FED Meets….Holds Rates Steady!!

The Federal Reserve Board left short-term interest rates unchanged today, ending a ten-month spate of cuts.  Signaling that inflation is now a greater threat to the economy than recession, the “FED” left the benchmark federal funds rate at 2%.   The commercial prime lending rate, a benchmark for millions of business and consumer loans—such as auto loan rates, home equity 2nd mortgages and credit card interest rates—will remain unchanged at 5%.  The Fed voted 9-1 to keep rates the same, the one lone dissenter being Dallas Fed President, Richard Fisher.   I’m surprised the vote was that close, given that three other Fed presidents, most notably the ones from Virginia and San Francisco, openly stated their support to raising rates to stem inflation, just a few weeks ago.  Their comments, along with the same sentiment openly echoed by Fed Chairman Ben Bernanke, was the impetus for consumer interest rates to rise over a quarter % the past couple of weeks.

ILLINOIS FILES SUIT AGAINST COUNTRYWIDE

Remember my rant against the lobbyists (mostly from call-center banks) who are preventing legislation for mortgage licensing?  Well, this is what happens when you incent “call-center L.O.s”, to write loans in volume, with no regard to consumer suitability:

Illinois Attorney General, Lisa Madigan, is suing Countrywide Financial, and CEO Angelo Mozilo, contending that the company and its executives defrauded borrowers in the state by selling them costly and defective loans that quickly went into foreclosure.  Amongst the most damning evidence, were e-mail messages sent to borrowers on their one year anniversary date, stating “Happy Anniversary—home values skyrocketed over the past year.  That means you may have thousands of dollars of home equity to borrow from at rates much lower than most credit cards”.   This created an atmosphere of refinancing the same people, over and over again, with loan costs that were repeated, all while adding to what was owed on the house.  For me, I’m not one who is crying for individual consumers who made bad choices—we’ve all done that one time or another.  But when you read that Countrywide’s call centers closed 60% of their loans on either sub-prime (poor credit) and Hybrid ARMS (negative amortization loans), one who knows this business can see that they were predators to the less educated or vulnerable borrowers.  I have been frustrated  because at one point a lender was calling three different clients of mine who had just closed loans four months earlier.  The problem?? I got them the loans through this particular lender and all 3 clients had a one year pre-pay penalty, due to prior credit issues.  Rather than wait for the one year to pass before putting them in an FHA loan (the plan), the lender tried to refinance them into a similar loan and deceived them into thinking their pre-pay penalty was waived.  It wasn’t.  It was rolled into their $14,000 of closing costs!!  OUCH!!  Now, they are getting sued.  KARMA Lives on!!

While our basic interest rates have remained low and steady over the past two years (30 year fixed principle and interest loan has been in the low to mid 6% range with zero points), the “pricing adjustments” from the banks have skyrocketed over the past 6-9 months.  The detail of these costs has never been conveyed to the consumer by the media, for whatever reason.  Maybe the overly-vague and generic term of ‘credit crunch’ fits their needs.

These price adjustments, better known “layering” to the banks and to mortgage professionals, adds costs to the borrowers’ loan and/or rate, depending on the category.  Such categories include pricing penalties for: less money down; taking cash out on a refinance; taking an interest only loan; and most punitively—lower credit scores.  The latter is the biggest change we’ve seen, started around the first of the year—and has grown since.

The best analogy I come up with for loans, relative to credit score, is that we used to be a —> Pass or Fail.  Now, it’s like you’re graded from “F to A+.  For example, a 620 score used to get an automated Fannie/Freddie approval all the time, with decent credit variables and 5% down.  Now a 620 score costs the borrower 2.5 points!!!  Or, if it’s built into the rate, today that would be a 3/4% rate penalty to a borrower’s final rate.  Even if you have a 719 Fico score, you are hit with a .5 fee (or 1/4% rate penalty). 

So if you have a $250,000 loan, a 620 score will cost you $6,250; or a rate 3/4% higher—> which is $150 a month higher with this loan amount.  With a 719 credit score, the adds are $1250 loan costs, or a $41 monthly payment bump.   These are for Fannie Mae and Freddie Mac loans, better known as conventional loans.

On FHA (HUD/Govmt 3% down) loans, there are only price hits for scores below 620.  Borrowers with scores ranging from 580—620 can expect pricing hits between 1% to 3%, usually it’s 1%.  Below is the standard Freddie/Fannie (conventional loans) pricing adjustment grid for credit scores.  Keep in mind, this doesn’t show additional adjustments for cash-out, 2nd home/Investment property, interest only, loan size, condo hits, etc