Reverse Purchase Mortgages begin Jan 1, Market Report, Last Chance for 2.25 Downpayment for FHA, Happy New Year!

I hope that your Christmas was blessed and that you had a joyous day. The new year of 2009 is upon us this week. The year of 2008 held for us a lot of changes, uncertainity, challenges, and determination. But I have a decided heart that we will continue to challenge ourselves in 2009 to be the best that we can be, to persevere through a tough economy and come out stronger than ever. In 2009, we will have 31,536,000 seconds of opportunity. Don’t miss “teachable moments” professionally and personally. Make it a habit to intentionally be a habitual learner this next year. Here’s to learning and growing together. Linda Last Chance!!!!! FHA Case Numbers- Reminder that we will need to order case numbers by 5:00 PM on Wednesday in order for your buyers to get the 2.25% down payment on FHA loans (verse the 3.5% down payment as of 1/1/09)- See below for more information. Also, beginning 1/1/09, seniors (62+) can purchase a home using a Reverse Purchase Mortgage. We will be talking about this program over the course of the next few weeks- I really think that it will be a big part of our market’s book of business so it is important that you understand it for your senior clients. We also have the update on the market report- see below. Important FHA Reminder- Last Chance!!!!!!! FHA down payment increases as of 1/1/09 from 2.25% to 3.5%. This is a 55% increase! IF you have a buyer that has a contract written before the end of this month but will be closing in 2009, call our office and let us order a case number. As long as the case number is ordered by 12/31/09, then we can still close with a 2.25 down payment verses 3.5%! Call us today at 972-278-3400 for more information. We will need to know address, full legal names and social security numbers in order to secure the case number. Reverse Purchase Mortgages According to AARP, there are over 250,000 people over the age of 62 in Dallas County. As of 1/1/09, seniors (62+) can purchase a home using an FHA HECM mortgage. This opens up a whole new market to realtors to market. Let’s discuss some examples: • An 86 year old widow in Monroe, Louisiana wants to relocate to Lancaster, Texas to be near her sister. She plans to sell her home in Louisiana and purchase a home in Texas using a Reverse Mortgage. She will net about $75,000 from the sale, and is looking for something in the $200,000 range. Based on her age, she will need to put about $65,000 down on the purchase, plus closing costs. It will be close, and she may have to scale back to something in the $180-190,000 range, but it is a workable deal, and she can accomplish her goal without dipping into savings, and she will never have a payment as long as she lives in her new home. • Rosie is 62 and needing to downsize from her $300,000 home in which she will net $150,000. She does not want a payment as she is now alone and does not want to have that monthly expense and also wants reserves. She began to look at $100,000 homes and had almost decided to not purchase as she cannot find anything in that price range that she is comfortable living in. After finding out about the new Purchase Reverse Mortgages, she has decided to purchase a $200,000 home, put $100,000 down, saving $50,000 for her emergencies and taxes and insurance and never make a payment as long as she lives in the home as her primary residence. What is your story? What is your senior client’s story? This is an unexplored market ready to explode! What you need to know on Purchase Reverse Mortgages:  NO INCOME VERIFICATION! NO Ratios of Income vs Expenses!  NO CREDIT CHECK- NO Minimum Credit Score!  Seller cannot pay any closing costs  All persons on loan (and warranty deed*) must be 62+  Downpayment required will depend on age of buyer (see below).  LTV is based on the youngest age of those on the loan (and warranty deed*)  Loan limit is based off a max of $417,000 (!)  Highly recommend a 45 day closing (at least for the first six months)  Use Standard TREC contract  FHA loan (FHA property condition apply) Age Approx LTV Approx Down Payment 62 51% 49% 70 56% 44% 80 66% 34% 90 76% 24% 100 81% 19% We will continue to explore this hot new market over the next few weeks. Do you have a senior client that could benefit from purchasing a home and NEVER having a monthly payment? Call us at 972-278-3400 and ask for our Reverse Mortgage Director, David White. Market Report The material contained below is provided by a third party to real estate, financial services and other professionals only for their use and the use of their clients. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, we do not make any representations as to its accuracy or completeness and as a result, there is no guarantee it is not without errors. The following is from the mortgage industry training company in which I train with/for in the last 10 years. A lot of my market knowledge has come from this company and it is now a pleasure to be able to reciprocate and teach for them. Below you will find a link for a 10 minute video for a little talked about “Mark To Market”- thought by many economic specialists as the real reason behind the economic crisis. If you would rather read it than listen to the link, visit my blog at http://lindadavidsonmortgage.blogspot.com and click on “Mark To Market Accounting”. The knowledge will be huge and I think you will find it amazing! The Real Reason Behind the Economic Crisis The current economic crisis is the top news story for nearly every media outlet. But, somehow, one of the most important factors that led to this challenging market is also one of the least discussed. The crisis in the financial markets seems to be the top story on every news channel. But many of the reporters and so-called pundits don't understand what really happened...and what may happen next. I'm pleased to share with you a short video and article that were created to put an end to the confusion once and for all! In these easy-to-understand resources, Barry Habib, Founder of the Mortgage Market Guide and Chairman of the Board for Mortgage Success Source, explains in layman's terms exactly what caused the current financial crisis - and what to be watching for in the near future. Please take a moment to access these resources here...the few minutes you spend will open your eyes to what very few "experts" truly understand. If you would rather read it than listen to the link, visit my blog at http://lindadavidsonmortgage.blogspot.com and click on “Mark To Market And as your trusted advisor, I'm committed to doing whatever I can to help you understand what the current economic situation means for you going forward in 2009. Wishing You And Yours A Happy New Year and A Blessed 2009! We are here when you need us- simply call us at 972-278-3400. Happy New Year! Linda

Mark to Market Accounting

Mark to Market Accounting By Barry Habib Chairman of the Board, Mortgage Success Source The financial crisis we are in today was not caused by mortgages or housing, although they were both catalysts. The real reason was an accounting rule called "Mark to Market" (also known as FASB 157). Few people have a strong grasp of this rule, and even those who do have a tough time explaining it on air due to time restrictions. So let’s take a few minutes to break it down, so you can have the inside track on this very important concept and understand why it represents some great opportunities. Why does ‘Mark to Market’ exist? Let’s go back to the stock market crash, which occurred between 2000 and 2002. With the S&P down 49% and the NASDAQ down 71%, many people lost much of their life savings and they were very angry. Companies like Enron and Arthur Andersen were able to find ways to make their books looks more attractive, which was reflected in an artificially inflated stock price. Both the public and Congress had a call for more transparency in business and hastened the passage of “Mark to Market” accounting. This is the notion that all assets should be valued as if they were sold on a daily basis. Under the letter of the law, failure to do this conservatively can now result in jail time. So what’s the problem? Before we get into what this means for banks, let me make a quick analogy using a scenario that should make perfect sense to you and your clients. Let’s imagine that you own a house in a neighborhood where all of the houses are priced at around $300,000. Unfortunately, your neighbor, who owns his home free and clear, falls ill and needs emergency cash quickly. Because he is under duress, he must sell the home for $200,000 in order to get the cash he needs right away, even though the home is worth considerably more. Now would this mean that your home is now worth the same $200,000 that your neighbor sold his for? Of course not, because you are not forced to sell under duress. It just means that your new neighbor got a great deal. However, if you were a publicly traded company and had to abide by Mark to Market account rules, you and the rest of your neighbors would now have to say, by law, that your home was worth only $200,000 – not the $300,000 you would get for it if you actually sold. So what's the big deal? Read on. So how does this principle apply to banks? Let's say we decide to start a bank . . . call it XYZ Bank. We raise $2 Million to open our doors. Remember that our capital account is $2 Million. Banks make money by taking in deposits and paying low rates of interest to those depositors (maybe throw in a toaster too). We then take that money and make loans with it at higher rates. We keep the difference. So, we turn that money into $30 Million worth of loans. This puts our ratio of loans to capital (our Capital Ratio) at 15:1 ($15 Million in Loans to $1 Million in Capital). This level is acceptable, as long as we can shoulder some losses and recover. Because we are very conservative here at XYZ Bank, the loans we make require a minimum down payment of 30%, a credit score of 800 or better (that’s nearly an 850 which is perfect), proof of income and assets, a reserve of at least two years of mortgage payments (normal is two months) and income requirements that only allow 10% of monthly income to cover all expenses (normal is 40%). We do this and our loans perform perfectly. We make lots of money. Nobody is paying late and our clients are sending us holiday cards. They love us . . . it's a party. You and I are celebrating as we see our stock price soar. But real estate values decline and, even though all of our loans are paying perfectly, we must re-assess the loan portfolio to account for the decline in real estate values, which leaves us with less of an equity cushion. We had a minimum 30% down payment, which means the loans were 70% of the value of our assets – until we account for the decline in the market. Now, our position goes from 70% to 90%. That's riskier and, therefore, worth less than when our loans had a 70% safety position. Our accountants tell us that we must “Mark to Market” or risk jail. They say our value is now reduced by $1 Million. Whoa! We must take (or write down) this loss against our capital account. It is a paper loss – we don't write a check, we have no late payers, no defaults, no bad business decisions. Still, we must reflect this $1 Million paper loss in our Capital Account, which drops from a $2 Million to $1 Million in value. Here’s where things get problematic. At this level, with $30 Million in loans outstanding, we now have a capital ratio of 30:1. At this level of leverage, alarms begin to sound. Our ratios are out of the safe zone; we could go under with just a few losses, deposits are in jeopardy. Hello FDIC examiner, we are on the watch list, the Securities and Exchange Commission (SEC) is asking questions and our stock starts to tumble. The business networks are showing coverage of our now troubled bank. We are in big trouble. The problem, we are "over leveraged". The solution? We have to “de-lever” . . . and do so quickly. But there are only two ways to do that, and one of them isn’t really an option. The first way is to raise capital, but that’s not going to happen when our ratios are out of whack and we are in serious trouble as well as on the FDIC watch list. It is unlikely that anyone will be willing to invest cash in XYZ Bank. The other option is that we can sell assets, like the outstanding loans, which are increasing our capital ratio. Like your neighbor, who owned his home outright but needed cash for medical bills, we are now under duress. The paper we are holding has a lot of value, but we have to sell it quickly and, because of that, cheaply. So, we offload the loans at a loss, which exacerbates the problem because those losses further reduce our capital account. Very quickly, like a flushing toilet, things start to spiral – we are going down. The problem multiplies The problem doesn’t stop there. The fire sale we just had on our loans makes things worse – even for the banks that bought them up and thought they were getting a great deal. Under Mark to Market, the loans we just sold must be included in the comparables that other financial institutions use to value their assets. This is how the problem spread and got so bad so fast. Other good institutions, with good loans, have to mark down. Just like us, they become over-leveraged. It’s a chain reaction, all triggered by a well intentioned, but over-reaching accounting rule. Financial institutions fold, sell, or freeze. Credit - the life blood of our economy - is cut off at the source. Because of a lack of available credit, home sales and refinances crawl, auto sales drop and jobs are lost. Additionally, the economy enters a recession. During the last recession in 2001, the economy recovered relatively quickly thanks to $3 Trillion worth of home equity withdrawals. But, more restrictive programs, a lack of available credit, and lower home values will make it difficult for us to use home equity to help pull us out of a recession this time around. Fixing the problem The Federal Reserve has passed a rescue plan, which, over time, will provide some level of help. Some banks will get money to infuse into their capital accounts. Others can sell some assets to the government in an effort to “de-lever”. But, the big thing that is not talked about, not well understood, is the part of the rescue plan that traces this financial crisis back to the source. The US Congress has given the SEC its blessing to modify “Mark to Market” accounting. And by January 2, SEC Chairman, Chris Cox has to get back to Congress with ideas, if any, on how to fix Mark to Market accounting. It won't be eliminated, as we will not want to go back to the Enron days. But he is likely to adjust the Mark to Market provisions. Here’s one potential solution - even rental or commercial real estate properties can be valued two ways: 1. The comparable sales method, which determines the value based on what other assets have sold for, which is the way Mark to Market work currently. 2. A cash flow method, which values the property based upon cash coming in. If we see Mark to Market modified to use cash flow to value assets, without requiring a large percentage discounting mechanism - wow! What a shot in the arm that would be. We’d likely see the stock market rally, with financial stocks leading the uphill charge. Consider that, in today’s market, fund managers are holding 27% of their assets in cash, compared with just 3% they held in cash when the stock market peaked in October of 2007. That means there is a lot of money on the sidelines that can push stock prices higher. Additionally, think about the redemptions from hedge funds that eventually need to be put back to work. That’s another reason to be optimistic about stocks in the first quarter of 2009 – provided that Chairman Cox modifies Mark to Market accounting in a meaningful way. And a good stock market helps individuals feel better about purchasing homes. Additionally, stronger balance sheets for financial institutions will allow them to lend more money. The bottom line With some potentially very good news around the corner, there might be reason for optimism as we head into 2009. ABOUT MORTGAGE SUCCESS SOURCE Mortgage Success Source (MSS) is the strategic alliance of Mortgage Market Guide, LoanToolbox and The Duncan Group. Featuring the talents of industry leaders Barry Habib, Sue Woodard, Greg Frost, Todd Duncan, Linda Davidson and Jim McMahan, MSS provides money-making training and resources to more than 40,000 loan originators nationwide. MSS is the one-stop-shop for loan originators looking to achieve higher levels of success. All MSS products and technologies feature proven systems that are easy to implement and generate increased loan volume.