Bill McCord's Blog

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 The bulk of these are created by Fannie Mae and Freddy Mac who buy your mortgage from the Bank or Mortgage Broker who originally made it.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.

 

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/

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.

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/