Inside the Markets – Depleted Asset Lending

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As part of my ongoing series “Inside the Markets with Jon McLeod”, the top professionals in our area offer insights into their area of expertise.  This edition features Michael McCarthy from Paramount Residential Mortgage Group discussing his time as a floor trader in Chicago and unique ways to finance property using depleted assets…

Jon McLeod:                       All right. We’re here today with Mike McCarthy from PRMG Mortgage, and we’re going to talk a little bit about not just mortgages, but about his experience up in Chicago working in the commodities business up there. Mike, tell us a little bit about how long you’ve been in the mortgage industry and how you got started.

Michael McCarthy:          I’ve been mortgages for four years. Like you mentioned, I was in commodities prior. As the computer started to take over the trading floor, it kind of squeezed different people out. One of my neighbors was in mortgages up in Chicago and he’s the one that kind of got me involved in it. I have traded bonds, notes, and so forth, so it’s kind of a transition coming from trading into doing mortgages.

JM:                                         Okay. Have you found that your experience in the commodities and trading industry has given you an edge, if you will, in the mortgage industry?

MM:                                      Well, it definitely gives me an understanding of the markets and interest rates. I think I have a big advantage over that. And I have an idea, when different reports are coming out throughout the month, how it’s going to affect the rates, what they’re going to be looking for in those reports to see how it’s going to affect the rates. So what I can do is I can help to advise my clients, “Yeah. Maybe we should lock before unemployment comes out.” Or, “Maybe rates have gotten bad, but we’re going to come up against some support, and maybe we should try and hold off to see how it plays.” Or if we’re at the area, I advise my client, “All right. Well, let’s not lock now, but maybe we should get ready to go, be quick on the trigger, if we need to be.”

JM:                                         Okay. All right. Excellent. Talk to me a little bit about some of the things you did when you were up in Chicago, what your trading experience entailed.

MM:                                      Well, as far as trading, I was primarily a grain trader. I ran a company up there. It was the former Chairman of the Board of Trade. I ran his floor operations for … 10 years, and then I traded independently for about 12 years. Probably all told, I traded probably 15 to 20 years, back and forth, different scenarios. I’ve traded pretty much everything. I mean, my base was in the grains, but I traded S&Ps. I traded Dow. I traded gold. I traded crude. I mean, pretty much if there was something that was moving or if there was an opportunity, I looked into it.

JM:                                         All right. What’s the craziest thing that’s ever happened when you were up on the board up there, up on the floor, good, bad, or just kind of strange?

MM:                                      Me personally, the craziest probably 15, 20 minutes of my life was actually the day that Lehman went down because what had happened was some of these firms had money in grains, and they’re hemorrhaging money in other areas. So they had to liquidate their grain position. And I went up from having a good day to all of sudden these funds coming in, and they start selling everything they have, to getting run over, to actually turning it around, and having maybe the best day of my life, all of that in about a 15 minute timeframe.

JM:                                         Just so being able to be proactive, seeing what’s happening, being able to proactive, and make the adjustments on the fly?

MM:                                      Yes. And down there, that’s everything. You can go in with a game plan, and that game plan is generally over in 15 seconds. And then you have to start adjusting on the fly.

JM:                                         Okay. Excellent. Now, you said that you read a lot of the reports that are coming out, especially around things like unemployment, and that sort of things that can affect rates. What else do you do to keep yourself apprised of what’s happening in the market or to educate yourself in trends?

MM:                                      Well, every day when I go to the gym, CNBC is on, so I get the pertinent news of the day. I subscribe to a couple of different services, a couple of news services, so I’m reading every day. I still talk to some of my old trader friends to get ideas of what’s going on, what’s happening in the market, and so forth. And that’s basically reading.

JM:                                         Okay. Excellent.

MM:                                      Reading, watching different webinars.

JM:                                         Excellent. All right. Mike, obviously, we are in a very seasonal market down here. There’s a lot of people that own second homes, sometimes even third homes here. What are some of the challenges that you’ve seen with people when it comes to acquiring a second home? Maybe they wouldn’t want to buy something. They don’t necessarily have the cash to do so.

MM:                                      Well, definitely what I see a lot of is people that are looking to come down here. They’re looking to retire. Again, they’re winding down their career. So they don’t have necessarily the liquid income to afford two properties. There’s a couple of different ways that you can approach that. You can approach it as an investment property that you’re eventually going to turn into a second residence. Or you can look at some of the assets that you have, without actually touching those assets. You can use them more as a backstop. And then we can actually figuratively derive income from that asset.

JM:                                         Okay. How does that look? What does that look like?

MM:                                      Basically, there’s different parts. It depends on what your asset is. If it’s a savings account, if it’s a stock account, if it’s a retirement account, we can take different percentages of it. And this is also going to matter in your age, especially when it comes to retirement accounts. If you’re over 65, we can access more of it than we can if you’re under 65.

MM:                                      And then what we’ll do is we’ll take that, break it down by whatever our multiplier is, and then we can multiply it out by … or divide it out by, generally, anywhere between five years and 15 years. And we’ll use that number, and it’ll be a figurative income. We won’t take anything from that account, but you can use it almost like a backstop. It’ll say that you have X amount of dollars that you have in reserves. And that could be counted as X amount of dollars you can use as income, but again, you’re not actually touching any of that income.

JM:                                         So if I understand this correctly, if somebody’s got an IRA, and let’s say they’re 70 and a half, and now they’re in an RMD situation, if they wanted to make a purchase, but did not want to increase their income, that you can use that IRA as an asset to show income that they don’t actually have to take.

MM:                                      Correct.

JM:                                         Okay. All right. Is there any change in rates, or anything like that, to be able to do that?

MM:                                      It is a little more expensive, not a lot more expensive. There’s a couple of different plans out there, and the rates kind of break down as how conservative versus how risky you’re going to be with this. It can be done as an interest only. It can be done as ARM, to help offset some of those rates, but it’s not overly expensive. But it’s not prime rates. It’s going to be a little more expensive than prime.

JM:                                         Let’s see. You brought up an interesting point there about interest only or an ARM. Many buyers in that price range … or excuse me … in that age range, 70, 75, 80, that are taking out a mortgage, ask me frequently about a 30-year loan. What would you advise somebody who’s 70, 75 years old regarding financing, whether it’s an interest only, a 7/1, or a 30-year program?

MM:                                      Well, generally I would advise … if you don’t plan on being in the house for more than five, 10 years, or you’re looking at a life expectancy, you might want to go with an ARM or go with a shorter term mortgage. The difference right now in today’s market is what they call the yield curve.

MM:                                      Generally, your shorter term financing, it costs you less in interest and the further out you go because you’re taking the … the person shelling out the money is taking more risk. They want to make a little bit more money. In today’s environment, the market is almost flat, so there’s not much of an advantage taking a shorter term mortgage over a 30-year mortgage. And if you’re looking to say a quarter, it’s not worth it. If you were back in the old days, where, say, you take out a 5-year ARM versus a 30-year fixed, we’re talking a point, maybe more, but in this compressed environment, it’s not worth doing.

JM:                                         Okay. All right.

MM:                                      So if you have the opportunity to take out a 30 year, I would recommend it. You’re not going to save a lot doing a 5 year.

JM:                                         Do you see anything on the horizon that’s going to change these short-term to long-term yields?

MM:                                      Yes. This is going to sound bad, but it’s not really bad. Generally when the yield curve was flat or inverts, you’re looking at a recession within the next year. People freak out when they say recession. There’s been multiple recessions since 1945. And in every one, the real estate market is either going up or, at the very least, staying steady, with the exception, obviously, of 2008.

MM:                                      The difference between 2008 and the other recessions, people think that the recession caused the real estate crash, and that wasn’t the case. The real estate crash caused the recession. So that’s an anomaly. If you’re going over, looking at the other ones, the recessions will … generally real estate does well, but what generally happens through a recession is the market corrects itself. Your yield curve will start to move back up.

JM:                                         Okay. All right. Excellent. Excellent. Is there anything else that you’d like to talk about? We have a couple of minutes left. Anything else that you want to talk about or any other short-term things that people should be looking for if they’re out right now looking to get a mortgage?

MM:                                      Cost of waiting. If you’re not sure if you want to buy now and you want to wait six months, a year, well, property’s still going up. Interest rates are going up. That’s a function of different things that the Fed has done. That’s a function of inflationary indicators that we’re seeing in the market now. Rates are going up. So it’s going to cost you more money to wait.

MM:                                      And it’s not only that price of the property, but now it’s going to cost you more money that you’re putting down. If you’re not putting 20 percent down, your mortgage insurance is going to be a little more expensive because you’re taking out a slightly bigger loan. Your payments are going to be higher because you’re taking out a bigger loan and your interest rates are going up.

MM:                                      So cost of waiting. If it’s something you really want to do now, seriously look into it. Look into different options. If you can’t afford it, look into something like we were talking about, depleted asset. Look into something, if it’s second home, seeing if you can possibly offset some of the income as a rental and work your way back into a second home. So there’s options. Look into them. Waiting is probably your worst option.

JM:                                         Okay. Excellent. Well, we’ve been chatting today with Michael McCarthy from Paramount Residential Mortgage Group. You’ll see his number and his email address on the bottom of the screen there. If you have any questions, as always, please reach out. Until next time, have a great day. Thanks, Mike.

Michael McCarthy can be reached at mmccarthy@prmg.net