' for the difference between the $490k balance owed on the original 'piggyback' loan versus the $360k maximum amount of a refi loan under the new regulatory guidelines, or $130k. Throwing in closing costs and fees will add another $15-20k to the 'cash' requirement as well.
Additionally, that $130k cannot come from any source that would further encumber the bank's ability to count / use the 'full' value of the property as collateral. This means that 'silent second' loans against the property are now out of the picture. This means that the $130k must come from 'cash', from the sale or pledge of other assets unrelated to the property being refinanced (i.e. stocks / bonds / boats / cars / different properties), or from some form of 'unsecured' second loan. However, going the 'unsecured' second loan route will not only be very difficult to obtain, and will not only be expensive in terms of interest rate, but the additional monthly financial liability will be factored in by the bank's refi loan approval process when determining the refi borrower's ability to repay the primary loan in a worst case future interest rate scenario.
In regard to your specific question about refi equity extraction money from a second property being a possible source of 'cash' to pay down the equity shortfall on a first property, as long as the second property refi does not encumber the first property than it is a 'good' source. However, the same new regulatory guidelines are going to apply to any new equity extraction loan on the second property ... the banks are not going to approve a home equity loan / refi loan where the total level of indebtedness on the second property exceeds 80% of its current market value. If the second property was purchased for say $300k, if the current market value has fallen to say $250k, and if the existing mortgage balance on the second property has been paid down to say $150k, then lenders will be willing to approve a home equity / refi loan for the difference between the $150k mortgage balance and 80% of the $250k current market value or $200k maximum total debt on the second property, equaling $50k in equity extraction. However, if the existing mortgage balance on the second property has not been paid down below the $200k level i.e. 80% of the current market value, then the lender is not going to approve a home equity / refi loan.
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Last edited by Melonie; 09-21-2007 at 11:19 PM.





Unfortunately, this comes down to 'officially sanctioned' prejudice in terms of categorical risk. One of my friends in the banking industry likened the current situation to auto insurance rates for male drivers in the 18-25 age group. Some percentage of male drivers in this age group will be able to document 4-5-6 years of perfect driving record. However, because the categorical risk is high due to the existance of lots of other male drivers age 18-25 having accidents at a statistically high rate, every male driver age 18-25 is thrown into the same risk pool regardless of their personal driving record and is made to share the costs of covering the 'losses' caused by other members of that risk pool. The insurance companies are allowed to take the position that the fact a male driver age 18-25 has not had an accident in the last 4-5-6 years merely means that he is overdue for an accident in the coming year !I don't see why validated tax returns would even be considered low-doc or need a "high enough" credit score. After all, it's filed with the IRS just like a W2 and any creditor worth its salt can validate it with a simple inquiry. duh!
I know, I know, *supposedly* self-employed income isn't as stable as that from a regular job. Yeah, tell that to the people who lose their jobs everyday to cutbacks and downsizing
This is now basically the case for dancers in particular, and for self-employed people in general, in terms of default / bankruptcy risk to lenders. Like the male drivers age 18-25, some percentage of dancers and self-employed people in general are going to be able to document 4-5-6 years worth of consistent annual earnings and zero defaults. However, because of the 'officially sanctioned' prejudice, lenders are allowed to make a similar assumption that the 4-5-6 years worth of good financial track record merely means the person is overdue for financial problems in the coming year !
Again according to my banker friend, the real force behind the tightening lending standards are the foreign investors whose money is the true source of new / existing mortgage loans. Keep in mind that Americans in general do NOT save money. In general, Americans spend more than they earn, Americans have a negative net worth ex retirement funds (which are not 'attachable' in a bankruptcy thus can't be counted as collateral), etc. Thus the money that banks are lending out for new mortgages does not come from American depositors / investors, it comes from investors in Germany, in the UK, if France - lately even China etc. As US mortgages are increasingly going into default, these foreign investors are being forced to eat losses ... as are the foreign banks and financial institutions involved. As the US dollar's exchange rate continues to fall versus their home currencies, these foreign investors are being forced to eat losses even when the American mortgage holders are NOT going into default. Thus in order to agree to keep bankrolling new American mortgages, these foreign investors expect to see a higher degree of 'safety' in regard to loan default risk, as well as expect to see higher interest rates to cover their exchange rate losses.
Lately this is becoming a huge problem, thus there is increased political pressure for the GSE's to expand operations ... in other words there is political pressure for more US tax money to be funneled into Fannie Mae and Freddie Mac to reduce America's dependence on foreign investors as the source of money for new mortgage / refi loans. But with the GSE's come rules and standards that the retail mortgage lenders must follow to the letter - and the risk pool of self-employed persons is part of those rules and standards since Fannie and Freddie don't want to buy such mortgage loans. This means that the retail mortgage lenders must look elsewhere for the capital to finance mortgage / refi loans to people falling into this risk pool ... that the capital is harder to find ... that the investors of that capital expect higher interest rates and tighter creditworthiness standards etc.
I just wanted to say that if you are trying to pull cash out of your house, it will be hard to get it. They are not as "liberal" with the appraisals as they were a year or so ago...and the market value is not climbing much...if at all...
If you are an investor, this is a great time to buy. With the foreclosures going through the roof, investors are swooping in and buying up the properties, renting them out (as the renter rate is steadily climbing...and since the investors get the properties much cheaper...they can rent them out cheaper) and building up their portfolio.
So, it just depends on which side of the mortgage spectrum you're on.





^^^ agreed about this being a bad time to try and extract equity from a house.
As to acquiring properties at 'bargain' prices with the intention of renting them out, that involves a calculated risk. Risk #1 is that the real estate market values could fall even further in the near future. I have my doubts about this issue because SO many subprime mortgage lenders are sitting on huge inventories of houses they have acquired in foreclosure rather than selling them at auction. Eventually these lender owned / held properties are going to have to be liquidated, and in doing so the local real estate market values will be driven even lower.
Risk #2 is that the rental cash flow equation won't change in the near future. Even if the rental property has a 'fixed' monthly mortgage payment, there are still large potential variables to consider. Property taxes are being increased nationwide as local gov'ts attempt to balance their budgets in the face of rising social welfare costs, rising gov't employee / retiree benefit costs, rising energy and other costs. Insurance costs are also rising , and particularly so in certain areas prone to weather risk. These two issues alone have the potential of adding hundreds of dollars per month in 'new' expenses to the cash flow equation.
On the flip side is the market price of rentals. As fewer and fewer houses, condos etc. are able to be sold at 'break-even' prices by current owners / developers, many are opting to try renting their property instead of selling in the hopes that they can cover their 'carrying costs' - or at least avoid an immediate bankruptcy filing versus a bankruptcy filing next year or the year after. However, this has the effect of making more rental properties available thus lowering the rental occupancy rate thus creating downward pressure on local market price of rentals.
Risk #3 - and the one that worries me the most, actually - is that an increasing number of tenants have little or nothing to lose in a financial sense. If you sign a rental / lease agreement with a seemingly 'good' tenant, but that tenant happens to wind up being downsized / outsourced or otherwise in financial trouble, the landlord may find that local renters rights laws mean big financial losses. In many areas it will be necessary for the landlord to invest additional money in legal fees plus wait out a 3 month eviction clock before deadbeat tenants can be removed from the landlord's rental property. If the landlord is lucky, the property will still be in suitable condition for re-rental with the minimal additional expense of some cleaning and painting. If the landlord is NOT lucky, then additional time and money will have to be invested to repair cracks / holes in walls, to replace stolen plumbing fixtures etc. Then after the property is vacated and restored to suitable condition to re-rent, another month is lost and more money must be spent on ads seeking a new tenant. Despite seizing the deadbeat tenant's security deposit, the several months worth of potential lost revenues plus the potential repair costs can make a huge dent in the cash flow equation.
^ All very true...however, in the game of Real Estate, simply breathing at the wrong time is a big risk. However, with the biggest risks are the biggest rewards.
I am not saying that everyone should run out and start buying foreclosure homes...what I am saying, is that if you do...know what you are doing...do your research...and make sure you can "afford" to do it.
My observations in this are 50/50, in both renting and flipping. Some of my clients/colleauges have achieved great success, others are in the red on this.
Our top advisor in the office has two clients, one a RE broker, another a mortgage broker, who lost millions on a huge flip/rent deal. They were very confused that it could happen to two guys with YEARS of experience, but it does.
Me, personally, I would actually rather invest in the market. I hear Countrywide is an undervalued bargain.![]()
"Have you ever been to American wedding? Where is the vodka, where's marinated herring?" - GB
"And do the cats give a shit? No, they do not. Why? Because they're cats."-from The Onion
Originally Posted by Mia M
Well, like I said...risk.
Of course, I have seen people lose their asses in this game. Some people we know...who were very successful, made some really bad choices, jumping into something they did not fully research...and then have their asses handed back to them, mauled.
Research, research, research.
Some seasoned investors think that they are so experienced that they just "know" and do not need to research anything...only to get into something that falls on them.
Research, research, research.
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