Wednesday, September 15, 2010

Common Sense Not Found in Automated Mortgage Underwriting Engines

Article By Jim Russell, Mortgage News Daily

We are now near the end of the third year of the financial crisis and still nothing has been done to reach deep into the supply chain and correct the core problem: wealth and credit are still not being distributed where they are needed most.

Yes there has been strong legislation passed to re-regulate the financial sector and provide the central government regulators extraordinary powers of supervision.  There have been incentives offered to spur the housing sector.  The FED is managing the money supply to insure low rates are available (hopefully to allow for lending to expand employment opportunities too); all admirable and necessary. 

Yet there are two areas woefully overlooked; basic credit underwriting and providing a clear view to investors of the loan level data allowing them to use their own tools to properly assess risk.

Time and time again we've heard lenders say their hands are tied when trying to extend credit to worthy borrowers because they do not meet underwriting guidelines tied to “artificial intelligence” systems and coded credit rating models. Sound credit underwriting is not collecting data from a borrower and uploading it to an automated risk model. These complicated mathematical formulas are performed in the abstract while abandoning the application of subjective factors that every good lender once used to assess the reliability/capability of the borrower to repay the credit line requested. 

While it is true that you can mathematically predict many things, the one thing you cannot predict is an individuals will to persevere and make payments in the face of economic turmoil. Perhaps one of the keys to avoiding future credit failure is to place less reliance on “artificial intelligence” and more on human judgment based on sound lending principals.  

The same ability to judge credit worthiness must be placed in the hands of the securities buyers as well.  The securitization of mortgage loans is absolutely necessary if we are to continue to efficiently provide credit to the market.  Yet the investor confidence necessary to have a well balanced market will not return until they feel comfortable with the associated risk.  The much discussed and now almost cliché term “Transparency” really is what is required. 

To provide the investors with a sufficient level of transparency without violating privacy rules is not impossible.  In fact the tools are available right now and every originator, lender, aggregator and issuer of securities should implement the universal application of using those tools.  Assigning every loan closed a Mortgage Identification Number (MIN) is the first step, capturing the 1003 and 1004 data from the credit application and the appraisal is the most basic step and then supplementing that data with MLS and recent sales data will provide the securities market with the basic tools required for proper pricing, sizing, risk assessment and structure.  Once again there is nothing suggested here that is not already available and at various levels being implemented.

By returning to a common sense approach to underwriting, proper use of the collected data, implementing easy individual loan identification and discarding 100% reliance on purely objective underwriting tools we will be able to provide credit at every level of need properly priced.  The loans will then be securitized in an open and transparent environment, permitting proper risk assessment, security structure, and pricing for each level of risk.

The question: Do these simplistic yet effective changes require legislation to force their implementation or is the market capable of making a common sense course correction on its own?

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Friday, September 10, 2010

Use A 401K Or IRA To Buy Real Estate TAX OR PENALTY-FREE.

By Troy Corman,

It seems almost every day, more favorable media reports are released regarding the turnaround in the residential real estate market. New homes are being built and sold at their highest pace in 2.5 years, with major Texas cities like Dallas and Houston enjoying 25-30%+ increases in new home construction. In fact where I live, in the East Dallas and Lakewood area of Dallas, new homes are usually sold before construction is complete.

With mortgage interest rates at or near their lowest levels EVER, and home demand and prices marching higher, savvy home buyers understand that they may never have a more financially favorable time to buy a home in their lifetime.

The only deterrent for many first-time buyers is where to get the cold, hard cash for the initial down payment and closing costs. Yet, that down payment cash might be right under your nose, if you have a 401K or IRA.

To encourage home ownership, Uncle Sam gives home buyers with retirement accounts a break. You can withdraw up to $10,000 from your IRA to buy a home for yourself or a family member - PENALTY FREE! You can only do this one time in your lifetime so make the most of it. If you have a 401K or 403B or other qualified plan, from a previous employer, you can roll over that account into a rollover IRA to purchase a home.

This technique allows you to take advantage of the current soft real estate market and record low Dallas mortgage rates. Also, with the negative stock market returns of the last 10 years, and with out-of-state residents and companies relocating to Texas in droves, Dallas and DFW residential real estate should provide a predictable and stable return on investment. To top it off, you'll get to enjoy the creature comforts of living in your own home.

You can also use your IRA to buy investment real estate, as we discuss the details in this previous post.

For homes that qualify, FHA mortgage loans allow down payments of as little as 3.5% of the purchase price. Also, upon negotiation, the seller can pay the buyer's closing costs - up to 6% of the sales price.

If you're self-employed or a small business owner with no employees, you may qualify to borrow up to $50,000 (or 50%)  from your self-employed IRA, TAX-FREE and PENALTY-FREE. To avoid taxes and penalties, you'll have to pay the money back to your IRA within 10 years for a personal residence, or 5 years for investment real estate. Also, the interest rate is super-low since it's based on the prime rate, currently at 3.25%.

For additional details, or if you could use some help buying, selling or leasing your property, or if you just want to chat, contact me at 214.690.9682 or email me at

Troy Corman is the founder of t2 Real Estate LLC, a Dallas real estate firm providing specialized knowledge with a hands-on approach. Specialties include residential real estate brokerage, land and acreage, and commercial real estate services. Contact us today at 214.827.1200 if you need to sell, buy or get your DFW property leased.

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Monday, September 6, 2010

Dallas Real Estate Up 33% In Last 10 Years.

10-year chart of Dow Jones Industrial Average - click chart to enlarge.

By Troy Corman,

Despite the latest housing slump, Dallas real estate returns over the last 10 years have crushed the Dow Jones stock market returns during the same time frame.

According to the Texas ATM Real Estate Center, the average Dallas home price in July 2010 was $237,000. The $237,000 number is $59,000 more than the average Dallas home price 10 years ago which was recorded at $178,000. This represents a 33% return over 10 years, or a 3.3% annualized return.

In contrast, the Dow Jones Industrial Average has actually lost ground in the same 10-year period. According to Yahoo Finance, on July 3, 2010, the Dow sat at 10,635. More than 10 years later, the Dow has slumped to 10,303.

As Dallas and all of the major Texas cities, including Houston, Austin and San Antonio, undergo dramatic population growth in the next 20 years, the long-term prospects of Dallas real estate are quite promising - particularly areas close to downtown Dallas. Real estate close to the heart of the city will become much more valuable as our population and traffic growth double in size.

With mortgage rates at all-time lows, and home prices at reasonable levels, renting and stuffing money into a 401K that you can't access for decades may be an inefficient strategy. In addition, home ownership allows you to deduct your mortgage interest and property taxes from your taxable income, while rental real estate adds additional deductions including insurance and depreciation. The stock market? Not so much.

To view more Dallas real estate statistics or Texas real estate statistics, visit the Texas ATM Real Estate Center.

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