Bloomberg Radio
"The Money Show"
July 24, 2003

"Outlook for Mortgages"
with guest, Michael Moskowitz
President of Equity Now, Direct Mortgage Lender

MODERATOR: You're listening to the Bloomberg Money Show here on Bloomberg Radio. I'm June Grasso. Thanks so much for being with us this evening. We are going to be talking about two things in the coming hour - First, mortgages. With us is Michael Moskowitz. He is the president of Equity Now. Thanks for being here, Michael.

MM: Hi, June.

MODERATOR: Let's talk about rising interest rates. First of all, what are rates at like now?

MM: You're talking about 5-3/4. You're talking about a month ago, the same product was 4-7/8. So it went up almost a percentage point.

MODERATOR: And are you expecting it to go up even further as we see rising Treasury rates or bad news for homeowners because these 30-year mortgages are moving in line with the 10-year Treasury notes?

MM: I personally expect it to go up another quarter or so in the next month.

MODERATOR: So now tell us about the adjustable-rate mortgage, first of all. What is that tied to, what kind of indexes?

MM: With an adjustable-rate mortgage, it's fixed for the first two years, maybe five years, seven or 10. That's an adjustable based on a 30-year amortization where after the initial fixed period; it may adjust every six months or maybe one year. But for the initial period, it's fixed. I think that's an excellent product for people who will be in the house for a short period of time - anywhere from two to seven years.

MODERATOR: All right. So tell us the pros and the cons of the adjustable-rate mortgage.

MM: Well, the pro of the adjustable-rate mortgage is that in today's market compared to that 30-year, 5-3/4 product, you're probably talking about 4-3/8, 4-1/2. So it's 1-1/4% lower. What I'm quoting now is a five-year fixed. Now, that product after five years is going to adjust. And if you end up living in the house, not five years, but six, seven or eight and the rates go up after five years, you may be in for an unpleasant surprise. Your rates might go up from 4.375, it may go up to 7 or 8 or 9. But if you know that you're going to be living in the house for not longer than five years, you can have a guaranteed fixed rate for those five years.

MODERATOR: So what do you advise people who are looking for mortgages right now and considering adjustable-rate mortgages, what kinds of questions should they be asking as they go out there and look for the best rates?

MM: The first question they should ask of themselves is psychologically are they ready to live with uncertainty. Some people are just psychologically better suited for fixed rates. Those people probably should pay a percentage point higher and have the comfort of having a 30-year fixed rate.

MODERATOR: All right. If you have questions about mortgages, if you have been shopping for mortgages and have been unlucky enough not to have locked in your rate before this recent rise, 1-800-971-1130. Michael, people who are coming to you right now - are a lot of them still looking to refinance??

MM: A lot of people are still looking to refinance. Unfortunately, some people who haven't locked in - this is what we have a lot of calls in the last week actually, the last two weeks. People who thought they were locked in with mortgage brokers and find out they weren't locked in and they're beginning to call around because they thought they were getting 5% and now they're getting 5-3/4 or 6.

MODERATOR: How did they make the mistake of not knowing whether or not they were locked in?

MM: Well, I think that consumers are consumers and it's really the fault of the broker or the lender. It's their responsibility to explain if they're not locked in or not.

MODERATOR: So they were mistaken they had their confirmation. Is it something that you should be getting in writing?

MM: Any locked-in agreement should be given in writing. One way, June, they get into it is they call a place that is offering a rate - a month ago, people were quoting 4-3/4. It was an unrealistic rate. It was basically a bait and switch. If the rates went down further, the lender or the broker might be able to offer it. So look, if you open up one of the dailies in New York on a Friday, that people were advertising 4% 15-year rates with a few points. Now, I know the business and I know that's underwater. You know, nobody's closing loans and losing 2% a loan.

MODERATOR: Now sometimes ads for stores will say as long as supplies last, come in. If you come in, then you might likely be told that's not really available, here's what's available. Is that what you're saying?

MM: Well, I think it's the responsibility of the newspaper to make sure that the rates advertised are available. And I think it's the responsibility of the banking department to police it. But, you know, I can't say anything bad about the banking department because they regulate me.

MODERATOR: Michael, as far as those people who are coming to you lately, tell me what the mix would be of asking for refinancing and then people who are still looking to buy their first home?

MM: Well, most of the customers at Equity Now are people who have a need to cash out. They either want money for business, they're paying off credit cards. My business is only about 5% purchasers. Maybe when the refi boom was last seen, we had 10, 15% rate reduction. But otherwise, our customers, yes, they want to reduce the rate, but they also want to pay off credit cards, they want ... $50,000 for education expenses.

MODERATOR: So in this environment, Michael, what do you suggest someone who is looking for the right mortgage for them or perhaps decides okay, well, I do need that adjustable-rate mortgage - how should you go about looking for the right mortgage and the best rate?

MM: If they are comfortable exploring an adjustable-rate mortgage, let's say it's what you call the hybrid adjustables before, maybe a five-year fixed - they should take a look at the first adjustment, meaning if after five years it could adjust 3% or 5%. We have a product that after five years adjusts 3%. I know there's a product on the market that after five years can go up 5% or even 6%. It's important to read these details and frankly, instead of talking to the attorney about the financial product, the mortgage, I think they would be better off speaking with their CPA to analyze the risks involved. They should also lock in - because we've had days in the last three weeks where rates went up a quarter percent a day on some days.

MODERATOR: Where do you see mortgage rates going in the future?

MM: I think in the next three months, they'll go up a quarter percent. We have a $425-billion deficit this year and when you're running deficits and you have a war going, rates eventually go up.

MODERATOR: All right. Let's take one more call here. Let's go to Drew in Rocky Point, New York. Hi Drew, you're on the Bloomberg Money Show. What's your question?

DREW: I'm in the process of purchasing my second home and my question is if I was to lock in to a variable-rate product for five years, what sort of exposure would I have on the other side of that five years? I heard you say before that it could jump as high as 5%. If I was to get out of that product and refinance at that time, what kind of exposure would I have?

MM: The exposure that you have is after five years, it could go up 3% or 5% and you really need to get a disclosure from your lender - not from a broker, get a disclosure from a lender. Even if you're dealing through a broker, get the lender's disclosure and read the fine detail. It's called the first adjustment. There are periodic adjustments, meaning after the five years, every six months or every year. And there's also the initial adjustment after five years and that's what you want to pay attention to, that's going to be your initial risk. There's also a lifetime cap, which could be anywhere from 5, 6%.

MODERATOR: Thank you very much, good luck. Well, in about 30 seconds, Michael, just tell us what your best advice is for those people looking for mortgages right now. First of all, is the idea to give up on refinancing right now?

MM: Well, I think there are still people out there who have 7% and 8% and they're just negligent. They should still look into refinancing. If you're looking for a mortgage, I think you should shop around with some reputable people. If it's too good to be true, it's too good to be true. Don't believe it.

MODERATOR: All right. Thank you so much, Michael Moskowitz, president of Equity Now, with the general outlook for the mortgage industry.