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Rate Cut Means Zip to Most

April 30th, 2008

The Federal Reserve’s rate cut to 2% shouldn’t inspire more than a yawn in financial circles, although many citizens believe that a cut by “the Fed” immediately translates to a drop in mortgage rates. Unfortunately not true, folks. The Federal Reserve is simply using its power in the financial marketplace to release more money into the system and influence banks to drop the interest rate they charge to lend each other funds overnight. While this short-term fix does have the effect of lowering the prime rate (which may influence rates on credit cards, some adjustable rate mortgages, and other lines of credit), the effect on most long-term mortgage rates is often the opposite.

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Bankers Versus Brokers: The New World Order

April 28th, 2008

Bankers and brokers have been throwing the same arguments around for years. Brokers claim to be better because they have access to programs offered by many different lenders and can therefore find the best program for you. Bankers claim they have more control of the loan approval and funding process and can offer lower rates. Both arguments are true to some extent. However, it really depends on the size and reputation of the institution involved.

Brokers According to Bankers: For example, bankers like to characterize brokers as fly-by-night opportunists who don’t care about their conduct — by the time the borrower realizes that he’s been taken advantage of, the broker has left the business and begun a new career selling cars or Amway.

Bankers According to Brokers: Brokers prefer to portray banks as moss-covered behemoths that only offer two programs and charge outrageous fees.

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Mortgage Rates Move Upward as Cycles Get Out of Synch

April 24th, 2008

Mortgage rates and housing prices run on different cycles, but they are somewhat related. However, coordination between the two cycles got somewhat out of synch over the past week:

From a potential home buyer’s perspective, it has been possible to sit back over the past year and watch prices steadily get cheaper. However, the tick up in mortgage rates could signal a call to action — it might be best not to wait too long before getting a mortgage.

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Help Is On the Way — Not!

April 23rd, 2008

The Wall Street journal reports that little is being done for homeowners facing foreclosure despite all the sound-biting from public officials and lenders. A recent study by the State Foreclosure Prevention Working Group found that 7 of 10 borrowers in trouble aren’t getting any help with their payment problems and aren’t involved in any kind of workout with their lenders.  This shouldn’t surprise anyone. According to another WSJ article last year the vast majority of subprime homeowners in foreclosure were there because of circumstances completely beyond the control of the lenders. Rather than defaulting because their rate adjusted up and the payments were unaffordable, most troubled borrowers (58.3%) reported being delinquent because of a decrease in household income such as a job loss. Other reasons included medical bills or illness (13.2%), divorce (8.2%), inability to sell a home (6.1%), and death (3.6%). Only 1.4% of loans went into default because of payment adjustments.  So it makes sense that rolling back rate adjustments won’t help most people. And workouts are not granted unless there is a very good chance of preventing a foreclosure and not just putting off the inevitable — something that won’t happen if the borrower remains ill or unemployed. It seems like fixing the economy will do more for homeowners than bandaging their loan programs.

Lenders Gone Wild: When Fees Get Out of Line

April 21st, 2008

Bankruptcy judges are uncovering some rather, well, icky practices in the mortgage servicing industry. Excessive fees, lack of notice before starting foreclosure proceedings, and incorrect application of payments are just some of the goings-on at some mortgage giants, according to the International Tribune. In one case a bank charged an elderly woman $465.36 in late fees and charges for missing a single $554.11 mortgage payment! In another, the lender asked a bankruptcy court to allow it to foreclose on a couple in bankruptcy because there was no equity in the home.  When that is the case lenders are allowed to foreclose in order to minimize their costs.  However, in this case the borrowers had $120,000 in equity and they were given no notice of the foreclosure by the bank! The judge in the case found there was an abuse of process and ordered the lender to pay the homeowners’ legal fees. The bottom line is this: if bankruptcy judges are finding lenders to be unethical when dealing with borrowers in bankruptcy, might the loan servicers also be conning the rest of us? Borrowers should make it a priority to look their statements over, check for unexpected fees, and make sure that their impounded taxes and insurance are calculated correctly.

FHA Minimum Credit Scores: Are You Exceptional?

April 18th, 2008

The latest buzz in the mortgage industry is about FHA loans. Traditionally, one of the advantages of FHA offerings was that there was no minimum credit score needed to get a loan. But now it’s rumored that there are new minimum credit scoring requirements. Is this true? Yes…..and no. Yes, because FHA guidelines do require a minimum FICO score of 580 for approval. And no, because there are exceptions to this rule. If your current loan is an FHA or VA and you are refinancing with no cash out (also referred to as streamlining) the credit score requirement doesn’t come into play. If you have no credit score and have to use non-traditional credit (such as statements from your landlord and utility companies) then you can still get approved for your loan. And finally, if you work with a lender that uses an FHA Automated Underwriting System (AUS) then you can get a mortgage with a score <580 if the automated system approves you. The AUS considers a host of factors in addition to your credit score and if these are strong enough to overcome a low score you may still get your mortgage.

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Low Mortgage Rates Threatened by Inflation Signals

April 17th, 2008

Mortgage news overall continued to spell opportunity for potential home buyers, but there are also signs that favorable mortgage rates might not last:

The combination of low mortgage rates and falling home prices is great for today’s home buyers, but the inflation signals are a reminder that these conditions may not last. 

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Mortgage Rates Are Down — Or Not…

April 16th, 2008

There’s lots of noise online about mortgage rates — enough to drive you crazy. “Fannie Mae limits are higher! This means loans will cost less!” “The Fed lowered rates! This means we’re saved!” No it doesn’t. There is a reason investors are willing to offer lower rates to those with good credit, low loan-to-values, and borrowing $417,000 or less. It’s because statistically they are proven to be less risky than larger mortgages. So calling what was a $600,000 jumbo loan last week a “conforming” loan this week doesn’t magically reduce its risk to that of a $417,000 loan. Talking about trying to put lipstick on a pig… The bottom line is that investors will continue to evaluate risk based on loan-to-value, credit scores, and yes, loan amounts. And the loans will be priced accordingly — the Fannie Mae Loan-Level Price Adjustment matrix is what your lenders will be referring to when determining what rates they can offer you. Take a look — you can see how the combination of variables affects your loan price. For example, a borrower with a credit score of less than 620 would be charged 2.75% more than someone with a score of 720 for the same loan if he borrows more than 70% of the home’s value. However, if he borrowed less than 60% there is no surcharge at all. And a borrower taking a “jumbo-conforming” 30 year mortgage pays .25% to .75% more in fees to get the loan. So before you shop, check out the matrix. See yourself from an investor’s point of view and know what to expect when you shop for your loan.

Walk Away from Mortgage? Not Anymore

April 14th, 2008

An April 13th article from the San Francisco Chronicle stated that it will be more costly than ever to walk away from a mortgage just because the investment didn’t pan out. New guidelines bar lenders from making Fannie Mae loans to applicants who went through foreclosure within 5 years unless they can prove extenuating circumstances. And even after 5 years the borrowers will have to come up with at least 10 percent down and have gotten their credit scores back up to at least 680. Rival mortgage clearing house Freddie Mac indicated that it is going after walk-away borrowers in court to collect deficiencies (the difference between what a borrower owes and what the lender gets in a foreclosure sale). Fannie and Freddie’s actions should be far-reaching — 76% of all new mortgages are bought by the giants and must therefore meet their guidelines. These actions should be welcomed by taxpayers and homeowners alike — very few neighborhoods haven’t felt the blight of a foreclosure and the resulting hit to the adjacent property values, and making those truly responsible face their consequences should lighten the burden for everyone else.

How Long Can Rate Stability Last?

April 10th, 2008

The significant thing in mortgages this week wasn’t what had changed, but what had stayed the same. 30-year mortgage rates posted their fourth consecutive weekly reading within a range of only 0.03%. 

This stability was not because of a lack in economic news. Among the prominent developments:

Indeed, considering the amount of economic news, the fact that mortgage rates remained unchanged was not because there were no new developments, but more because conflicting developments essentially fought to a standstill.

For mortgage shoppers, this meant good news — additional time to think and act while mortgage rates are still at uncommonly low levels. 

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