It’s also a good bet that people are paying far too much for their investment property deals in bubbly markets. And when it turns out that the cash flow is too thin to cover expenses, it could result in a whole new wave of foreclosures in the coming years.

Check out the following from CNNMoney.com:

In order to get in on hot housing markets, amateur investors are buying up homes and taking risky measures — like tapping their retirement accounts — to fund the deals.

“We’re seeing many people cash out 401(k)s or IRAs because they want to take advantage of the market,” said Sean Galaris of financial services firm LM Funding, based in Tampa. “This new scenario involves people losing significant personal funds since they are financing real estate through retirement accounts, savings and life insurance.”

Draining your retirement savings to get into a hot market seems extremely risky to me. If people are willing to do this, it sure seems like the bubble mentality has taken hold once again.

An Gut Check for Investors

This should serve as an important gut check for any real estate investor. If your biggest concern is getting in to avoid missing out, you’re probably going to end up paying way too much for a property. The best deals are not found when you’re competing against 4 or 5 other buyers and the prices are being bid up. You’ll end up paying far too much and not having enough cash flow to cover the inevitable broken dishwasher or vacancy.

According to the CNN article, some of the hottest markets are Las Vegas, Phoenix, Tampa, and Miami. There might have been good deals a year ago, but prices have been bid up enough since then that many buyers are paying full price or more.

Don’t Buy Unless You Have Upside

When you buy investment property, you need to have built-in upside. It’s that upside that reduces your risk. The better the deal, the less risk you have because you’ll have adequate cash flow to cover vacancies and repairs and you can easily sell the property if you need to.

Not sure what I mean? The photo in this post is a hint. For more information about how to buy “right”, check out my free report for real estate investors.

The following are the key changes that will apply to Annual MIP (the type of mortgage insurance that is included in the mortgage payment) for case numbers ordered on or after June 3, 2013:

1. For LTVs less than or equal to 90% of the home value or purchase price, annual MIP will be assessed for the first 11 years of the loan or until the end of the loan term, which ever comes first. Currently, annual MIP only applies for the first five years and until the LTV reaches 78%. This will apply to all loan terms.
2. For LTVs greater than 90% of the purchase price, the annual MIP will apply for the first 30 years or until the end of the loan term, whichever comes first. Again, under current rules, annual MIP only applies for the first five years and until the LTV hits 78%.
3. The annual MIP exemption for 15-year loans with 78% LTV or less is being eliminated.

This is the bottom line: if you’re buying a house with FHA financing and put down less than 10%, you’ll have annual MIP as part of your mortgage payment for the life of the loan. If you put down 10% or more, the annual MIP will apply for the first 11 years or the end of the loan term, whichever comes first.

If you’re planning to get an FHA mortgage in the next few weeks, be sure your lender orders your case number before June 3, 2013.

Check out the following from FoxBusiness.com:

The benchmark 30-year fixed-rate mortgage rose to 3.6% compared to 3.52% the week before, according to the Bankrate.com national survey of large lenders. The mortgages in this week’s survey had an average total of 0.31 discount and origination points. One year ago, that rate stood at 4.02%. Four weeks ago, it was 3.64%.

The 30-year fixed remains below this year’s record high of 3.85%, reached March 13. That was the last time rates had risen until now.

That may not sound like that much, but it’s a pretty aggressive spike for just one week – and rates are up a bit more this morning. Just two weeks ago we were routinely quoting no cost 30-year fixed conforming loans at 3.50%, but now we’re closer to 3.75%. That 0.25% worth of rate can make a big difference on your mortgage payment, particularly if you have a large loan balance.

Again, if you get a good mortgage quote, you need to jump on it right away. We’re in a very volatile mortgage environment where rates can spike aggressively on very short notice.

Some Perspective

Though mortgage rates have gotten hammered over the past week and half, it’s worth noting just how good mortgage rates still really are. The following chart shows average 30-year fixed rates back to the 1970s.

Click for Larger View

As you can see, back in the early 1980s, 17% was considered a great loan. My how far we’ve come!

We’ve been in a bull market for mortgage rates for 30 years now, and it’s worth noting that it can’t continue forever. Eventually interest rates are going to have to return to something more historically “normal”.

Is the Current Rate Spike Ending?

Mortgage rates tend to move with the 10-Year Treasury Note, which has spiked aggressively since the unemployment report came out a week and half ago.  According to Bloomberg, the recent rise in yields might be coming to an end, which could signal that the rise in mortgage rates may as well. From Bloomberg:

U.S. 10-year yields are above the so-called upper Bollinger-band level of 1.88 percent, suggesting the increase in rates is about to end. The bands gauge volatility by plotting standard deviations above and below a moving average. Analysts use them to determine a probable range for a rate or security.

In other words, the 10-year yield has spiked a little too far too fast, so it might be due for a pullback, which could mean a pullback in mortgage rates as well.

Even if the rate spike ends in the coming days, it could be quite a while before they drift back down to where they were just a few weeks ago. There’s plenty of bad economic news out there to drive down rates, but they seem to be “spring loaded” to the upside nevertheless. In other words, it takes far less for them to rise than it does for them to fall. The most recent wiped out nearly 6 weeks of drops in mortgage rates in the space of week.

Again, the moral of the story is to not procrastinate. If you get a good quote, get it locked in right away.

I recently offered a gentleman a 30-year fixed conventional loan at 3.50% (yes, today’s rates are incredible) and we would pay for all the closing costs. This man had been looking around online for different loan offers and came across another lender offering 3.375%, 1/8^th lower on the rate, for just $400 in closing costs. Not a bad sounding deal, right? Not so fast! Again, the devil is in the details.

Pay Attention to the Fine Print

I did a little research on the offer and discovered that it assumed that taxes and insurance would be paid as part of the house payment – something my borrower didn’t want. He wanted to be able to pay his taxes and insurance on his own.

It also assumed a 30-day rate lock, which comes with better pricing than the standard 60-day rate lock we quote. In today’s tougher underwriting and regulatory environment, it’s not easy to get a loan out the door within 30 days. If my borrower decided to move forward with the offer, it’s very likely the lender would not have let him lock right away or he would have been stuck paying lock extension fees, which can be .25% of the loan amount for a 15-day extension.

Remember, I offered a loan with a 60-day rate lock and a waiver of the escrow account for the taxes and insurance. To get the same features that I offered and make it a true apples-to-apples comparison, we would need to make the following adjustments to the pricing of the other lenders advertisement (if you’re not familiar with how pricing adjustments work, see my post on loan-level pricing adjustments, or LLPAs):

• 0.25% for 45-day lock
• 0.25% for 60-day lock
• 0.25% for escrow account waiver

Remember, pricing adjustments are in percentages of the loan amount, not the rate. The total costs to make this supposed $400 deal comparable to what I quoted add up to 0.75% of the loan amount. Considering this was a $400,000 loan, that meant my borrower would be paying the $400 plus $3000 (.75% of the loan amount) to get the 60-day rate lock and escrow waiver. Not such a good deal after all!

Many lenders, unfortunately, advertise very rosy rate scenarios to get you to call up and get a quote. They know that once they get you on the phone, they have a good chance they’ll keep you even if the deal doesn’t quite work out as good as the advertisement.

Apples and Oranges

A lot of mortgage borrowers are unaware that there are multiple factors that determine the rate and costs on a loan; there’s no set rate and fees for every loan scenario. Loan pricing is based on risk, and the total cost of the loan in fees and interest is the sum of a variety of risk factors.

The following are the most common factors that influence mortgage pricing and interest rates:

• Loan amount
• Property location
• Property type
• Escrows or no escrows
• Cash out
• Subordinate financing
• Loan term
• Credit score
• Loan-to-value

When you’re comparing loan offers and advertisements, make sure you’re making a true apples-to-apples comparison. If you don’t want an escrow account, make sure all your offers don’t have escrow accounts. If you’re taking out cash, make sure all offers take that into account.

The key is to make sure you’re truly making an apples-to-apples comparison between advertisements and loan offers. If you do that, you’ll better position yourself to get the best possible mortgage deal.

First, check out the following from Bloomberg:

Debate among Federal Reserve policy makers is shifting away from the timing of a reduction in bond buying to the need to extend record stimulus as inflation cools and 11.7 million Americans remain jobless.

At their meeting last month, several members of the Federal Open Market Committee advocated slowing purchases and stopping them by year-end. Since then, seven have voiced support for maintaining the current pace, including five who vote on the policy making panel: Governor Daniel Tarullo, New York Fed President William C. Dudley, James Bullard of St. Louis, Chicago’s Charles Evans and Boston’s Eric Rosengren.

“We heard a lot of discussion earlier in the year on the timing of tapering,” Ward McCarthy, chief financial economist at Jefferies Group LLC. in New York and a former Richmond Fed economist, said in a Bloomberg Radio interview yesterday. “Some of the more recent developments — the slowdown in the economy, the somewhat disquieting inflation data — has taken that off the table for now.”

With the Fed far from meeting its mandates for stable prices and full employment, policy makers next week will probably affirm a pledge to keep buying bonds until the job market improves “significantly,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington and a former Fed economist.

If “significant” improvement in the job market is what’s needed for the Fed to slow down or stop bond purchases, then I think the Fed is going to be printing money and buying bonds for quite a while yet. The economy is already showing evidence of slowing down again, and the fact that the government is continuing to print money, borrow on a massive scale, and roll out countless new regulations is all negative for the job market.

Let’s also not forget that higher interest rates could make the federal government’s debt and deficit problem even worse, so there’s every incentive to keep rates low for now.

Money Printing Could Drive Price Inflation

Unfortunately, all this money printing and bond buying could bring much higher prices for everything we buy in the future. Groceries and gasoline have already been getting more expensive, but the Fed’s unprecedented exercise in printing money could result in even worse price inflation in the future.

When the Fed prints massive amounts of new money, it tends to drive demand for goods and services, which results in higher prices for everything we buy. So far, the new money has mostly found it’s way into stocks, but at some point it could find it’s way into the wider economy and drive up prices.

Even Lower Mortgage Rates?

To get an idea of where mortgage rates could be headed if the Fed continues to buy bonds for a while, we might look east to Japan. the Japanese have engaged in a similar program for 20 years now (with little to show for it other than a massive mountain of debt) and their 10-year bond yield is currently at 0.59%. The US 10-year bond rate is bumping around 1.67% right now.

Might we see US yields drop to a level comparable to what we see in Japan? If so, we might see even lower mortgage rates than we have today. But only time will tell.

Your credit profile is one of the biggest factors that determine the kind of mortgage deal you can get or whether you qualify at all. Not only is it important to maintain the best credit rating possible before you apply for a loan, it’s also important to avoid doing anything that might impact your credit while your new mortgage is in process.

One Client’s Mistake Almost Cost Her the Loan

Unfortunately, I had a client recently who made a mistake that almost killed her loan. She was refinancing to get some cash out to do some home improvements as well as take advantage of a lower rate and shorter loan term.

Between the time she signed loan documents and the loan was to fund, she disclosed that, on a whim, she had purchased a new car. Unfortunately, that meant we had to reunderwrite her loan and include the new payment in her debt-to-income ratio. Because her expenses were so much higher because of the car payment, we also were forced to reduce her cash out by $10,000 so her debt-to-income ratio met lending guidelines.

The deal got done, but it was delayed by a few weeks and was big headache for everybody involved, including my client.

Stay Off Your Credit While Your New Loan is in Process

When you’re in the processing of getting a new mortgage, it is extremely important avoid doing anything that would impact your credit report, including the following:

• Open new accounts
• Be more than 30 days late on your payments
• Significantly increase your existing debt

Even if your loan consultant has already run your credit and your loan is approved, these things can still kill your loan. Lenders typically run what’s called “gap credit” at the very end of the loan process before funding to check for late payments, new accounts, and significantly higher balances on credit cards, credit lines, etc.

If something pops up, the lender may require an updated credit report. And if your credit scores fall, it could significantly change the terms of the loan or kill it altogether.

A mortgage is one of the most costly debts you’ll ever have in your life, so make sure you set your set up for success by putting your best foot forward from the get go and keeping it there. Take care of maintain a good credit rating and don’t do anything that would impact it until the loan is done and funded.

The basic eligibility criteria for HARP is the following:

• The loan must be owned or guaranteed by Fannie Mae or Freddie Mac
• The loan must have been acquired by Fannie Mae or Freddie Mac before May 31, 2009.
• The borrower must be current on mortgage payments with no late payments in the last six months and no more than one late payment in the last 12 months (note that some banks may require a clean mortgage payment history for the last 12 months).

If you’re underwater in your mortgage and haven’t yet explored your options under HARP, be sure to contact a mortgage lender today. Rates are fantastic right now and you may have some great opportunities to save money on your mortgage.

If you’d like to check out the full FHFA news release, you can read it here.

Check out the following from BBC:

A 10bn-euro bailout from the EU and IMF – required to keep the debt-laden Cypriot economy afloat – will only be granted if Cyprus itself raises 5.8bn euros, most of which looks likely to come from depositors with more than 100,000 euros in Bank of Cyprus and Laiki (Popular Bank).

…

Laiki, the second largest bank, is being wound up and folded into Bank of Cyprus, the biggest bank.

…

Bank of Cyprus depositors with more than 100,000 euros could lose up to 60% of their savings as part of the bailout, officials say.

The central bank says 37.5% of holdings over 100,000 euros will become shares.

Up to 22.5% will go into a fund attracting no interest and may be subject to further write-offs.

The other 40% will attract interest – but this will not be paid unless the bank performs well.

It’s not just big corporations and the extremely wealthy that are getting hit, many retirees from various countries have settled in Cyprus and keep their money there.  If you’re a British retiree and you’ve kept your money in Cypriot banks, you may have just lost a good chunk of your nest egg to bail out banks who took outsized risks with your money.

If you don’t have this kind of money in the bank, it might be hard to have sympathy, but you should. Because this deposit confiscation is now a precedent to be followed in other countries, it will significantly erode trust and confidence in the banking system around the world.

Fear causes people to pull their money from banks, which in turn exacerbates the problem of bank insolvency, which then leads to politicians enacting increasingly draconian policies that further reduce confidence and restrict depositors’ access to their money. Ordinary Cypriots are now having to endure heavy capital controls, including the following as reported by BBC:

• Daily withdrawals limited to 300 euros
• Cashing of cheques banned
• Those travelling abroad can take no more than 1,000 euros out of the country
• Payments and/or transfers outside Cyprus via debit and or credit cards permitted up to 5,000 euros per month
• Businesses able to carry out transactions up to 5,000 euros per day
• Special committee to review commercial transactions between 5,000 and 200,000 euros and approve all those over 200,000 euros on a case-by-case basis
• No termination of fixed-term deposit accounts before maturity

If you think this couldn’t happen here, you might want to think again. I can’t say for sure that it ever will, but the fact that Canada is now discussing Cyprus-style “bail ins” should be a cause for concern.

EU officials last weekend announced a bailout proposal that would force Cypriot depositors to take up to a 9.9% haircut on their bank deposits to rescue the island’s insolvent banking system.  The proposal created a firestorm and was flatly rejected by the Cypriot parliament earlier this week.

With EU officials and Cypriots now at an impasse over the bailout, the island nation has moved much closer to a collapse of its banking system and an exit from the euro.

Check out the following from Reuters:

Euro zone finance officials acknowledged being “in a mess” over Cyprus during a conference call on Wednesday and discussed imposing capital controls to insulate the region from a possible collapse of the Cypriot economy.

In detailed notes of the call seen by Reuters, one official described emotions as running “very high”, making it difficult to come up with rational solutions, and referred to “open talk in regards of (Cyprus) leaving the euro zone”.

The call was among members of the Eurogroup Working Group, which consists of deputy finance ministers or senior treasury officials from the 17 euro zone countries as well as representatives from the European Central Bank and the European Commission. The group is chaired by Austria’s Thomas Wieser.

Cyprus decided not to take part in the call, a decision that several participants described as troubling and reflecting the wider confusion surrounding the island’s predicament.

“The (Cypriot) parliament is obviously too emotional and will not decide on anything, if Cyprus does not even feel that they can attend the call it is a big problem for us,” the French representative said, according to the notes seen by Reuters.

The Cyprus bank holiday was scheduled to end today, but it looks more like it won’t end until Tuesday. If the banks do reopen Tuesday (maybe they won’t ever open again?), we’ll probably see a massive bank run that will quickly trigger the death of the Cyprus banking system. The country will be forced to exit the euro, default on debts, and reintroduce its own currency  – which will probably collapse in value and drive up consumer prices.

Things will be very painful in Cyprus for a while. The only question is, what will be the consequences for the rest of Europe’s banking system? And what other country’s will soon follow Cyprus? European officials have been desperately trying to maintain the currency union, but once one country leaves, others could follow as well and ultimately lead to the end of the euro.

In case you missed it, European officials this weekend proposed up to 9.9% savings levy on Cypriot depositors as part of a bank bailout package for the tiny Mediterranean island nation. In other words, to bailout heavily indebted banks, depositors in Cyprus would be forced to bank over up to 9.9% of the balance of their accounts to the government.

Naturally, the people responded with panic, to which the government responded by declaring a bank holiday until Thursday. Check out the following from The Guardian:

Cypriots reacted with shock that turned to panic on Saturday after a 10% one-off levy on savings was forced on them as part of an extraordinary 10bn euro (£8.7bn) bailout agreed in Brussels.

People rushed to banks and queued at cash machines that refused to release cash as resentment quickly set in. The savers, half of whom are thought to be non-resident Russians, will raise almost €6bn thanks to a deal reached by European partners and the International Monetary Fund (IMF). It is the first time a bailout has included such a measure and Cyprus is the fifth country after Greece, the Republic of Ireland, Portugal and Spain to turn to the eurozone for financial help during the region’s debt crisis.

…

People with less than 100,000 euros in their accounts will have to pay a one-time tax of 6.75%, Eurozone officials said, while those with greater sums will lose 9.9%. Without a rescue, president Nicos Anastasiades said Cyprus would default and threaten to unravel investor confidence in the eurozone. The Cypriot leader, who was elected last month on a promise to tackle the country’s debt crisis, will make a statement to the nation on Sunday.

Basically, to give it a more personal perspective, it’s like the US government helping itself to nearly 10% of your bank account balance to bailout your bank for the stupid decisions they made. Would that infuriate you? I sure hope so, because it essentially amounts to the confiscation of your property, your hard-earned dollars to cover the mistakes of another. It’s essentially a redistribution scheme from individual depositors to the big banks.

Fortunately, the Cyprus parliament voted the proposal down today, but I fear the damage has already been done. Once the door to such an idea is opened, even if it’s quickly slammed shut, it’s human nature to get your money out of harm’s way anyway.  The banks in Cyprus are currently on “holiday” until Thursday, but once they reopen, I fully expect to see a bank run. Depositors will pull out all their money and very likely cause what the levy was supposed to prevent – the insolvency of the Cypriot banking system.

This levy idea was absolutely breathtaking in its stupidity, and it’s likely going to undermine confidence in all banks, not just ones in Cyprus. And in case you were thinking this is only happening in Cyprus, New Zealand is also considering a deposit levy.

Look out folks, heavily indebted banks and their minions in government are looking to put their hands on your money. Could it happen here?