CW 1052 - Return of Adjustable Rate Mortgages, Mortgages as Assets & Mortgage Rate Update

Welcome to the Creating wealth show with Jason Hartman. You're about to learn a new slant on investing some exciting techniques and fresh new approaches to the world's most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine, self made multimillionaire who's actually been there and done it. He's a successful investor, lender, developer and entrepreneur who's owned properties in 11 states, had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason's footsteps on the road to your financial Independence Day. You really can do it. And now here's your host, Jason Hartman with the complete solution for real estate investors.

Welcome and thank you so much for joining me for episode 1052. 1052. As we realize and appreciate that it is an amazing time to be alive. But it's a paradox, isn't it? Because at the same time we realize that it's an amazing time to be alive, we also have to tolerate things, things in life like, well, leaf blowers, air conditioning abuse, the new secondhand smoke, air conditioning abuse. You've heard me talk about these things before as we enjoy the decline of culture and civilization. Well, I said enjoy, sarcastically of course. And we see the absolute moral bankruptcy everywhere on the news and how these just sleazy, unethical people are able to gain such a foothold in the world. It's truly amazing. I don't know what's going to become of society in the world. It's, it's really, it's really something else. You know, we will continue to observe. We sure will. I mean, every day there's a new scandal, there's this, that and the other thing. It's truly mind boggling. And we, we profile a lot of that on the show, as you know. So we just celebrated Labor Day. Americans did at least. And it's interesting. I saw ad for Sotheby's, the real estate firm. They talked about how Labor Day got its name. This is from Robbie Briggs, the president and CEO of Sotheby's. He talks here about its checkered past and how it was originally organized to celebrate labor unions and their contributions to our national economy. And look, folks, you know, I will completely agree that when labor unions started, they needed to happen. That was a very good thing. Like labor unions, civil rights groups, a lot of these other groups are sort of like looking for something to do nowadays. You know, they just, there's not a real serious cause that there was back at the founding. But any organization, any organization, whether it be a charity or a union organization of any kind, a government committee, of course, I mean, don't forget the government. Their main goal of any organization, just by the nature of human dynamics, is to perpetuate its existence and to increase its power. So that's what we see happen. But you know, back then, I mean, Americans were working 12 hours a day, six, seven days a week and they were barely getting by. You know, the big companies and the trust of the day, the robber barons, as they called it, they controlled everything, they controlled all the resources, right? But now we see a similar thing because as we watch the cultural decline and decay, we see the technical tyranny. These technology companies that are literally the new oppressors, the big tech companies, you know who I'm talking about. I tell you, they are infringing on people's copyrights. They are obviously infringing on people's privacy. They are just taking advantage in so many ways. So again, as society evolves and technology evolves, we need to take a look at this stuff all the time because it's just something that always needs to be kept in check. These big tech companies, they are like the new government. They are these sort of almost pseudo governmental entities and oppressing people in all sorts of ways. So, you know, we'll, we'll continue to look at that. But today we're, we have a mortgage update. We're gonna talk some real real estate stuff. I also wanna give you a little lesson on adjustable rate loans because I think we are going to see the popularity of adjustable rate loans come back as interest rates increase and the high end market is slowing significantly. The low end market definitely not slowing at all. Huge inventory shortage. And thank you those of you who reached out to me after mentioning that episode last week. We certainly need more property inventory. We have some great inventory, but not enough of it. So adjustable rate mortgages are going to come back. That is my prediction. Inventory very low. On the lower end, the good sensible rental properties, the properties that follow my commandment number five, thou shalt not gamble. The property must make sense the day you buy it or, or you don't buy it. But we will see the market react to this and the mortgage market, I believe, will start promoting adjustable rate loans again. We'll see if my prediction comes true. We've been in a fixed rate market for many years, so I will give you a little lesson on an upcoming episode on adjustable rate mortgages. A lesson that will beautifully simplify it and make, you know, Whether or not you should take an adjustable rate mortgage, it's not my favorite because I believe in the buy hold philosophy. But there are some times where adjustable rate mortgages can make sense. They can work sometimes depending on the five elements of the adjustable rate loan. And I will teach you about that on a future episode. Strong consumer spending out there is making the economy boom. Consumer spending is very robust. And the inflation target, you know the, the Fed has this 2% inflation target, right. That they always talk about. And I don't know why there needs to be any inflation. Right. But you know, it's back to that concept of the Phillips curve. And there is a belief out there that population growth, unemployment rates or employment rates, depending on how you look at it, and inflation need to be sort of managed and they need to sync up by the central planners. Right. And so the Fed's Target is a 2% inflation rate. Well, we are definitely moving in to an inflationary time and that's why we see rates increasing to stave off the potential for serious inflation. Now we have heard of some stories around the world, of course, Venezuela being the new poster child for economic disaster. How's that socialism and communism working? Not so well. It never does. It always fails every single time. It's tried everywhere it's tried. Not one success story, not even the Scandinavian countries. Okay, so we, we're definitely seeing some real signs of inflation and we will see how the, the central bank intends to manage that Again. I believe we have one of the most transparent federal reserves we've had in a long, long time. So we won't have to decode it too much. They've sort of announced what will happen. They're going to raise rates. It's just what they're doing. It's, they've got a plan to do it, they've got a plan to do it incrementally and it's going to happen. Now there is an interesting side effect to the way housing inventory and rates play out together. If you looked at it from a simplistic point of view, you would say, well, higher rates mean fewer people will buy and if fewer people buy, the market will slow and there will be more inventory of properties for sale. Right. That's sort of the first level thinking. That's what the knee jerk reaction would be. And ultimately it does sort of happen that way. But there's a serious other factor and this is the one that you really need to consider. Remember all those people that have been buying properties or refinancing the properties, they already Own, because, hey, the mortgage market from a refinance perspective and a purchase money perspective. Purchase money loans in the mortgage market has been booming the last several years as we have had very low rates. We've had a very hot market. We, we are into the second year of a Trump presidency and that has created a very hot economy. Love or hate Trumpster? But hey, I said during the campaign, as he was saying his dumb, dumb things, sometimes funny dumb things, though. Most entertaining debates in all history, right? As he was doing this, I was saying, hey, you know, hate this guy all you want, but he's going to be good for the economy. Now the question is, compared to what? Well, we don't know because you can't hear the dogs that don't bark. We don't know what would have happened if the criminal known as Hillary Clinton were president today. Everybody thought she would be right. And we don't know exactly what would happen. It's a mystery. But we can certainly speculate, and I think we all know, regardless of what side of the political aisle anybody is on, that the economy would not be this robust if we had Hillary Clinton as president. There's just no way. So all of these people have been buying properties, they've been taking out mortgages or they've been refinancing their mortgages to get lower rates. Now they've got these low rates. Remember, I always say the mortgage is an asset, okay? The mortgage is an asset. It's not a liability. Most people think it's a liability. If you look at a balance sheet, you know, you've got your assets on one side, your liabilities on the other side, and you subtract one from the other and you get your net worth. How much are you worth after all of your liabilities are subtracted from your assets? Right? And hopefully that's a very positive number. Hopefully it is, right? I saw my net worth during the Great Recession decline significantly, I would estimate. And it's hard to know exactly. I've never really understood how they do the net worth studies like the net worth of various celebrities or the Forbes 400 list of the wealthiest people in America. How do they do that? I mean, it's really hard to know what your net worth is. It's, it's not a simple thing because there are intangibles, right? There are businesses are. It's hard to know if they're not publicly traded, what your worth is, right? It's, it's really hard to know. You know, people try to try to evaluate the value of These non publicly traded companies and it's not easy to do that. But anyway, you have multipliers and so forth. So all these people have been taking out mortgages and we've talked about net worth. Okay, so you get how that works. But all of these people that have these mortgage assets, and I don't mean the lenders because they consider that an asset because someone owes them money. I mean the borrowers. The borrowers have a mortgage asset because they've been following my plan and now they're going to be in for some serious benefits from inflation induced debt destruction. My trademark term, inflation induced debt destruction. As time goes on, they will see inflation diminish the value of the debt. But what if you refinanced your house or you bought a house and you know, this could be your own home, it could be rental property, whatever. Any kind of real estate where you've got a mortgage that you took out in the past few years, well, you've got a very low rate and a very good asset there. Now if you're a typical homeowner, you're probably not going to want to sell that property. Because when you sell the property, guess what, you have to sell the mortgage too. Right? The mortgage sadly is not transferable. It goes with the property, not the person. So if you sell your home, I'm thinking like a typical owner occupant. Now if you sell your home and buy a new one, you got to relinquish that mortgage asset and people will be inclined to hold on to their home and the mortgage asset. Even if they can afford a nicer home, a bigger home, a better home in a better area. Even if they can do that, even if their family's expanding and they want to move and they can afford to move, they don't necessarily want to relinquish the mortgage asset because it's a very good, well priced mortgage for three decades long. Now this is the same concept. Remember when I interviewed one of our video editors on the show, Patrick, great guy. I interviewed him several years ago, maybe, well, not several, but three years ago, maybe four years ago. And he lives in San Francisco. He and his wife live in San Francisco. They have a rent controlled apartment. It is a very good deal. They've been living there a long time and I can't remember the exact numbers, but they were roughly paying, I think $2,400 a month. He came on the show and explained this whole thing and the property was worth about 1.5, $1.7 million for $2,400 a month or approximately. And you know, they would move, Patrick and his wife would be totally game for moving. But they cannot replicate that deal anywhere else because it's rent controlled and they've been renting there for like 20 years. So rent control makes for a stagnant market and so do long low rate mortgages. They make the market more stagnant. They make for less price discovery, they make for less movement. Because now people have got these great assets, just like Patrick and his wife and their rent controlled apartment, or they've got these super low rate mortgages and they don't want to give them up. Why would they want to give them up? I mean, on all my properties where I have these very low rate mortgages, I don't want to give them up either. They're really good deals. I can't necessarily replicate them. And so this causes inventory to be tighter, to be even a bigger shortage of inventory. So we'll see how it plays out. Now when there's tight inventory. Look, I think you all know the supply, the law of supply and demand and the way the supply and demand curves meet and the way they price things into the market. When there's low inventory and there is still demand and there's lots of demand for good solid income properties, prices go up, right? They go up. They have to, they can't do anything else. That's exactly what they have to do. And so we shall see how this all plays out. But it's going to be interesting now. It'll last for a while. Some of these people holding these low rate mortgages will ultimately come off the fence. Okay? It, it'll happen. Things will move. They just won't move as much as they maybe should move or might otherwise move. All right, so let's get to our mortgage update. As we kind of talked about that a little bit, let's get to some more specifics. Adam is doing the mortgage update today and we're going to do this more regularly on the show. He's been bugging me about it, so I said, hey, then you take the lead and go for it. Interview some of our lenders in our network and see what they have to say. And we will play that here in a moment. But first, congratulations. We had a few more people register for our awesome Hawaii conference coming up. That's coming up first week of November. And our Venture Alliance Mastermind retreat is right there the next day in Kauai. So we will be on Waikiki beach for the two day conference and then we will be in Kauai for a two day Venture Alliance Mastermind retreat. You can join us for both. Go to jason hartman.com and register for that Today there is an airfare war going on so congratulations. Airfare to Hawaii is really reasonable right now. Good things with the airfare war going on there. Also, be sure you enable our Alexa skill so you can get Jason Hartman's Real Estate update every day on your Alexa device. And be sure to subscribe to our new PropertyCast where you can get properties delivered to your mobile device or computer just like a podcast is delivered to you. Now watch. Everybody in the world will copy me on this great idea. But remember I was first with the Property Cast, so Jason Hartman's Property Cast, wherever you consume podcast content, you can get it there. And please rate, review and subscribe to that. We would appreciate all of your nice reviews and we always do. So thank you very much and let's get to our Mortgage Update.

Welcome to the first edition of the Mortgage Minutes. With me today is one of the lenders for from Jason's network who's here to discuss what's going on in the lending world. We're going to dive into where rates are now, what things have impacted rates recently and what factors are on the horizon that we need to be wary of. So first off, what rates are you seeing investors getting these days? I know you can't be too specific because everyone's situation is different, but what range can people with bad, mediocre and good credit be expecting?

Well, a lot of that is I guess, relative when you say the bad, mediocre and good credit. Bad credit may not put a person in a position to even get into the investment property financing part of it. But let's just say that if a person is looking at a medium credit score around 740, that's where you're going to see the majority of lenders not have an impact on interest rate based upon credit score because your interest rate is going to be adjusted based upon one a base rate is what's going to be issued. Then you're going to have some adjustments to it for the type of property you're buying. Is it going to be a multi unit single family, that kind of thing? That's going to be adjusted for the type of usage, primary residence, secondary home or investment property. And the another adjustment will be for the credit score starting at 740 and above. There'll be no adjustment as you go down in score every, you know, really a 20 to 19 to 20 point increment. You're going to have an adjustment to that. So the rate may stay the same, but there may be adjustment in cost or what we know as points, or there may be adjustment in the actual rate itself. So what I've seen many right now is in the high fives. A year ago we were doing things in the high four. So we've seen at least a 1-1/4% adjustment. To speak more specifics myself personally, I just closed on a property in Missouri. I used a competitor because I'm the only licensed loan originator in that state of my firm and I can't do my own loan legally. So I went outside of my firm and they locked me at 6%. And when I looked at the cost to purchase it down to go into the fives because of that loan size, it wasn't a real big loan size. It made no sense for me to front load that money. Because when I ran my own taxes and started looking at seeing how my tax would be impacted by that slightly higher rate as far as that deduction is concerned versus what I might have paid in taxes with a lower interest rate from the cash flow, they actually really was within pennies of each other. So it made no difference to me at that point. The only thing that would have been a difference for me to get that rate lower just so I can tell people I have an under 6%. But personally I don't care. I understand this well enough. That interest rate does not play as big a factor to me. I even run the numbers difference at 1%. And because of the tax deductibility here versus, you know, the income tax I would pay on the cash flow, the gap is so minuscule. It looks bigger on paper, but when you get done with all those that math for each person I know, for me specifically, it didn't matter at all. It was literally within dollars of each other.

All right, so you mentioned that a year ago we were looking at 4 and 3/4 or so, about a percent less. So what things have been going on in the economy that have led to rates rising, we have seen them climbing in the last few months and year. So what things have led to that.

We got to go backwards a little bit. 2007, when things really started to vaporize in the market, There's a big halt in the credit markets because everybody who was putting money into the mortgage backed securities market pretty much pulled out in August of 2007, as I recall. In fact, I received an alert at that time from a source that I subscribed to saying that There was big sell offs. So I contacted my staff while I was in Hawaii at the time and had them lock every deal we had for 60 days if I remember correctly. So I had an entire pipeline of probably about 40, 50 loans at the time. We locked them all and what that was is we grabbed that money before, was able to get pulled out of the market and set it aside for our clients. And literally like within the next 24 to 48 hours, the interest rates went up 2% because the supply drops so quickly. So fast forward to the end of 2008, December 2008, January 2009 when the Fed came out. It was Ben Bernanke, he was Hank Paulson worked together to start what they called the quantitative easing, which was a substantial amount of capital being injected into the mortgage backed securities pools by the Federal Reserve. Because we didn't have the money coming in from all the other sources that used to be pension funds and people's. I'm sure there was a mutual fund of some sort that would go in there. There was a lot of different funds across the world that would go into these things and supply the US economy with enough money to lend out to people to buy homes. Well now it came from the Fed and the Fed was dumping. If you look at the New York Fed website, they have a day a layout of everything that they put in over the last few years. And I have seen spots where they did over $40 billion a month. Well, there's trillions that we know there. I know at least over a trillion dollars went into that, that particular pool over the last few years. And when you're shoving that kind of money in, they're keeping that supply high. Well, if you think back on what happened then as well, what changed? It went from really anybody getting a loan to nobody getting a loan to them, really figure out the best way to release credit to the population. So it slowed down the demand because fewer could qualify. So demand shrunk very quickly. The volume of availability started rising really quickly. And so it forced rates were down extremely low to that really low point. Well then we got that equilibrium kind of figured out within probably I would say 2015, 16, 17. We had that demand that brought it into that mid, fours, mid to high fours up until the end of 2017. Well in 2017 we had another change of the Fed president. We had Janet Yellen in there for a little while after Bernanke. Well, the new Fed president looks at everything, says, well look at our economy, our economy is on the rise. Everything's been Going very well. We're in great shape. So we're going to start a new policy referred to as quantitative tightening, which is basically taking their foot off the gas. Instead of dumping upwards of $40 billion a month in there, we're getting. The last one I just saw was $3.6 billion being dumped in. So you can see the big contrast. Well, what that does, when you have a demand pulling on something and the supply starts to shrink, the cost of what that is starts to go up. So we saw a large jump from December 2017 up until about probably March 2018. We saw a massive jump, nearly a full percentage point. And it's maintained that gap since then. And it's all because the demand has started to shrink, because the rates going up, especially in the owner occupied world that, as you know, Jason talks about owning a home and living in it and paying the debt on it. That's your debt. There's no offsetting that. If you're buying that property and leasing it out, that's in a way somebody else is paying that debt and you have all these things that are working in your behalf to make it a much better deal for you to hold it regardless of what the rate is. So the demand in the investment world has shrunk some, but not as much. For those who understand that this interest rate phenomenon does not hurt them that much when you factor in every other aspect of their real estate investment and the benefits where homeowners have shrunk as far as their ability to purchase. So the demand has equalized out with the supply and kept us in this high fives, maybe low sixes depending upon who you're working with.

All right, so is there an end in sight to quantitative tightening? I know the Fed chair has come out and said that they view the economy as healthy now. So would they loosen it back up to kind of where it was before, before they started dumping money in? So would they kind of make it to quantitative equilibrium or something like that?

Good, solid question as to what their plan is. We don't know. I'm thinking that they're going to continue as they have planned out. I think like 2021. I got to go back and look at my notes that they're looking to be completely out of MBS's. So if they're completely out of mortgage backed securities by 2021, that I guess we're hoping that the market itself will sustain it. And I don't see why it wouldn't. Because when you think about the past and there's such A demand for MBS as people parking money and mortgage backed securities like crazy. If you watch the movie the Big Short, it goes into a lot of detail about that in a way that people can understand. But I always recommend anybody watching it for the first time, watch it two or three times. You'll need that much just to get a good handle of what's going on around you and to separate the characters and their roles. And then you'll start to see that the market will probably start to appreciate the MBS a little bit better because of how we're lending that money. It's not just going out to anybody like it used to. It'll have a little bit better value. Plus we're going to show a lot better performance because you're not putting out there to people just to buy something and hoping that the value is going to go up and then unload it like they did in the mid 2000s. That performance is going to be much better than it had before. And I've noticed that the real estate investors have a better performing portfolio, meaning for us as lenders than your homeowners, especially the first time home buyers. I've noticed that there are some reports that come out and they don't have the near their performance as far as on time payment that a real estate investor has. In fact, I got real estate investors and I encourage them all call me. You run into any problems with your payment schedule or how things are going on there because they are earnestly trying to make their payments. But sometimes different lenders and different servicing companies has a little bit of a different process and get a little bit more complicated than they want it to be. So you know, I get where the real estate investor can't wait to get their payment in and make sure that they're clean and keep their credit clean so they can continue to keep investing.

Now the Fed is meeting in September and is widely expected to be raising rates from their current, I believe 2%. Is this going to impact rates much or is it already priced in?

It's already priced in. Everybody already knows that that's the case. The only times that that really has much effect on the market is if they do something different than what they really published to the world, but the world believes it's going. It's when they are expecting them to raise it say an eighth and they raise it a quarter, then it has a little bit of a negative effect. But again it's that effect on those people that are putting their money into the mortgage backed securities as an investment vehicle that are driving that interest rate and the Fed moving that rate doesn't have a direct effect.

So what news items have you heard about that you think will be impacting rates in the next one to two months? Anything?

Nothing that stands out as far as interest rate impact. I'm not pulling anything up off the top of my head right now. It's really just kind of status quo. I'm not seeing a whole lot of things that are, that are going to drive it any differently. There are things that will have influence if you start seeing geopolitical news that comes out across the globe. We did have a nice little shot in the arm when we heard of some problems overseas, other economies having issues. Those will help the interest rates a bit if those other economies start getting strong. And anytime economies show strength, it doesn't matter if it's the US Economy or another country's, it does impact the rates a little bit negatively. Because if they believe things are going stronger, then they're going to put their money, meaning the global investor, anybody who's going to park money in the market of multiple choices. You can go into mortgage backed securities, which is the same as a bond. You can go into Treasuries, you can go into stocks, you can go into commodities, precious metals, crypto. You can go into multiple different things. Well, what you go to is dependent upon what you think is going to make money. Nobody put, well they did. I mean they should. People short it. But nobody goes into something as far as going long into something that's going to lose money. Their intent is to try and make a profit. And if they're going into say stocks, it's because they believe the economy has strength, has legs and that there's going to be a lot more growth in those particular sectors. So they'll probably take money from long term things such as those bonds or mortgage backed securities and park it over into stocks. And when they do that, we start seeing a raise in interest rate because the supply has shrunk. Now if we start seeing the economy and we get more news coming down the path of more economic issues, then who knows, we might be able to see those interest rates drop a little more because people want a long term stable place to put their money. Now one thing I did notice, I was looking at the Fed's website, is that consumer credit is up. When consumer credit is up. I personally think it's just an Aaron Chapman opinion that we may see that the consumer credit pushing to a point that puts a little bit of strain on the economy because the consumer ability to purchase things and to drive the economy is what has been driving it thus far. If you look back at 2017 with them showing a healthy economy to make the decision to do the quantitative tightening, well, it was all based upon consumption. I think it was 72 plus percent of the US economy of the consumer. And it was also pointed out to me last year that over 19% of the global economy is the US consumer, which I thought was really an interesting item to know as well to know how much the consumer drives all economies. So the thing that I found really interesting is that over the year of 2017, by I think it was end of second quarter 2017, the average savings per households about 5.5% of their income. But then you fast forward to the end of the year, it dropped down to 2.4% of their income. So it went down a significant amount over 50%. And so then we saw that consumer credit had gone up by the end of the year. So people were trading their savings for stuff and they're going into debt. And we did notice on the Fed site this morning, as I referenced earlier, that consumer debt is up. So if that continues, that may have a positive effect on the interest rates. But just because one, the supply is going to not be as drawn on as much because the consumer is not going to be spending as much in the bigger items because of their credit being used up for little things. But we'll see. That's just the first thing that kind of pops in my head as you were asking that question, I thought rattle around for a minute. And that's what seemed to be a potential on the future that may have some impact.

All right, so Flight to Safety is good for us investors. Thank you so much for joining us.

Thank you.

Thank you so much for listening. Please be sure to subscribe so that you don't miss any episodes. Be sure to check out the show's specific website and our general website, hartmanmedia.com for appropriate disclaimers and terms of service. Remember that guest opinions are their own and if you require specific legal or tax advice or advice in any other specialized area, please consult an appropriate professional. And we also very much appreciate you reviewing the show. Please go to itunes or Stitcher Radio or whatever platform you're using and write a review for the show. We would very much appreciate that and be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.