1 + 1 = ?


(image via The New Yorker Cartoon Bank)

The hardest arithmetic to master is that which enables us to count our blessings.  ~Eric Hoffer, Reflections On The Human Condition

In my book, I write a story about a company that looked for an accountant. In the job interview, they just asked one question:

“How much is 1 + 1?”.

The first candidate said “Two!”.

The second candidate said “Three!”

The third asked “How much do you need?”

In the book, the story supports my description of how mortgages were done in “the good ole days”, when stated income was a norm.

Today this story comes to mind in a completely different context, though still connected to the past. Before choosing a loan, one has to ask themselves, “What do we need?” or what are our choices.

Before the end of 2008, when everything changed and property values dropped, it was very easy to get an equity line or a line of credit (L/C). Now, many borrowers who have first mortgages and L/Cs are facing a number of issues when trying to refinance their first mortgage for a lower rate.

If the combined balance between the two loans is less than the conforming limit of $417,000, the most common practice is to combine two loans together, since there is no increase in the interest rate. If there is enough equity, we can also apply for the subordination of the L/C, (i.e. borrowers will still have an L/C available to them without any current balance).

It becomes more challenging when the first mortgage or combined amount is higher than $417,000. Those loans have higher interest rates to start with, so when the first mortgage is combined with an L/C, it is considered cash-out refinancing; which results in a rate increase. Meanwhile, some lenders have adjustable programs that are fixed for 3, 5, 7, or 10 years, and offer excellent alternatives. You can see some of the options I presented to a client in a recent email:

“Dear Mark,

I reviewed your mortgage and here is my analysis; you have a number of alternatives:

You can refinance your first mortgage for $460,000 @3.625% at 30 years fixed with monthly payments of $2,097.84.  Or 15 years fixed @ 3.0% with $3,176.00 in monthly payments.  Both options are with no out of pocket closing costs.  This is possible because lenders offer rebates.  You can lower the rate by paying closing costs.  Your credit line of $125,000 has to be subordinated, which we’ll do after your first mortgage is approved. 

Consolidation of the first mortgage with the line of credit (L/C) will create a new loan of $585,000 which is considered a cash-out and therefore is priced at 4.25% 30 years fixed.  At the same time, you can get $585,000.00 fixed for 7 years, and adjustable after that, at the rate 3.3% and monthly payments of $2,562.00.  If you choose to pay more, as you are doing now, (I was basing on 15 years amortization with monthly payments $4,225.00), the balance of your loan after 7 years is going to be $347,684.00.”

No one knows what will happen in the next 7 years; however the interest rate on your L/C will probably go up.  By paying down your new mortgage on the accelerated scale, you can bring the loan amount to the conforming limit, which has the lowest rate.  You might have a concern that fixed rates will never be low again.  And I agree – no one has a crystal ball.  But I am an optimist; if it happened once, why would it not happen again?

P.S. And Men, don’t forget about your Wive’s intuition…

During our initial conversation with Mark, he claimed that his wife wanted a 30 year fixed rate while he preferred a 15 year. Shortly after my email, Mark and his wife, Joan called me, and we discussed proposed options and it was Joan who had the last word.

Her response was very simple:

“We are not going to live in this house for another 7 years; I like the security of one loan with a low interest rate. Though we talked to other companies, I would like you to help us. You are the only one who gave us options.”


Best Wishes,


You Do Not Need Credit Scores

(image via Kruse & Crawford)

“A man who pays his bills on time is soon forgotten

 Oscar Wilde, writer, poet

Hang on, didn’t I write in my newsletter a few weeks ago, in Credit is Queen, that credit scores are a decisive factor in the mortgage game? We can compare a credit score to weight loss. Generally, people don’t hop on the scale constantly to check changes in weight loss, nor do they pay to do so. Other than a scale, there are simple factors to assess whether one has gained weight (clothes not fitting for instance)…And the solutions are relatively simple, like eating less carbs and cutting down on sugar. But no one in his right mind would write to the scale manufacturer, to complain that the scale is showing the wrong number, or expect that the federal government provide assistance to reach those scale manufacturers.

What prompted me to write this nonsense were two articles written by Kathleen Pender: Consumers Get New Help on Issues with Credit Reports and Credit Scores May be Free–But Aren’t Fico, which both appear in the San Francisco Chronicle.

In my book, I write in detail about credit scores and their effect on one’s mortgage. But it seems that credit scoring has become a big business, peddled by the banks and the credit bureaus.

Credit Bureaus
The only time borrowers require a credit score is when they apply for a mortgage or any other credit related needs. There are three credit agencies: Trans UnionEquifax, and Experian. Though they all use a variation of the FICO scoring system, their numbers vary. Mortgage lenders use the average number, regardless which agency reported it.

If there are two people applying for a mortgage, the lenders will use the lowest out of the two scores which is by itself an arbitrary rule.

There are many factors that can affect the score and in addition to this there are variations of scoring models. The score which is sold through some websites is called “educational” and is useless for mortgage qualification, and in my view, is a waste money.

Each industry has their own criteria like auto insurance or rent, and the scores will vary from one to the other. Besides, there are other scoring models like Vantage Score. Therefore, Wells Fargo offering a “free” credit score is a marketing gimmick to draw people into their branches and in my mind is very misleading.

But the Consumer Financial Protection Bureau (CFPB), which was set to monitor banking and mortgage activity by the government and is paid by your and my money, is not going to protect borrowers from the banks misleading tricks to get customers.

One of the CFPB’s functions is set to handle complaints and there are thousands of consumers who have reasons to complain. As far as credit reports and scores are concerned, I do not think complaints can really make a difference, but advice from an experienced mortgage professional can. Through many years of experience, we know what can affect the score and what actions consumers can take to improve it.

If you know someone who needs a mortgage and might have problems with their credit score, please do not hesitate and contact me. But first read my book. The credit is only one of the 5 C’s one needs to get a mortgage.


There are a few simple rules on how to have an excellent credit score.

  • First, something your grandmother may have told you, if you cannot pay your credit card bill at the end of the month, do not use plastic, or at least create a budget.
  • ALWAYS pay your bills on time. If you are travelling or have an emergency, ask someone reputable to do it for you. Paying online might help, if you have enough money in your account, but mistakes do happen.
  • Do not allow medical bills, or any other disputes go into collection. Pay first, then dispute. This alone will save you a lot of aggravation and can make a difference in getting or not getting a mortgage.
  • You can check your credit report (not scores) for free(www.freecreditreport.com) once a year for possible errors.
  • If planning to apply for a mortgage and suspect that your credit scores might be affected negatively, start the process three months in advance.



Best Wishes,

Manny<br />

A Small World

Small World
(image via The New Wage Truth)

“Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has.”
Margaret Mead

I received an email from a friend (who often refers me new clients), asking me if we do commercial loans. Our company is very unique. We are experts in every type of real estate loans. This week, we are working on a loan for the acquisition of a retail showroom, purchase/construction for two residential spec buildings, a refi loan for a hotel, a purchase of an industrial building, and a refi for a number of apartment and mixed use buildings.

One of the new referrals came from my corporate/real estate attorney, who has a client who needed to refinance an owner occupied industrial building. His loan had a balloon after five years, and the bank refused to renew his mortgage. When I inquired for the reason, he did not know, but informed me that he had short sales on two of his residential properties. My first reaction and obvious solution was to apply for an SBA loan. When I called my friend Bill Hand, who helps me with SBA loans, not only did he know the building, five years ago he helped the borrower to get financing for it. Bill also warned me that the client does not report enough income to qualify for a bank loan and because the borrower had a short sale, he cannot get an SBA loan.

The next step was to try to get a private loan to save the client from foreclosure. To accomplish this, the value of the loan had to be $1,500,000, while the bank appraised it for only $1,200,000. I questioned this value since I recently arranged financing for another building in the same neighborhood in downtown San Francisco and knew that the value had to be higher. To support my point of view, I needed an opinion from an experienced real estate agent, so I called my friend Rick O’Neil. (I wrote about him in my newsletter from last week.)

As it happened, Rick knew the building since only a week ago he found a tenant for the vacant space in the back of the building. While I was doing my research, the owner called his real estate agent Art, who works with Rick, to discuss the possibility to list the building for $1,500,000. Only a week later, Art had a buyer, who agreed to the full price. The buyer needed to get a mortgage. He contacted Wells Fargo Bank and Bill Hand. Bill used to work at Wells Fargo and knew that they would have a problem to approve the loan, but it would take them 60 days to realize it.

Meanwhile, Bill was leaving the bank he was working for. He called me, and there was a simple decision. We agreed to work together since I had sources to find fast solutions.

What a very small world we live in.

Mortgage Game Book

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Best Wishes,

Manny<br />

Manny’s Story and the Five Cs

From his childhood of factory work in communist Latvia to his current life as one of the Bay Area’s most respected and successful mortgage industry professionals, Manny Kagan has enjoyed a colorful journey to the top. In this fascinating new book, The Mortgage Game, Manny shares not only his amazing life story but also his secrets to finding the best mortgages possible. It all boils down to his trademark “Five Cs”—Collateral, Capacity, Credit, Capital and Character.

Using real-life examples, Manny shows how he was able to overcome the “minuses” of some of his mortgage- or refinance-seeking clients (and most clients have some minuses) and turn them into “pluses.” Just about every mortgage lender working today talks about the Four Cs, but Kagan takes it a step further and includes his own signature fifth C—character. This is the one that often makes the difference – and it’s the one that helped him become a leader in the industry.

In this book Kagan pulls back the curtain and shares details of his own real estate transactions—from the very first house he and his wife bought for their family, to subsequent refinance deals he was able to close on a basket of rental properties. The Mortgage Game is a valuable tool for anyone who’s thinking of investing in real estate or refinancing an existing loan.

The Mortgage Game offers up-to-date information on the current marketplace, along with clear explanations of how the market got itself into so much trouble. But this valuable book also offers more – it’s the one reference guide every home-buyer needs.