Christina Dunham's Random Real Estate Musings

A Lifeline to Struggling Borrowers?

The Bush Administration announced "Project Lifeline" Tuesday February 12, a new initiative to help struggling homeowners with all types of mortgages, not just subprime or adjustable-rate mortgages.

Part of the Hope Now Alliance (1-888-995-HOPE), launched late last year, the new Project Lifeline outreach program would grant homeowners who are at least 90 days late a 30-day break from the foreclosure process while their lenders try and work out a more affordable solution, including restructuring the loan, freezing or even lowering interest rates.

The program was put together by HUD, the Department of Treasury, and six of the largest financial institutions, including Bank of America Corp., Citigroup Inc., Countrywide Financial Corp., J.P. Morgan Chase and Co., Washington Mutual Inc., and Wells Fargo & Co.

These banks, which collectively service more than 50% of mortgages in America, have agreed to this program as a means to lessen the anticipated impact foreclosures could have on the open market. The objective with Project Lifeline, said Larry Di Rita, spokesperson for Bank of America, is to offer a "range of remedies to keep people in their homes."

Not everyone is as hopeful as Di Rita, however. Bruce Marks, CEO of the Neighborhood Assistance Corporation of America (NACA), a non-profit, community advocacy and homeownership organization, called the Lifeline program a "public relations gimmick with no substance."

The Hope Now Alliance, which includes 25 loan servicers, reportedly helped 545,000 subprime borrowers and 324,000 prime borrowers in the second half of 2007, according to CNN. No estimates on how many homeowners this new program will help have been announced thus far.

This past Saturday, I conducted a Fiscal Literacy/Credit Crunch Crash Course with Jeff Morgan of Net Worth Solutions for a group of new homeowners and real estate investors in Modesto. The event was organized by Carlos de la Fuente, a top real estate professional in the area, due to his desire to help clients develop better understanding about the importance of credit in successful real estate transactions.

After a brief background on the events that led to the mortgage market meltdown, I administered a short “quiz” to find out how much they knew about how credit scoring worked.

During the proceeding discussion, I was a little surprised at the myths and misconceptions they had about credit, and grew concerned about the mistakes they may have committed due to their lack of knowledge.

For example, one participant proudly announced she does not use any credit cards at all, and that she stays current on all her mortgage payments. Unfortunately, I told her that her lack of non-mortgage history is probably hurting her score.

Another said he paid off most of his credit card debt by transferring the balances to just one credit card. Bad move. He probably just lost another 30 points by increasing the “utilization ratio” or, in layman’s terms, maxing out one card.

One more participant mentioned that she’d arranged a reduction of her credit card interest rates by signing up for Consumer Credit Counseling. That’s well and good, especially since her monthly payments have gone down. But did you know that some lenders consider this the equivalent of filing for bankruptcy? And if the accounts included are closed, you lose precious credit history that will take a few years to replace.

Good credit is well worth the effort it takes to both achieve and preserve it. If you have good credit, the following tips will help you keep it that way. If you are looking to improve your credit, however, now is the time to get started. If you plan on entering into a loan transaction in the next 6 to 12 months, you simply cannot afford to make the following credit mistakes:

Don’t fall behind on existing accounts. Payment history accounts for the biggest percentage of your credit score at 35%. The more severe and the more recent the delinquency, the bigger the drop in score. One 30-day late can cost you anywhere from 30-75 points.

Don’t pay off old collections or charge-offs during the loan process. Paying collections will decrease your credit score immediately due to the “date of last activity” becoming recent. If you want to pay off old accounts, do it through the refinance, and make sure that 1) you validate that the debt is yours, and 2) the creditor agrees to give you a letter of deletion.

Don’t close credit card accounts. If you close a credit card account, it will appear to FICO that your debt ratio has gone up. Also, closing a card will affect other factors in the score such as length of credit history. If you have to close a credit card account, do it after closing your loan, and make sure that it is an account you’ve opened more recently.

Don’t max out or overcharge your credit accounts. This is the fastest way to bring about an immediate drop of 50-100 points in your credit score. Try to keep your credit card balances below 30% of their available limit at all times during the loan process. If you decide to pay down balances, do it across the board. Meaning, make an extra payment on all of your cards at the same time.

Don’t consolidate your debt onto 1 or 2 credit cards. It seems like it would be the smart thing to do; however, when you consolidate all of your debt onto one card, it appears that you are maxed out on that card, and the system will penalize you as mentioned above. If you want to save money on credit card interest rates, wait until after closing.

Don’t do anything that will cause a red flag to be raised by the scoring system. This would include adding new accounts, co-signing on a loan, or changing your name or address with the bureaus. The less activity on your reports during the loan process, the better.

Don’t do it alone. If you feel that the credit challenges you're facing are too much, or you don’t have enough time to do the work necessary to improve your own credit, don't lose hope and give up. Contact your mortgage professional for advice, or send me an email at contact@christinadunham.com for a complimentary credit consultation.

If you’re a realtor or real estate investor interested in organizing a small group of family and friends for an educational Credit Crunch Crash Course at your home or office, please let me know by calling 866.7.DUNHAM or sending me an email at the address above. The complimentary presentation only takes 20 minutes, leaving plenty of time of questions.

In many cases, small changes to your credit profile could yield big results that could save you thousands of dollars on your mortgage. However, if professional credit repair does become necessary, we'll gladly provide you with a referral to an experienced professional credit repair specialist you can trust.

NEXT WEEK: 5 Ways to Raise Your Credit Score – and FAST

Credit Scores: When Good is not Good Enough

In the past, a consumer with a FICO score of 620 was considered to be a low-risk borrower by Fannie Mae and Freddie Mac. Not anymore. After suffering major losses in the mortgage market last year, the nation's two largest mortgage finance lenders have redefined risk, announcing new Loan-Level Price Adjustments (LLPAs) for borrowers with FICO scores below 680.

LLPAs are automatic, cumulative fees based solely on credit scores, and they can significantly increase the cost of credit. These fees have nothing to do with your mortgage company or its various products and cannot be negotiated away.

Let's take a look at the impact that LLPA's have on conforming loans.

*Based on Loan Amount of $300,000. This chart is meant to be a guide. Interest rates and loan programs are subject to change.

As you can see, borrowers who have FICO scores below 680 will now be forced to pay more, either in points (as much as 2% more) or in interest rate. Borrowers with FICO scores below 620 will incur the maximum adjustment which, on a $300,000 loan, would amount to $6,000 in upfront costs.

For borrowers who can't or don't want to pay the cash up front, be aware that lenders have the option of converting these fees into higher rates. In the above example, a 2-point fee (2% of the loan amount) is charged to the borrower. The charge could be waived, however, in exchange for increasing the interest rate by one full percentage point. The end result would be an increase of nearly $7,500 in mortgage payments over the course of the first three years of the loan, which translates into approximately $200 more per month.

According to Fannie Mae and Freddie Mac, the FICO credit score used to determine the fees for single borrowers is the median or “middle” score generated by the three national credit bureaus. For multiple borrowers, the median score of the borrower that earns the highest income is used. In addition, requirements will vary based on the loan program and loan-to-value. For those borrowing more than 70% of the home's value, for example, credit scores must be 680 or more in order to avoid being subject to the adjustments.

If you are thinking about getting a mortgage in the next 12 months, your credit score is going to be more important than ever. Call your mortgage professional right away to find out where you stand. In some cases, professional credit repair may be required, which could take up to six months or more to achieve the most effective results.

Economic Stimulus Act of 2008 Passed by the House & Senate
How soon before the President signs it into law?

With a 385 to 34 vote in the House and an 81 to 16 vote in the Senate, an amended version of H.R. 5140 was passed and presented to President Bush on Friday, February 8. The President said that the bill “would quickly put money into the hands of the American people and provide our economy the boost it needs” and that he would sign it into law.

The bill provides a $150 billion plan to jumpstart the economy with temporary tax breaks for consumers and businesses, extended benefits, and most importantly, two provisions designed to assist the housing market.

The bill temporarily increased the size of loans that may be purchased by Fannie Mae and Freddie Mac, raising the current level of $417,000 to reportedly up to $729,750 in the highest cost regions of the housing markets. The bill also increases the size of loans the Federal Housing Administration could insure.

The stimulus package will only apply to mortgages originated between July 1, 2007 to December 31, 2008. To read a summary of H.R. 5140, visit: http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h.r.05140:

Although HUD has 30 days from the final passage of the legislation to provide their official loan limits for your area, the estimated data below can help you determine whether or not you may qualify for a conforming loan under the plan.

Metropolitan Area	Estimated Median Value	Estimated New Limit
Oakland-Fremont-Hayward, CA	$825,400	$729,750
Salinas, CA	$590,000	$729,750
San Francisco-San Mateo-Redwood City, CA	$825,400	$729,750
San Jose-Sunnyvale-Santa Clara, CA	$852,500	$729,750
Santa Cruz-Watsonville, CA	$610,000	$729,750
Napa, CA	$567,500	$709,375
Santa Rosa-Petaluma, CA	$498,750	$623,438
Vallejo-Fairfield, CA	$424,000	$530,000
Stockton, CA	$391,230	$489,038
Modesto, CA	$381,884	$477,355
Sacramento-Arden-Arcade-Roseville, CA	$381,884	$477,355
Merced, CA	$377,245	$471,557
Madera, CA	$340,000	$425,000

NOTE: These are not the official guidelines from HUD. They official chart of loan limits will not be delivered by HUD until 30 days after the passage of the legislation.

Interest Rates
When is the Best Time to Lock?

When it comes to mortgage loans and interest rates, it's never a good idea to gamble. If you are certain you are moving forward with a purchase or refinance transaction, it’s advisable to lock in an interest rate at the earliest opportunity.

Mortgage rates fluctuate on a daily basis, and often times there will be “intra-day re-pricings” when significant economic news are posted. While your mortgage advisor may closely monitor the performance of mortgage-backed securities and other economic indicators, they can only provide short-term forecasts of where rates may go, thereby offering a “lock” or “float” recommendation depending on whether your loan will be closing in 20, 30, 45 or 60 days.

A mortgage loan cannot be closed without a locked-in rate, and there are three main elements to take into consideration:

• Interest Rate
• Points or fees
• Length of the lock

Locking in a rate does not obligate the borrower to commit to the loan until the loan is actually closed. The lock is merely a security measure designed to eliminate the risk of market volatility throughout the duration of the purchase or refinance transaction. As long as the loan is approved and funded before the end of the lock period, the borrower will receive the interest rate quoted.

When a lender permits an extended lock-in period, the borrower will likely face a higher interest rate or additional fees that could be quoted as points. In other words, the borrower pays for the lender to take on the extended risk of being exposed to potential changes in the market.

For example, let's say a 30-day rate lock commitment costs the borrower one-half point, while a 60-day rate lock commitment costs one full point. If the borrower in this scenario needed the extended lock period, but did not want to pay points, then an alternative would be to accept a slightly higher interest rate. In this case, a 60-day lock would typically have a higher interest rate than a 30-day lock.

My recommendation for today? I would: lock if your closing was taking place within the next 20 days, float if your closing beyond that.

Of course, depending on results of economic readings this week, my recommendation may change.

The Federal Reserve and Mortgage Rates
Understanding What Causes Interest Rate Movement

The Federal Reserve constantly evaluates the US economy and, when necessary, takes steps to address inflationary concerns and avoid economic recession or depression. The mass media, in turn, reacts by providing a wide range of opinions and interpretations of the Fed's monetary policy.

This can make it very difficult for consumers to decipher how such actions will influence interest rates in general and mortgages in particular. And although actions of the Federal Reserve can have a direct impact on the Prime rate, mortgage interest rates are dictated by the trading of mortgage-backed securities, which are similar to bonds and trade on a daily basis.

This means that the real dynamic at the heart of interest rate movement is the competitive relationship between stocks and bonds.

Stocks, bonds, and mortgage-backed securities compete for the same investment dollars on a daily basis. There is literally only so much money to be invested. When the Federal Reserve feels that interest rates need to be decreased in an effort to stimulate the economy, this reduction in rates can often cause a stock market rally. When the market becomes bullish, the money to invest in stocks comes from the selling off of other investments, including mortgage-backed securities.

Unfortunately, when mortgage-backed securities are sold off to fuel stock market rallies, this causes interest rates to go up, not down. Take the recent cuts made: when the Fed cut the Fed Funds Rate by a 0.5 point on September 18, 2007, the 30-year fixed rate jumped from 6.31% to 6.42%. On January 24, 2008, the 30-fear fixed mortgage hit its lowest level since 2005. A week later, in response to promising economic news and a 1.25 cut to the Fed Funds Rate, the 30-year inched up from 5.48% to 5.68%.

Historically, there have been many instances where the Federal Reserve has increased interest rates, arousing fears that corporate profit margins would be affected. This resulted in stocks being sold off, leading money managers to search for a place to invest their newly liquidated assets until the next market rally. One such safe haven has been mortgage-backed securities, which cause mortgage rates to drop.

The daily ebb and flow of money is what matters most when it comes to the movement of mortgage interest rates. Your mortgage advisor should be making it a point to continuously monitor interest rates and advise you of opportunities to manage your mortgage debt at a better rate.