Born Again: When will you be eligible for a mortgage after a foreclosure or short sale?

Did you miss the fact that foreclosure filings were up 71% in the third quarter?

Which makes it a good time to remind everyone of the rules that govern when and how you'll be eligible for a mortgage after you've been foreclosed, surrendered a deed, or negotiated a short sale.

For borrowers with a foreclosure, short sale, or deed in lieu of foreclosure on their credit history, the following timelines apply before they'll be eligible for a conforming, conventional mortgage (Fannie Mae/Freddie Mac):

• Foreclosure: 5 years from completion date, minimum 680 FICO and 10% down for 7 years, investment property, second homes, cash out refinances not allowed for 7 years.

• Deed-in-Lieu of Foreclosure: 4 years, at least 10% down required for 7 years.

• Short Sale: 2 years.  4 years for Freddie Mac

For what it's worth, under FHA rules you have to wait two years before you are born-again.

Goes without saying that if you do wind up with a foreclosure (or one of it's close cousins) on your record, unless you handle the period after the foreclosure properly by re-establishing credit - no easy trick with a serious derogatory on your record - and accumulating a sizeable down payment, you are likely to be renting for a long, long time.

Or, another way to look at this: At some point in the next five years, buying may look really cheap, and you'll be locked out of the game.

10/24/08 at 09:36 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Credit, Fannie Mae, Foreclosures, Freddie Mac, Short Sales

As Home Prices Fall, Costs of Financing Continue to Rise

Can we talk about risk based pricing?

In the simplest of terms, risk based pricing is a system where the interest rate and/or fees paid for a mortgage vary based on the characteristics of both the borrower and the loan itself.

Some borrowers are more likely to default.  Some loan types, such as those with lower down payments, cost the lender more when they go bad. It really is a straightforward system designed to equitably align the costs and rewards for banks and borrowers by assigning a rate that, as accurately as possible, reflects the risk of default.

It's a nearly universal practice in mortgage lending, and whether you know it or not, the rate you are carrying right now probably included at least one adjustment to the rate or fees you were charged.

There are, quite literally, dozens of variables that can impact the price, or rate on a given mortgage, but the two most important are loan-to-value (equity in the home), and credit score.

Generally speaking, the higher the credit score, and the lower the loan-to-value, the better your rate.

We bring all this up because with defaults and losses on the rise (Freddie Mac lost $821 Million dollars last quarter) Fannie Mae is changing their risk based pricing fees, or "hits."  At Fannie, these are known as LLPA's or Loan Level Price Adjustments, and this is actually the third such adjustment since November of last year.

Take a look at this graphic (click to biggify), straight from a document called Updated Adverse Market Delivery Charge and Flow Business Pricing Requirements, which was released on Monday, right here.  We can think of no better way to illustrate how down payment and credit score interplay to drive the rate you actually get.

We've marked this up to illustrate what has changed since the last adjustment by Fannie.  Some are for the worse (in red.)  Some were for the better (green).  The negative negative numbers are credits, positive numbers are fees.

It's important to understand that the items in the chart are not adjustments to the rate, but to the price of a loan at any given rate. 

Adjustments can be paid (OR credited) in a lump sum, up front, as part of your closing costs, or as a slightly higher (or lower) rate. 

Here's a prime example of how the specific characteristics of the loan, AND the borrower can impact the cost of financing.

For example, if someone with a credit score of 685 puts 15% down on a purchase, there is a .5% price adjustment.  This means you can pay .5% of your loan amount up front, or take a rate that is .125% higher.  If that same person had a credit score of 675, the adjustment balloons to 1.5% of the loan amount, or .375% higher in rate.

On a $200,000 loan, that's a difference of $2000 up front, or $38.00 per month over a 30 year term.

The moral of the story: Even as home prices fall, the cost of financing those homes will steadily rise, especially if you have imperfect credit and lack a big down payment.

08/07/08 at 01:18 PM Permalink | Comments (1) | TrackBack (0)
Filed Under: Credit, Financing Options, Freddie Mac, Interest Rates, Risk Based Pricing

Pain for Prime Borrowers: Fannie Mae, Freddie Mac to Hike Fees; or How a Three-Point Difference in Your Credit Score Could Cost You Thousands.

Back in November of 2007, Fannie and Freddie (the two GSE's, or "Agencies" under whose guidelines some 70% of mortgages are underwritten) announced additional fees which would be tacked onto mortgages for borrowers with credit scores below 680 as of March 1st.  We reported on this here.

Since then, credit markets have deteriorated further, so the 'Agencies' are hiking these fees, or pricing "hits," across the board. By June 1st (though many lenders will implement these fees well in advance of that date) even borrowers with FICO scores over 700 - once considered rarefied air - will start feeling the pain.  See the chart below from Fannie Mae. See the Announcement from Fannie here [PDF!]

Click to Biggify

The graphic above may be Greek to many of the civilians reading this blog, so lets use the chart to illustrate the impact with a few examples:

Assumptions: You are buying a 250,000 home, with 20% down, so your loan amount will be $200,000, and the prevailing 30 year fixed mortgage rate is 6%.  Goes without saying you can document income and the down payment is yours.

Scenario 1:
Suppose you have a credit score of 721.

Loan Amount:   $200,000
Payment (P&I): $1199.10

Scenario 2:
Now suppose your credit score is a still very good 718 - just three points lower than the previous example. here's where it gets a little tricky - now you have a choice.

1.  You can either pay an additional .5% of the $200,000 loan amount ($1,000) to obtain a 6% rate.
2.  Or, you can accept a rate that is .125% or so higher, in lieu of the up-front fee.

Loan Amount: $200,000
Payment:        $1199.10 (+ $1,000 up-front)
                      $1215.22  (6.125% rate)

So at the end of the day, those three points in credit score will cost you $1,000 bucks up front, or an additional $16.00/mo (or $1920.00 over the next ten years)

Scenario 3:
Suppose your credit score is 679. Again you have a choice between an up front fee, or a higher rate, but the up front fee is now 1.25%, due to your credit score:

Loan Amount: $200,000
Payment:        $1199.10 (+ $2500 up-front)
                      $1247.74 (6.375%)

--------
                     
As you can see, even what were once considered safe, rock-solid credit scores are starting to feel the pinch of the credit crunch; and though rates seem to be on a (very choppy) downward trajectory for 2008, you'll need to have a darn good credit score and a healthy down payment to take advantage of them.

This should also be food for thought for those trying to time the real estate market  - in particular the "fringe" borrowers with less than 10% down payment, or those with less than 10% equity who are holding out for "better rates" to refinance.

Though fundamentals suggest property values will  continue to fall, there is no guarantee that cheap money (or any money, for that matter) will be available to finance them.

03/17/08 at 01:44 PM Permalink | Comments (4) | TrackBack (0)
Filed Under: Credit, Credit Crunch, Financing Options, Interest Rates

Behind on The Mortgage: What is a Delinquent Borrower to Do?

We've posted this once before, but given the number or search queries, emails, and phone calls we are getting asking the question posed in the title, we thought it was worth re-posting a summary of David A. Smith's excellent advice on what to do if you are, or are in danger of, falling behind on your mortgage payment.

Read the whole thing, there is a lot of insight on WHY these steps are important, but here are the high points, quoted directly, from the piece:

1. Announce the problem — in writing. Don’t wait for the lender to come calling — once you know you’re going to miss a payment or two, tell your lender this.

2. Come clean on your financial resources. When queried about your circumstances, come clean....Most people who can’t pay hide assets, fib about their situation, or at the very least hem and haw. Few things create more credibility than owning up to the situation — and credibility is one of your most precious assets.

3. Figure out what you can pay. Even if you can’t make full payments, you can make some partial payment. Figure out what it is. Tell the lender that.

4. Make regular partial payments. Even if you can’t pay 100%, pay something — every month. And make it the same amount. That regularity is soothing to the lender, and establishes a baseline that adds to your credibility.

5. Keep detailed records of everything. Not only should you keep copies of all your correspondence to the lender, keep the lender’s back to you. Judges and others are very sympathetic if you come in waving a sheaf of communications where you show you were a responsible borrower, trying to get the lender’s attention, and the lender just kept sending you form notices.

6. Find a real person inside the lender. Companies are abstract entities; job titles are uniforms we put on each morning and doff each evening. In between, a company is represented by individuals...Your goal is to puncture the anonymity barriers...

7. Propose rescheduling your debt, including lowering your mandatory payments. You’re delinquent, you can’t pay everything you owe, but you’re paying something. You’re seeking a piece of paper, signed by you and your lender, that specifies a breathing interval.

8. Explore refinancing. Loan payments have two elements, interest and principal. Both of them can change — meaning lower — in a refinancing.

9. Offer to chip in new equity. A lender facing a bad loan assumes that (a) the property will be her only good collateral, and (b) before she can get to the collateral, she’ll have to spend a bunch of money getting the borrower out of the way. If a lender thinks there’s new equity capital that can come in — from family, friends, or government, in short, from anywhere — that’s an automatic differentiator in your favor.

10. Look for financial help. Fortunately for the United States, we have a widely distributed network of assistance providers, particularly for homeowners. Credit counselors are one starting point; so are federal, state or local housing finance agencies all over the country.

11. Sell the property. Eventually, and sometimes even when all the preceding things are going on, you may wish to list the property for sale. If you do this, only good things can happen: You may get an offer that covers your debt and allows you to recoup equity, If you are marketing the property and you can’t get anyone to take it off your hands, that too is great evidence you can use to persuade your lender to give you a workout respite.

12. Consider bankruptcy. Sometimes nothing works. Sometimes the right answer, financially ugly though it may be, is to let the property go. However, as I wrote 18 years ago in my second bout with workouts (my first was in 1976), there are some unusual times when bankruptcy is the best survival strategy.

What's a Delinquent Borrower to Do? [AHI - David Smith]

01/04/08 at 11:48 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Consumer Protection, Credit, Foreclosures, How To, Personal Finance, Sub-Prime

The Price of Average Credit just Went Up

As you can see in the chart at right, the mounting losses at Fannie Mae and Freddie Mac, the two government sponsored enterprises who buy and guarantee 40% of US Home loans, have punished stock prices in the two mortgage giants.

And the buck won't stop at investors portfolios.

Beyond the meltdown in share prices, the impact of these losses will soon be felt by the average consumer, when Fannie and Freddie begin charging a hefty new premium for borrowers whose credit scores fall below 680 - a solidly average number. Take a look at the table below:

Quick Translation: "Price increase to Discount" means additional up-front "points," as a percentage of loan amount required. LTV = Loan amount divided by sales price. Ex: 20% down = 80% LTV

In other words, if you are buying a $350,000 property, putting 20% down ($280,000 total loan amount) with a 659 credit score, you will be charged an additional 1.25% or $3500, for the same rate as a borrower with a 680+ credit score.  Though this premium can be absorbed by taking a rate .375-.5% higher (in lieu of the up-front charge,) it will still result in quite a hit for those with mostly average credit scores.

This is a big deal precisely because credit scores between 620-680, though not perfect, were fairly easy to lend upon even with a modest down payment, and rarely resulted in higher rates or fees.  Though timelines will vary, expect most lenders to implement these changes on loans closing after Dec 31st 2008 - right around the corner in real estate time.

Raising one's credit score can take 60 days or more, so if you have not been taking an active role in managing your credit score, start now.  The price of average credit just went waaay up. 

Ready to turn over a new credit leaf? Here's a couple of resources:
· AnnualCreditReport.com: The only source for truly free credit reports (though you will pay for the score.)
· My Fico: Loads of great information and credit management tools, straight from the horses mouth, Fair-Isaac. 

Mortgage Giants Fuels Worries with Steep Losses [WSJ]

11/21/07 at 11:50 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Credit, Financing Options, First Time Buyer, Industry News, Interest Rates

Graphic: Prime vs. Subprime Late Payments

Just in case you've been living under a rock and have some lingering doubts about how poorly sub-prime home loans have been performing, and how utterly, insanely, lax lending standards had become in the sub-prime space, take a look at the graph at right from the WSJ.

That is one wicked looking curve, that has gone vertical, and shows no signs of stopping.  Ugly Stuff.

That said, we did find the performance of prime loans (you know, the ones made to people who actually had some prayer of repaying) encouraging.  Apparently well within historical norms.

In other words, everyone knows sub-prime is junk, but if prime delinquencies start to spike dramatically, look out.  Then we will have an actual housing crisis on our hands.

11/19/07 at 02:10 PM Permalink | Comments (2) | TrackBack (0)
Filed Under: Credit, Industry News, Reports & Research, Sub-Prime

How To: Weave Your Way Through Sub-Prime Trouble

One of our very favorite blogs on the planet is David Smith's over at the Affordable Housing Institute, who unpacks some of the more complicated topics in real estate and housing finance with a unique and entertaining elegance. 

Case in point, his recent writings on subprime.  The whole series is worth a read (and linked below,) but we'd like to highlight one particular point addressesing what to say when the delinquent payments mount, the phone rings, and it's your servicer/lender wondering "what went wrong." 

The first answer that occurs to many is "it was the [lender/broker/originators] fault," and whether true or not, this may be a big mistake for troubled borrowers.

Now, the media, politicians, and social justice orgs absolutely love the "duped borrower" story - they are in fact the central plotline to most of the current and proposed predatory lending legislation at the State and Federal level - and because these stories make for compelling drama, headlines, and congessional testimony (the stock and trade of the aforementioned) they are almost universally believed.   

The problem is, the servicer - the only party that has the power to provide relief - cares little about that particular brand of drama.  Mr. Smith explains:

“I was duped.”  “They never showed me that schedule.”  “They told me not to worry about it.”  “They said I could refinance.”  All these defenses are offered up. 

The thing is, they’re so easy to claim and so hard to prove that they usually fall on ears made deaf by overuse.  The loan originator who’s accused of deceiving you is conveniently gone, and there’s no way to verify your story.  Professionals learn to doubt melodrama: they presume you’re not the martyred saint you’re portraying.

Stories that sound too good and can’t be disproved are suspect.  Worse, 99 times out of 100, the written documentation is against you: “Isn’t that your signature?”

Use this argument only if you can prove it.  Otherwise you’re risking your personal credibility on a story that the lender will already have heard dozens if not hundreds of times.

In other words, any reasonable workout plan with a servicer absolutely, positively, depends on their belief that you want to and will make good if given the chance.  So don't flush your credibility by telling them a un-provable story - even if it is true, they will assume the worst of you unless you can back-up the claim.   

Again, the whole series is a must read for anyone wanting to understand the issues, challenges and potential solutions to the gathering storm of delinquencies and foreclosures the real estate industry (and our economy) faces.
AHI on Subprime/Lending:
How a Lender Thinks [AHI]
What's a Delinquent Borrower to Do? [AHI]
Subprime: Why Are You in Trouble? [AHI]
Subprime: What's the Best Way Forward? [AHI]

10/25/07 at 12:20 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Consumer Protection, Credit, Foreclosures, Fraud, How To, Real Estate Negotiation, Sub-Prime

Consumers, Well Acquainted with Mr. Frying Pan, Rush to Meet Mr. Fire

If you have any notion that our collective national jones for borrowed money at any cost and nearly any terms will be behind us once the market, the government, et al. deals with the mortgage mess, you might want to re-think things.

For instance: You might assume, super-smart blog readers that you are (you are!), that the consumer, faced with stagnant incomes, flat-to-declining home values, rising interest rates, and tougher credit standards, would curtail spending.  Right?  Well...not so fast.  Instead, it appears that consumers less able to tap home equity to feed spending habits are turning to credit card debt:

As Mortgage Equity Withdrawals decrease....(click for big)

The graphic above represents MEW, or Mortgage Equity Withdrawals (cash out refinances, Home Equity Loans, etc.) [Source: Calculated Risk, Dr. James Kennedy)

Credit Card Balances are Rising...

Source: Wall Street Journal, Credit Crunch Moves Beyond Mortgages, August 22nd, 2007
http://online.wsj.com/article/SB118773982869404682.html

Talk about frying pan to fire.  And, of course, with average credit card interest rates at already levels (13-18%) that make the ugliest sub-prime loan on the planet a bargain, Credit Card Issuers are raising rates:

Some lenders, such as USAA, are nudging up credit-score requirements across their auto loans, credit cards and personal loans. Bank of America Corp. and Capital One Financial Corp. recently raised fees and interest rates for some of their credit-card customers.

In part because of, you guessed it, rising mortgage defaults:

Nationally, credit-card delinquencies are relatively low at 4% and haven't risen significantly in the past three years. However, in certain markets, especially those that have been hit hard by a decline in home values, delinquencies have spiked higher.

Might it just be that the "problem" is not mortgages, or credit cards, or [insert any other way to borrow], but the fact that for far too long undisciplined lenders have been catering to undisciplined borrowers, across the entirety of the lending universe (from hedge funds down to your neighbor.)

It's like a trillion dollar game of chicken, and we have a hard time imagining how it ends well for many of the participants.  While we'd like to be able to say the undisciplined lenders and borrowers will get their respective comeuppance, many of the disciplined will be caught in the undertow.
Credit Crunch Moves Beyond Mortgages [WSJ]
Advance Q2 Mortgage Equity Withdrawal Estimate [CR]

08/23/07 at 11:27 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Consumer Protection, Credit, Economy, Interest Rates, Personal Finance, Sub-Prime

Quote of the Day: IndyMac CEO Mike Perry

"...right now, other than the GSEs and Ginnie Mae….the private secondary [mortgage] market is not functioning."

The private secondary mortgage market is where nearly every Jumbo, ALT-A, and Sub-Prime loan is sold after it is created (In other words, after you take out a mortgage the bank, lender, or broker then sells it on the secondary market,) and there are, apparently, no longer any buyers for these loans.  Like any business, if the buyers go away, so does the product.

How big a deal is this?  Hang on.  According to a study by Credit Suisse, these loans accounted for 52% of all purchase transactions in 2006.  Read that again: The types of loans used to purchase 52% of homes in 2006 are now, for all practical purposes, unavailable to new buyers (though things may stabilize, and some lenders may continue to originate in this space and keep the loans in portfolio indefinitely.)  Might this effect the RE Market?
Email from Mike Perry, CEO, Indymac Bank [The IMB Report] 

08/02/07 at 03:31 PM Permalink | Comments (1) | TrackBack (0)
Filed Under: Credit, Industry News, Sub-Prime

Banned in Minnesota Today: Trigger Leads

One of the better pieces of legislation to come out the East side sausage factory this year is a law banning the sale of what are known as "trigger leads" (more on this here, and here.)

[The] new law prohibits consumer reporting agencies or any other business entity from selling or exchanging with a third party information that a person’s credit history was requested in connection with a mortgage loan application.

In other words, until today, any time you applied for a mortgage, or had a mortgage lender run your credit report, that information, along with whatever other data was available in your file (credit score, current address, telephone number, loan balances, etc.)  was immediately sold [Edit for Clarification: Sold by the credit repositories - Experian, Equifax, Trans-Union, not your lender, who has no control over this], over and over again, to all manner of sketchball lenders from coast to coast, which would then use that data to solicit you for a loan, often using shady tactics ("your lender asked us to call you because our rates are better" for instance.)

Though we have always recommended shopping for a mortgage lender to work with, this should be done on your terms, rather than having your data indiscriminately sold to whoever will write the check.  Trigger leads are a breach of consumer privacy, and absolutely one of the more onerous practices the credit industry engages in.  Good law.
Mortgage Privacy Law Summary [leg.state.mn] 

08/01/07 at 09:39 AM Permalink | Comments (2) | TrackBack (0)
Filed Under: Credit, Industry News, Personal Finance