Simple Real Estate Definitions: PITI

Most homeowners make four housing-related payments each month:

• Principal on a mortgage


• Interest on a mortgage


• Taxes on the real estate owned


• Insurance for the real estate owned

Collectively, these payments are known by the acronym PITI but don't let it fool you -- a homeowner's monthly expenses are still called PITI even if one or more of the elements doesn't apply.

For example, a homeowner with an interest only mortgage does not pay principal each month.

Additionally, condo owners typically don't pay homeowners insurance -- they pay a monthly assessment and/or maintenance fees to an association instead.

But regardless for what it stands, determining a comfortable PITI should be every homeowner's starting point when looking for a new home. PITI is the monthly housing cost, after all, and by knowing what fits in your budget, it's a lot easier to compare homes and their related expenses.

It's certainly better than asking the bank "how much home can I afford" -- all that's going to tell you is the P and the I. As a homeowner, you need to know all four.

PITI is most commonly pronounced pee-eye-tee-eye.

(Image courtesy: Contractor-Books.com)

Mirror, Mirror . . . Who’s the Best? (Hint: It’s Not Suze)

This morning while paying bills on-line, I had CNNMoney.com’s video clips playing in the background. When I heard a piece on “who do you trust and what makes a good financial advisor” with Suze Orman, I was reminded again of how important it is when dealing with your finances to find someone who really knows you.

“The best advisor,” Suze said, “is the one you see looking back at you when you look in the mirror.”

No one knows your habits, your strengths, your limits and your risk profile better than you. And no one, but no one, cares more about your money than you.

Whatever you may think of Suze Orman and her advice to the masses, it’s hard to argue the point she made here, and it serves as a great rule of thumb whether you’re talking about credit building, financial planning, mortgage financing, insurance plans or whatever.

While we all know ourselves better than anyone else does, it’s unlikely we know financial planning, mortgage financing or how to reduce and eliminate debt as well as an experienced professional. That’s why it’s essential to find someone technically sharp and adept at dealing with the problem you are trying to solve.

More important, however, is finding someone willing to get to know you--your priorities, your needs and where you are in your life—if not as well as you do yourself, as close as they can come.

In conversations with prospective clients, I sometimes worry about them feeling they are in the interrogation room when 7 out of 10 questions have nothing to do with their current financing or interest rate.

It comes from my commitment to knowing what they really need before suggesting loan programs, rates and payment scenarios. In fact, it’s my way of determining whether we are truly a good fit in the first place.

So when you are searching for your next loan, make sure you’re listening for the way you’re being listened to. After all, we have to look in the mirror every morning, too.

And some of us actually care about who we see looking back.

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What You Need To Know About Mortgage Rate Quotes

Home buyers are often surprised when a "rate quote" from the morning won't be honored in the afternoon. Sometimes, the assumption is that the loan officer is just being sneaky.

This couldn't be less true.

Rate quotes change in the middle of the day because mortgage markets are in constant flux. All day, every day -- just like stocks.

And like stocks, a mortgage bond's morning price will likely "expire" before the day ends.

One way to visualize this is to look at today's Microsoft's stock price:
At 9:30 A.M. ET, the price was $28.46
At 9:38 A.M. ET, the price was $28.72

Over the course of 8 minutes, the stock rose by 26 cents and the "9:30 A.M. quote" was no longer available. For example, you couldn't call your stock broker at 9:38 A.M. and place an order for the 9:30 A.M. price because the price had changed.

Mortgage rates behave the same way.

Throughout 2008, mortgage rates have changed mid-day more frequently than in the past. On more than half the days, morning rate quotes were no longer valid in the afternoon. And, on at least 5 separate occasions, rates changed 4 times in just one day.

It's not typical, but it does happen.

So, if you're talking with your loan officer in the morning about a rate quote, be prepared to do all of your shopping in a compacted amount of time, and then be ready to make a decision.

By the time the afternoon rolls around, after all, that rate quote may well be expired.

If That Home Is A "Good Buy", Make Your Offer Quickly

Each month, University of Michigan researcher survey the U.S. population about their thoughts on the economy -- is it improving, it is worsening, is it staying the same.

May's consumer confidence survey registered it's lowest reading since 1980.

Given the recent headlines, that shouldn't be surprising:

• Unemployment is spiking
• Gas prices are at an all-time high
• Housing markets keep getting bad press

But despite all of that, the American Consumer appears to be taking the economy's hiccups in stride.

For example, last month, retailers around the country reported rising sales levels that doubled what economists expected. This isn't supposed to happen when consumer confidence is falling as fast as it is, right?

But, a closer look at the retail sales data shows that discount retailers such as Target and Wal-Mart led the charge higher. So, although consumers are feeling worse about the economy, they're still spending money.

And when they do, they look for value.

For home buyers, this should sound familiar because it's every real estate agent's mantra right now -- "there's a lot of good values to be had." It's why some homes are getting multiple offers within days while other languish on the market for months.

The difference lies in the perceived value of the home.

Home buyers are actively looking for "good buys" and when they find them, they're quick to make an offer. It's why the housing market is showing pockets of strength despite low consumer confidence levels overall -- everyone's snapping up the bargains.

(Image Courtesy: Wall Street Journal Online)

Guess Which 4 States Accounted For More Than 50 Percent Of May 2008 Foreclosures

RealtyTrac released its most recent foreclosure statistics and if you only read the headlines, you think the entire country was on the verge of losing its homes.

The underlying data tells a different story, however.

More than half of the country's foreclosure activity in May 2008 was tied to just 4 states in the union:
California (28 percent)
Florida (14 percent)
Arizona (5 percent)
Michigan (5 percent)

In other words, the majority of mortgage defaults are coming from a small minority of states.

See, between 2002 and 2006, California, Florida and Arizona were very popular with real estate speculators, many of whom over-extended themselves on real estate; and Michigan's economy has been decimated by job losses in the auto and manufacturing industries.

In addition, these 4 states are among the nation's most populous. It makes sense that they are distorting the national statistics.

On a local level, the news is not so grim. Not only did 20 states show a reduction in monthly foreclosure activity, but many more fell below the national foreclosure average. That type of story, though, doesn't make for good headlines, is all.

Search the full May 2008 foreclosure report for yourself on RealtyTrac's Web site.

Cancel Your PMI Before It's Too Late To Cancel It

When homeowners borrow more than 80 percent of a home's value, mortgage lenders often require a corresponding insurance policy called Private Mortgage Insurance.

PMI provides a cash payment to lenders in the event of a homeowner defaults.

But because PMI policies are designed for high LTV loans only, they usually contain cancellation options for when home equity percentages reach 20 percent or more.

In other words, PMI can be temporary.

There is a caveat, however: Lenders will not automatically remove mortgage insurance when LTV falls below 80 percent -- the onus is on the homeowner to initiate a formal request.

Earlier this decade -- when home values were soaring -- many PMI-paying homeowners recognized their equity growth and successfully petitioned out from PMI.

Many other homeowners, however, forgot.

So today, as home values stagnate or depress in different U.S. markets, homeowners eligible for cancellation may find that both their home equity and their right to cancel have vanished.

PMI helps makes high LTV loans possible, but there's no reason to pay it longer than necessary. If your current mortgage requires PMI payments and your loan-to-value lurks below 80 percent, contact your mortgage lender to start the PMI cancellation process.

Or, if you're unsure about your home's value and the 80 percent threshold, call or email me anytime and I can help you connect with somebody to give you the answers you need.

Is The Federal Reserve Telegraphing Its Next Rate Hike?

The Federal Reserve is stumping hard on inflation this week, creating speculation that Fed Funds Rate hikes may be in store for later this month.

This is a counter-intuitive development because increases to the Fed Funds Rate are typically associated with periods of rapid economic expansion.

Lately, we've seen anything but.

Witness:

• High levels of unemployment
• Reduced consumer spending
• Falling consumer confidence

Despite the downbeat news, though, multiple Fed members are taking a hard line on inflation, adding that a strong dollar support the economy and help to offset high oil prices.

A rate hike could help accomplish that goal.

If the Federal Reserve votes to raise the Fed Funds Rate, Prime Rate will rise in tandem. Prime Rate is the basis of interest rates for credit cards and home equity credit lines. Holders of each debt type, therefore, would face higher monthly payments.

Mortgage rates, by contrast, would be expected to fall, but how the market would actually react to a rate hike is anyone's guess.

The Federal Reserve meets 8 times annually. Its next meeting is a two-day affair beginning June 24.

(Image courtesy: The New York Times)

Why Your "Dear Seller" Letter May Be Met With A "Dear John"

Several years ago, when homes sometimes sold within hours, prospective buyers often drafted "Dear Seller" letters, an accompanying personal note to help purchase offers stand out in a multiple-bid situation.

Today, some buyers are writing a different kind of letter to win a seller's favor -- a letter explaining why the buyer's offer is so far below the seller's asking price.

You can't blame buyers for trying to explain themselves, but after reading this tongue-in-cheek piece from The New York Times, it's clear that real estate negotiations between a buyer and a seller are simply a matter of perspective.

Whereas a buyer may use Fear to get his price, a seller may counter with Hope.

The article drafts a buyer letter and a suggested seller response. Both letters are powerful and persuasive, and hint at the real truth in real estate -- that reaching a purchase price agreement is only as difficult as finding a buyer and a seller committed to working together.

And that match happens every day in every city in America -- even the ones in which the housing market is reeling the most.

It's been said that a listing price is just a starting point for conversation, but if that conversation starts with "Dear Seller" and the seller is feeling hopeful, don't be surprised if you get a Dear John in response.

(Image source: The New York Times)

Why It's Good News For Home Buyers When Unemployment Rates Surge

On the first Friday of every month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.

More commonly called the "jobs report", today's 2-page analysis of May 2008 shows that the economy shed jobs and that unemployment surged.

This is terrific news for home affordability.

That may sound counter-intuitive, so let's dig deeper into the jobs report and what it really tells us about the U.S. economy.

Over the last year, rising food and energy costs have chipped away at household budgets, leaving Americans with two basic choices:

Spend less on discretionary items like vacations and dining out
Demand more pay at work so they can vacation and dine out
If Americans choose to spend less, the economy eventually slows down because two-thirds of it is tied to Consumer Spending. This is anti-inflationary.

But, if Americans demand pay raises instead, businesses eventually pass those higher wage costs back to consumers in the form of higher prices.

This is called a "wage-price spiral" and it's very inflationary.

So, because today's jobs report showed unemployment surging by a half-percent to 5.5%, Americans really have no choice but to follow the "Spend Less" path -- they're not in a position to demand more pay at work.

Today's jobs data is good for home affordability because it relieves inflationary pressures in the economy and when inflation is falling, mortgage rates tend to do the same.

Better mortgage rates mean less expensive housing payments.

Source
Employment Situation Summary
BLS.gov, June 6, 2008

(Image courtesy: Wall Street Journal)

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160 Million “We’re So Sorry’s” and One Big Opportunity

“We’re so sorry, Uncle Albert

We’re so sorry if we caused you any pain

We’re so sorry, Uncle Albert

But there’s no one left at home

And I believe I’m gonna rain”

Can you say “We’re so sorry” 160 times? And do it again a million times over?

That’s exactly what one credit bureau promised last week.

In the largest class action settlement in US history, credit reporting giant TransUnion agreed to a preliminary settlement in Chicago federal court Wednesday that would provide 160 million Americans free access to their credit scores and six months of credit monitoring with no strings attached.

“This is astonishing,” said Ken McEldowney, executive director of Consumer Action, a national advocacy group based in San Francisco. “It’s everything we tell consumers that they need to find out if they have problems with their credit. They are getting information on how to improve it and information about whether they are creditworthy,” said McEldowney.

The settlement entitles consumers to six months of a TransUnion monitoring service—the one I use myself—that allows them access to information in their credit reports as well as their current scores at any time.

And for those of us who love being lazy, it even notifies subscribers by email of significant changes to their files, including reports of late payments or accounts opened in their names. TransUnion normally sells the service for $59.75 or more—meaning the settlement is worth as much as $10 billion.

How did borrowers get so lucky? Plaintiffs in the case alleged that anyone who had a credit file maintained by TransUnion (nearly half the U.S. population) were inundated with junk mail from marketers who bought data from the credit reporting giant. Federal law prohibits the sale of a person’s private credit information except under certain circumstances, such as when he or she has applied for a loan. The plaintiffs argued TransUnion crossed the line in the sale of private information.

The settlement represents a big opportunity to both borrowers and TransUnion. By filing a claim under the lawsuit, eligible plaintiffs receive 6 to 9 months of free access to one of the industry’s premier credit monitoring services. TransUnion offers a wide range of credit monitoring and educational resources.

The settlement represents a boon to TransUnion in that the company does not admit to any wrongdoing and at the same time offers a free trial to 160 million potential customers. Six months is more than enough time to get a handle on your credit profile, and it’s likely that after a free trial lasting 6 to 9 months, many will continue to subscribe to the company’s service.

Anyone who had any type of loan account between January 1987 and last Wednesday (and there must be some sort of prize for anyone who does not fit in that category!) is eligible to file a claim under the settlement. Claims can be filed starting June 16^th at the settlement web site https://www.listclassaction.com/ or by calling 866-416-3470.

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(Source: Chicago Tribune, May 31, 2008, Kathy Kristof)

The Proper Way To Give And Receive Gifts For Downpayments

When a home buyer is gifted cash for a downpayment, there is a right way and a wrong way to receive the funds.

The right way includes:

• Completing an acceptable gift letter
• Documenting the withdrawal of funds with receipts
• Documenting the deposit of funds with receipts

The wrong way is to ignore the rules that mortgage lenders clearly spell out for you.

Mortgage lenders watch gifts closely because they want to make sure that the "gift" is not really a loan-in-disguise. If it's a loan, the total dollar amount must be counted against the home's total loan-to-value and higher loan-to-values typically increase lender risk.

If it's a gift, a signed and dated gift letter should accompany the home loan application. An example:

I am the [relationship to recipient] of [name of recipient] and this letter serves as evidence that I am gifting [name of recipient] [amount of gift] to be used for the purchase of the home at [complete address of property].

This is a gift -- not a loan -- and there is no expectation of repayment.

Signed, [Signature of donor]

For additional evidence that the gift is legitimate, the recipient should make sure that deposited funds are not commingled at the bank. If the gift is for $12,000, for example, then the recipient's bank deposit receipt should indicate that a $12,000 deposit was made.

There may be legal and tax liabilities when gifting funds between family members so if you're unsure about how donating or receiving a gift may impact you, call or email me. If I can't answer your question, I can certainly refer you to somebody that can.

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Did You Know : The Lifespan Of A Mortgage Approval

Mortgage approvals don't last forever.

A conforming mortgage approval from Fannie Mae or Freddie Mac has a shelf-life of 120 days.

After 120 days, the approval expires and a mortgage applicant must re-submit his application for consideration.

In addition, a mortgage approval can "expire" within the 120-day period for other reasons:

-- Change of job status or income
-- Newly-acquired monthly debt (i.e. car payment, student loan)
-- Change in asset levels

If your current mortgage approval (or pre-approval) is dated prior to February 3, 2008, it is now expired and your new approval may be subject to Fannie Mae's new, more strict, underwriting guidelines.

Guess What Number Could Doom Your Loan Now (Hint: It’s Not Your Credit Score)

“I’m thinking of a number . . .”

Unless you’ve been living under a rock for the past 10 years, you've seen the ubiquitous FreeCredit.com commercial featuring a too-smart-for-his-own-good looking guy in a director’s chair and those 5 famous words.

In fact, I apologize if you’ve somehow finally succeeded in banishing this annoying phrase from your mind only to be reminded again by this post.

As annoying as this guy was, the commercial helped wake America up to the importance of the mysterious 3 digit number known as your credit score. Without the right number, your chances of qualifying for favorable interest rates—or qualifying for a mortgage at all—are often doomed from the start.

These days, however, there is a new number wreaking havoc with borrower’s attempts at obtaining mortgage financing. And unlike the credit score, there is virtually nothing borrowers can do to change it when it doesn’t come in at the right level.

The new number killing otherwise successful loan applications today? Appraisal value.

Several factors, all a function of the collapse of the mortgage market and subsequent declining home sales, have converged to give appraisal value an increasingly prominent role in loan approvals:

Declining markets

A new “declining market” designation has meant tighter lending guidelines for certain properties, reducing the maximum loan-to-value allowed on a given loan by as much as 5%. A loan originally approved for $285,000 on a $300,000 property in a declining market is now limited to $270,000—a $15,000 reduction in funds available to the borrower.

Tougher appraisal review

Appraisal reviews by lenders have resulted in greater scrutiny of appraisal reports. After reviewing an appraisal, the lender’s market review “experts” often order values to be reduced by tens of thousands of dollars before approving a loan. A recent legal settlement regarding mortgage broker-appraiser relationships will place even further restrictions on appraisal practices.

Foreclosure and short sales

Perhaps most important has been the rise in housing inventories, foreclosures and short sales. Slow sales and increased supply places downward pressure on home prices, while below-market sales resulting from foreclosure and short sale prices compound the pressure.

While it is illegal for loan officers to consult with or advise appraisers concerning home valuation, some lenders are setting up “valuation desks” independent of their appraiser to conduct preliminary searches of recent comparable sales data before ordering an appraisal. By considering whether recent comparable sales figures are likely to support the value needed for a loan to work, borrowers can better determine whether it’s worth it to order and pay for an appraisal for a property that may come up short in value.

Short of picking up and moving a house to a neighborhood that is retaining its values, there is little a borrower can do to compensate for the new threat to qualifying.

But judging from the number of borrowers stopped in their tracks by unfavorable appraisal values, the grating memory “I’m thinking of a number” conjures may help keep expectations realistic, and could even help save a few hundred dollars when the numbers don’t add up.

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The Impact of Falling Oil Prices on Mortgage Rates

Falling oil prices is one reason why mortgage rates are dropping for the first time in 6 days.

Oil is off $9 per barrel from last week, a shift that correlates to $0.23 per gallon of unleaded gas, roughly.

This drop is good news for both home buyers and "rate shoppers" -- high gas prices is partly to blame for rising mortgage rates this week.

The connection between oil prices and mortgage rates is not necessarily clear, but it goes like this:

• High oil prices are linked to inflation
• Inflation devalues the U.S. dollar
• Mortgage bond repayments are made in U.S. dollars

Therefore, inflation devalues the payments made on mortgage bonds and investors typically avoid products with decreasing returns.

So, as demand for mortgage bonds fall, prices fall, too. This is basic Supply and Demand and many people "get" how that relationship works. But what is not so well known is that when the price of a bond falls, its corresponding interest rate goes up.

The reverse is true, too, and that's what we're seeing today. Because oil prices are falling, it's reducing one of the many inflationary pressures on the economy and mortgage bonds are suddenly more attractive to investors.

Higher demand means higher prices and lower yields. Mortgages rates are benefiting from the action this morning -- they're down about 0.125 percent across the board.

(Image courtesy: The Wall Street Journal)

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Why It Will Be Easier to Get a Mortgage Approval Today Than Monday

Mortgage financier Fannie Mae is toughening its mortgage application decision-making process effective Monday, June 2, 2008.

The new guidelines will force many Americans to face higher mortgage rates, higher loan fees, or to be shut out from "prime" mortgage rates altogether.

• The new "mortgage rules" include the following changes:
• Higher income levels required for basic approvals
• Interest only loans are now considered high-risk
• Condos are now considered high-risk
• 60-day mortgage lates within 6 months are a major red flag

Not all of the changes are for the worse, though.

In the new guidelines, self-employed borrowers will no longer be viewed as more risky than a W-2 employee. This will help small business owners and commission salespeople get more mortgage approvals than in the past.

Fannie Mae agreed to honor all mortgage approvals granted prior to its changes, so if you've been putting off that pre-approval, consider talking to your loan officer before the weekend starts.

Your mortgage approval will be much more lenient today than if you wait until Monday.

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18 of 20 Real Estate Markets Show Signs of Improvement

The monthly Case-Shiller Housing Price Index is a popular and often-quoted measurement of the housing market's health. The chart above is sourced from its report published yesterday.

In 18 of the 20 largest metropolitan areas, home values declined at a slower pace than in the previously measured month. The report also showed that national home prices are down 14.4 percent from March 2007.

Unfortunately, it's the more sensation "14.4" figure that newspapers chose to report this morning. If you never went further than the headline, you'd miss a key piece of analysis.

Comparing today's market to last year's market is a lot less valuable than comparing it to last month's market. That's a better way to analyze the market's health.

If we look beyond the headline and examine the data behind it, we see that housing may still be sagging in some areas, but it's not sagging nearly as much as it used to.

(Image courtesy: Standard and Poor's)

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How Spiking Oil Prices Have Mortgage Rates In Tow

High oil prices are derailing the mortgage market this week, taking an almost-vertical path higher.

Since mid-February, prices are up by 50 percent.

Rising oil prices can be a threat the U.S. economy because with every extra dollar that Americans pay to energy companies, there is less money available for every other company that makes up our national economy.

Strangely, it comes at a time when the "other" companies need it the most -- their costs of operating are rising, too.

So, businesses are faced with a tough choice and both options prove poor for mortgage rates.

Keep prices level and suffer smaller margins (and profits). Pass higher costs onto consumers in the form of higher prices.

If profits suffer, job cuts and weak corporate spending can undermine an economic recovery. If higher costs are passed on, it leads to inflation and that devalues the U.S. dollar and mortgage bonds.

This is why mortgage rates have spiked along with oil prices this week. And, when oil prices level off a bit, we can expect that mortgage rates will, too.

Crude oil is up 1.8 percent this morning.

(Image courtesy: Wall Street Journal Online)

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How We Know That Prime Rate Will Likely Rise Before It Falls

Three weeks after adjourning, Federal Reserve officials release detailed minutes of their most recent meeting.

The April 30, 2008 minutes were released Wednesday and it affirmed traders' beliefs that the Federal Reserve will not be in a hurry to lower the Fed Funds Rate again.

This is bad news for two groups of people whose borrowing costs are tied to Prime Rate, the interest rate that is 3 percentage points higher than the Fed Funds Rate:

Homeowners with home equity lines of credit
Americans with credit card debt

Because Prime Rate moves in lock-step with the Fed Funds Rate, it, too, has fallen by 3.25 percent since September and now rests at 5.000 percent.

With the release of the April FOMC Minutes, though, it appears that Prime Rate is more likely to increase than to decrease moving forward.

If your home equity line of credit offers a "convert-to-fixed-rate" option, now may be a good time to consider switching over. Be sure to talk with your loan officer first, though -- he/she may have alternate options for you.

(Image courtesy: The Wall Street Journal Online)

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Simple Real Estate Definition: Loan-to-Value

Loan-to-value is a math formula that represents the relationship between how much a home is "worth" and how much money is borrowed against it.

Loan-to-value is often abbreviated as "LTV" and is one of the many factors that lenders consider when underwriting a mortgage application.

The math formula is straightforward:

In the LTV equation, Loan Size is the amount of money borrowed from the bank and Home Value is the lower of the home's purchase price or appraised value.

Home loans with low loan-to-value ratios are usually less risky for banks. This is one reason why mortgage rates tend to be more favorable for home buyers and homeowners when their respective LTVs are low.

Typically, a "low" LTV loan is one in which the loan-to-value is 80 percent or less. In some instances, however, 70 percent is considered "low". The cut-off point depends on the mortgage lender and the mortgage product.

On a home purchase, the one way to lower LTV is to make a larger downpayment, thereby reducing the LTV equation's numerator. Buying a home for below-market value would not reduce LTV, for example, because the purchase price would be used as the equation's denominator.

On a home loan refinance, the denominator is always the home's appraised value.

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Did You Ask: Has There Been A Mortgage Rate Reprice In The Last Hour?

Yesterday, several mortgage lenders issued three separate "rate sheets" in response to the changing mortgage market.

It was the fourth time in the last 6 trading days that mortgage lenders issued multiple rate sheets in a day, and continued the trend that started in mid-January.

The yo-yo nature of mortgage rates underscores the importance of making mortgage rate comparisons within a limited time frame.

Multiple quotes should be gathered with an hour of each other and, even then, it's prudent to ask your lender: "Has there been a mortgage rate reprice in the last hour?"

The current market volatility is in contrast to the "normal" environment of one-rate-sheet-per-day to which mortgage rate shoppers have been accustomed. But with the changing economy, we all have to adapt.

Mortgage rate quotes from this morning won't necessarily be valid this afternoon so if you're in the market for a home loan, be sure to do your shopping in a limited timeframe and don't forget to ask about the reprice.

(Image courtesy: City of Peterborough)

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Homebuilders Poised To Capture Different Kind Of Green? Not Quite Yet

A recent study of the nation’s largest publicly traded homebuilders finds that despite a rapidly emerging market for “green homes,” they have yet to fully embrace environmentally sustainable design and construction.

The study was released by Calvert Funds – one of the nation’s leaders in sustainable and responsible investing – and Boston College Institute for Responsible Investment.

Recent headlines trumpet historic lows for new home starts while homebuilders nationwide struggle to maintain the bottom line. With the green building industry seeing annual growth of as much as 30 percent, green building features for new homes present a clear opportunity for the homebuilding industry. One recent survey finds that homeowners are willing to pay a premium for greener and cleaner homes of $18,500 on average.

The survey of the 13 largest publicly traded U.S. homebuilders used four major “green” indicators: energy use; building-material use; water use; and land use. According to the report, “while every major homebuilder has incorporated some environmental and efficiency programs and products into some of their new homes, . . . the industry has a long way to go before any of the companies can truly claim to be addressing the risks and opportunities inherent in the environmental and climate change dilemmas.”

Visit Calvert Funds for a copy of the report. Much more about green building and sustainable design and construction practices can be found at the US Green Building Council’s LEED (Leadership in Energy and Environmental Design) site or the federal government’s Energy Star program.

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What Mortgage Fraud Looks Like

According to the FBI's 2007 Mortgage Fraud Report, more than 46,000 cases of suspected mortgage fraud were reported last year. This led to bank losses exceeding $813 million.

If you're looking for reasons why mortgage underwriting is measurably more difficult in 2008 -- add "mortgage fraud" to the list. Lenders now perform extra scrutiny on each home loan application to protect against additional losses on all levels.

Mortgage fraud is a federal crime and exists in two basic varieties:

1. Fraud for Housing -- Misrepresentation by a mortgage applicant for purposes of buying a home, usually related to income, assets, or debts. The applicant intends to repay the loan as agreed.
2. Fraud for Profit -- Coordinated misrepresentations by a group of people related to applicants, appraisals, loan documents and relationships between buyer and seller. The applicant does not intend to repay the loan as agreed.

Although both are illegal, Fraud for Profit is most concerning to law enforcement officials and mortgage lenders. That's because Fraud for Profit tends to incorporate multiple loans for multiple homes in a single neighborhood.

In other words, the bank's potential loss is larger with Fraud for Profit schemes.

The photo above (from the FBI report) is from a Fraud for Profit home appraisal. It indicated that the "recently renovated condominium" included Brazilian hardwood, granite countertops, and a value of $275,000.

Clearly, this is untrue.

Despite increasing 31 percent, mortgage fraud growth slowed in 2007 as law enforcement agencies and mortgage lenders increased their efforts to identify and arrest perpetrators.

(Image courtesy: Federal Bureau of Investigation)

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Back To Basics: The 5 Key Components That Make Up Your Credit Score

To those of us with more in our lives to worry about than how are tradelines look or how many points up or down our score went last month, credit matters are often complex and confusing. Sometimes, it pays to get back to basics.

Today, we feature a clip from Linda Ferrari, President of Credit Resource Corporation. Linda is an expert on credit remediation and is great at putting it plain and simple.

No matter where you go, every effective credit repair or score-building program will start with and build upon these 5 key components.

In fact, one of the easiest ways to take control of your credit profile is to start right here: review each of these 5 basic components and see how you are doing with each. You’ll be surprised what a difference addressing just a few of these can make.

For additional resources, review the links under DOLLARWISE in the sidebar at the right. To learn more about Credit Resource Corporation, visit www. http://www.creditresourcecorp.com/.

Source: LoanToolbox
www.loantoolbox.com

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Your Mortgage Is Not a Big Mac (or Why It Pays to Have a Personal Mortgage Advisor)

The typical way to order a Big Mac® looks something like this: step up to the counter, order your burger, pay and eat. Your order taker doesn’t ask whether you really need a Big Mac®. Nor does he question whether it’s the right burger given your unique dietary needs or taste preferences. And when you're done, he doesn’t give you a call to ask if you were happy with the burger, or let you know that the price just went down or that there’s a better Big Mac® on the market. It would probably seem strange if he did.

Unfortunately, many borrowers purchase a mortgage the same way they order a Big Mac®. Even worse, many loan officers are treating your mortgage transaction the same way. As a result, borrowers with plenty of equity are finding themselves up to their necks in debt and with few good options for relief. Quite often, their desperate circumstances could have been avoided had they been working with a seasoned mortgage advisor rather than a simple order taker when structuring their original mortgage.

The costs can be shocking. Consider the case of one recent client: Joe (not his real name) wanted to take advantage of today’s falling interest rates and consolidate some debt. In addition to his primary residence, he owned 2 rental properties, one of which he owned free and clear. His combined equity across the three properties was over $630,000. He was shocked to learn that due to tighter than ever lender guidelines and a lower than expected credit score, he was unable to qualify for a new first mortgage or home equity line of credit. He was a classic example of the old “house rich, cash poor” trap, and was stuck paying high interest payments on more than $50,000 in credit card balances.

Joe’s not the typical speculative investor who used 100% financing and overextended himself. He earns in excess of $100,000, bought his properties over several years and pays all his bills on time. He just failed to get the proper advice every borrower is entitled to when he structured his last mortgage.

A careful mortgage advisor would have pointed out the value of placing a home equity line of credit on his investment property. Having one would have given him the key to unlock over $300,000 worth of equity in an emergency. Unlocking it now will cost him hundreds in extra fees and interest in the form of a sub-prime loan he’ll take to access the cash.

So the next time your mortgage advisor asks “do you want fries with that?,” ask him what he means. You just might save yourself some serious heart burn.

(Big Mac® is a registered trademark of McDonald's Corporation.)

A Simple Explanation of "Credit Crunch"

News sources like to use the term "credit crunch" in describing the U.S. economy, but they rarely define what a credit crunch is and what it means for Americans.

A credit crunch is when the amount of available loans suddenly decreases over a very short period of time.

Usually, it follows a period of lending which, in hindsight, becomes known for its "easy money".

The start of a credit crunch often coincides with consumer loans starting to go bad and lenders losses starting to mount.

The realization that more losses are ahead forces lending institutions to tightening their respective lending guidelines.

• Since the current credit crunch began in mid-2007, Americans looking for credit now face:


• Higher credit score requirements on auto loan applications


• Higher fees and interest rates on credit cards


• Larger downpayment requirements on their home purchases

And now, the newest symptom of the credit crunch: the largest buyer of mortgage loans -- Fannie Mae -- has instituted a new, 580 minimum score requirement for all mortgage applicants.

As consumer delinquencies mount and the economy continues to sputter, getting access to credit will likely get tougher for every American -- good credit and bad.

And that's the defining characteristic of a credit crunch.

Source: Credit Crunch
Wikipedia, April 8, 2008
https://en.wikipedia.org/wiki/Credit_crunch

What's In Your Wallet? More Than You May Want!

If you were to stop what you were doing and give yourself 10 seconds to list everything in your wallet or purse, what would be on your list?

Cash, driver's license, credit cards, debit cards, membership ID, a receipt or two and a subway card -- that's my list.


If after making your list, you actually emptied your purse or wallet in front of you, would there be more than you expected? An unpaid bill with your address and account number on it? A credit card receipt with your card number on it? An expired ID you haven't used in months?

With one in four US households falling victim to identity theft in the last five years (FTC)--many of us are walking around with ticking time bombs in our own back pockets.

Author "Fox" of the Squawkfox blog emptied her purse recently and found she had already lit the fuse. The result of her exercise was "Ten Things You Should Never Carry in a Purse or Wallet" to avoid identity theft. Besides the obvious social security card, passport and birth certificates, some surprising items also made the list: business cards, flash drives, checkbooks and even condoms!

In addition to Fox's post, Truecredit.com and MyFICO.com offer excellent resources for protecting yourself from identity theft--from simple common sense practices to identity theft insurance.

Are you toting more than the bare necessities? Do yourself a favor and purge the purse of risky business.

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The 80/20 Rule Applies to Foreclosures

RealtyTrac released Q1 2008 foreclosure statistics and the data follows an interesting statistical phenomenon most commonly known as the "80/20 Rule".

The 80/20 Rule states that 80 percent of the effects come from 20 percent of the causes.

In this case, 80 percent of bank repossessions in the first three months of 2008 came from 20 percent of the states in the union.

Accounting for 156,463 repossessed homes nationwide:

1. California (40,023 homes)
2. Texas (14,935 homes)
3. Michigan (12,016 homes)
4. Ohio (10,299 homes)
5. Florida (10,185 homes)
6. Georgia (8,265 homes)
7. Arizona (7,956 homes)
8. Colorado (7,022 homes)
9. Tennessee (4,533 homes)
10. Indiana (4,446 homes)
11. Illinois (4,216 homes)

Overall, 0.55 percent of homes were repossessed by banks in the first quarter.

FHA Home Loans Emerge As A Cheap Alternative For Low-Credit Score Homeowners

FHA stands for Federal Housing Administration, a by-product of the National Housing Act of 1934 and now a sub-group within the U.S. Department of Housing and Urban Development (HUD).

The FHA is not a lender nor does it build homes. The FHA exists to insure lenders against loss in the event that a homeowner defaults on a mortgage.

Mortgages backed by FHA are often called "FHA loans" even though it's somewhat of a misnomer. A more appropriate name would be "FHA-insured" loans because that better describes the FHA's function.

With the FHA's guarantee, mortgage lenders are enticed to make loans on which they would otherwise pass and the explicit backing from the government holds mortgage rates low for borrowers.

FHA loans are often used by borrowers with less-than-20-percent downpayments and, therefore, tend to require mortgage insurance payments.

For FHA loans above 80%, mortgage insurance rates are 0.50% annually (paid monthly) with an up-front payment of 1.5% against the loan size and due at closing. Homeowners with 15-year fixed FHA loans, however, are exempt from the annual insurance payments.

For all homeowners, though, when the loan balance reaches 78 percent of the home's value, the annual MI is no longer required.
Mortgage rates for FHA loans are typically higher than comparable conforming mortgages but because of new, risk-based pricing from Fannie Mae and Freddie Mac, homeowners with credit scores under 680 are finding FHA a viable alternative.

And often with lower rates.

Source: FHA Loan
Wikipedia, April 1, 2008
https://en.wikipedia.org/wiki/FHA_loan

How The 84,000 Parts Of Inflation Impact Mortgage Rates

When the everyday "Cost of Living" increases, our dollars don't go as far as they used to. Economists call this inflation.

One popular method of measuring inflation is to track prices for 84,000 individual items and lump them together into a "basket". If the overall price is higher, then the economy is experiencing inflation.

If a picture is worth a thousand words, this one from The New York Times is worth at least 84,000. Broken down item-by-item, life is more expensive in some places you expected, and some places you didn't. For example, over the past year:

Gasoline: +26%
Milk: +13.3%
Children's Shoes: +4.6%
Pet Supplies: +6.8%

Aside from damaging household budgets, inflation can be especially rough on both active home buyers and homeowners looking to refinance. Inflation is linked to high mortgage rates.

This is one reason why mortgage rates have fallen since the Federal Reserve's hints last week that its rate-cutting cycle may be over; many believed that additional Fed Funds Rate cuts would stoke inflation later this year.

In the absence of inflation, mortgage rates tend to improve (all things equal).

Source:
All of inflation's little parts
Matthew Bloch, Shan Carter and Amanda Cox
The New York Times, May 3, 2008

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The Counties In Which Home Prices Are Rising

When real estate news is reported on television or in the papers, it's usually told as a national story. Unfortunately, stories like these aren't helpful for everyday Americans because real estate is not a national market.

Real estate is local.

The graph above was used by Fed Chairman Ben Bernanke in a speech to Columbia Business School earlier this week. Using data from conforming mortgage fundings, it shows the change in home prices from year-to-year on a county level.

Any county not in red increased in value.

In other words, contrary to what reporters tell us, real estate is retaining its value just fine nationwide. Aside from a few counties and states, most areas appreciated.

Graphics like this put important real estate issues in perspective. Home values may falling precipitously in some areas, but those neighborhoods represent just a fraction of the country overall.

In most regions, home values are up.

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You're Not Immune -- No Matter What Your Credit Profile Looks Like

Four times annually, the Federal Reserve surveys 84 different banks about general banking conditions.

One of the survey questions asks about current mortgage lending standards and whether they are loosening or tightening.

The chart at right is from the April 2008 survey and it illustrates what we already know: It's getting tougher and tougher to get approved for a home loan.

Some of the areas in which mortgage guidelines are tightening are well-known:

• More thorough income documentation
• Higher credit score requirements
• More "money in the bank" post-closing

Some areas are less well-known:

• More scrutiny of prior delinquencies
• Strict review of appraised values

Overall, getting a mortgage approval from a bank is more difficult than in months past and the tightening trend is expected to continue throughout the rest of the credit cycle.

No "class" of buyers is immune, either -- not even the "prime" ones.
Home prices may fall going forward but stricter mortgage guidelines means that fewer home buyers will be able to take advantage.

If you're unsure about your credit profile, check with your loan officer to see how additional restrictions could impact your ability to purchase (and finance!) a home.

(Image courtesy: Federal Reserve)

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Why Free Credit Reports Are Worth What They Cost

The ubiquity of "free" credit reporting services like FreeCreditReport.com, TrueCredit.com, and AnnualCreditReport.com have helped breed a new generation of credit-aware Americans.

Because credit ratings have more importance to everyday life than in years past, this is a welcome development. For example:

• Lenders use credit ratings to determine borrowing rates
• Insurers use credit ratings to determine premiums
• Employers use credit ratings to make hiring decision

Unfortunately for Americans, though, not all credit reports are created equal. And when it comes to actually applying for credit in the form of a new credit card or mortgage, the free reports are worth precisely what they cost.

This is one reason why home buyers should have their credit reviewed by a mortgage lender as soon as possible in the home buying process -- the free reports offered by the major credit bureaus may be misleading and incomplete.
Free credit reports are useful for identifying identity theft and reviewing active accounts, but do very little to help a potential creditor gauge your creditworthiness.

As the chart shows us, each industry's creditors has a way they like to do business and that way is the "standard" way.

(Image courtesy: The Wall Street Journal)

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