Ok,
Let me see if I can respond to your points...
If someone can afford to pay 20% more for a house than market, and pay 2% over market interest rates, I still cannot understand why an existing lender will not lend to them at a lower rate than you are offering
A couple of reasons come to mind;
1) Does not fit their acceptance criteria, which may include;
- an applicants asset/liability ratio
- LVR requirements
- type of income (self employed etc)
2) They may qualify for a standard loan, in terms of income, but lifestyle choices mean they choose not to save for a deposit.
3) Maybe self employed and LVR requirements for no-docs not suitable
4) May not be a permanent resident, and wants to use a lease-option to secure a place and get a toe hold while they are processed
If it is simply that they are too impatient to get a deposit or some similar security, then the new Federal NRAS scheme should be able to help them out in saving a deposit
Not everyone qualifies for government housing (i.e. National Rental Affordability Scheme). People on high income won't qualify and sometimes people on high incomes have high costs of living which hampers their ability to save for a deposit (and pay rent).
apart from the old approaches like renting (which should allow you to save a deposit as well as it is a far lower amount than a mortgage), living at home, etc.
Buying, Renting, living at home are lifestyle choices, and some don't suit everyone. I did live at home when I owned an investment property, but moved to be closer to work and places that suit my lifestyle. Sometimes living at home is not an option if your parents are not close to your work.
All this is immaterial. You are describing fractional reserve banking. There is no logic in the comparisons you are making, it sounds more like a gently persuasive MLM-type spiel to attempt to legitimate something questionable. You are still charging 2% over the odds for the cost of money, and a 20% markup on a house to boot. You may be able to justify one, but both is difficult.
Why are my points immaterial and your are valid? this doesn't sound like a balance discussion? Of course its material. We're discussing wrapping which is the process of buying money at one price point and selling it at another. The point I make here is that money the general public buy off banks has been wrapped from bonds.
Justify is an interesting word to use. Sounds like a line drawn in the sand between justice and injustice. i.e. all those who sand on this side of the line stand for justice
Let's talk about "justification" for a moment. How does a renevotor justify a markup of 20% on a property when all the did was do some weeding, buy some plants and paint and clean up the house i.e. consider the show "Selling Houses Australia". A 3 day make over and "bang" markup.
Actually its very easy to justify a 2+20 markup...ready... its called an hourly rate.
Consider this, do you think selling a wrap is an "instant" profit?
It isn't, reason is...
1) Cost of marketing
2) Cost of travel locating property
3) Cost of inspections
4) Buying/selling fees
5) Time spent checking payments for the term of the loan
In regards to #5, that could be once a week, once a month for 1-25 years. That's a long time.
In other words that "instant" profit needs to be amortised over the term of the deal.
Also that 20% markup is depreciated due to inflation over the time too, so the initial "value" of that money is reduced over time.
If we compare apples with oranges, I might view the commission of an agent as hard to justify since they only work for a couple of weeks to sell a property and really, who knows how many hours they spend on any one particular property?
So getting back to justify, remember a wrappers work doesn't stop after the sale, it begins!
My remarks still apply -- that a qualified and competent borrower should be able to go to a conventional lender and obtain cheaper finance and not overpay for a house.
I agree, conforming borrowers go to conforming lenders, and non-conforming borrowers go to non-conforming lenders. And some lenders even go to builders like Masterton Homes who do deals with conforming lenders to offer non-conforming no-deposit finance loans. So my remarks also still apply, I guess we're both right here.
You mean they didn't want to be associated with the meeting.
Opps, I appear to have misled, no no no, they said this AT THE MEETING, they were the guest speaker for the W.A. members meeting. Sorry if I wasn't clear. The government officials I've worked with appreciate the oppporunity to help with education. Getting the facts from official sources and not from word of mouth or rumors is much better, wouldn't you agree?
And how was he 'pretty reasonable' exactly?
I personally spoke to the President of the US last week about invading Russia, and he was 'pretty reasonable about it' too. Anyone can make any sort of statement like this without proof, it is not believable and it means nothing without evidence and exact knowledge of what was said and why.
>Delivered-To:
[email protected]
>From:
[email protected]
>Subject: Meeting with Director of CAV
>To: President_FinanceWrapsAsn <
[email protected]>
>Date: Tue, 10 Feb 2004 10:18:06 +1100
>
>
>
>Michael
>
>Further to your request for other invitees we propose that Ian and
>myself (and other CAV staff working on vendor terms contracts) meet
>with yourselves. Following this meeting one or two spokespersons could
>meet with the Director. As the Director will only be able to meet for
>30 to 45 minutes this will provide the best use of resources within the
>available time.
>
>If you would like to propose a few times when everyone will be
>available in Melbourne, I will check availability and book a room.
>
>After the meeting we will organise a meeting with the Director for the
>spokespersons.
>
>Regards
>
>Christine Rowley
>Project Officer, Credit and Finance
>Consumer Affairs Victoria
>Phone 03 9627 6283
The meeting itself was with the Director and several consumer advocates. We discussed some recent cases that were brought to the Government's attention, and how the association could assist. All agreed the volume of cases was very low.
When did you speak to the President of the US?
And yet the spruikers courses promote that if the wrappor gets into any trouble, you are able to evict them and start all over again with a new hopeful, and rinse and repeat as many times as you like. Just as the US subprime market is melting down due to unqualified borrowers getting into loans they can't repay, so will your wrappors.
That is one position that some people take, in your view, what do you believe should happen?
I'm sorry, that is not possible, and it's way too glib.
What facts can you provide to support your claim that it's not possible?
Here's a scenario...
At the time of the purchase, gross rental return was +10%. Now assume that the wrap payments and sale price were calculated so that the initial wrap payments equal the current rent payments.
Now move forward a few years and the rent in the area increases. However the wrap payments were based on a fixed interest loan (locked for 5 years) so they never moved.
So in this scenario, the wrap payments were less than the median rent.
It is possible, what on earth would make you think its not possible? Just because you don't know how, it doesn't mean its not possible!
What was the price of that house vs the median price in that area? It would be easy to find an unsaleable dump in an otherwise good area and wrap it to a poorly qualified borrower.
The house was wrapped before the 2003 boom.
What were the circumstances of that borrower? At today's interest rates, asking prices for houses, and asking rents, there is no way known between two equivalent houses in an area, that one can be wrapped in a mortgage for less than the going rental rate -- otherwise every renter would be buying.
That's the funny thing with hindsight really. Before 2003, many people should have bought. Knowing what I do know I wish I bought more for myself!
Ok, think of this...
2000 - house for sale for $50,000 (i.e. Tamworth), mark it up 20% i.e. $60,000
2008 - same house now worth $140,000
2008 - refince house off +2% vendor finance
Would the price of +20% and +2% for 4 years justify $90,000 in equity? if all you paid was the same amount you did in rent 4 years ago?
Many renters are now home owners because of wrappers - some are still renters because they were told wrapping is not ethical(?)
Yes some people do default on wraps, then if we consider areas like Bankstown, there are many "conforming" borrowers who are also defaulting. And if we compare 2003 prices of properties with 2008 prices some might even say that 2003 prices were excessively marked up.
This whole description smells to high heaven, I'm afraid. Do you think that I'm some sort of idiot that I'm not fully aware of today's cost of buying a house vs renting? Especially after a 2-fold increase in house prices over the last 7 years vs a CPI-only increase in rents? According to national statistics?
Since you asked for my opinion, I'm happy to give it freely, yes I do think you're an idiot.
Don't take my words at face value, in fact - for your own financial well being, done take anyone's without research.
Here's some homework...
1) Pick a regional city with population greater than 50,000
2) Get the median price of a 3br/1ba home in 2000
3) Get average interest rate in 2000
4) Get median rent in 2000
5) Mark up property price by 20%
6) Determine 90% loan on new price (borrowers deposit will be FHOG + cash)
7) Determine loan payment on 90% LVR with +2% rate spread onto of average
8) Compare loan payment with average rent
The renter's income had doubled? That's quite remarkable -- how did they manage that? What was the 'external factor' given they were even more able to pay off this funny sounding wrap mortgage? Should I dig any further? What say you actually post up hard dollars and cents specifics and describe this mythical house and its wrappor buyer, and compare it to others in the mythical suburb in the mythical town somewhere in a mythical country with mythical house/rent prices. Thanks.
The wrappee was made a manager at their work. I was informed that the chance of owning a property lifted his self esteem. I did a job with provided 45% shift loading, again doubling is not impossible. My wife's has tripled her salary over 5 years in IT from a basic tester to business analyst.
I know IT people who mow lawns in their own lawn mowing business, nothing remarkable about hard work.
Oh, and an Internet search on your name brings up the following story, which is nothing like the one you have just told:
So you have been doing research, excellent!
Tell me, what didn't the SMH article say? that's right they didn't tell the readers about the comparison between the wrap payment and median rent.
1) They quote a loan balance of $93,000
2) They quote a suburb of Beresfield
Now go look up the median rent for Beresfield on the Dept. of Housing Website at the time the article was publish and compare that with the repayment on a $93,000 loan with a +2% markup on the average interest rate at that time.
Jenman's article pretty much quotes the SMH.
According to the story, you evicted, or tried to evict, a family of wrappor clients 2 weeks before Christmas for falling into arrears, and received a great deal of negative press for doing so. They had spent a lot of money capitalizing the property they were living in and stood to lose all of their mortgage payments and capitalization money.
The process began 9 months before that (after the previous Christmas).
What's been happening in the last 4 years exactly, and why does your erstwhile 'mentor' Steve McKnight no longer include wrapping in his repertoire?
I think the property boom is what happened, as I mentioned early 10% rental yields made wrapping easy because the different between rent and wraps was minimal, but now property has doubled and rent yields have halved, the original method used by McKnight is not as effective.
Nowadays people are using other methods such as deposit finance, 2nd mortgages, etc.
For example in Feb this year at an auction I negotiated with a vendor to buy a home (for my PPOR) with a $50,000 interest free vendor finance loan (it fell through because I forgot some paper work) but the vendor agreed in principal because it would have been at the price he wanted.
With interest and property high, I'm now looking to buy property with vendor finance rather than sell with vendor finance.
For example, we're currently looking at a deal where the house has 3 vendors who are beneficiaries of an estate. So we are talking to the agent about a possible reverse mortgage with a low interest rate. So rather than buy the property with a conforming loan at +8% (which we qualify for), we'll see whether we can buy the property on a 2% loan. That way the majority of our loan payments would be principal.
Why would they wait later for the money? Because we're planning to offer above market price for the property (the savings in interest payments would offset the cost to us).
Regards
Michael Gruber
