Bill McCord's Blog

 FICO scores measure the risk that an individual will default by evaluating their history of credit management. The exact formulas used are top secret but FICO has given the following components and the approximate importance of each:

35%- Payment History. Late payments of bills such as Mortgage, Credit Cards, Car loans etc will lower a person’s FICO score . Paying bills as agreed over time will improve the score.

30% – Credit Utilization. The ratio of current revolving debt (Credit Card and Charge Account balances) to the total available credit (Credit Limits). Consumers can improve their FICO scores by paying off debt and reducing balances to less than 50% of the available credit. Closing existing revolving charge accounts can have a negative effect on this ratio, and lower your score. Before closing accounts be sure to do some more research, or get qualified advice.

15% – Length of Credit History. Time improves FICO scores without any action other than paying all bills on time.

10% – Types of Credit Used. FICO scores are improved by having a good history of managing multiple types of credit (Installment, Revolving, Consumer finance etc).

10% – Recent Credit Applications. Multiple requests to obtain new credit over a short period of time can hurt an individual’s FICO score. However, individuals shopping for the best rate for a Mortgage or Auto Loan over a short period will not see any negative impact on a FICO score.

For more detail on this and other Credit Related questions the following link is a Gold Mine of factual information.
 http://www.myfico.com/CreditEducation/

You probably didn’t see the reports that Goldman Sachs is talking to Fannie Mae about buying, at a discount, $1 billion worth of low-income housing tax credits from the government-controlled Agency.
Fannie Mae can’t use the credits because you have to actually earn money to use such an off-set against profits.
Goldman Sachs on the other hand is making profits hand-over-fist thanks in part to the Taxpayer Funded TARP program.
For the nation’s tax collectors the issue might boil down to this:
if we let Goldman buy the tax credits, that means a Wall Street firm that received Bail Out money, will be able to lower their taxes at a time when Uncle could really use the money.
It’s worth remembering that TARP funds were intended to help the Banks re-start making loans to individuals and small business’s.

The Administrations well meant efforts to make it possible for many homeowners to avoid foreclosure has stirred up a hornet’s nest among some media commentators.

The Plan described at http://www.makinghomeaffordable.gov/ uses up to $75 billion to provide incentives to holders of FANIE MAE and FREDDY MAC loans to work with Borrowers to refinance, or modify existing problem loans, rather than simply go ahead and foreclose.

This is a classic version of the glass ½ full, or ½ empty. Typically, in our current exclusively partisan media, the answer is dictated solely by political affiliation regardless of the facts.

This is unfortunate because there are legitimate reasons for supporting, opposing, or, better still, improving the current process.

One the one hand it is a legitimate effort to try to help Joe Public get through a situation brought about by failures in our economic systems. Given the Trillions of dollars being ploughed back to the very people who caused this situation, the $75 Billion allocated to this program is peanuts.

On the other hand there is a valid argument to be made that subsidizing refinances, or modifying problem loans, is simply putting off an inevitable final default. This can often hurt the very people it purports to help by having them use up scarce funds in a doomed attempt to save an impossible situation, rather than simply give the property back to the Lender and getting  on with life.

The December report on the status of this program provides ample ammunition for both schools of thought, and the regulators have shifted emphasis to try to deal with the problems showing up.

The summary shows that 728,000 loan modifications are already in the required trial phase. Unfortunately only 31,382 have completed that phase and have become permanent, saving homeowners an average of $550 per month. The low rate at which Trials become Permanent  is a serious problem raising concerns that a significant number of these modifications are simply allowing the Banks to delay acknowledging the number of bad loans on their books and to avoid taking the losses on to their Balance Sheets.

If that is true then the inevitable result will be a longer period of foreclosed properties coming to market as these failed modifications fall apart.

As with most things there is not a simple answer, but on balance I come down on the side of giving the program a fair shot. This is based mostly on my view that given the countless billions we have poured into supporting the financial institutions that caused the problems,  a little effort to give similar assistance to the victims is not unreasonable.

This is a great time to refinance into a long term fixed rate mortgage, but it’s not always obvious how to do it in order to ensure the best combination of interest rate and costs, specifically Points. 
For example, the lowest rate is not automatically the best deal. This depends greatly on how long you plan to stay in the property.
My rule of thumb is if you expect to be moving within 5 years go for the lowest cost you can get and accept a higher rate for that short period.
If you expect to live there for more than 5 years pay some of the costs up front in order to get the lowest rate for many more years.
Next, take your preferred strategy to 4 different possible Lenders:
1. Your current Lender.
2. A local Credit Union.
3. A good Mortgage Broker.
4. A Major retail Bank i.e. BofA etc.
Ask each to give you a quote based on your situation. If you are not asked how long you plan to stay  in your  house get up, walk away, and go look for a professional.
One more thought. If tempted by an online or other mortgage advert, good luck, but be wary of the very common bait and Switch tactics often used in this business.
And last but not least, be aware that APR is a very flexible statistic which can be manipulated and interpreted in numerous ways. It is not a valid way to sellect a mortgage.

In the world of smoke and mirrors called “The Finance System” the word PRIME has two very different meanings.

One is PRIME RATE (the interest rate banks charge their best clients. Normally 3% above Fed Funds Rate.

The other is SUB-PRIME to describe a mortgage (SUB-PRIME MORTGAGE) that should never have made. Hence the “The Sub-Prime Mortgage Crisis“.

In the real world occupied by most of us “Ordinary Folk” the term Sub-Prime should not be linked to a Mortgage; It actually refers to the Borrower of the Mortgage i.e. The person whose Credit, Income, and/or Cash for down payment is not good enough to get a ”Prime” Mortgage. Hereafter referred to as The Sub-Prime Borrower.

This person has always been with us. Until the unbridled greed and avarice of Banks and Wall St intervened with their “No Possible Homebuyer Left behind” programs these folks rented until such time as their financial situation allowed them to qualify for a sensible mortgage.

Let’s be clear on this. The Sub-Prime Mortgages were and are High Risk loans made to High Risk people. These loans could only be made if the Bank knew it could sell them on to a 3rd party before the inevitable late payments started. This way the Banks got their profit with effectively no responsibility for the future performance of the flakey loan.

It was effectively a game of “Pass the Parcel in a Bagdad Pub”.

By the time these loans started going bad they had spread throughout the Worlds Financial systems leading to the current situation so often referred to as the Sub-Prime Mortgage Crisis.

At the end of the day we have a large number of Banks and other Wall Street hot shots who  made enormous profits by selling what they all knew to be an unstable product to an undereducated public.

This is a recurring story in our history.

If you don’t want to become a victim of the next wave then you need to get educated in how the system really works before you meet the next Bernie Madoff.

For some thoughts on how you might do this check out my posts from 04/25/2008 “Kick Start the Kids”.

A small but very welcome glow of sanity from a historically well run Bank.

After acquiring $117.3 billion dollars worth of option adjustable rate mortgages (ARMs) in its acquisition of Wachovia last year, banking giant Wells Fargo is now practicing a rare but effective loan modification strategy: the cramdown.

Through September of this year, Wells Fargo has forgiven an average of $46,000 on approximately 43,500 high-risk loans in its portfolio. The typical debt reduction is around 20% of the loan principal, though in rare cases Wells Fargo has cut as much as 30%. Reports put the six-month default rate of loans modified by Wells Fargo at 15-20%, less than half the current rate of 40% suffered by the rest of industry’s extend-and-pretend modifications.

Debt reduction is only one of many tools Wells Fargo is using to aid its distressed borrowers, and is currently not being used as a blanket fix for all underwater homeowners.

My Opinion: While this is a national story and certainly only a very small slice of the current problem pie, a mortgage lender taking into account the need for principal reduction is a big acknowledgement that the underwater state of many homeowners’ mortgages require this type of treatment. This is something other lenders and Congress need to understand when considering the mortgage quandary. Continuing to “kick the can down the road” with “extend and pretend” modifications will do nothing to solve the massive negative equity problem. The fact that the small glimmers of hope — in the form of cramdowns — are coming from a lender and not the regulators really speaks to the hands-tied, head-buried-in-the-sand mentality which must be overcome if we are to move ahead with a recovery.

Re: Wells Fargo Cuts as Much as 30 Percent in Principal from the Wall Street Journal

An increasing number of Listings are stating that they will not accept offers from FHA or V/A Buyers.

When questioned the Agents usually claim that these loans impose additional costs on the Seller. This was true up till a few years ago, but no longer. In fact, they have a huge advantage in today’s world.

 When questioned they claim that these loan impose additional costs on the Seller. This was true up till a few years ago, but no longer. In fact, these loans have a huge advantage in today’s world.

The following explains why this is so:

First a little clarification regarding current appraisal procedures is required.

1. As of July 2009,  for all Conventional loans, the selection of the appraiser is governed by the much despised HVCC (Home Valuation Code of Conduct) guidelines from Fannie Mae. These require that no-one involved in the transaction has any control over the appraiser chosen. This must be done by a 3rd party Appraisal Management Company (A.M.A.) who will collect the full cost of the appraisal plus some profit for themselves. There are no requirements regarding the qualifications of the chosen appraiser except for having the required state license. As the A.M.A. gets to keep the full amount of the appraisal fee, they have a strong interest in giving the job to the lowest bidder regardless of where they live and work, or whether they have any knowledge of the market conditions where the property is located. In recent times I have had one appraiser come from Tracy to value a property in the Hayward Hills, and another come in from Benicia to Tracy. In both cases they brought in a valuation 20% lower than the agreed purchase price and blew the deal away. Both prpoerties went back on the market and closed with FHA Loans using a local appraisor.

2. For Government Loans (FHA, V/A) the appraiser can still be selected by the Lender, The agent, or the Buyer as has always been the case. This ensures that the appraiser will be local to the property and therefore have current knowledge of the neighborhood in which the property is located.

Result is that the appraiser can be selected on their merits and qualifications, rather than based on how cheaply they agree to do the job.

NOTE: There are a limited number of circumstance where FHA & V/A loans cannot be used due to the short time between the last time the property sold and the current date. These a typically “Flippers” bought at foreclosure sales, quickly updated, and put back on the market for an easy profit.

This situation is currently the subject of Bills in both houses of Congress and will most certainly result in new guidelines resulting from law, not in response to pressure from one politicslly motivated State Attorney running for Govenor.

The rumours and speculation surrounding this Bill are getting increasingly shrill and uninformed ranging from:

1. Extension of the credit is a done deal and will possibly even increase the amount to $15,000.

2. It will be changed to apply to deals that are in escrow before the current Nov 31st deadline and close within 60 days more.

3. It’s dead as of Nov 31st.

4. Etc, etc,etc.

The best site i’ve found for intelligent discussion of this is http://www.californiateachersandemployeeshomeloanprograms.com/update-8000-homebuyer-tax-credit-extension-october-2009/

Scott is a very diligent researcher and reporter on this and more generally 1st time buyer programs.

If you live in Silicon Valley and are thinking about buying your 1^st house this is probably the best ever time to do so. 

1. Santa Clara County has a new 1st time buyer program which gives a 30 year, $40,000, Down Payment Assistance loan at 2% interest, with no payments required for the 1st 4 years. After 5 years the interest rate becomes ZERO. The maximum total interest over the life of the loan can never exceed $3,200. THIS IS FANTASTIC. 

2. 90% of the Cities in Santa Clara County have one or more special 1^st First Time Buyer programs to help get a foot on the Home Ownership ladder. 

3. Federal Government and the State of California have several different 1^st Time Buyer programs. 

4. Many of these programs can be combined to provide affordable ways for the majority of people who at present believe they can’t afford to buy. 

5. The Santa Clara County Association of Realtors has a new program which will provide 6 monthly payments of up to $1,500 per month for a Home Buyer who loses their job. 

6. The IRS is giving an $8,000 Tax Credit to any 1st time Buyer who buys before Nov 31st this year. This is a CREDIT not an allowance. It means that even if total Fed Tax was $6,000, not only would that be wiped out but you would get an additional $2,000 rebate. That’s an $8,000 gift from Uncle Sam. 

In addition to all this Mortgage Interest Rates remain at historically low levels, while home prices have come down substantially from the peaks of 2007. 

There will never be a better time than this for that 1^st purchase.

Government is often criticized for putting all its efforts into helping business and nothing for the ordinary citizen. However, when they do put programs in place we have a tendency to ignore them.

Here’s just one example:

A 401-K plan usually involves an employee putting up to 6% of their salary into a company sponsored program. Typically the employer increases that contribution by adding in up to 50% of what the employee puts in. (this is increasingly being reduced but is still at least 25% in most cases). This means the employee is getting between 25% and 50% interest on their savings, plus their contribution is exempted from Income Tax for the year it is made.

So how come only 7% of people eligible for this benefit actually use it up to the max allowed? (Source Putnam Investments).

How come 20% of participants in these plans have actually reduced the level of contribution during the past 2 years?

My guess is that a large number of these people would like to maximize the use of these plans but don’t know how it could be done.

I also suspect that a large percentage of them could solve the problem with a mortgage better suited to their circumstances.