Those days, thankfully, are over.  Yet, I am meeting a lot of people around Atlanta who, for whatever reason, have credit card and other debt that is holding them back from getting ahead.  They want to move forward and start saving, but the minimum payments due are not allowing them.  So, they look to consolidate that consumer debt into a new, low interest mortgage to help the household cash-flow.

Deadline: March 31

Conforming loans have been more and more difficult to do high Loan-to-Value debt consolidation loans.  First, because the days of adding a Home Equity Line of Credit (HELOC) were over.  Then, because Fannie Mae and Freddie Mac cut back debt consolidation mortgage loans to 85% of the appraised value of the property.  Then, because Mortgage Insurance Companies (read: PMI) refused to insure those loans in markets they considered “declining markets”.

So, for the average homeowner around Atlanta, the only option for a debt consolidation refinance was and FHA Mortgage Loan.  FHA would go to 95% of the appraised value of the home in a cash-out refinance.  But even FHA got tougher.  If you were to exceed 85% of your property’s value, then you would now need two appraisals.

And now, things are getting even more difficult.  For mortgage applications taken on or after April 1, 2009, the max cash-out refinance for even FHA mortgages will be limited to 85% of the home’s value – and then only if you have owned the home for 12+ months.

So, if you have been considering a cash-out refinance, and you will need a high loan-to-value, act this week to make sure that we can do it for you.  Call me if you have been considering an FHA debt consolidation refinance, and your home is in Georgia.

Related posts:

1. Considering A Debt Consolidation Loan
2. Investment Property & Debt Consolidation Change
3. Is it Time to Refinance?

And, we’ve all done it.  ”Well, just this time, because things are tight, and I am sure I will be able to pay off this balance next month…”

We wake up one day six months later with a large credit card balance hanging over our heads – and a news cycle that constantly reports that the President or some economist is stating how bleak the economic future could be, the deficit is at an all time high, and wondering if super inflation is just around the corner.  Then it sets in: heartburn.

A quick solution

Well, it used to be commonplace, and perhaps too much so, to roll everything into a new, low-rate mortgage. That said, if you find yourself in that position and have some equity in your home, a debt consolidation refinance could be a good option.  

monthy cash flow savings

The above chart shows a real example of a loan I closed for a client just recently.  I will explain each line, briefly.

1. The top number represents their prior mortgage payment + minimum credit card payments for the cards that we rolled into the new loan.  
2. The Second line is the new mortgage payment, with the credit card balances rolled in.
3. Line 3 is the monthly cash-flow savings from month 1.
4. Then come the closing costs to close this loan for the client.
5. And the last line represents the number of months to break even.

Related posts:

1. Debt Consolidation Refinance Getting (Even More) Difficult
2. Investment Property & Debt Consolidation Change
3. Cash Out Refinances: A Memory of Past Times

After briefly recapping the subprime and credit implosions, and pointing fingers of blame where due, he asks if on a grander scale the US Government is not falsely propping up an economy of consumer excess?  Then, if you accept that premise to be true, what would happen to immediately bring our economy to it’s knees – or put us on life support – if foreign governments stopped buying our debt in the form of bonds.

Well, admittedly it would not be pretty; and it would be painful.

But beyond Schiff’s facade of being Paul Revere in this whole economic mailaise, he, too, is an optimist.  I think Schiff believes, as I do, in the American spirit which accepts adversity and grows stronger and flourishes from it.

If the worst in the economy is ahead of us, here’s what I would suggest:

• Credit will tighten more.  Right now if a borrower has decent credit, it is quite possible to get a very favorable rate on a home loan.  That would change, largely due to the false lows in mortgage rates going away as the Fed would stop buying Mortgage Backed Securities.
• Goods and services would escalate in price, due to inflation and the rapid constriction in free-flowing credit.
• Many companies would simply have to shut down, and jobs would be lost.

No one said that being part of the greatest nation on Earth would be easy.  Because a nation is made up of people, I believe that Americans will be just fine, and we will show our true colors as we – potentially – lead the world out of this recession and rebuild on a stronger, more solid economic footing.

Related posts:

1. Economic Impact of Selling a Home
2. Finally, the Fed is Buying
3. The Rate Roller Coaster

And the authors of the article had an interesting way of spelling out just how much that is, in terms we can all get our arms around:

The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.

That is a lot of cash. You know, economists and government officials continue to state how important it is for Americans to begin spending money on consumer items again, in order to jump-start the economy.  One thing is for sure, Government is not asking us to do anything that it’s not willing to do first.  And a fine example of spending the Government is setting!

I have said this before, but these bailouts feel more and more like an average American household applying for and getting a new Discover card – even at 0% interest for the introductary period – then transferring the AmEx balance that has been so bothersome to the new Discover.  Then, later that weekend, going to the mall with a new lease on spending, with the 0-balance AmEx card in their wallet.

A better example may be to severly cut spending, to limit salaray increases on…members of congress, and to make the first step to saving on spending and making a dent in the federal deficit.  (I know, deficit’s aren’t always bad, they can be a catalyst to an economy.  I get it.  But the limit was surpassed some time ago.  About the time that foreign governments began questioning the sanity of continuing to purchase our debt).

What can we do as Georgians living in our homes, raising our families?  We could picket.  But that won’t do any good, in my opinion.  So, practical things that we can do are:  

• Pay off non-preferred debt (i.e. any debt that does not carry with it a tax benefit. Read, credit cards, car loans, student loans, etc)
• If ‘paying off’ debt is not possible in the short run, then roll it into a new, low-interest mortgage loan.  This is not the ideal long-term plan, but it solves the short-term goal of getting monthly cash flow to it’s maximum.
• Save the difference in savings, until you reach 6 months household expenses.
• Cut superfluous expenses, and save the difference in a liquid account.

Related posts:

1. The Magic Number 7
2. A History of Bailouts
3. Debt Consolidation Refinance Getting (Even More) Difficult

Inflation, essentially, is caused by a money supply that outweighs the goods and services being offered for those dollars.

So, I happened upon this article, by Adam Hamilton, in which the author makes a very compelling case for the reasons that the inflation that is coming is going to be big and ugly.  He almost argues that the CPI numbers that measure inflation may be being under-reported, on purpose.  Interesting, and if that is the case, then that under-reporting will not be possible once the inflationary causes begin to hit main street. Here is a quote:

Inflationary expectations hurt the stock markets, and weak stock markets hurt the economy as the stock panic abundantly proved. Scared citizens are not only harder to rule over, but they won’t vote for politicians’ reelections and they won’t be able to shoulder as big of tax burden to pay for politicians’ grand spending plans.

And inflation just around the corner is not good for a populus that has a slowing economy.  We have all read about (and hopefully not experienced) the growing job losses, and an anecdotal phenomenon that I am seeing, is a growing number of employees taking pay cuts instead of incurring layoffs.  Interesting.

Preparing for Big Inflation

The author of the article that I cited above suggests some things to do to prepare for and ride out the coming inflationary period.  For those, just read the article.  He is an investment advisor, so his suggestions are geared toward stocks, commodities and other investments.

I, of course, am not an investment advisor.  If anything, I could be called a debt advisor, since that is what I deal in – helping people set up and manage the largest indebtedness that most people will take on in their lifetimes.

My advice, then.  Take full advantage of these artificially low interest rates, and refinance the home.  If you have unsecured debt such as credit cards, student loans or car loans, and you have the equity in your home to do so, then roll those debts into a new home loan in the high 4% to low 5% ranges, depending on how you qualify.

Then, get on that budget and savings plan that you have always talked about, even though it means cutting back a little on the nice things that you enjoy.  And, if need be, do some things to bring in a little extra income.

But the refinance part, do it quickly. The reason is two-fold.

1. First, mortgage rates are artificially low right now, because the Fed is the main player buying Mortgage Backed Securities (MBS) – those bonds that drive the mortgage rates.  They are planning on buying MBS through the end of June, 2009.  Once they stop buying, watch for rates to take off like a missle.
2. And, second, when we do see inflation take hold, mortgage rates rise as bonds are shunned.  The reason is that bonds and inflation mix like oil and water.  They don’t.  In fact they can’t, because by definition bonds offer a fixed rate of return on an investment.  And that fixed rate, say 4%, is diluted more and more as inflation rises.  If inflation is at 4%, then the real return on that 4% bond yield is…nothing.  Right, inflation cancels the yield on the bond.  So what if inflation hits 6%?  Bonds are negative, and have to rise to compete.

Related posts:

1. The Fed May Have Another Trick Up It’s Sleeve
2. The Fed vs. Inflation
3. The Magic Number 7

I will have to research to be certain, or maybe a reader knows and wants to post a comment, but I think in the US there are limits on the amount of interest that credit card companies can charge.  But it is somewhere in the 30+% range.  Which is ugly enough.

So, again I say, with even tougher times ahead for the economy, if you have significant credit card debt, and have some equity in your home, then it will make great sense to consolidate all that into a new home loan, with fixed rate home loans so low.  Both conventional and FHA rates are still bouncing around historic lows, so now is the time.  You will be happy you refinanced, if you jump on it now.

Related posts:

1. Debt Consolidation Refinance Getting (Even More) Difficult
2. Investment Property & Debt Consolidation Change
3. Considering A Debt Consolidation Loan

Click the link above and prepare for a rather long read, but a very interesting one that is worth the time.

In essence, I agree with their conclusion:

[...]We do not know how it will unfold but expect to see a major currency event this year.

As much as it pains us to say it, we cannot shirk from our responsibility to note that the politics of a shrinking global economic pie will not improve prospects for peace in 2009. Our international institutions for regulation of trade and economic development are geared to managing the challenges of growth, not shrinkage. The tendency of nations to withdraw into themselves in times of economic trouble when increased cooperation is all the more critical must be countered with a concerted effort to maintain close and constructive economic and political ties. Europe is especially vulnerable, and we hope that US leadership stays particularly close to its European allies during the year ahead. 

Keep in mind, that as ugly as the economy and markets get in 2009 that there is nothing new under the sun and this too shall pass. 

At the start of 2007, I knew that many mortgage lenders would fail.  Okay, I knew this because I listened to people much smarter than I, such as Bill Dallas.  And at the outset of 2008 I told clients and friends while musing over a beer, that banks would fail.  Okay, I did not go nearly far enough, in hindsight.

So, for 2009?  On the one hand, that is a more difficult one to predict.  As stated above, there are multiple macro-economic and political influences that I would not speculate on.  But on a personal level, times will get tight.  First with deflation, which we are beginning to experience now, and then with very high inflation – and I say this based on the recent past performance of the governement actions which begin well, then get off track.  I do not think the government will do what it needs to effectively contain the coming very high inflation.

What do we do, here in the suburbs around Atlanta?  Easy.  Prepare.

1. Consolidate debt into a low interest and managable monthly nut.  This can be done by rolling credit car debt, car loans or other unsecured debt into a new home loan.  Look to FHA loans if you need to cash out quite a bit of equity.  Conforming mortgages work well, also.
2. Cut expenses or take on another job (or start a home-based business).  Just look at your budget and do what you need to make sure that there is extra to save and stock away over the coming months.  This will be important to cover things as prices inflate, and just in case you are caught up in the next wave of layoffs as unemployment rises.
3. Plan to do things to enjoy life and relieve stress.  Start by turning off the evening news, if you haven’t already.  Watching that will give you an ulcer, if done on an extended basis.  As the iTulip article stated, ‘this, too shall pass’.  So, stop and smell the roses (or tulips) along the way.

Related posts:

1. Tough (Economic) Love
2. Debt Consolidation Refinance Getting (Even More) Difficult
3. Considering A Debt Consolidation Loan

30 year mortgage rates ended Friday close to 4.75%.  A bit higher for lower credit scores or higher loan-to-values, of course, but still in the low 5′s.  Good, by any measure.  But, watch this video, and you will see why these rates could be history in early January – and why stocks may be headed up at the same time.

Bottom line:  If you are considering refinancing your conventional or FHA loan on your Georgia home, call or email and let’s lock right away.

Related posts:

1. Mortgage Rates Hit 37 Year Lows; Applications Hit 5 Year High
2. It’s a Bird, It’s a Plane, It’s a…CEO
3. Get Docs in for a Refinance – Lock Today

Bloomberg reported that the Federal Government has now committed to throwing even more money at the economic crisis, to try to unfreeze the credit markets.  And that’s equal to half the GDP from last year.  It’s a big number.

You know from previous posts that I was a fan of the original bailout bill.  The simple explanation was that investors bought into pools of loans through Mortgage Backed Securities (MBS) and other instruments that have always had a built-in default rate of 1%.  When defaults of some of those loan pools spiked to 4%, those investors freaked, and the market began to melt-down; or freeze up, depending on the metaphor that your prefer.

On the street, people said, “You mean 96% of mortgages are still performing well?  What is the big deal?  Why all this talk about a crisis?”

But, look at it from the investors point of view, and you will see why I was in favor of the bailout.  The default rate increased by 400%, thus diluting their returns on what should have been a safe, secure and predictable investment.  That becomes intolerable.

Send in the Cavalry

So, Bernanke, Paulson and Co., with the backing of Congress, rode in to save the day.  They would buy these troubled asset pools – supposedly for a steep discount.  And banks and others get rid of those troubled assets, tighten their lending guidelines for new loans (which has already happened), ensuring that the same ‘subprime’ problem does not repeat, and everyone is happy again.  Even the taxpayer, assuming the government bought the troubled asset pools that are performing at 94-96%, for, say, $.40 on the dollar.  An easy solution where everybody wins.

And if that had happened, I would have given Paulson a ‘High Five’.

Alas, it did not.

As the Bloomberg article linked above states, the Fed is not really disclosing where the money is going, who it is being lent to, and what the government is getting in return.

What Do You Do Now

One thing is for certain – Inflation is just around the corner.  And it won’t be comfortable.  So, trim outgoing expenses now.  You can make a list of the outgoing expenses to trim as a household.  From a macro perspective, look at your mortgage and other debt:

• If you have an Adjustable Rate Mortgage (ARM) that is going to adjust in the next year, switch to a fixed rate or another long term ARM now.  As inflation hits, the only effective weapon against inflation that the Fed has is to raise interest rates.  And they raise the Fed Funds rate, which has an indirect effect on the Indices that adjustable rate mortgages are tied to.  So, LIBOR and the others will rise along with the Fed’s actions.  Refinance now; you will be glad you did.
• If you have credit card debt and car loans and you have equity in your home, you will want to strongly consider consolidating all of that into a new home loan.  You get the tax benefits, a lower interest rate on that debt – and most importantly you get increased cash flow.  And, as of January 1, FHA loans will do a cash-out refinance to 100% of your home’s value.

Related posts:

1. How Would You Like That 4.5%, 30 Year Fixed Rate?
2. It’s the Weekend. Remember Bear?
3. Inflation is Coming. Do You Know What to Do?

So, right now, with all that happening and while we sit in the middle of a credit crisis in the country, one good thing has happened for Veterans all over with recent changes to the VA loan guidelines.

Now, if funds are tight and a veteran’s household needs to tap into their equity for debt consolidation, to remodel or repair the home, or for any other reason, they can now to a loan for up to 100% of the home’s value, minus the funding fee that every VA loan has.  In reality, you are looking at about 97% of the home’s value as cash out.

That’s big news considering the continually tightening criteria for conventional loans.  And, it will help a lot of past and present military personnel and their families around Georgia, during these tough economic times.

If I can help you with a refinance that will help your family, give me a call.  I would be honored.

Related posts:

1. Considering A Debt Consolidation Loan
2. Debt Consolidation Refinance Getting (Even More) Difficult
3. Looking for 100% Financing?