Category: Mortgage Loans

By ROSEMARY CALIGIURI
Staff Writer
Part 2 of 2

The newspaper asked five financial advisers to answer some of the most frequently asked questions about what’s happening in the markets. The advisers include: Jeff Broadhurst with Broadhurst Financial in Lansdale, Rosemary Caligiuri with Harvest Group Financial Services Corp. in Middletown, Michael Garry with Yardley Wealth Management in Newtown Township, Tony Petsis with Anthony Petsis & Associates in Newtown and Robert Wilgos with Laurel Financial in Middletown.

All cautioned that their answers are general and investors should talk with their own financial planners before making any decisions on their portfolios.

Q: What impact, if any, will the government takeover of Fannie Mae and Freddie Mac have on mortgage rates?

A: Seriously, nobody really knows what the effect will be on rates. Initially, mortgage rates decreased when Fannie Mae and Freddie Mac were taken over, and now they’re fluctuating — up and down.

I know this isn’t the answer you want to hear, but it’s a truthful one. I think the mandate of Fannie and Freddie is to make housing more affordable for more Americans. To do that effectively, rates need to be reasonable. As of Friday, the average 30-year fixed mortgage rate was 5.86 percent. Historically, this is a very good rate.

Investors who buy Freddie Mac and Fannie Mae bonds will have the implied backing of the U.S. government, so in return for this safety, investors will settle for less interest. That will hopefully translate into good and reasonable rates. Bottom line: I think rates are good now and wouldn’t wait to decide on either re-financing or purchasing new real estate in anticipation of a huge rate drop.

Tony Petsis

Q: Will I still be able to get a mortgage, credit card or other loan?

A: Yes, if you have good credit history, verifiable sources of income, and a history of making timely payments.

Most banks will be tightening their lending standards, if they haven’t already. The idea of a credit crunch is banks become afraid to lend money because all of a sudden they see risk everywhere, where just recently they saw none. That said, banks are primarily in the business of lending money and need to lend money to make money. So they’ll make loans and approve credit cards — just not to everybody who applies any more.

My guess is that getting a mortgage, credit card or other loan will become more like it used to be, when the standards were a little higher. That’ll make it harder for young people and first-time homebuyers to establish credit and make their first home purchase.

It’s always important to monitor your credit report and keep your credit score high so you get approved for the mortgage, credit card or loan you apply for, and at the most favorable rates.

Michael Garry

Q: In light of tighter lending practices by banks and mortgage companies, what can I do to improve my credit score?

A: Many different factors are used to determine your credit score. Some carry more weight than others. Significant weight is given to factors describing:

 Your payment history, including whether you’ve paid your obligations on time, and how long any delinquencies have lasted;

 Your outstanding debt, including the amounts you owe on your accounts, the different types of accounts you have (e.g., credit cards, installment loans), and how close your balances are to the account limits;

 Your credit history, including how long you’ve had credit, how long specific accounts have been open and how long it has been since you’ve used each account;

 New credit, including how many inquires or credit applications you’ve made, and how recently you’ve made them.

Always make your loan payments on time. If you can’t make all your payments, don’t ignore them. Negotiate with credit card companies to get on a repayment schedule you can afford. Otherwise, your credit score will be negatively affected. To improve your credit score, it’s also important to make sure that any positive repayment history is correctly reported by all three credit bureaus.

Robert Wilgos

Q: How often should you look at your retirement account statements or portfolio?

A: You can look at them as often as you like. You may want to rebalance once per year, twice at most.

If you think that by looking at the account statement you can discern some trading strategy in the short term, you’re very mistaken. A simple buy, hold and rebalance strategy will outperform the vast majority of professional money managers. An amateur is not likely going to do any better by trading in and out of funds or securities.

It’s more appropriate to set a rational allocation and relax.The critical thing to do is to determine your capacity for risk. That depends upon your time horizon, investment knowledge, income, net worth and comfort with risk. Once you have an understanding of your capacity for risk (take the risk assessment survey at www.ifa.com) then you invest in a risk-appropriate, globally-diversified (tax-efficient) portfolio of low cost funds. That will allow you to buy, hold, rebalance and RELAX.

Jeff Broadhurst

Q: Where is the safest place for my money right now?

A: Safe is a relative term. One definition of a safe money place is where you’re highly unlikely to lose principal if you follow the rules:

 U.S. treasuries: Nothing is safer than a U.S. Treasury-issued or insured obligation. If you hold a U.S. government security until maturity, you will get your entire face value.

 Banks: Make sure your bank is FDIC-insured. All non-IRA bank deposits are insured up to $100,000 per depositor per bank or $200,000 per joint account total per bank. Certain retirement IRA deposits are guaranteed up to $250,000 per owner, per insured bank. Research the safety rating of your bank. Just to be safe, keep total deposits below $100,000 per person per bank. Money market mutual funds through brokerages have no such guarantees. See Bankrate.com for ratings and FDIC.gov for insured guidelines.

 Annuities: Fixed annuities are only issued by insurance companies. Insurance companies are examined by independent rating agencies and also have safety ratings based on their financial strength. The National Association of Insurance Commissioners regulates products and financial safety standards of companies. It’s a highly regulated industry. In the final event of an insurance company failure, the policy holders would be protected by the State Guaranty Association.

Courier Times

By Ellen James Martin
Smart Moves
Article Launched: 09/21/2008 12:00:00 AM PDT

By now, many economists had projected that the “credit crunch” would have eased. But prospective home buyers — including those with stable jobs and decent credit — still confront unusually high hurdles to gain approval on their home-loan applications.

“People in the mortgage industry are extremely hungry for business. But they’re also extremely picky who they lend to. The last thing they want are more foreclosures coming back to haunt them,” says Blaine Rickford, president of an independent mortgage firm.

Mortgage officers — those who take loan applications and deal with the public — prepare files on would-be borrowers. Yet no file is ever approved by a bank unless its underwriters give the green light.

“You never get to meet the underwriters — these loan supervisors are off-limits to borrowers. But mortgage officers talk to them directly and can plead your case if they think you’re a good bet,” says Rickford, who’s worked in the mortgage field since 1978.

Develop a positive rapport with your mortgage lender and you’re more likely to reach your home-buying goal, says Leo Berard, charter president of the National Association of Exclusive Buyer Agents (www.naeba.org).

“You don’t want to torpedo your chances of owning a home because of some financing glitch. Those who win in the mortgage process take a businesslike approach,” Berard says.

Here are pointers for home-loan applicants at a time of tight credit:

Educate yourself on the basics of mortgages before you apply.

Many home buyers, and particularly novices, are in the dark about mortgages and how lending works. Because they feel ignorant on the topic, they hesitate to pose important questions.

But as Berard says, the basic concepts of mortgage lending aren’t so complex that you can’t grasp them in a short period of time. Start with the Internet, taking a look at the “mortgage” entry in Wikipedia (www.wikipedia.org), the free online encyclopedia, and its related links. You can also go to the U.S. Department of Housing and Urban Development’s Web site at www.hud.gov.

Also, Berard encourages you to stop by your local library to check out a book or two on the topic, such as “Mortgages for Dummies,” co-authored by Ray Brown and Eric Tyson.

Knowing a bit about mortgages before you apply will help you be more adept at choosing the best possible home- loan product for your situation. You’ll also be less vulnerable to unscrupulous lenders, Berard says.

Arrange a face-to-face meeting with your mortgage lender.

Many mortgage officers are happy to entertain applications from would-be borrowers they’ve never met. Technically, there’s no reason you can’t apply for a home loan over the telephone.

“But for important business transactions, it’s always to your advantage to meet one-on-one,” says Berard, a veteran real estate broker.

A face-to-face meeting is especially important for those expecting to confront unusual barriers to loan approval, Rickford says. These include people who are self-employed, have credit scores below 720, or have limited assets — such as savings — on which to fall back if they can’t meet their mortgage payments.

“An in-person interview adds to your credibility as a borrower. You’ll be more believable when you attempt to explain your financial issues,” Rickford says.

Also remember to dress the part when you go to the lender’s office. You needn’t wear a business suit but you should look neat. Avoid overly casual attire, such as gym clothes or sandals.

Have your documents ready when you reach the lender’s office.

Mortgage officers are working harder than ever to assemble files that meet the exacting requirements of their underwriters. They’re very appreciative of borrowers who make their jobs easier by showing up well-prepared.

Rickford says ideal loan applicants arrive at their initial appointment with extra copies of the essential documents their lender will need. These include the most recent month’s worth of pay stubs and W-2s for the past two calendar years. You’re also likely to be asked for two years’ worth of tax returns, along with statements showing the present value of your holdings — such as savings accounts, stocks, bonds and retirement funds.

Mortgage officers are also impressed by loan applicants who’ve scrutinized their credit reports in advance of a meeting. Under federal law, you’re entitled each year to one free credit report from each of the three large credit bureaus: Equifax, Experian and TransUnion. Just go to this Web site: www.annualcreditreport.com.

You’ll also want to access your credit scores. Such scores, which draw on data from the credit bureaus, provide lenders with a quantitative measure of a person’s credit risk. Most lenders use FICO scores, pioneered by the Fair Isaac Corp.

Usually you need to pay a fee to obtain your credit scores. One approach is to buy these through the Fair Isaac Web site: www.myfico.com. You can also receive credit scores through the credit bureaus. FICO scores typically range from 300 to 850.

Berard recommends you make printouts of your credit history obtained through your online search. Place these in a three-ring binder. Use a highlighter to identify any “dings” or inaccuracies that show up in your credit reports. And be prepared to tell the lender the steps you’ve taken to resolve these issues. For example, you’ve paid the dentist who reported you delinquent to the credit bureaus and have obtained a receipt to prove it.

Stay in close touch with your lender until your mortgage is approved.

Given the recent turmoil in the mortgage industry, home buyers are less likely than before to get early approval for financing on a home they’ve picked out. More questions will probably arise as you go through the application process, and some will require a written response from you.

For instance, suppose your credit reports show that you were late in making a payment on a car loan or credit card. The processing of your mortgage could be held up until you draft a justification for such credit blemishes — such as a temporary lapse in employment when you were between jobs.

Lenders appreciate loan applicants who stay in close touch and are proactive about resolving issues that surface along the way, Berard says.

“Call your lender once or twice a week. Ask politely if you can do anything to help get your mortgage through. Like anyone in a service field, lenders much prefer dealing with folks who are cooperative,” he says.

Ellen James Martin is a syndicated columnist. E-mail her at ellenjamesmartin@gmail.com.
Mercury News

Despite homeowner relief and low interest rates, many homeowners are still struggling to get mortgages today. I ran into this issue myself–11 lenders later, I found the one that was decent. It takes patience and is often frustrating. Struggling the most are those with either lower than 700 FICO scores, or those who are self-employed who were using stated income loans. Here are six tips to getting a mortgage more easily in today’s market:

Be prepared with documents! Scan your pay stubs, keep copies of your current employment records and, if you are self-employed, keep a letter from your accountant and business license copy in a PDF format. This saves tremendous time when you go to file.

Stay away from companies that will “raise your FICO.” Most of these are scams–they will take your money, but you won’t see your credit score increase. One way to do that legitimately is to pay off 50 percent of each credit card, rather than pay off your high interest cards first (which makes the most financial sense in most cases). Once your cards drop to 50 percent of their available limit, your FICO goes up because you are considered a less risky borrower. Another way to improve FICOs is to not close old loans and show them paid off. And until the end of the year, if you are an authorized user on someone else’s card, this can help improve your score, too (provided he or she is not over his or her limit!)

(Ed. If you can find a good mortgage broker who will help you raise your credit report score then take advantage of it. In many cases mortgage brokers are not any better at credit score improvement than the companies she describes. Our recommendation for credit report repair services are good as gold and that can be backed by the Better Bsuiness Bureau.)

Shop around–big time. Lenders are advertising easy loans, but the devil is in the details. Look out for origination fees (as much as 2 percent or more of the loan amount!), penalties for having a “lower than 700″ credit score, and companies that wont take your loan if you have a second mortgage.
Maximize your first mortgage. Try to get as much as you can on your primary mortgage because the cost of home equity lines of credit and seconds today behind other loans at the 75 percent combined loan-to-value rate is very high.

Don’t just take your broker’s word for it. Some brokers have access to great lenders that you don’t have access to through wholesale lending. But that doesn’t mean you shouldn’t also shop around yourself. Compare what your broker finds to what you find, and be prepared with all the documentation you can handle.

Do your own appraisal. Particularly on jumbos or in areas that are “declining markets” (each bank is different in terms of ZIP codes they consider in the declining market arena), the banks often use internal appraisals. And rather than overinflating price as many did, they’re coming in at far less than they should to be fair and accurate. Having your own appraisal can be a good baseline to see whether the banks are ripping you off. If they can show a higher loan to value, they can charge you more for the loan!

Dani Babb
Entrepreuner.com

Village Soup

By Jaret & Cohn Real Estate - Rockland
Martin Cates

U.S.A. (Sep 5): Consumers often mistakenly believe that mortgage lenders use only credit scores from Equifax, Experian, TransUnion, and Fair Isaac’s myfico.com to gauge creditworthiness.

However, Consumer Reports recently found that lenders also use NextGen FICO scores, FICO Expansion Scores, and Industry Option FICO scores — which take car loans into consideration — as well as custom formulas.

Given that these credit scores or scoring models are not available to consumers, experts say that consumers should not rely solely on available credit scores to determine their likelihood of getting a loan. They would be wise to make timely bill payments, make more than the minimum payment, hold down credit card balances, and retain old accounts.

Additionally, experts say it might be worth keeping tabls on other credit scores, such as Experian’s PLUS scores, which are not yet sold to lenders but could be in the future.

Source: Allentown Morning Call (PA) (09/02/08)

Los Angeles Times
Liz Pulliam Weston, Money Talk
September 7, 2008

Dear Liz: I’m 47, divorced, with two teenage daughters and a grandson living with me in Los Angeles. I make $40,000 a year.

With the current credit crisis, I’m wondering whether I can ever become a first-time homeowner. My FICO credit scores are under 600. What would be a realistic timetable for getting out of debt, saving for a down payment and raising my scores over 700? Is two years enough time?

Answer: You don’t need 700-plus FICO credit scores to buy a home, even in today’s tough borrowing climate.

But your current scores are low enough to indicate you’re having ongoing problems managing your finances. Scores under 620 are poor and typically mean serious, recent credit problems.

Agencies affiliated with the National Foundation for Credit Counseling ( www.nfcc.org) offer classes in budgeting and homeownership that might prove helpful. For example, in Los Angeles, ByDesign Financial Solutions is an NFCC-affiliated agency that offers free budget counseling, HUD-approved pre-purchase housing counseling and low-cost personal finance management workshops.

Once you get your finances on track, you should be able to start rebuilding your scores. Although it’s impossible to say how long it will take, you could see significant improvement within a year or two.

Better credit scores will help reduce the interest rate on your mortgage, which will help you qualify for a bigger loan. But what you can afford will depend on a number of other factors as well, including your down payment and your other debt obligations. Realistically, you might be able to afford something in the $100,000 to $145,000 range, which doesn’t buy much in Los Angeles.

That doesn’t mean you have to give up your dream. You may be able to find something in your price range, you may decide to relocate or you may find someone (a friend, a relative or another single parent, perhaps) who wants to buy a home with you. If you’re determined enough, you can find a way.

BusinessWeek

Posted by: John Tozzi on September 02

Alt-A mortgages were designed for people with good credit who had trouble documenting their income — people like the self-employed. Not as risky as subprime but not quite prime either, Alt-As made some news recently because they’re part of what’s ailing Fannie Mae and Freddie Mac. About half of their combined $3.1 billion loss in the second quarter came from bad Alt-A loans.

Part of the problem is that many of these loans, like their riskier subprime cousins, went to people who never should have gotten them. Not self-employed, maybe not employed at all. That’s why some call them liar loans: no documentation of income or assets.

This Barron’s article sums it up nicely:

So loans intended for self-employed home-buyers went instead to speculators. Now there’s concern that Alt-As may lead another wave of defaults beyond the subprime crisis.

What does this have to do with small business owners? Entrepreneurs who took out Alt-A mortgages may be hit when their rates reset — jeopardizing their homes at the same time the soft economy is squeezing their businesses. (The nightmare situation: rising mortgage payments and falling profit margins.) Sam Bornstein, a New Jersey accountant, first gave me a heads up about this a few weeks ago.

When I looked into this a little more, another concern surfaced. Small business owners with good credit (who can actually afford the homes they want to buy) may not be able to get Alt-A loans because so many people abused them as “liar loans,” and nervous banks don’t want to lend.

So we’re still watching this unfold. But in the meantime, I’d like to hear from you. If you’re self-employed and have an Alt-A loan, are you worried about making payments? Or if you’re trying to buy a house, are you having trouble getting financing because you’re self-employed? What other aspects to this story should we watch?

Arizona Republic

David Shapiro now knows what happens when HELOCs freeze over.

The Sun City retiree received a letter recently from JPMorgan Chase, notifying him that he and his wife wouldn’t be able to draw any more funds from their home-equity line of credit. The bank froze the loan because of a drop in the couple’s home value.

Shapiro, an 81-year-old former aerospace executive, said they’ve used about $30,000 on the $100,000 loan and planned to tap a bit more until an energy investment starting
paying bigger dividends next year.

“We’ll get by, but it annoys me,” said Shapiro, who adds he has a high credit score, has various other investments that could be used as collateral and hasn’t missed any payments.

“They should take into consideration your net worth and other factors, not just the value of your home.”

Yet as the credit crunch lingers, banks continue to mail such letters. The list includes Bank of America, Countrywide, Citibank and Washington Mutual.

“With property values going down, banks are afraid to have these lines of credit out there, so they’re closing them,” said Stan Lund of Lund Mortgage in Peoria, the immediate past president of the Arizona Association of Mortgage Brokers.

The letters often cite a drop in home value as the catalyst, inform customers that the freeze is taking effect immediately and remind borrowers they still owe outstanding principal and interest payments.

“Unfortunately, sharply lower home prices have prompted us to reduce or freeze home-equity lines of credit,” said Mary Jane Rogers, a Chase spokeswoman for Arizona. “We are trying to protect both the homeowner and us from (borrowers) owing more than their house is worth.”

Some, like Chase, use an automated process to assess the home’s value and invite customers to appeal if they think the numbers are off base.

Unfortunately, the tide is ebbing faster in metro Phoenix now than in any other of the 20 cities tracked by the S&P/Case-Shiller home-price index. Current market conditions make an appeal difficult.

To succeed, you also would need to pay $350 or so for an appraisal. Shapiro believes his golf-course home is worth about $35,000 more than the $185,000 cited by Chase, but he doesn’t plan to appeal because of the need for an appraisal.

The ironic thing about the HELOC-freeze trend is that these loans remain the safest consumer bets bankers have in their portfolios. A mere 1.1 percent of HELOCs were 30 days or more past due as of the first quarter, the most recent period for which figures are available, reports the American Bankers Association. That compares with a 3.1 percent delinquency rate for auto loans and 4.5 percent for credit cards.

Unfortunately, the delinquency trend on HELOCs has been nudging higher and now stands at an 11-year high.

Bankers are getting worried because these debts are second on the pecking order behind the primary mortgage. If a borrower defaults with little equity in a dwelling, the bank could be left holding an empty bag.

For customers who planned to tap into a HELOC to meet a big-ticket bill like a remodeling job or upcoming medical expenses, a freeze can cause major disruptions. They’re also worrisome for many small-business owners who rely on HELOC financing, Lund said.

For this reason, it might pay to plan ahead, draw out some of the cash in your HELOC and place it in a secure, interest-bearing account until it’s time to spend the money. Just be aware you’ll start the interest clock ticking sooner.

It also might be smart to check your credit report, evaluate your credit score and make fixes if necessary. Sometimes a drop in credit quality triggers a freeze, not just a declining home value.

Unfortunately, a HELOC freeze itself can lower your credit score because it will show you as having used a larger percentage of your remaining borrowing capacity.

“It could hurt because credit scores are based in part on your loan balance compared to available limit,” Lund said.

While there are reasons for trying to convince a bank that your home is worth more than it thinks, the odds are stacked against you.

“I haven’t seen anyone win an appeal,” Lund said.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.

Hartford Courant

The first hint of good news about housing showed up last week.

But it was tentative.

Home prices are still declining, dropping a shocking 15.9 percent from a year earlier. But the pace of the decline slowed. In other words, the decline is awful, but seemingly not as bad as it has been.

It was enough to catch the attention of Karl Case, one of two people who designed the Case-Shiller Index, a key barometer for watching home prices. With the release of June numbers last week, he said, a three-month trend perhaps suggests that the worst of the housing wreck has occurred.

Others say the bottom may be far off. That, of course, doesn’t mean declines won’t continue for months to come. There is an 11-month supply of homes on the market, twice what’s considered normal. And the way to get rid of homes in a glutted market is to cut prices. Once some of the homes on the market clear out, there will be less competition and prices can stabilize.

So analysts are watching for early signs of recovery because the stakes are high for homeowners, banks and the economy in general. Banks are struggling because mortgages aren’t being repaid, and that pressure, in turn, has caused them to cut back the loans they are granting to customers.

That’s where troubling signs showed up in last week’s numbers. It appears that perhaps a shortage of loans could be about to set the housing market up for more distress, rather than improvement.

When going through last week’s data on housing sales, Lawrence Yun, the economist for the National Association of Realtors, spotted sales weakening in some areas of the country that had been resilient.

The reason could be that people aren’t receiving the loans they need to buy homes, he said. Chicago was one area. The area that especially caught Yun’s attention was Dallas.

“Texas is strong, jobs are strong, but people just can’t get a mortgage,” he said.

His concern has implications that apply to other healthier housing areas too. Although the housing problems began because many Americans were given loans they couldn’t afford, and because speculation was rampant in areas such as California and Florida, the financial system has reacted in a way that is punishing areas that have no inherent reason for housing problems.

“Credit availability is needed before housing can recover,” says Vince Farrell, chief investment officer of the Soleil Group in New York.

But credit, or the ability to obtain an affordable mortgage, has been going in the wrong direction.

“An unprecedented tightening of mortgage loan standards and rising mortgage yields amid a weakening economy threaten to extend housing’s slump,” said Moody’s economist John Lonski.

For a hint of what lies ahead, economists look at mortgage applications for the purchase of a home.

During the four weeks that ended Aug. 22, he said, a Mortgage Bankers Association index suggests a 29.1 percent decline in mortgage applications year to year. That’s the largest decline of the housing recession, following a drop of 22.5 percent in July and 20.7 percent in June.

“Mounting worry over the near-term supply of mortgage credit diminishes the favorable implications of July’s monthly increases for unit sales of existing homes,” Lonski said.

Despite a gain in new- and existing-home sales in July over June, which analysts welcomed last week, Lonski and others are troubled by what the credit crunch is doing to mortgages. With banks and gigantic institutions such as Freddie Mac and Fannie Mae constrained in lending by the bad mortgages that are poisoning them, many individuals can’t obtain the mortgages they need to purchase homes.

You can see the stress the financial system is under when you look at 30-year mortgage rates compared to the yields on U.S. Treasuries. Typically, the two are close. But in an unusual situation, the rates on 30-year mortgages were about 6.5 percent during the recent four weeks, compared to 3.9 percent for 10-year Treasuries. Two years ago, without today’s stress in the system, the gap was 1.5 percentage points.

For individuals, that plays out in higher-priced mortgages than the Federal Reserve’s interest rate cuts would suggest, and also fewer mortgages.

According to data collected by Inside Mortgage Finance, people with credit scores above 740 generally have been able to get loans. Others may struggle. But people who don’t have enough money for a 20 percent down payment and have scores around 680 can obtain Federal Housing Administration loans.

To obtain the best deal, shop around. Know your credit score before applying for the loan, and work to improve it. Obtain a free credit report at AnnualCreditReport.com. Hunt for mistakes and dispute them.

To see the credit score used by lenders, order it for $47.85 from MyFICO.com.

Paying bills on time will improve your score. In addition, keep the total balances owed on your credit cards below 10 percent of the amount of total credit you are allowed.

Gail MarksJarvis is a Your Money columnist. Contact her at gmarksjarvis@tribune.com.

Active Rain Real Estate Network

photo credit: TheTruthAboutMortgage.com

FHA Seller Financed Downpayment Reform and Risk Based Pricing Authorization Act of 2008

This new bill was proposed on August 1st. It is a new bill might bring life back to down payment assistance and non-profit companies such as Nehemiah and Ameridream. The bill is H.R. 6694 and currently looks like the only hope to keep down payment assistance around after October 1st, 2008.

Who Did It?

The bill was sponsored by U.S. Representative Al Green (from Texas). This new legislation was also co-sponsored by U.S. Representatives Gary Miller (of California), Maxine Waters (also of California) and Christopher Shays (Connecticut).

What Would This New Bill Do?

The Main Objective

This new bill would again allow Down Payment Assistance (a.k.a. DPA) be an allowable gift source for FHA loans. Currently, the recent passing of H.R. 3221 has left down payment assistance discontinued as of October 1, 2008.

The Big Obstacle

Obviously down payment assistance was included in the recent housing bill because it has been the source of many foreclosures. Specifically, loans with down payment assistance were 3-4 times more likely to be foreclosed on. Kind of wild.

Also, this doesn’t take into consideration many of the loans that have been originated after the popular Fannie Mae and Freddie Mac programs disappeared (it wasn’t long ago!).

Major Changes

In order for down payment assistance to even be considered to be reinstated, I think it’s obvious that there would have to be some changes to the way. Here’s what I read so far (actual numbers will likely change if this bill makes it through):

Down Payment Assistance:

* FICO Scores over 680 get a ‘free pass’ to use Down Payment Assistance.
* FICO Scores between 620-680 mortgage insurance is required (at least that’s how I read it)
* They would like to allow borrowers with less than 620 FICO score, but they have to determine the mortgage can be insured without ‘resulting in need for an appropriation for a credit subsidy’.

Risk Based Pricing:

* In all, the bill is requesting the authorization for risk-based pricing. This is the same type of risk-based pricing that Fannie Mae implemented in the first quarter of this year. If a borrower has less than a 680 FICO score (or 720 in some cases), you will pay a higher interest rate.

This goes back to risk vs. return. Basic rules of business.

Who Cares?

You should. But if you know anyone who’s been looking at buying a home and cannot come up with the 3% required down payment. Many Americans (that are still managing to make their house payments) have purchase their home with little to no money down. If programs like seller down payment assistance disappear, you’re going to shore up a lot of potential buyers and kick them right out of the market.

Over the past year, over 32,000 Americans have called on Congress and the Bush Administration to keep downpayment assistance around. Some of the large supporters include:

* National Association of Homebuilders
* Labor Council for Latin American Advancement
* U.S. Conference of Mayers
* Congressional Black Caucus
* Congressional Hispanic Caucus

Talk about a diverse group of supporters. It’s obvious that this impacts many Americans and I encourage YOU to take action and do what you can to support this bill. It’s a very big deal.

Want To Help Keep Downpayment Assistance Around?

Contact your local state representatives and let them know why you feel it’s good for Americans.

Victims of the Subprime Meltdown: The Failure of Good Intentions
Richard L. Cravatts Ph.D.
August 22, 2008

Just this week, as the implosion of the $1.3 trillion subprime mortgage crisis seem to threaten even government-sponsored Freddie Mac and Fannie Mae, lawmakers and housing advocates were already busy look for culprits, accusing mortgage companies and banks of “predatory lending” practices, usurious lending, and even outright fraud, often on the backs of vulnerable minority families in inner-city and working class neighborhoods. The irony of this particular aspect of the subprime collapse should not have escaped the notice of many in the nonprofit housing sector whose own efforts contributed, to a great extent, to a crisis that will potentially victimize thousands of the very borrowers affordable housing activists originally sought to help.

In fact, the subprime mortgage market, which represented just 5 percent of lending in 1994 and grew to 20 percent of all outstanding mortgages by 2005, became an effective tool by which community-based organizations were able to help many low- and moderate-income families, for whom access to credit had previously been limited, realize opportunities for home ownership.

Subprime lending was originally buoyed by changes in banking regulations, and particularly the 1977 Community Investment Act (CRA), which mandated that banks extend credit to low- and moderate-income customers in the communities where the banks did business. Understandably resisted by banks not wishing to take on risky loans, the CRA did, however, provide a stick which housing advocates effectively used to bludgeon banks into writing mortgages for what would have previously been considered unqualified borrowers, since CRA regulations gave community groups new opportunities to interfere with bank expansions, growth, acquisitions, and increased lending in prime markets if banks did not respond affirmatively to the CRA´s demands for lending largesse.

What is more, the Federal government was an unwitting accomplice in making a flood of these subprime loans more widely available when, in 1992, Freddie Mac and Fannie Mae addressed their own affordable housing objectives by starting to “bundle” subprime loans to ease their sale in secondary markets, thereby fueling the exponential rate at which such loans were written.

Bruce Marks, as one notable example, now CEO of the Neighborhood Assistance Corp. of America, in the 1990s browbeat local Boston banks like Fleet by calling them “unrepentant corporate criminals” for their lending practices, and was successful in extracting a $140 million loan pool from Fleet targeted to low-income home buyers, using the CRA as a key bargaining chip. “Every individual and community has the right to credit,” Marks testified at the time to the Senate Banking Committee, “it’s what allows communities to grow and prosper.”

Homeownership, it was widely thought, was the principal and reliable way to strengthen communities by giving residents a stake in their property and helping create personal wealth through the potential building of equity in a home-even if many of those new homeowners, it now appears, were actually qualified for the mortgages that would make these social dreams a reality.

But despite its good intentions and the efforts of well-meaning housing advocates, the Community Investment Act may have had unintended negative consequences for the very people it was designed to help, according to Fed chairman Ben S. Bernanke, who questioned the soundness of a policy that enlarged lending to new groups of sub-par borrowers, observing that “recent problems in mortgage markets illustrate that an underlying assumption of the CRA-that more lending equals better outcomes for local communities may not always hold.”

That view, of course, contradicts what had been the conventional wisdom of affordable housing advocates, like Marks, who pushed for first-time home buying opportunities for their constituents and generally believed that that rewriting the rules of lending was a necessary, and acceptable, price to pay for achieving the goal of a more equitable access of credit. But it also necessitated that a new mortgage product, a subprime loan, had to be created to meet the needs of the borrower with less than perfect credit or low income.

These nontraditional mortgage products were certainly imaginative, including a number of features to help facilitate the qualification process, such as no income verification for borrowers, loans of up to 100 percent of the property´s value, interest-only loans, low introductory teaser interest (with later adjustments to considerably higher rates), lax or unrealistic property appraisals, and other loosening of what had been rather well-regulated and rigid underwriting standards in the mortgage industry.

These developments were all good for unqualified borrowers, but they were fraught with potential calamity, to which the current meltdown in the subprime market clearly attests. First, borrowers who did not have to document their incomes-or who sometimes, in collusion with mortgage brokers, lied about their actual income-are clearly more likely to default when sickness, job loss, or other economic strife affects their ability to come up with monthly mortgage payments.

So while homeownership rates for white households only increased by seven percent between 1995 and 2006, for example, in that same timeframe blacks realized a 13 percent increase and Hispanics an 18 percent increase in ownership rates, evidence that the goals of housing advocates were seemingly being realized.

But tragically, too, it was precisely the property owner the housing advocates were trying most to help who were the first to feel the fallout of their bad choices and risky mortgage deals. The Center For Responsible Lending, an advocacy group that fights predatory lending, for instance, found in one of their reports “that, for most types of subprime home loans, African-American and Latino borrowers are at greater risk of receiving higher-rate loans than white borrowers, even after controlling for legitimate risk factors.”

Also, low- and moderate income buyers are by their very economic state more likely to buy properties in “developing” or distressed communities, where appreciation is never guaranteed and in fact the value of homes frequently declined, providing a disincentive to continue making mortgage payments. Buyers who had paid little or nothing in the form of a down payment also felt less compunction about walking away from properties when they decline in value or the borrower runs into financial trouble.

Those figures suggest that darker days may well be ahead for housing advocates´ key constituents-those for whom credit and ownership had previously been unavailable-and that perhaps more than 1.5 million households nationwide will face delinquencies and foreclosures as rates readjust, property values continue to decline, and hard economic times make keeping one´s home difficult even with all the best intentions.

Former HUD Secretary Cisneros Cites Housing Decline as Unprecedented Drag on US Economy; Calls for New Stimulus Package with Strong Housing Measures
FHLBank San Francisco DNC Forum Releases New Demographic Data on Sub-Prime Borrowers

Aug. 27, 2008

DENVER, Aug 27, 2008 /PRNewswire-USNewswire via COMTEX/ — Henry Cisneros, former secretary of the US Department of Housing and Urban Development (HUD), declared today that the housing industry is in a “truly dangerous place” and that significant steps must be taken by the next administration to address the mounting problems.

Mr. Cisneros spoke at a housing forum at the Democratic National Convention that was hosted by the Federal Home Loan Bank of San Francisco (FHLBank San Francisco). Mr. Cisneros said the stakes are high because housing “is so embedded in the overall economy,” and the situation “continues to get worse.”

“Today, we cannot say how it will turn out,” Mr. Cisneros told the gathering at the Colorado Convention Center. Joining him on the panel were Marc H. Morial, president and CEO of the National Urban League, and Maurice Jourdain-Earl, managing director of Compliance Technologies. The panelists reflected their personal views during the forum, and those views were not necessarily endorsed by the FHLBank San Francisco.

Dwight Alexander, vice president of legislative affairs at FHLBank San Francisco, set the stage for the discussion by noting that the housing industry has been beset with foreclosures related to sub-prime loans, depreciation of property values, tight credit by the banks and problems at the mortgage giants, Fannie Mae and Freddie Mac, which are suffering millions of dollars in losses each quarter.

“The housing industry is facing serious problems, and we brought this talented panel together to help us better understand the issues and what the solutions might be,” Mr. Alexander said.

With the economy staggering along, Mr. Cisneros said the new administration next year will be forced to pass a second stimulus package. He said it must contain measures to deal with the credit crunch that is curtailing investments and lending. “We won’t get the job machine started without credit,” he said, adding that measures must also assist people and communities hurt by foreclosures, assist those who will be hurt in the future and increase the supply of affordable rental housing.

Mr. Morial agreed, but said an emphasis must be placed on homeownership. He noted that government programs, such as the GI Bill, were the foundation for the growth of the middle-class in the 70s, 80s and 90s. “Homeownership must be a goal,” he said. “The goal for the nation must be to close the homeownership gap between whites and people of color.”

Mr. Morial also said that any measures aimed at improving the credit situation for banks must also include a national law against predatory lending.

Meanwhile, Mr. Jourdain-Earl gave the audience a clearer picture of sub- prime borrowers. His company is a leading provider of technology that analyzes lending patterns across the country. His data determined that while the majority of sub-prime loans went to non-Hispanic whites, there was a much higher concentration of sub-prime loans to people of color.

“Whites had more sub-prime loans than all minorities combined,” he said, but added that more than 50 percent of the loans to African Americans were sub-prime loans.

Source: Congressional Hispanic Caucus Institute Inc (CHCI) Hogar

Townhall.com
by Roger Schlesinger

Beginning the story in chronological order, we have the chicken being played by the real estate industry and the egg by the mortgage lenders. The chicken is telling all who will listen that the industry will be in good shape as soon as the lenders begin lending in earnest again. The egg is just as adamant as the chicken when saying they will begin lending once the real estate market starts moving.

So what we have now, as Paul Harvey would say, is “The rest of the story.” Before we get into that, however, we notice that an ominous character looking much like the big bad wolf is lurking around the story, played by Fannie Mae and Freddie Mac. In as much as they are the predominant lenders today, they feel that you should be charged a “whole lot more” for no other reason than they can do it with ease. Now we have the cast, characters and scenario for a story that currently has no ending. But I am getting ahead of myself once again.

In the proverbial battle of the chicken and the egg, I am forced to go with the chicken in this case. Real estate cannot really improve and “start moving” without sufficient financing. The bulk of the financing we had was done through securitization of mortgage loans. A simplified overview: a lender would bundle a number of loans and sell them at the best yield he could find on Wall Street. Wall Street investors would get a fixed rate on their “bundled loans” and the lender would take his money and profit and start the process over again. Unfortunately there aren’t any bids for the most part on bundled mortgage loans, so that type of financing is not available at this time. This largely eliminates jumbo loans as a category for borrowers.

Fannie Mae and Freddie Mac finance conforming loans, and a small amount of jumbos known as conforming jumbos. The conforming jumbos are set to disappear at the end of the year as the stimulus bill that created them runs out on December 31.

Lenders are unwilling to make jumbos loans in great numbers because they do not have a way of selling them. The larger banks who are mortgage lenders are playing a game with their prospective borrowers: they will give you a loan but at a rate and cost you will not take unless you are desperate. They apparently do not want to be accused of being a hindrance instead of a help, so they will offer loans in the high 6% range up to the 9% range with heavy points attached. Even if you are desperate, it is much harder to qualify for a rate in the 7% range with 1.5+ points than in the low 6% range without points. These same lenders are anxious for you to consider them for conforming loans, loans up to $417,000 maximum, until they are raised to $625,500 in January. Why? Because they will still be considered as “mortgage lenders” and can sell the loans to Fannie or Freddie.

Realtors are working hard to sell houses but without jumbo loans, the houses over $700,000 aren’t moving for lack of financing. Once you get into prices in the millions, the borrowers can go after private banking money found in the major banks that cater to that clientele. Therefore the vast majority of house sales are limited to those that can be bought with loans no higher than the conforming limit. As an aside, this is another reason for the drop in the average price of a single family residence.

After the first of the year, we will see some improvement in the housing market where the conforming limit has gone to $625,500. Even though this new limit is more than $100,000 below conforming jumbos’ limit, the market will get a boost because conforming loans are better priced and offer easier qualification for most borrowers. The big mystery is whether the new conforming limit will be decided by state or broken down like the conforming jumbos to each specific county. If the limit applies statewide, it will provide the most help to the recovery of the mortgage and real estate markets. Using California as an example, more than half the state wouldn’t get the move up to $625,500 if limits are determined county-by-county, even though there are very expensive areas in many of the less affluent counties.

And now the big bad wolf(s): Fannie and Freddie. We are all familiar with the fact that the two giants in the mortgage industry are in trouble financially, and thus they are anxious to start making more money to help alleviate the problem. How can they make money? They facilitate loans for the public so they decided to charge the public more for their services. It started a year or so ago with a charge for taking cash out of your house, which would mirror what jumbo loans was doing. The borrower would have to pay a fee if the cash-out was over 75%. Then it dropped to 70% and now, depending on your credit score goes down to any cash-out transaction. No matter how good your credit score, everyone pays at 75%.

But there is quite a difference in the charge.