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

The credit scoring model seeks to quantify the likelihood of a consumer to pay off debt without being more than 90 days late at any time in the future.  Credit scores can range between a low score of 350 and a high score of 850.  The higher the score, the better it is for the consumer, because a high credit score translates into a low interest rate.  This can save literally thousands of dollars in financing fees over the life of the loan.                                                                                                                                                             Only one out of 1,300  people in the United States have a credit score above 800.  These are people with a stellar credit rating that get the best interest rates.  On the other hand, one out of every eight prospective home buyers is faced with the possibility that they may not qualify for the home loan they want because they have a score falling between 500 and 600. 

The Five Factors of Credit Scoring

 Credit scores are comprised of five factors.  Points are awarded for each component, and a high score is most favorable.  The factors are listed below in order of importance.

1. PAYMENT HISTORY-35% IMPACT

Paying debt on time and in full has the greatest impact on your credit score.  Late payments, judgments, and charge-offs all have a negative impact.  Missing a high payment will have a more severe impact than missing a low payment and delinquencies that have occurred in the last two years carry more weight than older items.

2. OUTSTANDING CREDIT BALANCES-30%

IMPACT

This factor marks the difference between the outstanding balance and available credit.  Ideally, the consumer should make an effort to keep balances as close to zero as possible, and defiantly below 30% of the available credit limit when trying to purchase a home.

 3. CREDIT HISTORY-15% IMPACT

This portion of the credit score indicates the length of time since a particular credit line was established.  A seasoned borrower will always be stronger in this area.

 4. TYPE OF CREDIT-10% IMPACT

A mix of auto loans, credit cards and mortgages is more positive than a concentration of debt from credit cards only.

 5. INQUIRIES-10% IMPACT

This percentage of the credit score quantifies the number of inquiries made on a consumer’s credit within a six month period.  Each hard inquiry can cost from 2 to 25 points on a credit score, but the maximum number of inquiries that will reduce the credit score is ten.  In other words, 11 or more inquiries within a six month period will have no more impact on the borrower’s credit score.  Note that if you run a credit report on yourself, it will have no affect on your score.

Remember that the credit score is a computerized calculation.  Personal factors are not taken into consideration when a credit report is generated.  It is merely a snapshot of today’s credit profile for any given borrower, and it can fluctuate dramatically within the course of a week.

The other big piece of news today was that Consumer Confidence has dropped to a low not seen since the Carter administration.  This is most likely due to the fact that consumers at large feel that there is still more difficulty coming in the economic markets. 

My summary??  Rates are still really good.  The thing that is stopping most borrowers is that there is now a shortage of ‘niche’ programs that fit borrowers that do not fit conventional guidelines.  While I understand that many programs should not have been so easy, I think there needs to be a balace that can accomodate those that are not conventional but still good credit risks.  Until we begin to see some of those programs coming back, difficulties will continue. 

If I can be of any help to you, please do not hesitate to call/email me!!

The Current Situation
The mortgage market has long been a source of strength in the U.S. economy, but it is facing very significant challenges today, especially in the subprime segment that serves consumers who have shorter or weaker credit records. In recent years, slowing home prices and a loosening of underwriting standards have contributed to sharp increases in delinquencies and foreclosures. As of January 2008, the most recent month for which data are available, about 24 percent of subprime adjustable-rate mortgages (ARMs) were 90 days or more delinquent, twice the fraction that were delinquent one year ago. For mortgages overall, more than 1.5 million foreclosures were started during 2007, up 53 percent from the previous year. All told, the  expectation is that the number of foreclosures in 2008 will likely exceed the number in 2007.

Both delinquency and foreclosure are traumatic experiences for the families and communities affected. Recent declines in house prices have eroded the equity that homeowners have in their homes, which has made it difficult or impossible for many of them to refinance their mortgage on more favorable terms compared to their current mortgage, even if interest rates have declined since they took out their loan. Tighter lending standards have also limited opportunities for these families to refinance. When struggling homeowners cannot put themselves on a sustainable financial footing, neighborhoods also suffer–properties are not maintained and foreclosures, particularly when they are clustered together, put further downward pressure on house prices. This is bad news for investors, too, because as property values decline, the substantial costs associated with foreclosure rise even further. Finally, falling home prices can have local and national consequences because of the erosion of both property tax revenue and the support for consumer spending that is provided by household wealth.

Ongoing Efforts to Help Struggling Borrowers
Given the high cost of foreclosures to everyone involved–lenders, investors, borrowers and their communities alike–it is in everyone’s interest to develop prudent loan modification programs and provide for other assistance to help borrowers avoid preventable foreclosures. Indeed, policymakers and stakeholders have been working hard to find effective responses to the increases in delinquencies and foreclosures. The steps that have been taken so far include initiating programs designed to expand refinancing opportunities and efforts to increase the pace of loan workouts.

One example of positive steps being taken is the effort by NeighborWorks America and the Homeownership Preservation Foundation to offer financial counseling services through the Homeowner’s HOPE Hotline. With the encouragement and leadership of the Treasury Department, the national Hope Now Alliance–a broad-based coalition of government-sponsored enterprises (GSEs), industry trade associations, counseling agencies, and mortgage servicers–is working to find ways to help troubled borrowers, particularly those facing interest rate resets, through loan modification plans. Recent actions by the Federal Open Market Committee to lower the target federal funds rate and resulting decreases in short-term interest rates also should help mitigate the problems associated with interest rate resets.

Useful steps also are being taken by the FHA, which provides insurance on a variety of fixed- and variable-rate mortgage products that can be used by borrowers who want to refinance their home and who meet specified underwriting and other criteria. For example, the agency recently established the FHASecure plan to help borrowers who are delinquent because of an interest rate reset and who have some equity in their home. FHASecure provides such borrowers the opportunity to refinance into an FHA-insured mortgage. Separately, the FHA’s loan limits recently were raised significantly by the Economic Stimulus Act of 2008, further expanding the potential reach of the FHA’s mortgage insurance programs. We understand that the FHA is studying additional ways that the agency’s insurance programs could be expanded or modified, consistent with existing statutory authorities, to better help troubled borrowers.

Loss-Mitigation Strategies to Reduce Foreclosures
In cases where it is not possible for the distressed mortgage borrower to refinance his or her mortgage into a more sustainable mortgage product, the next-best solution may be some type of loss-mitigation arrangement between the lender or servicer and the distressed borrower. The Federal Reserve, in conjunction with the other federal banking agencies (which include the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision), the Conference of State Bank Supervisors and the National Credit Union Administration, has issued guidance urging lenders and servicers to pursue such arrangements, when feasible and prudent, as an alternative to foreclosure. For the lender, servicer, and investor, working out a distressed loan with a struggling borrower makes economic sense if the net present value (NPV) of the payments under a loss-mitigation strategy exceeds the NPV of proceeds that would be received in foreclosure.

Loss mitigation can be advantageous to both the borrower and the lender because the costs associated with foreclosure can be very substantial. Historically, the foreclosure process has usually taken from a few months up to a year and a half, depending on state law and whether the borrower files for bankruptcy. Anecdotal evidence suggests that the time to complete a foreclosure has been increasing recently, as the number of foreclosures has risen and the average time that properties remain on the market has lengthened. The losses to lenders and investors from foreclosures include not only the missed mortgage payments during that period, but also the costs of taxes, legal and administrative fees, real estate owned sales commissions, and maintenance expenses. Additional losses arise from the often significant reduction in value when a property is repossessed even in stable housing markets, particularly if the property is unoccupied for some period. In fact, a recent estimate based on subprime mortgages foreclosed in the fourth quarter of 2007 indicated that total losses exceeded 50 percent of the principal balance. Whether the losses are that large in all cases is difficult to know, but what is known is that the foreclosure process itself destroys considerable value. The existence of such costs raises the real prospect that, by restructuring distressed loans in those cases in which the borrower wants to stay in the home, borrowers, lenders, servicers, and investors may all be able to achieve a better outcome than is attainable if the foreclosure process is allowed to run its course.

Lenders, servicers, and investors have historically relied on repayment plans as their preferred loss-mitigation technique. Under these plans, delinquent borrowers typically repay the mortgage arrears over a few months in addition to making their regularly scheduled mortgage payments. These plans often are most appropriate if the borrower has suffered a reversible setback, such as a temporary illness. However, anecdotal evidence suggests that even in the best-case scenarios, borrowers given repayment plans redefault at a high rate, especially when the arrears are large.

Loan modifications, which involve any permanent change to the terms of the mortgage contract, may be preferred when the higher payments associated with a repayment plan do not result in a sustainable solution. In a loan modification, the borrower’s monthly payment is reduced through a lower interest rate, an extension of the maturity of the loan, a write-down of the principal balance, or a combination of all three of these measures. The effort by the Hope Now Alliance to freeze interest rates at the introductory rate for five years for eligible borrowers with an adjustable-rate mortgage is an example of a modification, in this case applied to a class of borrowers.

To date, permanent modifications in this credit cycle episode, as in the past, have typically involved a reduction in the interest rate or an extension of the loan terms, while reductions of principal balance have been quite rare. But the current housing difficulties differ from those in the past, largely because of the pervasiveness of situations known as negative equity positions in which the amount owed on the mortgage exceeds the current market value of the property. A distressed borrower with a negative equity position may have neither the means nor the incentive to remain in the home. In this environment, servicers and investors may well find principal reductions that restore some equity for at-risk homeowners to be an effective means of avoiding delinquency and foreclosure.

Although principal write-downs may be especially germane today given the prevalence of negative equity positions, they are not necessary or appropriate for all borrowers who have negative home equity or who become delinquent on their mortgage. On the contrary, a strategy of targeting write-downs to certain groups of borrowers may provide the best path forward. For example, one possibility would be to limit the availability of write-downs to those borrowers with high debt payment-to-income ratios and loan-to-value ratios significantly in excess of 100 percent before loan modification, but with the capacity to carry a written-down mortgage. In any event, it seems clear that principal reductions should be part of the tool kit that servicers and investors bring to bear as they deal with delinquent loans.

Additional Actions That Could Help Reduce Avoidable Foreclosures
Several steps could be taken to provide further impetus to loan modifications, including principal write-downs, in appropriate circumstances. One such step that could be taken relatively quickly by the industry is the development of a template that would guide servicers and others as they consider whether, and under what circumstances, to pursue various types of loan modifications, including principal write-downs. Enhanced guidance on loan modifications could help forge a common understanding among servicers and the investor community on when a particular loan modification tool is most appropriate. This guidance would help address the concern expressed by servicers that expanding the rate of principal reductions may expose them to increased litigation risks even in situations where the servicer reasonably determines that such action is beneficial to investors in comparison to other available options. The Hope Now Alliance organized by the industry and the Treasury Department successfully created guidelines dealing with interest rate resets. Leadership also is needed to provide guidance for other loan modification tools and to clarify the “best practices” to be followed by servicers in order to mitigate servicers’ litigation risks.

The Congress can take another important step to facilitate greater use of loan modifications by moving quickly to reconcile and enact FHA modernization legislation permitting the FHA to increase its scale and improve the management of potential risks borne by the government. Such legislation could improve the FHA’s ability to reach a wider range of borrowers while allowing the agency to develop appropriate underwriting and pricing methodologies for any increased risks assumed.Separately, the GSEs–Fannie Mae and Freddie Mac–could be asked to do more. Recently, the Congress has greatly expanded Fannie Mae’s and Freddie Mac’s role in the mortgage market by temporarily increasing the conforming loan limits for these GSEs. In addition, their federal regulator, the Office of Federal Housing Enterprise Oversight, has lifted some of the constraints that were imposed on these entities because they have resolved some of their recent accounting and operational problems. Thus, now is an especially appropriate time to ask the GSEs to move quickly to raise more capital, which they will need to take advantage of these new securitization and investment opportunities, to provide assistance to the housing markets in times of stress, and to do so in a safe and sound manner. As the GSEs expand their roles in our mortgage market, there is a strong need for the Congress to move forward on GSE reform legislation, including the creation of a world-class GSE regulator. As the Federal Reserve has testified on many occasions, it is very important for the health and stability of our housing finance system that the Congress provide the GSE regulator with broad authority to set capital standards, establish a clear and credible receivership process, and define and monitor a transparent public purpose–one that transcends just shareholder interests–for the accumulation of assets held in their portfolios.

Rates continue to fluctuate.  The “bail out” of Bear Stearns has been received with mixed reactions by the financial community and there is some question on the final terms of the agreement.  Meanwhile…back at the ranch….the fed lowered the consumer rate again to 5.25%.  At the same time, Unemployment news came out today with numbers  showing more of an increase than expected which brought home loan rates down roughly .25 at weeks end.  The big “R” word for recession keeps being floated among economists. 

What does this mean for you?  Lower rates on your Home Equity Line of Credit which is nice.  The other types of loans do not seem to be reaping the benefit of the lower rates although even those rates are still good.  Less, in the way of loan programs and increasing foreclosures, still continues to force a glut of unsold homes on the market.  If you are looking to buy and can qualify, now is the time for a great deal.  If you need to refinance, value is the key and if it is there, now is the time also for a great rate.  Selling might be hard but with a good real estate agent, you have the best shot. 

As more news comes in, we will post more updates!!  Stay tuned…..

What all of these means for you is that for

However, most buyers live in their new home an average of seven years or more. If that fits you, it almost always makes sense to buy rather than rent, in practically any market.

If you are thinking about delaying a purchase because you want to “time the market” to get the very best deal, that is almost impossible to do with precision. Even if you are in an area with declining market prices, the most knowledgeable experts cannot reliably anticipate the “bottom” of a real estate market. Afterwards, they can look back and say, “The market began to turn in 1997,” like it did in some areas of California that had a tough market in the nineties. Before the turn, though, no one knows.

If you aren’t an owner, you’re a renter. Renting is just throwing money away. You don’t get to reduce your income taxes by itemizing deductions like property taxes  and mortgage interest. 

Interest rates are low right now. If you wait, interest rates could be higher. That means your monthly payment will be higher, too. No one can predict rates that far in the future but rates are very low right now.

The easiest way to accumulate wealth is through home ownership. Three out of four people have more equity in their home than assets in retirement plans, stocks, mutual funds, and savings. Though no one can guarantee your property will appreciate, over time it generally does. Over the long term, you can generally count on it.

As a buyer, what do you need to do to give you the best bang for your buck?  First of all, determine your price range. Then choose a neighborhood where your target price is in the lower tier of prices in that neighborhood. That way, your home has less vulnerability on the down side and the higher-priced homes will help pull you up during hot markets.

Also, try to steer away from homes on busy streets or homes that back to busy streets. Buy a house as close to the center of the tract as possible. Don’t buy houses across the street from a park or a school. Try to buy in a homogeneous area, where all the homes are similar to one another. For example, if you are buying a single family home, you do not want to buy next to an apartment or condominium complex.

And remember, talk to a real estate agent and ask for advice. Ask them what the market is like in your area.

There are LOTS of sellers out there right now. Inventory is high. If you make an offer, ask for incentives to buy that particular home.

If you are putting ten percent down or more, you can ask for up to six percent of the purchase price in incentives. These incentives CANNOT BE CASH, but you can ask the seller to pay your closing costs. You can also take advantage of programs such as the Nehemiah Program that allows sellers to contribute 6% of the purchase price which includes your 3% down payment and 3% towards closing costs.  This program works if you qualify and are looking to get an FHA loan.

If you’re putting down five percent or less, you can still ask for incentives. The amount you can ask for is limited to three percent of the purchase price. The reason there are limits is because you are going to finance the purchase with a mortgage and lenders have guidelines on how much sellers can provide in incentives. Those guidelines help them limit loan fraud.

Talk to a real estate agent. Have that agent recommend a lender who will talk to you about incentives and explain what you can request.

That’s no easy thing.   How do you tune out all the chatter and ink on recession, housing, subprime woes, the credit crunch, rogue traders, insolvent bond insurers, $100 oil and nukes in Iran?  It’s enough to make you sit on your thumbs and wait before making any big moves.   But what, exactly, are you waiting for?
There has rarely been a moment in history when you couldn’t scare yourself into doing nothing.   And yet, as Lynch observed nearly 20 years ago, “in spite of all the great and minor calamities that have occurred … all the thousands of reasons that the world might be coming to an end–owning stocks has continued to be twice as rewarding as owning bonds.”   A top reason to not buy stocks, in Lynch’s view, is if you don’t already own a home–in which case, that should be your first investment, since an owner-occupied home is nearly always profitable.   Through a spokesman, Lynch reaffirmed these views to me–housing debacle and all.  When prices are falling, few people have the discipline to buy stocks, a house, gold, art or any other asset.   But those who do pull the trigger excel in the long run.   As John D. Rockefeller famously said, “The way to make money is to buy when blood is running in the streets.”  And the streets are stained crimson. Start with stocks.   They have been pummeled this year.   GDP braked sharply last quarter, and there has been plenty of panic about a recession.   The Federal Reserve is slashing short-term interest rates at the fastest clip in decades.   But if you stick to your steady, diversified plan while everyone else is retreating, you will be happy years from now.  For one thing, Fed rate cuts always lift the economy eventually, and the stock market typically starts responding just as headlines get gloomiest.   Sure, the market could fall again before recovering.   But the recession may be half over already–or we may avoid one altogether.   You just never know.  As for housing, certainly some skepticism is in order. Formerly sizzling markets in Florida, Nevada, Arizona and California probably haven’t seen the worst headlines just yet, though they may well be close.   And “jumbo” mortgages, those more than $417,000, are likely to remain artificially high for a few more months while banks work through their credit issues.But let’s say you are emotionally ready to be a homeowner.   You have good credit, plan to stay put for five years and have been waiting for the perfect entry point.  It’s time to get serious–before an inevitable rise in interest rates wipes out your advantage.   “The thing that will make home prices stop falling is the very same thing that will push mortgage rates higher,” says Jim Svinth, chief economist at mortgage firm Lending Tree.   So anything you gain by a further drop in prices might be offset by rising financing costs.  Consider a typical home that sells for $218,900. You put down 20% and get a 30-year fixed-rate mortgage at today’s rate of 5.5%.   Monthly principal and interest come to $994.31. Let’s say that 12 months from now the same house goes for 10% less, or $197,010.   But by then the recession is history and the Fed is jacking up rates to stem inflation.   If mortgage costs rise a point, to 6.5%, your monthly payment would be $994.94 and you’d have saved nothing. Meanwhile, home prices might steady and sellers might become less willing to negotiate.   And you have spent a year living someplace you’d rather not be.

It’s more complicated if you must sell before you can buy.  But that logjam won’t persist forever–and if it appears you’ll be trapped for a few years, try to refinance at today’s lower rates.   Risks always seem most acute when the headlines give you ulcers.   But that’s exactly when you should think long term–and get off your thumbs.

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