Mar 17th, 2009 By Andres Navarro
Fair Isaac Corporation’s (FICO) newest risk assessment tool will be shedding more light on your credit history, and that could make qualifying for a mortgage even more challenging. The new tool, which is called BEACON® Mortgage Score, is designed specifically for mortgage lenders and is expected to be the most robust and accurate tool for measuring mortgage risk and financial management / responsibility. Sounds impressive, doesn’t it? It is, if you’re a mortgage lender. However, if you’re a current homeowner looking to modify your mortgage or if you’re a homebuyer in the market for a home and need to qualify for a mortgage loan, BEWARE! The BEACON score makeover means you’ll need to make changes in how you handle your financial obligations in order to qualify for a mortgage product you desire.
The new BEACON® Mortgage Score tool will have some features of previous BEACON score products, including maintaining the current scoring table, which goes from 300 – 850. It will also maintain the current policy on how inquiries affect your credit score. What’s new is that now, in addition to the already existing reason codes used to explain information of your report, there will be an additional 15 more codes. However, the biggest potential challenge for those of you trying to qualify for, refinance, or modify a mortgage loan is the fact that even more data will be used to scrutinize your mortgage loan credit worthiness; unfortunately, what type of "additional data" is used has not been released but it has been said that the information is based on information that Equifax collects on credit holders. (This is a prime reason to make you’re your credit information on file at Equifax is correct!)
While that’s certainly enough changes for any current or soon-to-be homeowner to digest, there could be more. Now, to be clear, FICO® has not announced changes beyond those listed above as of this writing. However, it wouldn’t necessarily be a stretch for FICO’s BEACON® Mortgage Score to take on some of the characteristics of FICO Risk Score, Classic 08, which is the new FICO® risk tool for assessing business’ credit worthiness. IF additional changes occur for BEACON® Mortgage Score that do follow FICO’s business product’s lead, some of the additional changes that may affect your ability to qualify for a mortgage loan might include:
Preference for mortgage applicants with long history
Longer, deeper looks into credit histories so that what’s on a credit report as well as the patterns that emerge based on that information are taken into consideration.
The influence of the types of creditors and / or blemishes on a credit report being weighted
As you can see, the current mortgage and economic crisis is already causing mortgage and other financial industry professionals to take strides to protect themselves future risk. As we watch to see how the industry attempts to "fix" itself, the best thing you can do—as a homeowner or a homebuyer—is to put yourself in the best financial position for obtaining or modifying a mortgage. So, be proactive and keep your credit history in as best condition as you can. That way, when Equifax begins providing BEACON® Mortgage Score scores to lenders in April, you’ll be able to qualify for a mortgage loan right away or whenever you need one.
The head line says it all, but that is not what you hear from the media. Last week, The Financial Times ran an editorial that re-enforced what we've been saying all along, that is contrary to the negative news we are hear from almost all media sources; it is a good time to buy real estate. But that constant barrage of negative news creates adverse feedback loops that overwhelm the psyche. The most immediate way to thwart these loops and improve psyche is simply turn off the news, or at least throttle back the number of times you read the same account. Another way to improve your mind set is not to get too caught up in the daily, hourly and, yes minute by minute ups and downs of the markets, but know, that in the great scheme of things, markets run in cycles, the pendulum swings back and forth, and this market is no different.
People tend to absorb news as if it actually happened to them or will happen to them in the near future. Fertile minds tend to conjure numerous scenarios, most of them bad. They also tend to extrapolate today into infinity. Trends do not last forever.
We are not Pollyannas by any means; we understand the economy needs to work out quite a few kinks, not the least of which is the business borrowing environment. (Harley-Davidson was recently forced to borrow at a 15% annual rate, which is absolutely absurd.) That said, we are feeling a better about the market every day. After all, what's not to like about a housing market that is showing the best combination of borrowing costs, prices, and affordability in nearly 40 years? Add a little optimism to the mix and we'll be in full-fledged recovery mode before you know it.
Affordability continues to quickly improve due to declining home values and improving mortgage rates. Mortgage rates continue to fall, and have reached their lowest level in nearly 60 years. The 30-year fixed mortgage rate was at 5.100% at January month-end, and hasn’t moved since. The median home price in the resale market has fallen nearly 15% year-over-year to $174,700, according to the National Association of Realtors while the Case-Shiller index shows an annual decline in paired sales of nearly 17%. The annualized existing home sales volume increased to 4.7 million transactions in December, up from 4.5 million in November. The volume of pending home sales increased in December, and is now 2% higher than one year ago, which suggests a further uptick in sales activity. The supply of unsold homes shrank slightly to 9.3 months of inventory, reaching its lowest level since June 2007.
Don’t try to pick the bottom of the market, you will always miss it. Because, until it is past you won’t know it arrived! You will be much better off in the long run to act now. If you have found a property you want. If you have the income. If you have the credit score and income to qualify for a mortgage loan ; there is no time like the present to make that purchase.
Three Sides to the story
Actor, economist, opinion scrivener Ben Stein began an op-ed piece in the New York Times with this ominous declaration: "The banking system is in a state of peril not seen since the early 1930s." Stein went on to say that banks "are in a state of fear that if they lend money again, those loans will go bad as well."
But then Robert Samuelson, also an economist and opinion scrivener, noted in a subsequent op-ed piece in the Washington Post that perhaps banks aren't in such a state of peril. "Contrary to popular wisdom, banks – institutions that take deposits – aren't the main problem," Samuelson said. "In December, total U.S. bank credit stood at $9.95 trillion, up 8% from a year earlier, reports the Federal Reserve. Business, consumer and real estate loans all increased."
So who is right? It is difficult to say, because in the same op-ed Samuelson further muddied the waters by stating, "Unfortunately, banks remain reluctant to lend because they still have lots of bad loans on their books."
Scratching your head? So are we. The point is that it's tough getting a handle on this credit contraction, which is why we see so many conflicting solutions to so many conflicting problems. One thing is for sure though, the mortgage market is in better shape than most lending markets – funds are readily available at bargain rates. The good news is that it's only a matter of time before our good fortune begins streaming into other sectors of the economy.
That said, we are attracted to a few of the plan's provisions, not the least of which is the provision to provide first-time home buyers with an $8,000 tax credit, which would not have to be repaid, unlike the current $7,500 tax credit. What's more, it would extend the credit's expiration date to December from July. Those eligible for the credit must purchase a home before Dec. 1, 2009 .
The credit extension appears to have broader support than most of the provisions in the stimulus plan. Mark Zandi, an oft-quoted economist at Economy.com, responded positively, but somewhat tepidly, to the credit. "The home buyer tax credit is a plus for the housing market," he said. Brian Bethune, an economist at IHS Global Insight, was more upbeat, noting on Bankrate's Web site that the credit should "induce more home sales" and "buffer" the rate in the decline of home prices.
Whatever the level of enthusiasm, we like the credit. Home prices could use a buffer at this point. Existing home prices have tumbled to an average of $175,400 in December 2008 from an average high of $230,200 in July 2006, according to data from the National Association of Realtors. We've often said that lower prices are needed to stimulate sales, and it's true, but potential buyers also need some assurance that prices won't drop much further after they take the plunge. More buyers, which the credit encourages, decrease the odds of that occurring.
What the government's upcoming law may entail for homeowners
By ALAN ZIBEL
Associated Press
February 14, 2009 6:00 AM
WASHINGTON — The government, facing a housing crisis that's escalated far beyond all but the most dire predictions, is looking at ways to spend at least $50 billion to make sure borrowers can stay in their homes.
President Barack Obama is scheduled to announce a sweeping initiative on Feb. 18 in a speech in Arizona, one of the nation's most severe hot spots for foreclosures. Details of the government's plan are not yet ready, but there is already plenty of chatter in the nation's capital about how it might work.
Q: How might the government's plan work?
A: The plan is likely to feature hefty incentive payments designed to encourage the lending industry to lower mortgage rates or reduce the total principal amount owed by borrowers, a Democratic Senate aide briefed on the plan said Friday. The idea is believed to be attractive because it is expected to be far less expensive than having the government buy up troubled loans, which are often combined and divided into mortgage-linked securities that are owned by investors.
It was unclear, however, whether those government subsidies would be paid up front to companies that collect mortgage payments, or whether they would stretch out over several years. Those companies, known as loan servicers, have been roundly criticized for not being equipped for a massive surge in defaults and foreclosures.
Q: How big is the problem?
A: Over the past two years, foreclosures have skyrocketed. More than 2.3 million homeowners faced foreclosure proceedings last year, up more than 80 percent increase from 2007, and analysts say that number could soar as high as 10 million in the coming years, depending on the severity of the recession.
Q: Why haven't earlier efforts to fix the problem worked?
A: The Bush administration's approach was to encourage the lending industry to make changes to the interest rate or even the principal amount. But the results have been disappointing, largely because of the way home loans are held in complex mortgage-linked securities. Some investors in the securities have resisted going along with the needed changes.
Q: I'm paying my mortgage on time. Will I get help?
A: The plan is expected to help some borrowers who are not yet in default, though it's not clear how many. Mortgage companies are likely to analyze the level of debt held by borrowers for signs of financial strain. Based on those criteria, borrowers could get a lower interest rate, or possibly a lower principal amount.
Q: How much would it cost?
A: Howard Glaser, a mortgage industry consultant who served in the Clinton administration, calculates that if 2 million borrowers' payments were lowered by $500 a month, it would cost the government $6 billion per year — assuming lenders matched half of the cost of doing this.
Q: What are some of the pitfalls?
A: Directly subsidizing mortgage rates could be difficult because most delinquent loans are tied up in mortgage-linked securities, and it's unclear how long the subsidized payments would last, or how they would affect the value of those investments.
Also, designing an accurate test of who will be eligible is likely to pose problems because borrowers may be able to find ways to game the system in an effort to qualify.
Q: What are some alternative ideas?
A: Many troubled loans are attached to second mortgages, which allowed homebuyers to borrow up to 100 percent of the cost of a home. If the government simply bought up those loans, which are trading at a deep discount, "they can have the same amount of payment relief at a much lower expense," said Credit Suisse analyst Rod Dubitsky.
The term du jour must be "animal spirits," because it appeared in more than a few financial publications last week. The term, popularized by the late economist John Maynard Keynes in his 1936 tome The General Theory of Employment, Interest and Money, is related to consumer and business confidence (a theme we've been pounding hard in recent months).
Animal spirits also refers to a close concept – trust, an emotional state that dismisses doubts about others. Indeed, one can't be engendered without the other. Unfortunately, trust, like confidence, has been waning of late, which is no surprise given that every day seems to unearth a new account of some financial reprobate having pillaged his clients' accounts.
Too much trust can obviously lead us astray. Surprisingly, so can too little. Keynes noted as much in his General Theory: "A large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most of our decisions to do something positive... can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
Here's to animal spirits: Encourage your clients to trust in the cyclical nature of the market. What has gone down will go back up, and it may begin to do so sooner than anyone expects. With mortgages still available and great deals on property to be had by anyone with decent credit, verifiable income, and an adequate down payment, acting now on a real estate purchase could reap big benefits in the long run.
No-fee mortgage. Are you kidding me?
"No fees. No worry. No, really," (yeah right!) Relax, you've just found the best mortgage deal." Translation: Get your back to the wall, you're about to get Sc_ _ _ _ _ ! ! !
If these kinds of misleading ads were true, in the truest sense, all of the Mortgage Brokers in the country could and would be out of business shortly.
Do you honestly think any bank would really pay every mortgage closing cost? In my "Never-to-be-Humble" opinion, the vast majority of banks pride themselves in figuring out how they can squeeze out every last penny in a fee of some sort. Now, keeping that in mind, do you REALLY think they are going to do a mortgage loan for you without exacting a price which will more than make up for those ever loving fees they are not going to charge you. Where do they recoup their additional profit? In a HIGHER RATE! (Is that a surprise?) It doesn't have to be much. Does the deception work? Read on . . .
With the nation's housing markets in the dumpster, the Bank of America says its home-loan applications are up 40 percent from a year ago, and all of their bank branches and telemarketing facilities are doing a land office business. "The response has been tremendous," Terry Francisco, BofA spokesperson said. "We think it's a very breakthrough product." According to Francisco, the BofA deal has: "No appraisal fee, no title-insurance charges, unless the borrowers choose to purchase a policy for themselves as well as for the lender" (is there a Real Estate PROFESSIONAL out there who would recommend purchasing property without title insurance?). "No administrative, application, underwriting or other lending charges." "No requirement to buy private mortgage insurance, usually required when a buyer's down payment amounts to less than 20 percent of the purchase price. A guarantee that the mortgage will close within 25 days (unless the borrowers request a longer closing period). The "No Fees Deal" does include a "walk-away" penalty of only $250 if the customer has been approved for a home loan but later chooses another lender. How many Brokers could or would get away with this kind of a fee? The BofA "No Fee Deal" still collects for escrows for taxes, insurance, state and/or county revenue stamps,
While "No Fee Deals" do save up front costs, the price of paying with future value dollars, and the total of those costs because of the higher interest rates charged usually don't make any monetary sense. According to www.Bankrate.com, the market rate on the 23rd of May was 6.3% average with a low of 5.8%. Bank of America's 30-year, fixed-rate, "no fee" mortgage loan for customers with good credit on that date was going for 6.8 percent, a half percent premium!
A $250,000 mortgage, would have cost a borrower $30,000 more over the life of the loan with BofAs "No Fee Deal" when compared with a loan based on the 6.3 percent market average.
What BofA is doing is the same thing as Ditech.com, E-Loan, Countrywide and others have been doing for some time; they are just the latest on the band wagon. There is no such thing as a free lunch; and the old adage "if it sounds too good to be true, it is", has never had a better personification than in the "No-Fee" mortgage.
Caveat Emptor (Buyer Beware) should be the watchword for anyone looking at a No-Fee mortgage. Check it out, but check out a good Mortgage Broker before you go the closing table. If you expect to be in a house for only a few years, you still might want to consider loans that fold many of the up-front fees into a rate. Any good Mortgage Broker can do this for you and be honest about it. Just remember, no one works for nothing, and with the "No Fee Mortgage", the second half of "Pay me now or Pay me later" is the operative part of the phraise.
David l. Skibowski
Branch Manager. 1st Metropolitan Mortgage,
President, The Skibowski Company LC
Is It Half Full or Half Empty?
All depends how the Media spins it.
Two articles from Wednesday April 25, based on the "latest report by the Mortgage Bankers Association.
Headline from CNN Money:
"Mortgage apps fall for fifth week"
"Mortgage applications continued their recent decline last week, falling for the fifth straight week, according to the latest report by the Mortgage Bankers Association.
The industry group's seasonally adjusted index of mortgage applications dropped 2.5 percent to 630.6 in the week ended April 13, from 649.5 one week earlier. . ."
Headline from Reuters:
"Mortgage applications rise but home sales tepid"
"The Mortgage Bankers Association on Wednesday said its mortgage applications index climbed by a seasonally adjusted 3.6 percent in the week ended April 20 to 653.3, its highest level since the week ended March 23 when it hit 671.0.
Mortgage applications rose last week after five straight weekly declines, but March home sales were weak and tighter lending standards suggest more of these loan requests will be turned down, economists say. . ."
My Analysis:
Are we actually as bad off as the mainstream media keeps telling us we are? Certainly there are areas of the country where housing inflated beyond prudent values, but for much, if not most of the country overvaluation is not the case.
We all know that bad news sells, and I think that is 50% of the story. I think the other 50% is essentially the reticence of the media to say anything good about the economy. It really makes no difference wether you are a fan of the Bush administration (who has certainly made more than its share of mistakes), or not. It is impossible to deny the fact that the DOW is at an all time high, and employment is also at an all time high. (The "half full" form would be that unemployment was at an all time low),
The Media has the populous all up in arms over ARMS(adjustable rate mortgages) and the Subprime sector of the market; trumpeting the bad news, or making the good sound bad. How about a couple of "Did-ya-Knows" about the mortgage markets Did-ya-Know that the FHA delinquency rate is slightly higher than the Sub Prime delinquency rate? Do you realize that the total Sub Prime delinquent (>90 days of Foreclosed) mortgages are less than 2% of the total mortgages outstanding? Losses in the Sub Prime market will be borne by the investors who have chosen to be in that market, while losses in the FHA secured arena will be reimbursed to the lenders from Taxpayer’s dollars.
It is too bad that there are people who wanted to have a home and were sold a mortgage which they could not afford. It is too bad some bad apples, i.e. lenders and loan officers took advantage of people some of those people who wanted a home and oversold them without concern wether or not the borrowers could make the payments in the long term.
But turn that thought around and I wonder how many more families today own their own home because of the availability of Sub Prime mortgages than owned their own homes in 1999? The good part of the story is the 86% of people who now own their home and are making the payments. who were helped by Mortgage Advisors who really helped them achieve the American Dream via Sub Prime Mortgages .
Dave Skibowski, Branch Manager, 1st Metropolitan Mortgage Co., Traverse City, Michigan
How many times have you said to someone "Have a Great Day" as a closing to your conversation or meeting, etc.? In my never-to-be-bumble opinion, have a great day is not a good thing to say. It’s like saying, "You go and wait for something to happen, and I hope it is something good." How much better it is to say, "Now, You go out and do whatever is necessary to move your life or your career along the track which will help you achieve your goals in life." That’ s too many words, so let’s shorten it to, "MAKE YOUR DAY GREAT!" This command (for that is what it really is) is written with Caps and an exclamation point, because that is the way it should be delivered.
Most people in this world are content to coast along, waiting for something good to happen to them. They don’t like their job, they would like a better/bigger house or apartment, they would like to make more money, but what do they do about it? They wait to "Have a great Day" entirely based on how someone or something else will affect them. They may buy a lottery ticket so they can jump to the top, but there is only a 75million to one chance that will ever happen. How much better it is to set your goal, and then "MAKE" something happen to advance you another step along the road toward that goal. Can you make it happen every day? Probably not at first, but the more you try, the more often you will be successful. Success breeds success. The more successful you are, the more successful people will flock to you. The more you help your friends to be successful, the more successful you will be.
Don’t wish for something to make your day great; You MAKE YOUR DAY GREAT!
Dave Skibowski, Branch Manager,
1st Metropolitan Mortgage Traverse City, Michigan
So, Who's to Blame
I read an interesting article on Bankrate.com by Elizabeth Razzi, a freelance personal financial reporter and author of “The Fearless Home Seller,” it was entitled “Mortgage Ignorance Rampant.” It headlined polling results that showed 34% of homeowners don’t know what type of mortgage they have, Adjustable Rate or Fixed Rate! I really don’t find this surprising, as it is my belief that many of the people who jumped into the mortgage business as Loan Originators in the past five or six years did so without having any real background which would qualify them for the job. They were warm bodies who could answer the phone, follow the script, and SELL the person with whom they were speaking a mortgage loan. And preferably, a mortgage loan with a couple of points up front (Origination Fee) and two or three on the backside (Yield Spread). To keep the rate on the proposed loan palatable, the mortgage form offered was an adjustable rate loan. Everyone was scrambling for the lowest rate, and what you got was an Adjustable Rate Mortgage or Option Arm. Wham, Bam, Thank you Mam; next caller please!
I have personally been the business of finding people money for over twenty-five years. Most of it on the commercial side of the business, but also many years doing Residential loans. For years I have called myself a Mortgage Advisor because most clients with whom I met, knew nothing about mortgages, except the fact they had to get a mortgage to get the money to buy a house. Even those who were refinancing their home had very little mortgage knowledge. And, it was interesting to note that even though my clients may have been quite sophisticated in other financial matters, their mortgage savvy was nil. While I was doing working with mortgage programs everyday, the average person only goes through the mortgage process a few times in a lifetime, and in order for me to be comfortable advising them on what kind of financing they should use, I needed to educate them on what the various kinds of mortgages were and what went into their qualification for a mortgage. To help the make the right decision they needed to know what the positives and negatives were for each kind of product and how the different programs fit with their needs and desires. Could I do this over the telephone? Yes, but it was much easier if I met with the clients where we could sit around a table and draw pictures of the plans, because pictures make the learning easier and the understanding greater.
Who is to blame for the Subprime fiasco? Is it the lenders who created the new mortgage programs which allowed so many more people to qualify for home ownership? There is possibly some responsibility there. Customers were screaming for loans; there was a mortgaging frenzy, and where there is that amount of clamor for a product, there are bound to be profiteers. But, in my opinion, the profiteering was much more on the side of the people who originated the loans. the ones who had no compassion for their clients or compunction to get them into the right mortgage, rather only to sell them the one which made the most money. So much for who profited, the question is who’s to blame?
Today we see the politicians holding hearings. They are up in arms over the Subprime foreclosures, which they should be. They are looking for someone to blame, and they are pointing their fingers at the lenders. When you point your finger at someone, there are three pointing back at you. I know we have all heard that, and in this case the three fingers point at the culprits. There are many states in this country where there are no controls, no required education, no modicum of experience necessary to become a Loan Officer or Loan Originator. All lawyers, financial planners, stockbrokers, bankers insurance agents, etc. must be licensed. The individuals who guide clients through the largest financial transaction they will probably ever make in their lives are unlicenced, most times untrained, and I’m sorry to say, often only in it for the buck. There will always be people who will take advantage of a situation. Training and Licencing will not eliminate the problem, but Training and Licencing will go a long way toward minimizing it.
Next time, “What a Mortgage Advisor should know”
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