Folks are wondering what will happen after Fannie Mae and Freddie Mac are put to sleep. Here’s one alternative – Union Bank:
Full disclosure – Mark is married to Klinge Realty staff person Anna.
Jim Klinge
Klinge Realty Group
Broker-Associate, Compass
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- 682 S. Coast Hwy 101, Suite #110
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Okay … Mark says they can do a 30-year fixed jumbo @ 5.25%. However, what’s gonna happen to that rate when the government & FED play a lessor role in mortgage financing.
Oh great, Mark discloses that 90% of the jumbo loans they do are adjustable rate mortgages. The 5-year interest only is the sweet spot … and it’s a 40-year loan. WTF! But the good news is, they allow the borrower to convert the loan to a amortized fixed rate after 5 years. However, that fixed will be dependent on current market conditions. Does anyone really think rates are gonna be this low 5 years from now … PAYMENT SHOCK. Come on … when is this nonsense gonna end! These banks have already screwed our economy, and now they’re setting it up for another round.
Cheap money is destroying the USA. Mark discloses that you can leverage $697,500 and have a payment of $2,268. WTF! See how the bankers manipulate housing prices.
Mark discloses that UNION Bank will loan you 1.1 million with only 10% collateral. Whippie … let’s leverage 11 to 1.
@Jim … this is not “old fashion banking”, this is ponzi lending, and will get us in the future.
BTW, of all the big banks, I have the most respect for Union Bank. Mainly because they don’t trade paper, and the stay out of the equity markets. However, they are being forced to offer this ponzi financing because they have to compete with other banks.
One more point …
I do wish the rules would go back to “old fashion” way of financing. Meaning … you put 20% down, and payed your loan back over 15-30 years. No payment shocks, no balloon pay-offs, no floating payments, no more BS.
Also, I think it would be great if banks were forced to pay higher premiums to the FDIC for broader exposure (in the insurance business, they call this adverse selection). It kinda reminds me of the $1-million+ Florida beach property paying $500 a year to the federal flood insurance program, only to rebuilt every 10-15 years.
I will probably get skewered for saying this, but here goes…
Low down payment loans are not what caused the bubble. They have been around for the last 50 years or so and are “old fashioned” financing. If you otherwise qualify based on your income, there is nothing wrong with a low down payment loan. Adjustable loans didn’t cause the bubble either. Before the bubble, you did not have huge percentages of default in these loans.
The problem with the bubble is that low down payment loans and teaser rates were coupled with very loose income and appraisal standards. Lenders would not care what your income was, and if they pretended they did, then making up your income was perfectly acceptable also.
Trying to impose rules that force big down payments or prohibit the possibility of increases in adjustable payments will make the housing problem worse, not better. Trying to artificially reduce demand with paranoid loan restrictions is no solution.
TOUCHE Anonymous! WTF were my thoughts exactly after watching 5 minutes of that video. Looks like Union Bank is rolling out the red carpet to sucker people into buying more house than they can afford. After 35% price declines and a 20% down payment requirement, I guess they are willing to turn a blind eye to the types of loans that got people into trouble in the first place to make a profit. Good luck to all 90% of the Union Bank ARM jumbo loan borrowers out there.
700 K with a payment of 2268. If taxes, insurance, and maintenance cancel out the your deduction it seems that you are about the same as renting for 5 years without any tenant risk or rent increases.
In 5 years if your home takes a big nose dive down you live in it for another 2 years basically rent free. If home prices have appreciated you can cash in your chips and sell or lock in the rate and pay the thing off.
At this point in the interest rate cycle it is very smart lending. Bring you in now at low rates, don’t get the bank locked into sub 5% income for 30 years, but force you into a higher rate 5 yrs out. That is just good business.
For all the gripers out there, why don’t you open a 30 yr CD at 2%…too low for you? Well that is exactly why the bank doesn’t want to do the same thing by writing a loan locked at a low rate forever.
ps: remember, that mortgage money has to come from somewhere. If it doesn’t come from the gov (bravo UB) and it doesn’t come from RMBS (bravo UB) it has to come from somewhere. That somewhere is your savings/deposits.
Most people likely have never thought through the “where does it come from” part of mortgages. They just expect it to be there as if it were just sitting in the vault waiting for the honor of lending it to you.
Think it through. You want the bank to make a low rate (read: low income for them) loan for 30 years, but who wants to commit money to them for more than 12 months??
Its amazing they can do it and still turn a profit by not playing all the Wall St/Gov games.
@clearfund
If it doesn’t come from the gov (bravo UB) and it doesn’t come from RMBS (bravo UB) it has to come from somewhere. That somewhere is your savings/deposits.
Wrong … the banks are allowed to loan 9 dollars for every 1 dollar they hold in reserve. The reason why Union Bank is capable of making a profit is because they continue to expand their balance sheet. If they were forced to use GAP accounting rules, including mark-to-market, and were only allowed to loan money on their deposits, (1 dollar in – 1 dollar out), they’d be insolvent … out of business.
The only way they’re able to get away with this is expanding the amount of loans they offer. I.E., if all debts were paid off tomorrow, all banks would be insolvent on Monday, including the Fed.
Once you understand this, you realize how our system is tilted to favor the bankers. It’s been this way for 100 years, and only now starting to be exposed.
It’s generally accepted that prudent savors are the one’s that attain wealth, yet nothing could be further from the truth. JP Morgan was a highly leveraged banker/investor who became wealthy by NOT working hard, but rather by taking huge risk, and leveraging. Once you get this, it’s easy to have less respect for people like Warren Buffett (the Oracle of BS), and more respect for the people that actually design and make things, and put people to work. Look at the last sweet deal Warren Buffett did with his investment in Goldman Sachs … here’s a guy that hold warrants in that evil bank, that are backed by Uncle Sam, and collects a 10% annual dividend. Could the average Joe get these terms? HELL NO!
A lot of hate in the comments today.
I found this video very interesting as I was not aware that these loans (jumbo I/O ARM) were still available. I can better see how some buyers are able to “afford” to pay the prices they pay. One buyer looks at an $850K home and see a $3600+ payment while a buyer with this loan is looking at under $2300, both with 20% down.
I agree that this does remind me somewhat of the bubble days – and it is frustrating that you are competing with buyers that are not using “conservative” 30 year fixed financing.
But remember he said 20% down so the borrower’s ~$160K+ down payment is still put at stake, so this is not “risk free” speculation.
What he didn’t cover is how much the payment changes after the I/O period and what assumptions they use when assessing whether the borrower has sufficient income.
As a current (and relatively recent) Union Bank mortgage loan customer, I’m surprised they didn’t mention the home loan product that we found most attractive in their portfolio, which was their 15-yr interest only product, which I believe is relatively unique in the marketplace.
We figure we’ll only stay in our home for 10-15 yrs, at most, given our retirement plans and stage of life, and we got our payment to just under $2000/mo for a house that they (Union Bank) recently appraised at $1.8 mil (and would probably fetch more, even in today’s market). We purposely only requested a mortgage of about $580,000, so for us, it works out great. We view it as a type of hedge strategy, with our home mortgage being one of various investments…we didn’t really want to own our house 100% and wanted to take advantage of low-ish rates but yet wanted to also keep our monthly payment extremely low and not be highly leveraged with our home.
We could have easily paid for our house in full given our cash on hand, BUT (and it’s a big BUT!) we have ZERO income from jobs although our credit scores are practically perfect. Union Bank looked long and hard at our financials. They did not like the fact that we only had savings and no income, which we felt was appropriate, yet frustrating, since we know we’re good for the loan! Their underwriting is extremely and justifiably onerous, but we were willing to provide all the records they requested, and we did a lot of checking, re-checking and explaining to get a great rate and a very convenient product.
I feel like they’re doing things right…we are the perfect risk for a bank and they recognized that and responded with a product that is innovative and meets our needs, at a great rate to boot. Wish there were more out there like them!
P.S. We did not work with Mark, so this is not meant as an endorsement of Mark or UB, just sharing our experience.
“Does anyone really think rates are gonna be this low 5 years from now”
Rates 5 years from now are going to be exactly in the same place as today. The FED controls the rates, and the FED will not and can not increase interest rates. Doing so will crumble whatever phony economy we have left. It will also raise bond rates for government, state and corporate borrowing, and bring about another massive recession that will make the 2008 recession, and 30’s depression, look like a hiccup.
“Mark discloses that UNION Bank will loan you 1.1 million with only 10% collateral.”
It’s their money, they can loan at any collateral they want. Let the shareholders and depositors with over $250k FDIC guarantee worry about it.
If they were forced to use GAP accounting rules, including mark-to-market, and were only allowed to loan money on their deposits, (1 dollar in – 1 dollar out), they’d be insolvent … out of business.
I agree, fractional reserve banking is a scam.
http://en.wikipedia.org/wiki/Criticism_of_fractional-reserve_banking
The 15 year I/O mortgage is really a lease with the valuation risk on the holder of the lease, as well as the maintaince cost. So lets call it what it really is a long term lease with appreciation rights. Don’t call it ownership, because it is not. Of course this is not to far from the model in a lot of the UK for the land portion where you lease the land for 99 years and build on it.
Sounds like an interesting loan program–however, I too have had an issue with Union Bank’s Policy and Customer Service. They called my Business Line with no almost no notice and would not cut me any slack. I was forced to pay it off–in full–with no time extensions (less than 30 days). To save my credit, I did some tap dancing and paid it off with a few days to spare. However, I now refuse to bank with them whatsoever in the future because of this.
Yes, Lyle, I don’t disagree – for many, the 15-year I/O is more a lease than ownership, but in our case, owning 70% of the home, it’s not the case. For us, it’s a hedge strategy.
What would make this product REALLY attractive is a 5 yr., interest only, ZERO down loan. Live in the house for 5 years with payments less than rent, get an interest write off, strategically default and live in the place another year for free, save your $$$ over time and then bail. What’s not to like? If we’re going to drive a stake through the heart of capitalism, then let’s go for broke.
@Scott #9: Not hate, frustration. Median income savers such as myself, saw market prices (during the peak) rapidly outpace our ability to save and keep up. Then as the market began waning — fostering a sense of hope that prices will correct to our level of affordability — banks and government threw assets and programs at the impending disaster to avoid a potential meltdown. Some of these programs — cash for keys for example — make a mockery of fools like myself. Banks preferring to sell properties to cash buyers, at times for less than what they’d get from savers who need a loan, makes a mockery of fools like myself.
This is one fool however, who believes that he who laughs last, laughs loudest…and I’m patient.
I’m glad we still provide a place where people can get their ya-yas out.
http://www.youtube.com/watch?v=UzNxYjf_4p4
I assume the 15 year interest only loan is variable, set on a yearly basis. This is one hell of a risk.
Hi Everyone. A couple of answers. The 15 year fixed interest only is fixed at the same rate for the full 15 years. It does not adjust. Current rates are between 5.75% and 6.00%.
In terms of payment shock, the UB ARM are 40 year loans. Meaning that after the initial adjustment period, we can fix the loan in over 35 years. Most other loans are yearly adjustables amortized over 25 years (if original loan was 5 year). Rate is calculated by using the current 30yr t-bond + .625%. the 30yr. treasury is about 4.33% today, which would make the fixed rate 5.00%. There are no fee’s, no underwriting, and no appraisal requirements to fix in the rate. it is a function of our initial approved loan.
Another way to look at the 5 year i/o. Here is an exercise in comparing a 5yr. i/o to a 30yr. fixed. Comparing a 5.125% 30yr. fixed rate on a $697,500 loan against the 5yr. i/o at 3.875%.
30yr. fixed payment $3798
5yr i/o payment $2268.
Let’s assume you’re capable and willing to make the 30yr. payment. Why not apply that to my 5 year i/o? If you did, after 5 years:
The balance on the 5yr. i/o would be $595,348.
The balance on the 30yr. would be $641,632.
Almost double the amount of principal balance paid down in 5 years!
Let’s compare adjusted payments.
If your rate after 5 years was 6.00%, based on the lower balance your payment would be $3,395 fixed for 35 years.
Much lower than the $3798 on the original 5.125% fixed payment.
Just to equal the $3798 payment, you would need an interest rate of 6.99%. Let’s face it, it’s dollars and cents paid to lender’s every month, not percentage points.
You’ve also taken your equity in your own hands. With no change in values, over 5% you’ve given yourself an extra 12% in equity over 5 years. No one can control market conditions, but this is an example of controling what’s in our power without any more monthly output than you would have on today’s 30yr. fixed rates.
To Mark Lovec,
“(On the $697,500 loan)after 5 years the balance on the 5yr. i/o would be $595,348. The blanace on the 30yr. would be $641,632. Almost double the amount of principal balance paid down in 5 years!”
I thought i/o means interest only, meaning the whole monthly payment for the initial 5 years covers interest only, none of the principal balance paydown. Am I wrong?
Question man: I believe mark was saying that if you can pay the larger monthly amount of $3798/mo then if you made an identical payment on the 5 yr i/o (more than is required) then you would pay down principal faster by the amount which is greater than the required 5yr i/o pmt…still out of pocket the same, only an extra 50k went to principal because of the excess pmt.
Yes, if you’re comfortable with the 30 yr payment of $3,798, making the same payment while on the 3.875% I/O knocks off an extra $50,000.
It’s because of the amortization tables – on the 30-year fixed it is skewed that only $819 goes towards principal paydown.
On the 5-year you’re knocking down $1,546 per month because of the lower interest and no amortization table that tilts the interest paid towards the beginning of the term.
This was my fault – I didn’t give Mark notice that I was going to run this post, and he went to a funeral yesterday.
I appreciated Mark’s response (#19), but he did some slight of hand that typifies the type of deception that gives the industry a bad name.
He compared a 30-Year fixed rate with his 40-Year program as if they were somehow the same. Hardly an honest comparison. And sadly, many people would miss that they will be stuck with 10 additional years of payments with his program.
He is talking about paying down principal twice as fast, which is admirable. He gets a pass.
If you could covert to 6% fixed-rate after the fifth year, and amortized over 25 years, the payment is $3,834/mo.
My point was that there will be life after Fannie/Freddie, and here’s UB offering a loan that is at least in the ballpark with what you’d get from a Fannie/Freddie package.
Thank you clearfund and JtheR for the clarification. I skipped a sentence while reading it.
I learned something today! Thanks for the video and the ARM/10% down/40year loan did sound somewhat odd, given today’s credit climate.
Nice video though and the response makes sense….even if I don’t understand all of it, ha.
One question though. Let’s say the person who got the loan comes into a lot of money (through a will or just a really good investment etc.)….can the person just pay off the balance of the loan? I was hearing that, with some loans, they don’t allow you do to that without paying some sort of fee.
What’s the policy on that with these loans?
I think it’s an ok loan product. Probably good for some borrowers. The biggest thing for me would be some kind of requirement to qualify people at the fully amortizing amount. I don’t have a problem with people that want to free up some cash flow to do other things. I’d put the requirement that FDIC deposit insurance requires some lending standards. If a bank wants to operate outside of those standards, they can they just don’t have access to the taxpayer to cover the loss.
The one thing we do know about the American population is that if you offer them the loan, somebody out there is going to take the money regardless of their ability to pay.
Hi Again. Wanted to drop a quick line and answer some comments.
#24 Scott, just a way to use this loan program to your advantage if tackling principal aggresively is something one wants to do. The only disapearing act is that principal balance. Keep in mind that just like a 5yr. ARM is not for everyone, a 30yr fixed may not be for everyone either. We do have 7, 10, and 15yr. and 30yr fixed mortgages this program is just getting you to think outside the box a little.
#27 College Joe. There are no penalties for paying any portion of the balance off at any time during the loan process. Also, every time you lower your principal, your payment adjusts downward based on your current loan balance. On a fixed loan, no matter how much pricipal you pay down, your payment remains the same through the term of the loan.
#28 livinincali. You’d be happy to know that all of our loans are qualified at the interest rate selected on a full principal/interest taxes and insurance payment. You’d also be happy to know that we didn’t take any government money and were not even mentioned in any of the bailout packages. We have an extremely low default rate because we do qualify our customers fully.