Christina Dunham's Random Real Estate Musings

As a kid, report cards indicated how well we were doing at school. As an adult, credit reports let lenders know how well we are doing with our finances.

A credit score is an extremely important financial tool. It provides access to the financing you need in order to buy a car, a home, or pay for college tuition, among other things. Since higher scores equate to lower costs and vice versa, it's vital to understand the factors involved in calculating your score.

How you’ve paid your bills in the past gives a lender an indication of how you can be expected to pay them in the future. A credit score, such as a FICO score, is simply a formula for assessing credit risk and takes into consideration the following information:

Payment History: 35% impact. This constitutes the largest percentage of your credit score. Paying debt on time has a positive impact. Late payments, judgments, and charge-offs have a negative impact. Delinquencies that have occurred in the last two years carry more weight than older items.

When applying for a mortgage, every point in your credit score can make a big difference. So don't make any major financial or credit decisions – even paying off an old debt or delinquency – without first discussing it with your mortgage professional.

Outstanding Credit Balances: 30% impact. This factor marks the ratio between the outstanding balance and available credit, or utilization ratio. Ideally, consumers should make an effort to keep balances as close to zero as possible, and definitely below 30% of the available credit limit when planning to enter into a loan transaction within 3-6 months. Often, the difference between a borrower with a 720 credit score and a 680 credit score, all other things being equal, is simply the “credit utilization” ratio.

Credit History: 15% impact. This marks the length of time since a particular credit line was established. A seasoned borrower, especially if they have over five years of credit history, is stronger in this area.

Type of Credit: 10% impact. A mix of auto loans, credit cards, and mortgages is more positive than a concentration of debt from credit cards alone.

Inquiries: 10% impact. This quantifies the number of inquiries (or requests for credit) that have been made on a consumer's credit history within a 6-12 month period. Each individual inquiry – up to 10 – can hurt your credit score by as much as 5 to 30 points. Any additional inquiries thereafter will not affect your credit score.

In other words, don't start the loan process until you’re ready to act. Otherwise each individual credit inquiry could cost you. However, scoring models have now been adjusted to count multiple “hard” inquiries within a 14-day period as a single request. So, when you’re ready, your credit will be too.

Under the 2003 Fair and Accurate Credit Transactions Act, you have the right to a free copy of your credit report every year from each of the three major credit bureaus -- Equifax, Experian and TransUnion. Go to www.annualcreditreport.com for a copy and contact your creditors if you find any errors.

Until next week, Happy Home loan Shopping!

NEXT WEEK: What Caused My Credit Score to Drop So Suddenly?

Anyone looking to buy, sell, or refinance a home are confronting a very different market from the one that existed just 6-12 months ago. Between 2004 to 2007, many loans were made to homeowners with non-traditional or "non-conforming" situations, be it a poor credit history, inability to document income, or any number of factors that do not fit within the traditional "box" for home loans. These loans are often called "Sub-Prime", or "Alt-A", meaning they were somewhat riskier in nature than A credit, prime, or traditional loans.

During the time of the real estate boom, rampant appreciation was seen in the housing market. Investors clamoring for ever-higher returns turned to the real estate market and credit markets to take advantage of the boom. This insatiable appetite for new profits led to some pretty wild and loose underwriting guidelines. Estimates indicate these types of loans accounted for anywhere from 40 to 70 percent of mortgage originated during this time.

Back then, someone with a 580 credit score could easily secure 100% financing on a $685,000 purchase, with no income documentation as well as limited verifications on employment and cash reserves, even if they were recently self-employed, had two foreclosures, and a bankruptcy within two years. The financial markets were willing to grant them a mortgage based on perfection within the markets, both housing and investment.

Problems started surfacing in the third and fourth quarters of last year, and mortgage delinquencies started to mount. As such, bond investors started pulling back and companies started to fall. We started to see weakness in the mortgage market last December, when the first of several large companies was set to take a fall. Own-It Mortgage, a subprime company that was set to close over $20 billion in loans in 2007 was hit with a lack of desire by investors to buy the loans they had funded. Unable to fund the loans themselves, Own-It was forced to close their doors, becoming one of the first ten companies to go down the tubes and be featured on the Mortgage Implodes website, which now lists 233 companies that have gone away.

The most recent casualty of the subprime bust was the bail-out of beleaguered Bear-Stearns, which once had stock trading at $150 a share. JPMorgan Chase said it would purchase Bear-Stearns for $236.2 million, or only $2 a share.

As home prices started to stagnate, many people who obtained loans based on the premise of continually escalating home prices were caught in a trap, as they were unable to sell and unable to refinance their loan. The homeowner who had been living a lifestyle based on their equity was now maxed out, having spent way beyond their normal means.

With no more equity to pull out to consolidate or lower their payments, they were now in trouble. Mortgage payments started to slip and delinquencies rose. According to RealtyTrac, foreclosures are up 60 percent from this time last year, and double the figure from 2006. Last year, more than 1.28 million homes received foreclosure notices. The figures are expected to climb steadily upward for the foreseeable future, but experts forecast that the housing market will begin to recover late this year to early next year.

There is no doubt that what we are experiencing today is unprecedented in real estate and mortgage lending. From the mortgage market meltdown to the subprime crisis, foreclosures are on the rise and credit requirements are tightening. But with every crisis comes an opportunity.

There are more homes available for sale than there are buyers, presenting a huge boost for those looking to invest in real estate today. There are different strategies that apply to homes at various stages of the foreclosure process, and different financing options available, and the breadth of information available can be confusing.

For this reason, the Dunham Group has joined forces with Al Ortega and Annie Chang of Prudential Real Estate as well as Ken David of Stewart Title to present a workshop on Smart Investment Strategies in Today’s Real Estate Rumble. Individuals interested in taking advantage of the current housing situation will benefit from learning about:

• 10 Things You Must Know about today’s housing market
• 7 Buying Myths and Misconceptions about investing in foreclosures
• 5 Stupid Mistakes Smart Borrowers Make when applying for a home loan
• 5 Ways to Beat the Credit Crunch
• 3 Things You Can Do Today to get started with Smart Real Estate Investing

The workshop is free to the public and is slated for Thursday, April 3 from 6pm to 8pm at the Stewart Title Offices at 1900 O’Farrell St. in San Mateo. There are still a few seats left. For more information or to reserve your seat, email me at contact@christinadunham.com.

Until next week, Happy Home loan Shopping!

The Federal Reserve once again slashed the federal funds rate rate, this time by 75 basis points, to 2.25% on Tuesday. This is the sixth cut in the past six months in the central bank’s efforts to stave off a recession, citing a weakening labor market and a slowdown in spending by consumers.

A cut in the Fed Funds Rate decreases the cost of borrowing, stimulating business activity and economic growth. It affects commercial loans, credit card rates, and home equity lines of credit.

History shows us that in the wake of a Fed cut, Bond pricing may initially pop a bit higher in response, but generally very quickly reverses direction and worsens. Fed cuts fuel inflation, because the lower rates just serve to make it more attractive to buy and finance goods and services. And inflation is the arch-enemy of Bonds.

Last week, retail sales data came in lower than expected, and the Consumer Price Index held steady. Unfortunately, this data failed to move rates downwards as it usually would. The culprit continues to be lack of investor interest, and the situation is unlikely to improve anytime in the immediate future.

The collapse of a major overseas hedge fund as well as investment bank, Bear Sterns, highlight the challenges for institutions with significant mortgage-backed holdings. Stocks soared higher on positive earnings results and outlook from two major players in the financial world, Goldman Sachs and Lehman Brothers.

Goldman Sachs Chief Executive Lloyd Blankfein stated “Market conditions are clearly very difficult, but we saw strong customer activity across many of our franchise businesses in the first quarter. Although market conditions present many challenges at the moment, they also offer considerable opportunities.”

This just in from the Sierra Pacific Mortgage corporate office -- as of March 31, 2008, Mortgage Insurance Companies will stop insuring 100% loans.

The maximum financing available for conventional loans after March 31, 2008 will be 97%, so borrowers will have to contribute at least a 3% down payment on a purchase transaction, or possess at least 3% equity in a refinance transaction.

The minimum credit score requirement for loans at 95% to 97% is 680.

Mortgage Insurance companies enable homeowners to borrower a larger percentage of a home's value by assuming a portion of the lender's risk in making a mortgage loan, protecting the lender in case the borrower defaults.

Research shows that homeowners with less than 20% invested in a home are significantly more likely to default, making low down payment loans riskier for lenders and investors. Mortgage Insurance only protects the lender and investor from loss, not the borrower.

Private Mortgage Insurance (PMI) is typically less expensive than FHA insurance because it only covers the top 20% to 30% of the mortgage loan, while FHA insures 100% of the loan.

With recent changes in government regulations, mortgage insurance premiums are now deductible through the year 2010.

Stay tuned for further development. For more information, drop me an email.

Economic news continued to be mostly sour last week with the Labor Department’s Employment Report highlighting the current economic challenges. While the unemployment rate did tick downward to 4.8%, the drop was due mostly to qualified job seekers giving up on finding a job.

The economy also shed another 63,000 jobs last month, and the ISM Manufacturing Index slid below 50, indicating that manufacturing may be contracting. Generally, this much negative economic news would drive mortgage rates downward. However, because investors have been less interested in mortgage-backed instruments, mortgage rates have held higher.

Additionally, many institutions have been selling parts of their portfolios of mortgages, often at a discount. This additional supply of cheap mortgage investment products in the marketplace has kept rates from dropping even further.

Mortgage rates march higher as investors continue to be hesitant about even good-quality, mortgage-backed investments. Existing and new home sales numbers again revealed that the bottom has yet to be found for the struggling housing market. Delinquencies and foreclosures continue to be dismal and market experts predict that this may continue on to next year.

Mortgage lenders continue to be pummeled by the credit crunch. As of March 4, 2008, 233 lenders have either filed for bankruptcy, halted major operations, sold off divisions, or closed shop completely. Many mortgage brokers are also leaving the business, shrinking from 53,000 in 2006 to around 35,000 in 2008 according to David Olson, managing director at the research and publishing firm Wholesale Access.

Sue Woodward of Mortgage Market Guide indicated that individual loan originators are also feeling the crunch. During the height of the 2005 real estate boom, it is estimated that there were over 500,000 loan originators in the U.S. Since then, that number has fallen as much as 60% to an estimated number between 175,000 and 200,000.

If you find yourself suddenly orphaned by your mortgage professional and need assistance with mortgage planning, equity analysis, or credit consultation, feel free to email me with questions at contact@christinadunham.com

With foreclosures on the rise, many lenders have tightened their guidelines and increased minimum credit score requirements. Hardest hit are homebuyers seeking loans with low or no down payment, and homeowners looking to refinance but have little equity in their homes.

How you’ve paid your bills in the past gives a lender an indication of how you can be expected to pay them in the future. A credit score, such as a FICO score, is simply a formula for assessing credit risk and takes into consideration the following information: payment history, debt levels, new credit accounts, and mix of credit accounts.

If you are looking to improve your credit score quickly, now is the time to get started. Here are some great strategies you can utilize right away to give your score a little boost.

Create Some Balance: While paying down installment debt (car, school, mortgage, etc.) will definitely boost your credit score, paying down or paying off revolving debt, such as credit cards, can cause a quick jump in your credit score. The trick is to get and keep your balances below 30% of your credit limit on each card. For faster results, attack those cards with balances closer to their respective credit limits first, as opposed to those cards with simply the highest debt. Remember, if you pay off any credit cards completely, do not close your accounts without discussing it with your mortgage professional first. Cancelling those cards may inadvertently undo all of your hard work.

Know Your Limits: Make sure that your credit card issuers are reporting the correct limits on your accounts to the three major credit bureaus. Without an available limit, your account will appear to be maxed out at its highest reported balance each month. This could cost you up to 80 points in certain instances. Some creditors, such as American Express® and certain cards issued by Capital One®, actually have a policy of not reporting available credit. However, most companies will report your credit limits if you ask them in writing.

Take Some Credit: If you have a credit card account in very good standing, make sure that all three credit bureaus know about it. Just like your credit limits, some creditors don’t report your information to all three credit companies – this is why credit scores often vary between bureaus. If this is the case, give them a call to find out why. Correcting this oversight could provide a significant boost to your score. Also, if you’re in very good standing, ask your creditor for a lower rate or higher credit limit. This will increase the gap in the debt you owe versus the credit you have available. Sometimes hinting about closing an account can suddenly bring out the generous spirit of certain card issuers. Give it a try. The worst they can say is no.

Protect Your Interests: Your credit is calculated based solely on the information available to your creditors. If you have a HELOC, make sure it’s listed as a mortgage or an installment account on your credit reports and not a revolving debt. If you had a bankruptcy, be sure that all items associated with the bankruptcy are being reported correctly, that is with a zero balance. This action could increase your score by 50-100 points. Because simple mistakes like these can wreak havoc on your credit score, it’s important to monitor your credit every four to six months.

Even the Score: If you find information on your credit report that you believe is inaccurate or incomplete, then you have the right to dispute it free of charge. For the fastest results, visit the appropriate credit bureau’s website and file a complaint online. If supporting documents are necessary, you have to file your dispute by mail.

If you’d like more information or a copy of our Sample Dispute Letter, give me a call at 866.7.DUNHAM right away. We’ll be glad to help you in any way we can or, if it becomes necessary, refer you to credit professionals you can trust.

Until next week, Happy Home loan Shopping!

NEXT WEEK: Anatomy of a Credit Score

SPRING FORWARD! Don't forget to set your clocks one hour ahead before you go to bed on Saturday night, March 8!

SAVE THE DATE! Thursday, April 3, 2008 from 6pm to 8pm Want to take advantage of bargain deals in foreclosures and bank repos? Confused about the credit crisis and how it affects your financing options? Interested in getting in on the ground floor of the next real estate boom? Then join Christina Dunham along with Al Ortega and Annie W. Chang of Prudential California Realty for a FREE 2-Hour Workshop on Smart Investment Strategies for Today’s Real Estate Rumble. Where: Stewart Title Offices | 1900 O’Farrell Street, Suite 325 | San Mateo, CA RSVP: Call 866.7.DUNHAM or email contact@dunhamgroupmortgage.com before 3/31/08 To ensure an interactive workshop, seating is limited to the first 30 RSVPs.