Monthly Archive for June, 2010

Mortgage companies always seem to be in the news lately, and today is no exception. Articles about one large lender's alleged practices, and how attorneys general from various states are reacting, have been popping up all over in the last three weeks.  They demonstrate that reverse redlining is not just the province of sketchy boiler-room sub-prime outfits. But what exactly is reverse redlining?
Redlining is the practice of refusing to lend in down-and-out neighborhoods because it's perceived as riskier than lending in mansion territory (at least it was until prime buyers of big houses started defaulting in droves). But during the big lending boom of the last few years, that wasn't the issue. Rather, certain lenders actually sought out these neighborhoods, assuming that the people in them were less educated, more desperate, and therefore more likely to buy sketchy mortgage products. That's reverse redlining. Municipalities have even gone as far as blaming mortgage lenders for creating blighted areas in their towns.

Memphis, like many cities throughout the US, has been devastated in the economic downturn. Unlike most other locales, however, Memphis is placing the blame for its crime, unemployment, and blight squarely on Wells Fargo Bank. The city is suing the lender, claiming violation of the fair Housing Act caused home buyers in certain neighborhoods to be targeted for risky loans and forcing whole neighborhoods to go down when the foreclosure wave hit. 

But Wells counters that Memphis has a long history of economic turmoil, poverty, unemployment, and crime, and that a mortgage lender is not the cause. Perhaps those in government are finding themselves in the hot seat and it's easier to blame lenders than take responsibility. As the case progresses, more will come to light.

In any event, this blog is about you, the credit-challenged person who needs a mortgage. And if you live in a disadvantaged neighborhood, you may find yourself targeted by dirtbags hoping to make you a bad loan. The best way to protect yourself is to simply refuse to work with or provide any information to anyone who approaches you unsolicited. Make your own inquiries.

This site is a good place to find licensed lenders who offer legitimate products. Understand that these days, if you don't qualify for an FHA loan, you're looking at hard money financing. Sub-prime mortgages are rare as hen's teeth (as grandma might say), but hard money lenders are private individuals or groups who are willing to lend to those who can put up big down payments and pay big fees. Because they aren't required to be licensed, you have fewer protections when dealing with these folks. 

Once you take your best shot by completing the inquiry form on this site, you will either end up with a few bad credit mortgage offers to select from, or you'll be told why you don't qualify for a mortgage today. Being turned down is okay! You don't have to put a bag over your head or anything. Because with your declination, you get valuable information; you can work with your loan agent to determine what to do to get an approval and put yourself on a plan. There are debt managers and credit counselors who get big bucks for that advice. Play your cards right, stick with reputable lenders, and avoid reverse-redlining scoundrels. 

The Federal Open market Committee, which famously meets periodically to talk about the economy and interest rates, is having a meeting today and tomorrow. And it may decide to "raise" interest rates. But does that mean mortgage rates will go up as a result? Nope.

In fact, you could argue that the fed affects long-term mortgage rates about as much as it affects the outcome of the Super Bowl. What the fed can influence is the Federal Funds Rate.

So, what's the Federal Funds Rate?

Banks and other depository institutions by law have to maintain a certain level of deposits, called reserves, with the Federal Reserve Bank. That's to make sure there is cash to pay depositors when they want it. The Fed doesn't just leave the reserves in a vault, however. The money is lent to banks overnight to cover varying needs for cash. The Federal Funds Rate is what is charged for these funds. So when the Federal Reserve "changes" the Federal Funds Rate, all it's really doing is choosing a different rate to target and using its power in money markets to move the rate toward its target.

So, how does the Fed Funds Rate affect mortgage rates?

An increase in the Fed's overnight rate does not cause an increase in long-term mortgage interest rates. In fact, Fed rate cuts can actually trigger slight increases in 30-year mortgage rates! This is because mortgage rates are driven by bond markets and the price of mortgage-backed securities (MBS), which reflect investors' expectation of future inflation. When the Fed cuts rates, more money is dumped into the system, but the resources it can be spent on are limited, so prices increase. Today, the most influential resource is oil. When oil prices rise, investors get nervous and exit the bond and MBS markets, which causes MBS prices to fall and interest rates to rise.Conversely, an increase in the Fed Funds Rate could result in rates dropping a little.

But home equity rates could increase.

Home equity loans often carry interest rates based on the prime rate (which is the rate that banks charge their largest and most credit-worthy customers) shows these two rates parallel each other almost perfectly). And which mortgage product pricing is based on the prime rate? Second mortgages like home equity loans (HELOANs) and home equity lines of credit (HELOCs). So, home equity customers may be the losers in the Federal Reserve rate game.

Your income is down. Your expenses are up. You'd like a mortgage modification but your property is a rental. Or your loan is too large. Or you got into a trial mortgage modification but were not given a permanent one. Are you destined for foreclosure? Probably not.

Mortgage servicers reported to HUD that between April 2009 and the end of April 2010, 2.8 million homeowners have received mortgage modifications. Guess how many of these were completed through the HAMP program? Just 346,000!
So if you don't qualify for HAMP, there's HOPE. As in HOPE NOW, the alliance of mortgage servicers, investors, mortgage insurers, and non-profit counselors that attempts to offer private-sector solutions to the mortgage foreclosure problem.

Better Late than Never

HOPE NOW's members didn't do such a great job at first. I mean, consider that the effort was put together by the same folks who largely caused the problem in the first place, right? Early restructurings did not usually mean better terms for the borrowers; lenders favored putting delinquent borrowers into higher payments to make up missed amounts. So those who couldn't afford their mortgage payments before being "helped" were somehow expected to miraculously pay more each month. Duh.

HOPE NOW Not Hopeless

Today, the effort can be considered a moderate success. if you want to try for a non-HAMP modification, you do need to show that reasonable concessions (the average modification drops the payment by $500) will allow you to stay in your home and keep the payments coming. So there has to be sufficient income. Note that income from members of your household who are NOT on the mortgage can still be counted. If your other, non-mortgage debts are keeping you from paying your home loan, and you don't see any possibility for improvement, consider bankruptcy. Many lenders will allow modifications in conjunction with a Chapter 7 or 13 bankruptcy as long as the bankruptcy trustee or judge approves it. And if you were initially denied a HAMP loan mod but your circumstances have changed, you are allowed to reapply.

The CARD Act has provided consumers with a lot more protection from unscrupulous credit card companies than we ever had before. But that doesn't mean you don't have to keep looking out for #1. Many borrowers with credit cards now have a false sense of security about their cards, which could cause them financial or credit problems.

Credit Card Companies Can Still Increase Your Interest Rate

The only difference is that now they have to give you 45 days notice and allow you to opt out of the increase. If you don't contact the company, your rate will increase. If you do choose to opt out, there are consequences. Your account is closed, so you won't have access to that credit anymore. If you're using it for necessities like to provide cash flow for a business, that could be a problem. Any automatic payments attached to that card will not go through anymore; if you don't fix it you could really damage your credit. In addition, closing the account could lower your available credit and raise your credit utilization, which generally drops your credit score.

You May Not Get Any Notice of a Rate Increase

I know; I just said that you get 45 days notice. I lied -- you don't always get 45 days. if you are 60 days or more behind on your credit card payments, the company can raise your interest rate without giving you the heads-up. Finally, you may have a card with a variable rate. When the CARD Act was passed, lenders were given several months to find or create loopholes and keep the money coming. During this time, your credit card company may have quietly converted your fixed-rate card to a variable rate card, knowing that interest rates can't go any lower so they have to move higher. Rate increases on cards with variable rates tied to financial indexes can come without notice to you.

Read Your Statement

One useful piece of information that comes with your statement, thanks to the CARD Act, is the number of months it will take to pay off your balance if you only make the minimum payment. It's probably decades. You also get to see what kind of payment it would take to pay off your balance in three years. This is the magic number -- most debt management plans have goals of getting you debt-free within three years, and you should make it your goal too. If that number is simply too impossible, consider consulting a credit counseling service about negotiating lower payments and interest rates, or contact your credit card companies directly about closing the accounts and lowering the rates so you can pay off the balances and start your new debt-free life.

Reverse mortgages are the only home loan products in which people with bad credit don't pay any more for their loans than people with good credit. And as long as you don't have an active (not discharged) bankruptcy going, your credit problems won't keep you from getting a mortgage approval. But people with bad credit need to be really careful about one thing when they get a reverse mortgage, also called a Home Equity Conversion Mortgage (HECM). Or they could lose their homes.

FHA, which administers and insures the most popular reverse mortgage program in the country, has stepped up its enforcement of its policies and increased foreclosures of HECMs. How can a loan that requires no payments from the borrowers end up in foreclosure? It can if the borrowers don't pay attention to the requirement that they preserve the home's value by paying its property tax on time, keeping hazard insurance in force, and maintaining the home and grounds.

In the past, FHA was very reluctant to throw out aging homeowners who forgot to pay their property taxes or who let their hazard insurance policies lapse. It didn't want to be tossing old people into the street when it could just wait until they vacated the home, sell it, and repay the loan. But the agency can no longer afford to do that; it lost $798 million last year -- the first loss ever.

Why should it matter if you miss your insurance or tax payment? Because if you don't keep your insurance in force, and your house burns down, FHA takes a huge loss -- the collateral has little value. If you don't pay your taxes, the county can lien your home, and it gets paid first in a sale -- the lender may not get everything owed. And if you don't maintain the home, and keep the grounds safe, the resale value could drop, and the lender could end up with a loss.

People with bad credit often get that way because they're a little, um, casual about paying bills and taking care of business. If you do that with a house and you have a reverse mortgage, however, you could end up homeless before you know it.

Have you ever worried about the extremely personal information you supply to mortgage brokers or loan officers when you apply for a bad credit mortgage? Think about it -- you give them your Social Security number, home address, employment, birth date -- pretty much everything an identity thief needs to wreak havoc on your financial ...

A couple of George Washington University instructors discovered a big reason that people who buy new homes may regret the mortgage choice they make. The phenomenon is called "cognitive resource depletion," but that fancy phrase just means that once you have broken your brain searching out your property, you lose the ability to make smart ...