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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