Bill McCord's Blog

There’s been a lot of babble in the media about the possibility of a Federal halt to ALL foreclosures. Being the MASS Media there seems to be 100% agreement that this would be catastrophic for the crippled Economy, and disasterously expensive for the poor Banks.

The reasons stated are that it will slow down the recovery which needs lots more honest decent folks to lose their homes.

I beg to differ.

I suspect that a moritorium would actually result in Banks putting more effort into Loan Modifications and, where not feasible, Short Sales, which cost 20% less than foreclosures but need a small element of intelligence. These options are both far less traumatic and would get the bad loans reseolved quicker.

Anyone care to guess why the Banks aren’t doing this already?

Given that the Banks caused this situation with their stupid lending practices, is it too much to ask that they give us a little help in digging out of it.

The new FICO® 8 Score is fast becoming the new standard. It has already been adopted by over 3,000 banks and other financial institutions.

But is it good news or bad news for you as a consumer?

Their are multiple small changes but the two I see as the most significant are:

1. Multiple late payments will now carry a heavier penalty than in the past. These are the 30, 60, 90 day lates that show up under “Derogatory” accounts.

2. The penalties for using too much of any credit are increased. If you have any type of credit with a maximum amount available your score will be lowered if you owe  more than 30% of the total maximum allowed. This can be your VISA or Sears card, or a Home Equity Line of Credit. NOTE.

 This applies even if it is a company credit card in your name.

The result of these changes can mean your credit score can be lowered even if you never had a late payment in your life. Too much credit availability is a no-no. This will apply most frequently when applying for a mortgage, when the bank will assume your total debt to be the maximum amount of money you can get at with just your signature.

The Federal Reserve (the Fed) took aggressive steps during 2009 and early 2010 to drive mortgage interest rates down in order to encourage more people to buy homes and revive the real estate industry.

To understand how they did this we need to know what actually controls mortgage interest rates for the home buyer.

 It is the price of Mortgage Backed Bonds (MMB’s)and NOTHING else. The bulk of these are created by Fannie Mae and Freddy Mac who buy your mortgage from the Bank or Mortgage Broker who originally made it. They then package hundreds of mortgages together as a Bond and sell it off to private investors (Pension and Insurance companies are typical buyers). The proceeds from the sale are used to buy new mortgages from the Banks and Brokers. This virtuous circle is the motor that drives the Real Estate market.

The Private Investors stopped buying when they realized that a lot of the individual mortgages inside the Bonds were badly designed (Sub-Prime) and payments from were less reliable than they had been told.

When investors stop buying MMB’s the Mortgage Lenders have no money to lend and the Real Estate Market freezes up.

One solution would have been to increase the interest rate on new mortgages in order to offer a higher rate to the investors to compensate for the higher risk. In normal times this is how the market works. In the current circumstances the Investors were not going to buy at any price.

In early 2009 the Fed came to the rescue to avoid a total shut down of the housing market. They began buying these MMB’s in huge numbers and aaccepted very low interest rates. This restored the supply of money available to make new mortgages at historically low rates, and stabilized the whole residential real estate industry.

These Fed purchases have been completed and the challenge now is to attract Private Investors back as buyers for MBB’s. They are there, but will not accept the low rates that the Fed did. Therefore the interest rates paid to get a mortgage will have to go up.

Potential Buyers need to be getting serious if they want to take advantage of these historically low rates.

 

Most Silicon Valley residents consider Cupertino schools are the reason why people will gladly spend more for their house than for a similar one in the surrounding Cities. I agree.

However, here’s a brief excert from a Mercury News Article discussing how different School Districts are handling the swinging budget cuts they are getting as the State works on cutting it’s huge deficit. http://www.mercurynews.com/cupertino/ci_15090121

“The exception to continued cuts is the Cupertino Union School District. A teacher union agreement to take furlough days, plus an unprecedented community campaign that raised more than $2 million, saved 107 teacher jobs and will preserve 20-to-1 class-size ratios in primary grades”.

Anyone aware of other school districts where all interested parties are co-operating to ensure the level of education is treated as the most important factor?

Here’s one more example of a Bank pretending to do something positive about loans to defaulting Sub-Prime borrowers, while actually increasing their payments.

While 90% of mortgage lenders resist  handing out any type of loan modifications, despite being advised and even pressured by the government to do so, Bank of America claims it is now taking the lead. The initial B of A model seeks to conditionally (read: unlikely) cut up to 30% off the principal of 45,000 home mortgages nationally. Note: This is not the same as a reduced payment.

This program is very limited in breadth and scope. It applies only to those homeowners with negative amortizing ARM’s.  The principal reduction program will not be available to underwater homeowners with fixed rate mortgages or ARMs with amortized payment schedules. B of A claims their goal is to reduce homeowners’ monthly payments to an amount equal to 31% of their household income – the parameter set by the federal government two years ago, in 2008, based on long-standing fundamentals of mortgage lending.

In practise this program will apply only a few of the loans B of A inherited when it took over Countyrywide; specifically (negative amortization loans), where the Borrower is at least 60 days late!!

A more important problem is that the proposed modifications will usually result in a HIGHER MONTHLY PAYMENT for people already unable to make the current minimal payment.

For a delailed analysis of this Public Relations Excercise check http://blog.firsttuesdayjournal.com/2010/04/lenders-attempt-to-lock-homeowners-into-paying-underwater-homes/

Speaking as a Realtor I should welcome the new California tax credit for certain homebuyers. Instead I condemn it as nothing more than a subsidy for lenders, the building industry and the brokers/agents (including me) handling their transactions.

California is a virtually bankrupt State with the 3^rd worst educational system in the Country.

To be allocating $200 million to such a program, while simultaneously imposing huge cuts on education, seems to me the height of irresponsibility.

In practice this program will chiefly benefit people who would be buying anyway, and steer them toward new construction. I don’t see this as anything Realtors should be cheering about.

Banks and Builders however are welcoming it with huge sighs of relief.

Just my opinion.

I am expecting that one of the major tax breaks in the nation will be hit by our elected representatives once they get back to running the Country (After the Fall elections).

Our dangerous levels of Public Debt are going to have to be dealt with and The Mortgage Interest Tax Deduction is an obvious and inevitable target.

Even as I type this I can hear the screams of “No Way” they’d never dare touch it.

Having lived through the British “phase out” of mortgage tax relief, and observed it’s results, I am convinced that this unfair tax break will soon join the Dodo, and our society will be the better for it’s going; Indeed, the process has already started, as limits on the total dollar amounts, and number of properties eligible have already been implemented over the past few years. Not all at one go, but little by little, so that in a few years it will, just like the smile on the face of the “Cheshire Cat,”  have totally faded away.

What we currently tell our taxpayers is that if they agree to take on one particular type of debt ( a mortgage) we will lower their taxes. If not we will have to increase their income taxes to make up for what we are losing to their more affluent fellow citizens i.e. Mortgage holders.

Is it good to have a high level of home ownership YES. Should it be done by this type of Social Engineering (Socialism) NO.

Could it be posible that one or more of our currently troubled States might be the 1st to take this path?? Perhaps the one that put in that other masterpiece of tax malpractice, Prop 13.

Rep. Maxine Waters [D-CA35] recently introduced H.R. 5072,The FHA Reform Act of 2010 which would impose hugely increased monthly payments on anyone buying a home with an FHA insured loan. This is a large majority of all 1st Time Buyers.

Already, effective from April 5th, the upfront Mortgage Insurance Premium was increased from 1.75% to 2.25%, (a 29% increase).

Now, in a further attack on the 1st Time Buyer, this misguided lady proposes a 300% increase on the ongoing monthly Mortgage Insurance payment.

To understand the impact of this consider a new $300,000 purchase with a 30 year fixed FHA loan.at 5.5% interest rate. The monthly payment will go from $1,804 up to $2,051. An increase of 12%.

Put another way; If the maximum you could qualify for was $300,000 before, it would now be only $270,000.

At one fell stroke this bill would eliminate an enormous number of willing buyers at the bottom end of the market.

When you consider that each 1st Time Buyer potentially creates a move up Buyer we can’t afford  this kind of interference in this very fragile recovery.

Here is another dynamite program for 1st time home buyers.

Details here are for Santa Clara County but other Counties and Cities also operatate these programs.

The County of Santa Clara has been awarded a new MCC Allocation in the amount of $3,031,944.

This award should serve approximately 70 Households.

MCC Applications will be accepted beginning February 12, 2010, until the allocation is depleted.

MCC PROGRAM: The Mortgage Credit Certificate Program is available for first-time home-buyer’s purchasing their first home in participating cities in Santa Clara County. The Mortgage Credit Certificate Program gives first-time home-buyer’s a federal income tax credit of up to 15% of the interest paid on their first mortgage loan each year the home-buyer keeps the same mortgage loan and lives in the same property as their primary residence.

The Maximum Income Limits for 2010:

Effective February 12, 2010:

1 or 2 person household = $102,500

3 or more person household = $117,875

The Maximum Purchase Price Limits are:

Resale/Existing Units = $570,000 and for,

Newly Constructed Units= $630,000

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 payment bills such as Mortgage, Credit Cards, Car loans etc will lower a person’s FICO score to drop. Paying bill 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 record of 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. All such enquiries will be counted as just one.

http://www.myfico.com/CreditEducation/