The Blog of Maxim Porges

Archive for December, 2009

  • Lamenting the Loss of 100% Mortgage Financing

    While I totally get that 100% financing is seen as a big contributor to the Great Mortgage Meltdown of 2008, I don’t believe this is entirely true, and I’m pretty surprised that they have gone away for good. Allow me to explain.

    As a young professional, gainfully employed on a decent salary, I decided in 2003 that I wanted to buy a home. I started saving up for a down payment. However, the housing market was starting to pick up its pace, and I quickly realized that the values were going up faster than I could afford to save a down payment that would make any difference at all to the price of the kind of house I wanted. This being the case, I went out and found a property that I liked, and my step mom (who was brokering mortgages at the time) found me 100% financing with no down payment, a decent interest rate, and no PMI. In this manner, I ended up buying my first (and current) house in June of 2004.

    Since then, I’ve never missed a payment, my mortgage was (and still is) affordable within my means, and my credit has always been excellent. Thanks to a solid financial education from my parents, I’ve been debt free (barring an occasional car payment and a mortgage) for as long as I can remember. I’ve also steadily amassed a tidy sum in a money market account over the last decade with the purpose of covering me in case I should lose my job or fall on similar hardship. My wife and I have also routinely tucked away savings for retirement in our 401Ks and IRAs. So, when Jessica and I started looking around recently for a bigger house, I expected that people of our credit standing, financial stability, and obvious fiscal responsibility would still be able to get a 100% mortgage.

    As it turns out, this is not the case. 100% loans are gone for good, and the system is back to requiring at least a 5% down payment (unless you go FHA at 3.5% and subject yourself to the loan limits for your locale). Also, PMI is standard once again on loans until the house reaches an 80% debt-to-value ratio, where the “value” portion is equal to the sale price and not the appraised price. And no matter how good your credit is or how much cash you have on hand, those are the rules.

    So, let’s explore why these rules are stupid.

    It goes without saying that 100% financing (or, indeed, any financing) should only be offered to people who qualify for the loan, and not to people who can’t afford a mortgage in the first place. I’d like to think I fall in to the “qualified” category. Currently, my wife and I have access to enough assets in liquid and retirement savings that if we both lost our jobs, we’d have funds to draw on so that we can keep paying the mortgage and other bills for quite some time. So, with 100% financing and no cash out of pocket, we’re in great shape in even the worst-case scenario.

    Now let’s look at the 80% loan scenario. If we take some of the cash we have as our safety net and put it in to the house as a 20% down payment, the safety net is diminished. Even though our mortgage payment is smaller in this scenario due to the lower value of the mortgage loan, we’ve got less access to cash to cover us if one (or both) of us loses our jobs. Thus, the likelihood of us defaulting on the loan becomes higher than it was before. In other words, we become riskier people to lend money to. How this can make any sense to the lending institution boggles my mind.

    To boot, if we were to default, we’d lose the cash from our down payment when we lost the house leaving us in an even worse financial position than the default alone. In this way, it just makes no sense to put any cash in to a property: the only cash I’d ever want to invest would be earned equity from the sale of our existing house, but with the market the way it is we’ll probably only earn about 10% profit of our house’s original value if we sold it tomorrow, which is hardly 20% of a more expensive house.

    Let’s say we put in 5%. Now we’re paying PMI, which would be somewhere between $200 and $350 extra each month, giving us a larger monthly payment to make. Again, should we lose our jobs, this means that we’ll run out of savings faster paying for something that’s supposed to protect the lender. Once again, we’re in a worse position than we would be with cash in hand and a 100% loan. The same is true for “creative” financing with two mortgages (such as one at a low interest rate for 80% of the house, another at 10% at a higher interest rate, and a 10% cash down payment).

    With that all said and done, let’s look at the impact on the housing market. Here you have my wife and I looking to invest in a slightly more expensive house that we can readily afford. But due to the down payment requirement, we’re probably going to avoid it altogether. That means no home sale. Assuming that we’re not the only ones following this thought process, the likelihood for the housing market to stabilize and for qualified people to start investing in it again is slim – other than the investors who summed up fat stacks of cash from the boom and are coming back in to pick over the spoils, of course.

    It just doesn’t make any sense. I say bring back the 100% loans – only this time, actually qualify the people looking to secure them instead of just handing them out to anybody who can fog up a mirror.

    2009.12.08 / 3 responses / Category: Uncategorized

  • Maybe I Don’t Want a Nook

    I took a look at the Nook today in our local B&N store. Don’t get me wrong – it’s a nice e-reader, it’s just not exactly what I was expecting.

    What I was hoping for was a device that I could use to carry all my books, notes, and PDFs, which I could then review and/or annotate on the road. Pretty much the only thing that the Nook wouldn’t be able to do for me is the annotation use case, but that’s a big deal to me, unfortunately. The problem is that while the Nook can annotate documents, the process for highlighting the bit you want to annotate (and then adding the annotation itself) is really slow due to the fact that the e-ink display takes so long to redraw with each movement of the cursor. While it would be possible to annotate documents, it would take so long that I would go out of my mind.

    The bottom line is, I think I’ve been spoiled by having an iPhone with a full touchscreen interface and snappy performance; I may need to wait for that Apple tablet after all.

    Besides the annotation situation, the Nook is a neat little device. If you are in the market for an e-reader, I highly recommend that you check it out. The weight is right, the build quality is decent, the screen is clear and easy to read, the color touchscreen is a nice addition that works well with the main screen, and the online browse and purchase process is fast and easy enough considering the scope of the device’s capabilities.

    2009.12.08 / 2 responses / Category: Uncategorized

  • I Want a Nook

    With my birthday and Christmas approaching, my wife always asks the inevitable question of what I’d like to receive as a gift. Due to the fact that I’m either totally spoiled or have meagre requirements for self-actualization, I’ve got pretty much everything that I could ever want, and it isn’t often that a material possession of any kind should take my fancy. However, with all these eBook readers coming out, now is one of those rare times.

    There’s been something of an electronic reading revolution going on for a while, which has continued to gather steam as more mobile devices appeared and laptops dropped in price. For a long time, I couldn’t get used to reading on a computer; there was just something about holding a book and learning to “know” where to open it for a piece of reference material (being a programmer, most of my books are technical and reference is my primary use case). However, in the last few years I’ve really come to love being able to search and annotate electronic documents, and the fact that my Macs print everything to PDF natively has facilitated this to the point where I’m completely paperless. Having an iPhone has allowed me to experience electronic reading on a small screen, which works, but has highlighted for me why a bigger screen would be better and a different device is needed.

    My boss got a Kindle shortly after they came out, and I definitely liked it, but it seemed limited in implementation. Now that B&N has come out with the Nook, the whole concept of a viable eBook reader seems to be getting off the ground.

    Nook vs. Kindle
    There are a few things I like better about the Nook when compared to the Kindle. Firstly, Nook has the Android OS. I can see B&N opening the device up to third party developers at some point, which would be pretty cool. Even if they don’t, I expect that future software revisions will have all sorts of cool stuff in them. Secondly, the Nook has WiFi access. Third, it has a memory expansion slot for a microSD card, and I intend to start using such a card to hold all my technical notes and reference materials as well as my eBooks. Fourth, it supports the EPUB format, which O’Reilly (the premier technical publisher) is embracing as one of their electronic book formats, which means I don’t need to wait for B&N to offer certain titles (and their programming reference library for eBooks is surprisingly poor considering the geek factor associated with eBooks). Finally, it has a replaceable battery.

    On the con side, the Nook doesn’t read .txt or .doc files, but these features seem well in the range of paltry software updates in future revisions. Also, there doesn’t appear to be a way to wirelessly get my self-generated content (such as files from work) on to the Nook, although you obviously can transfer documents via microSD or USB. I’d be willing to pay a small fee to get documents on to the device wirelessly, or to maintain my own online library of images and eBook content. Again, since the phone runs on Android, these are use cases that I see coming to fruition in the future – and if they don’t, it won’t be the end of the world.

    Use cases
    Almost immediately after getting a Nook, I can see myself writing a few handy AppleScripts to convert web pages, software design discussions in emails, technical documents from work and the web, and other stuff to PDF to be saved in a “pending transfer” directory on my computer, which I’ll copy over to my microSD card before powering down at the end of the day. I can then refer to this library of reference materials wherever I may be. Ideally, if the Nook offered a basic web browser one day, I could set the script up to FTP content to a location on my personal web site where I could retrieve it wirelessly on-demand; that would be the bomb.

    Why not wait?
    Of course, there are some other really interesting things happening in this space. The Plastic Logic QUE is not going to be released (or maybe just the details of it) until January 7th, 2010 (although there is a video of its prototype on YouTube). But since the QUE is aimed at business users, will probably be more expensive, is bigger than I would really like my eReader to be, and won’t run Android AFAIK, I’m not sure this is the device for me.

    And then there’s always the possibility that the ubiquitously non-existent Apple tablet should show up some time when we least expect it. We all know that the iPhone rumors took several years to come to fruition, but they finally did – and look at the impact that device has had on its market. Again, an Apple tablet is likely to cost a fortune; $200.00 to $300.00 all-in for a Nook with accessories seems like a good deal to me.

    Now, if only my wife read my blog… :)

    2009.12.05 / 3 responses / Category: Uncategorized