Mortgage Rates Plunge Below 5% – But Does it Help Investors?

by Steve Crossland, REALTOR in Austin TX on November 26, 2008 · 13 comments

From my Daily Realtor news feed:

Mortgage rates declined Tuesday after the Federal Reserve said it would spend $600 billion to support the mortgage securities market.

Rates fell to 4 7/8 percent, a 1 1/8 percentage point decline. David Beadle, president of BestInfo, said it was the sharpest one-day decline since 1988.

“I hope that the effect is that it brings more investors home to investing in housing,” said Alfred DelliBovi, president of the Federal Home Loan Bank of New York. “[Investors] have had a sense in the markets that anything connected with a mortgage is bad” even though most people pay their home loans, he said.

This is great news for buyers, but I have a news flash for Albert, who says “I hope that the effect is that it brings more investors home to investing in housing”.

Albert – NEWS FLASH – There are plenty of investors ready to buy additional rental properties, but we can’t obtain new loans because the Feds have us capped at 4 loans max.

The 4 loan cap means that investors like me and Sylvia, who have bought and/or sold real estate in Austin every year since 1994 and have never missed a paymemt on anything, ever, cannot qualify to buy an additional investment property because we have “too many real estate loans” already and therefore the government deems us “risky” borrowers. This would be funny if it were not so stupid.

And many of our investors are in the same position. What the government has done by dropping the loan cap from 10 to 4 earlier this year is to eliminate the best buyer pool there is – experienced investors who have a long term track record of owning real estate and making on-time payments.

Give us loan rates below 5%, and maybe do something else creative such as waiving of the capital gains if we keep the property 5 years or longer, and I’ll go out and buy 3 or 4 additional investment properties in Austin before the end of the year.

Hopefully someone in Washington wakes up soon. Removing the 4 loan cap combined with sub 5% interest rates will bring investors out into the market but idiots who think of these rules have us all sitting on the sideline.

{ 13 comments… read them below or add one }

1 ed November 26, 2008 at 7:21 pm

Exactly! Ridiculous!

I’ve was told that if you put the home in LLC’s then they are owned by the LLC, not you. Therefore, you can put all your properties in the LLC except your residence, then finance up to 3 more. Do you know anything about this? I hope he is correct as I’ve meant to do this a long time ago. I just filed with the state.

If this is the resolution to this riddle, I plan to buy 3 more properties after the first of the year.

2 Steve Crossland November 26, 2008 at 8:37 pm

> you can put all your properties in the LLC except your residence, then finance up to 3 more.

I’ve heard of these workarounds, but the properties will still appear on Schedule E of your tax previous returns, so I’m not sure how that would play. Too much work for me, monkeying around with various ownership entities and such.

They should simply drop the 4 loan cap and incentivize investors to buy properties. Of course, one might say that’s how we got into this mess, but there is a difference between investors and the type of speculators who never should have purchased rental property in the first place.

Steve

3 ed November 27, 2008 at 9:07 am

You are right. The 4 loan cap has prevented a large number of properties that would make great rentals to stay on the market. However if this is a viable option, it is easy to set up and it eliminates risk of any additional assets outside the LLC from litigation . This could be great for small investors as their are a ton of properties that would cash flow on the market right now with 20% down.

The flippers and people who thought their own home was an investment didn’t help matters, but the institutional subprime banks are to blame for the current conditions. Individual numbskull investors wouldn’t make a dent in the broad marketplace if it wasn’t a systematic shift brought on by the credit default swap.

If you put enough down, use a professional property manager and plan for the long term, you don’t need to be an expert investor to make real estate an terrific aspect of your portfolio.

Keep up the great work with your blog. I really appreciate the monthly statistics and insight in the Austin market.

4 Leon Fu November 27, 2008 at 10:31 am

Where are you getting sub 5%? I’m seeing 5.5% to 6% rates. I don’t see any type of mortgage rates under 5%.

5 Observer November 28, 2008 at 7:58 pm

>>>Give us loan rates below 5%, and maybe do something else creative such as waiving of the capital gains if we keep the property 5 years or longer, and I’ll go out and buy 3 or 4 additional investment properties in Austin before the end of the year.

I have a better idea. Give every person no interest loan for purchasing the primary residence or better yet just give them free money for that.

Steven, the real estate market problem is affordability (thanks to the speculators ie investors), not a lack of buyers. House prices must come down to get in line with people’s incomes. Thanks to the cheap loans and human’s greed for the situation where we are today

6 ed November 30, 2008 at 10:55 am

I don’t even know where to start with the last comments.

Free interest on our homes???
Who do you think would pay for that? Tax payers. If you subsidize something, you get more of it. See Econ 101

Human Greed?
Really? Are we not a capitalist nation where to pursuit of wealth is part of our DNA? The credit default swaps, and institutional speculators caused the mortgage issue, which was caused by overly deregulating the financial markets. The little investors and sub prime families should not have the opportunity to get no interest, nothing down etc… mortgages.

Obama just brought in Volker as a economic advisor. He was appointed by Carter as Fed Chairman where he raised interest rates into the double digits. We face crisis now, and Medicare, Social Security and national debt crisis in the near future that is more severe than the inflation problems of the late 70′s. Voker may have been right to stave off inflation, but in the short term, that worries me.

Point being – Interest rates are low, home prices are relatively low, seller are motivated, so don’t be afraid to buy investment properties. Use a professional like Steve to help guide you and a professional management company once you buy it.

7 Observer November 30, 2008 at 3:13 pm

Taxpayers are already paying for the mortgages at 5% interest rate. The no interest loan proposal was a sarcasm if you didn’t get it. But at least that would be fair for all taxpayers and economy (more disposal income) rather than subsidizing few investors.

Why do you think the interest rates went below 5% on 30yrs mortgage last tuesday? Because FED announced that it will buy both MBS and other direct obligations from GSE’s and FHLB’s. They will buy up to $500bln of MBS. And guess where these money are coming from? From TAXPAYERS.

Fannie/Freddie were basically nationalized. The biggest financial institutions are lining up for the governement bailouts. Sounds like a failure of “capitalist nation”.

If it was a true capitalism and market economy then the real interest rates would be high

8 Sam Chapman December 3, 2008 at 3:46 pm

There was an article in today’s (12-3) Statesman about the foreclosure auctions being slow. Gosh, do you think the non-cash investors are there? Not the ones who already financed four properties. Rediculous!

9 Steve Crossland December 3, 2008 at 4:07 pm

> Thanks to the cheap loans and human’s greed for the situation where we are today

It’s not the cheap loans that caused the problem, but the unqualified people to whom the cheap loans were given.

I almost agree with you on the “greed” part, but would use a different word … impatience. It’s the general unwillingness or inability of people to practice delayed gratification.

For home owners, that would mean waiting until you can truly afford a home before buying one – which means making a down payment and using a standard loan.

For the investors it would mean being willing to build wealth slowly, over time, instead of thinking that real estate investing should be quick and easy.

Steve

10 Jennifer December 5, 2008 at 4:49 pm

We have five investment properties as part of our retirement strategy and are paying them down as quickly as possible by living super-cheap and putting all our extra income into them. But because we are over the four property limit we can’t do a refinance to a more aggressive payment schedule.

Ironically, we are trying to put more money IN, not take it OUT, so even though I understand the impetus behind the limits on investor loans it does seem to be a disincentive for people who are trying to play by the rules.

I checked into the LLC idea with our tax/financial guy and here’s what he said.

“An LLC does not help – properties are generally not owned by an LLC at the time they are financed, but rather the individuals who purchase the property do so as individuals, then quitclaim their property into the LLC. Banks do not generally loan to LLCs, only to individuals. It is conceivable that a bank would loan to an LLC only if it had been in business for several years and had sufficient capital, collateral, credit history, and cash flow to qualify for the loan on its own.”

So that’s out for us, but fortunately we found out thanks to the great folks at Texas One mortgage, with a substantial extra principal payment we can re-cast one of the mortgages to have the lower balance re-amortized at the original terms. That will save us a lot on interest costs every month so we can focus on the principal pay-down.

11 yourapostasy December 9, 2008 at 2:15 pm

Steve, with all due respect, if you aren’t accessing the private, commercial capital markets, and are depending upon federally-regulated loan markets and terms to meet your funding requirements, then you aren’t a professional investor. Maybe a small investor, using regulatory arbitrage to exploit the difference between capital availability at the federal and private market levels. But if you want to play professionally, then pay the commercial rates and go on commercial terms (yes, I know it is hard to get lenders to listen, but deals are still being struck, it’s not as if BAC for example has fired their entire loan division). Frankly, I was taken aback at your admission that you don’t use commercial paper and terms, because from what I followed in your blog I took you to be much larger investors, as you offer some great insights I see lacking from much larger firms.

More power to you for your astute sense of the market and acumen, but I think it more than a little odd to complain about limited access to taxpayer-backstopped capital markets for private gain. You should be thanking your deity of persuasion on your knees that you have access to any taxpayer-backstopped capital for commercial purposes at all. Those are, let’s face it, below-market rates judging by what we can secure in the private placement markets today.

I am strenuously opposed to non-recourse funding facilities, where losses are made up by taxpayers, commingled for commercial ventures like yours. Heck, I don’t even want taxpayers in the real estate business at all. Use taxpayer funds to ensure transparency and systemic regulation, sure. But securing loans is better left to the private markets that are allowed to default if they fail their risk management oversight.

There is nothing that prevents small investors like yourselves from stepping up to commercial paper. Sure it will be expensive as hell at first, but it can be done, even today. Structure your business appropriately, find a good enough business case, and shop around enough, and you will always find a lender with enough business sense and capital to back you. Leaning on the taxpayer as a model’s true and only lender however, is not really investing on the open market, it just means the model has a single point of failure. I have posed this to other real estate professionals who dismiss my questioning by saying they can’t be bothered with the additional overhead of “going corporate”, that it’s not worth it to them. Well, that’s their choice, but the fact remains that the option exists, and to complain that the taxpayer won’t backstop more properties is simply not facing the reality that millions of small businesses contend with “going corporate” with no taxpayer backstop whatsoever every day.

Through this blog, you’ve demonstrated that you are facile enough with the data analysis and perceptive enough that IMHO you have what it takes to tap commercial paper and expand your investment scope. Sure you would have to scrap for a few more points of yield to make a deal work with more expensive paper, but I have no doubt you would be able to find such deals. You’ve been lulled into complacency by the cheap backstop, take it as the gift it was and move onward and upward, instead of looking in the rear view mirror and treating it as your model’s choke collar.

Keep those great insights coming.

12 Steve Crossland December 9, 2008 at 4:24 pm

Hi yourapostasy

Thanks for your comments. Yes, cost of money and the ease, or lack thereof, with which real estate loans can be obtained does in fact influence the small investor. For the fix/flip buyers, private hard money loans are easy to obtain at 13% with 3% origination for 70% LTV. Anyone can get that loan because the lender bases it on the property more than the borrower. On a short hold, the interest rate and fees don’t really matter a lot.

But for long term hold, it’s a different story. For those of us who buy and hold, a 4% or 5% increase in interest (as would be the case with commercial investment portfolio loans) kills the numbers and therefore the deal.

Steve

13 ed December 10, 2008 at 11:02 am

yourapostsy:

Were the guys at Lehman, AIG, Meryll not professionals who are now getting tax payer backed funding for their poor investment products? Because single family home investment and small commercial investments can’t support a hard money terms doesn’t mean that those involved are not professionals. I am not a professional myself, but I have to disagree with you on that point.

It is my hunch that you sell commercial hard money loans.

Also, I posted before regarding moving homes in an out of an LLC to refinance them in order to get around the 4 home limit. That route doesn’t work as the mortgage companies will not allow transfer of liabilty unless you refinance.

As usualy, Steve was right. We just have to wait till Fannie and Freddie pull their head out. So frustrating!

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