Mortgage Blog

Congress set to expand homebuyer tax credit

November 5th, 2009 10:02 AM

WASHINGTON – Buying a home is about to get cheaper for a whole new crop of homebuyers — $6,500 cheaper.

First-time homebuyers have been getting tax credits of up to $8,000 since January as part of the economic stimulus package enacted earlier this year. But with the program scheduled to expire at the end of November, the Senate voted Wednesday to extend and expand the tax credit to include many buyers who already own homes. The House is scheduled to vote on the bill Thursday.

Buyers who have owned their current homes at least five years would be eligible for tax credits of up to $6,500. First-time homebuyers — or anyone who hasn't owned a home in the last three years — would still get up to $8,000. To qualify, buyers in both groups have to sign a purchase agreement by April 30, 2010, and close by June 30.

"This is probably the last extension," said Sen. Johnny Isakson, R-Ga., a former real estate executive who championed the credits.

The homebuyers tax credit is one of two tax breaks totaling more than $21 billion that the Senate included in a bill extending unemployment benefits for those without a job for more than a year. The other would let companies now losing money recoup taxes they paid on profits earned in the previous five years.

"We are still in a world of economic hurt, and Congress must continue to act boldly and creatively," said Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee. "With the right mix of tax breaks and investments we will get through this recession and get folks working again."

The real estate industry has been pushing to extend and expand the housing tax credit. About 1.4 million first-time homebuyers have qualified for the credit through August. The National Association of Realtors estimates that 350,000 of them would not have purchased their homes without the credit.

Extending and expanding the tax credit for homebuyers is projected to cost the government about $10.8 billion in lost taxes. While the measure passed the Senate by a 98-0 vote, Sen. Kit Bond, R-Mo., questioned its efficiency in stimulating home sales.

"For the vast majority of cases, the homebuyer tax credit amounted to a free gift since it did not affect their decision to purchase a home," Bond said. "And for the small minority of buyers whose decision was directly caused by the credit, this raises the question of whether we are subsidizing buyers who may not have been able to afford buying a home in the first place."

The credit is available for the purchase of principal homes costing $800,000 or less, meaning vacation homes are ineligible. The credit would be phased out for individuals with annual incomes above $125,000 and for joint filers with incomes above $225,000.

The credit would be extended an additional year, until June 30, 2011, for members of the military serving outside the United States for at least 90 days.

Expanding the tax credit for money-losing companies is projected to cost $10.4 billion.

The business tax break would allow money-losing companies to use current losses to offset taxable profits earned in the previous five years, giving them refunds of taxes paid in those years. Under current law, businesses with annual gross receipts of more than $15 million can claim losses back only two years.

The tax break would help industries suffering losses in 2008 or 2009, including retailers, homebuilders and newspapers. Congress included a scaled-back version of the tax break — for companies with revenues of $15 million or less — in the economic recovery package enacted in February. The new tax break would be available to companies of any size, providing a quick source of cash.

The U.S Chamber of Commerce has been a big backer of the tax break for money-losing companies.

"It frees up capital that they can use to maintain jobs and potentially even hire new people as the economy returns," said Caroline Harris, senior tax counsel for the U.S. Chamber of Commerce.

The tax breaks would be paid for largely by delaying a tax break for multinational companies that pay foreign taxes. It was passed in 2004 and originally was to have taken effect this year, but would now be delayed until 2018.

Posted by Jeremy Schachter on November 5th, 2009 10:02 AMPost a Comment (0)

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The new rules of mortgage lending

February 4th, 2009 4:23 PM

The new rules of mortgage lending

Shopping for a home loan? Things have changed - here's what you need to consider.

NEW YORK (CNNMoney.com) -- If you're shopping for a mortgage these days, it's a whole new world out there.

"There have been a huge number of changes over the past few years in mortgage borrowing," said Gibran Nicholas, founder of the CMPS Institute, which trains and certifies mortgage advisors.

Of course, many of the subprime loans that helped fuel the housing boom - those that didn't require borrowers to show any proof of income, or that let homeowners make minimum payments - are are simply no longer available.

But even buyers looking for a traditional mortgage are now faced with different factors to consider.

Here is what you need to know:

Paying up-front points. Borrowers can pay points - one-time, up-front fees - in order to reduce their mortgage's interest rate over the life of the loan. One point represents 1% of the mortgage value.

But they often assume that they should never pay points, according to Alan Rosenbaum, founder of mortgage broker Guardhill Financial. That's a mistake, in his opinion.

When interest rates were high, paying points didn't make sense because borrowers were very likely to refinance after rates dropped. They wouldn't hold their original loans long enough to recoup their up-front costs.

But now borrowers can get a lot more bang for their buck. The old rule of thumb was that paying one point at closing could lower their mortgage's interest rate by a quarter percentage point or so.

"Today the spread is worth a half point to a full point on the rate," said Rosenbaum.

It means paying $2,000 on a $200,000 mortgage at closing can shave as much as a whole percentage point off the loan's interest rate, changing a 6% loan to 5%.

That would save $126 a month, and pay for itself in 16 months. Even if the rate were only lowered to 5.5%, that would still save $64 a month, paying for itself in 32 months.

Still, not everyone is convinced. Rosenbaum recently had a client who chose a 15-year fixed rate loan at 5.875% with zero up-front points on a $800,000 loan, instead of paying a point to get a 5.375% loan.

Had the borrower chosen to pay that point, he would have recouped that cost in about three years, and then gone on to save more than $200 a month for the remaining 12 years of the loan.

Of course, there are caveats. Buyers who are planning to refinance or sell within a few years shouldn't pay points, since the strategy simply doesn't pay in the short term.

Making more than the minimum down payment. If you can afford to put 25%, 30% or more down, should you do it?

Most lenders require a minimum down payment of 20%; anything less and borrowers will need to obtain private mortgage insurance.

And if a buyer could afford to put more than 20% down, it was generally assumed that they should.

The traditional thinking was, "If you have the capital to commit, why not?" said Keith Gumbinger of mortgage research firm HSH Associates. "It will give you a smaller balance to pay off. But now, in light of declining home markets, not everyone would agree with that."

High down payments can be wiped out in severely declining markets.

Nicholas said he knows of a couple in Arizona who put a whopping $400,000 down on a million dollar house a couple of years ago. That gave them, they thought, a nice home equity cushion should they run into financial trouble.

"But prices are down so much, the couple still fell underwater," he said. "It would have been better to conserve that cash in case home prices continue to decline."

Locking in the mortgage rate. Many borrowers choose not to lock in when rates are falling, as they have been, since they assume that the deals will only get better.

But that's often a mistake.

"We almost always recommend that if you have the numbers that make your deal work, then lock it in," said Gumbinger.

His reason: Interest rates tend to jump up much faster than they inch down, meaning that buyers are much more likely to get stuck with a higher mortgage rate than they are to get lower one because they waited.

Besides, locking in at the currently very affordable rates can give borrowers peace of mind, which is no small matter when you're trying to buy a house.

"You'll sleep better at night," said Gumbinger.

Posted by Jeremy Schachter on February 4th, 2009 4:23 PMPost a Comment (0)

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Dec. existing home sales rise 6.5 percent

January 29th, 2009 12:21 PM

Jan. 26, 2009 08:34 AM
Associated Press

WASHINGTON - Sales of existing homes posted an unexpected increase last month, closing out the worst year for the U.S. real estate market in more than a decade.

The National Association of Realtors said Monday that sales of existing homes rose 6.5 percent to an annual rate of 4.74 million in December, from a downwardly revised pace of 4.45 million in November.

The results were better than expected. December's sales had been forecasted to fall to a pace of 4.4 million units, according to Thomson Reuters.Buyers were taking advantage of dramatically lower prices, especially in distressed markets like California, Florida and Nevada, where foreclosures have swamped the market.

The nationwide median sales price plunged to $175,400, down 15.3 percent from $207,000 a year ago. That was the lowest price since May 2003 and the biggest year-over-year drop on records going back to 1968.

"The economy just simply cannot recover as long as home prices continue to decline," said Lawrence Yun, the trade group's chief economist, who called on lawmakers to include tax credits for home buyers in the economic recovery package being considered by Congress.

For all of 2008, there were 4.9 million existing home sales, down more than 13 percent from a year earlier, and the lowest total since 1997.

And another encouraging sign - the number of unsold homes on the market in last month fell nearly 12 percent to 3.7 million. At the current sales pace, it would take 9.3 months to sell all the properties, down from 11.2 months in

Posted by Jeremy Schachter on January 29th, 2009 12:21 PMPost a Comment (0)

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Time To Buy?

January 29th, 2009 12:20 PM

Cheap rates and foreclosure sales lure house hunters.

By Andrew Murr | Newsweek Web Exclusive

Jan 29, 2009

Falling housing prices spelled opportunity to A. J. Harpold. The Los Angeles-based entertainment assistant, 29, had been looking for a year to buy her first home when she joined 2,300 other potential buyers at a foreclosure auction recently at the L.A. Convention Center. Her target: Lot 14, a 4 BR, 2 BA San Fernando Valley bungalow she'd inspected with her real-estate agent and contractor. As the auctioneer cried the prices and the tuxedo-clad bidders' assistant roamed the aisles, Harpold jumped in at $330,000. Another bidder topped her. She came back at $350,000, then $370,000 before she won at $385,000 ($404,000 counting a 5 percent auction fee). "The price was just right," she says, noting that she'd be paying 35 percent less than the home's 2006 sale price of $665,000.

The housing market is still in the tank, but bargain hunters like Harpold are starting to jump back in. How is that possible? Relatively cheap foreclosure properties and falling interest rates are attracting buyers. Nationally, foreclosures rose 81 percent, according to RealtyTrac, with nearly half of the total coming in just four hard-hit states: Florida, Arizona, Nevada and California. In California, foreclosed properties made up 46 percent of all existing home sales last year, according to MDA DataQuick, and foreclosures were up 181 percent statewide. "The market is being driven by foreclosures and foreclosure products," says James Liptak, president of the California Association of Realtors. Last month in the suburban Inland Empire counties east of L.A., nearly 70 percent of existing home and condo sales were foreclosures.

Despite mortgage rates that hovered at about 5.25 percent, housing prices continued to fall, according to new data released this week. Nationally, the S&P/Case-Schiller home price index showed a drop—a record 18.2 percent—in the year that ended in November 2008, the latest data available. All 20 cities in the index dropped, but hardest-hit markets led the way down: Las Vegas plunged 31.6 percent; San Francisco 30.8 percent and Los Angeles 26.9 percent for the year. Meanwhile data released Monday by the National Association of Realtors showed a small glimmer of hope: while prices continued to fall, more people bought existing homes in December than the month before as sales of existing homes rose 6.5 percent, led by an impressive 13.6 percent jump in the West.

In California, the new shoppers are bargain hunters with good credit. "You are seeing an entirely new set of buyers," says Jeffrey Frieden, CEO of Real EstateDisposition Corp., the California auction firm that put on the Los Angeles auction. "Some of them are younger families and other first-time buyers, and a lot of them are people who were priced out of the market before." REDC sold 32,000 homes in about 35 states last year, and business is booming. He says the bulk of customers these days are buyers looking to move in. Frieden says that the well-preserved homes go to move-in buyers; investors looking for rentals or teardowns to build apartments are buying what he calls the "rougher assets."

Getting a loan remains problematic, but buyers with good credit are able to get approvals. Harpold, who makes about $60,000 yearly by splitting time as an assistant to Marty Kudelka, Justin Timberlake's choreographer, as well as to dancer and actress Mayte Garcia, Prince's ex-wife, says banks have told her she has "exceptional credit" with a FICO score of more than 800, which she earned by having plenty of savings and little credit-card debt. She is still working out the details of her loan, but she says she's considering a 30-year mortgage, with no points, at 5.3 percent. She's hoping to keep her down payment low, around 5 percent, "so I can have more liquid cash to fix up the house." (FHA-insured loans still call for as little as 3 percent down payment.)

California needs more motivated and qualified buyers like Harpold. The housing crisis has exacerbated the state's fiscal mess. Falling house prices mean lower property-tax receipts to run local governments and schools, leading to layoffs and cutbacks. Meanwhile state unemployment jumped to 9.3 percent, and the state is collecting less in sales and income taxes. The little money the state has left is being fought over by legislators and Gov. Arnold Schwarzenegger who are dealing with a budget shortfall of $42 billion through 2010. Without an agreement, the state could run out of money by late February.

State controller John Chiang recently warned he might have to delay $3.7 billion in tax refunds and disability payments in February unless state lawmakers reached a viable budget deal by the end of the week—a delay that would hurt many, including families on the brink of foreclosure. Help from Washington may be on the way, though. The House version of the stimulus package, passed Wednesday, contained $11 billion the feds could rush to Sacramento—and cut the budget shortfall by 25 percent.

Plenty of hurdles remain. Credit is hard to come by for "jumbo" loans above $417,000 that dominate the more expensive, coastal markets. Rising unemployment may replace fears over falling home prices as a psychological hurdle. "A year ago, the public put off buying out of fears that prices were going to go lower," says the California Realtors' Liptak. "Now they are worried, 'Am I going to have my job six months or a year from now?'"

Back at the REDC auction, buyers were a mix of caution and exuberance. Los Angeles banker Richard Teng had his eye on a downtown condo for his wife, Masako, and their baby daughter. With a household income of about $200,000, Teng set limits in the mid-300s for his bids on a pair of two-bedroom condos. But when the bidding zoomed past his target price, he bailed. "I'll keep looking," he said. But Walter Tillman, 64, a retired city worker, bought a $250,000 home in South Los Angeles—sight unseen. The auction firm sent him the wrong catalog, so he didn't see even a picture until he got to the auction. Still, he's aiming to put 20 percent down and get a loan at around 5.7 percent. "That was my first bid at any kind of auction," Tillman says. "We kind of took a chance." The housing market won't stabilize until a lot more buyers think it's smart to take chances, too.

Posted by Jeremy Schachter on January 29th, 2009 12:20 PMPost a Comment (0)

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Phoenix leads nation in home price drop

November 7th, 2008 3:05 PM

by Catherine Reagor - Oct. 28, 2008 10:52 AM
The Arizona Republic

Metropolitan Phoenix now leads the nation for home price declines, according to the S&P/Case-Shiller Home Price index released this morning. The Valley’s existing home price fell 30.7 percent between August 2007 and August 2008.

The Valley just beat out Las Vegas for the top spot for the biggest drop in home prices. The Nevada city’s resale home price has fallen 30.6 percent based on the index.

Miami, Los Angeles, San Francisco and San Diego were all right behind with home price declines of more than 25 percent.

Most of the country’s big metro areas posted home price declines. An index of the 20 largest U.S. cities fell almost 17 percent.

“The downturn in residential real estate prices continued, with very few bright spots in the data,” said David Blitzer, chairman of the Index Committee at Standard & Poor’s.

Cleveland and Boston were the only two major cities, tracked by the index, to post gains in home prices.

Metro Phoenix trailed Las Vegas and Miami for home price declines until August. The index lags about two months so researchers can gather all the necessary home data.

The S&P/Case-Shiller Home Price Index uses resale data to track home prices. It is considered one of the most accurate housing indexes in the country.

Posted by Jeremy Schachter on November 7th, 2008 3:05 PMPost a Comment (0)

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Mortgage rates take big drop after bailout plan

September 9th, 2008 3:25 PM

Mortgage rates take big drop after bailout plan

Brokers see them staying below 6 percent for the next several months

By Jane Hodges

MSNBC contributor

updated 18 minutes ago

For the first time in nearly eight months, mortgage brokers and lenders have good news for their clients. That’s because the federal bailout of mortgage giants Fannie Mae and Freddie Mac has resulted in a sharp and sudden drop in mortgage rates.

Sunday's announcement that the government would intervene in the troubled lending giants sent long-term mortgage rates plunging.

The average rate on a 30-year, fixed-rate mortgage had fallen to 5.88 percent, down from 6.26 percent last week, according to Bankrate. The average rate on a 15-year fixed-rate loan fell to 5.49 percent, down from 5.77 percent during the week prior. For the mortgage market, that represents a huge drop, virtually overnight.

“I’ve seen a drop like this happen maybe two or three times in my 17 years in the business,” said Bob Walters, chief economist at Quicken Loans. “That’s an extraordinary rate drop.”

He said the Detroit-based company logged its busiest day of the year Monday in terms of combined new loan and refinancing applications.

While interest rates on fixed-rate mortgages dipped below 6 percent in January, that drop only lasted one day. This time, lenders say, the newly lowered interest rates should last much longer. The news, they say, is good for consumers as well as for the real estate industry.

For mortgage lenders and brokers, the needle’s shift south means that phones are ringing and Blackberries are quivering with eager calls from consumers.

“When you see rates go down nearly half a point in one day, people notice,” said Joey Hansen, a mortgage broker in the Apex, N.C. “I think we’ve entered a new world. The confidence restored in world markets will last for awhile.”

For her part, Hansen believes fixed-rate mortgages will remain below 6 percent for several quarters.

Ditto for Peter Thompson, senior loan officer at Professional Mortgage Partners in Downers Grove, Ill.: He believes rates could stay below 6 percent for the rest of 2008.

“A lot of people missed out on these rates the first time,” he says, referring to brief rate drops in January. “People are just finding out about the new rates.”

But other brokers note that, while the newly lowered rates could last for a few months, they won’t stay below 6 percent forever and may climb back up to about 6.5 over the next year.

Joe Metzler, a senior mortgage broker at the Metzler Mortgage Group at St. Paul, Minn.-based Mortgages Unlimited, says that he’s seen only a slight uptick in customer contact since the news of the federal intervention broke, and what calls he’s gotten are coming mostly from clients already shopping for a mortgage but who hadn’t yet locked in rates.

Metzler said he was burned in January when rates dropped to around 5.8 percent: He hastily organized a postcard mailing to 15,000 former and potential clients and mailed it out the day of the rate drop, but as the week wore on rates ticked back up to about 6.3 percent. By the time clients called about the low rates marketed in his mailing, he couldn’t offer them, he says.

Yesterday I was reluctant to do that again,” he says.

He thinks they are mostly at the level they are now as a "knee-jerk" response to the federal intervention, and will kick-start a market recovery before going up again.

“Rates can’t live there forever,” Metzler says. “I’d tell anyone who thinks rates below 6.5 percent are a good deal to lock them in now.

Posted by Jeremy Schachter on September 9th, 2008 3:25 PMPost a Comment (0)

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Realtors: Existing home sales rose in July

August 25th, 2008 11:35 AM

Realtors: Existing home sales rose in July

39 commentsAug. 25, 2008 08:44 AM
Associated Press

WASHINGTON - Sales of existing homes rose 3.1 percent in July, easily beating Wall Street's expectations, as buyers snapped up deeply discounted properties in parts of the country hit hardest by the housing bust.

However, the number of unsold properties hit an all-time high, the latest indication that the worst housing market slump in decades is far from over.

The National Association of Realtors reported Monday that sales rose to a seasonally adjusted annual rate of 5 million units. Sales had been expected to rise by only 1.6 percent, according to economists surveyed by Thomson/IFR. Home sales were 13.2 percent lower than a year ago and prices were down dramatically. The median price for a home sold in July dropped to $212,000, down by 7.1 percent a year ago.

Despite the third monthly sales jump this year, the number of unsold single-family homes and condominiums rose to 4.67 million, the highest number since 1968, when the Realtors group started tracking the data.

That represented a 11.2 month supply at the July sales pace, matching the all-time high set in April.

Sales were up in all regions of the country except the South, which posted a 0.5 percent decline. Sales rose by 5.9 percent in the Northeast, 0.9 percent in the Midwest and 9.7 percent in the West.

Analysts say that until the inventory level is reduced to more normal levels, the housing slump is likely to persist. The inventory level is being driven higher by a massive wave of mortgage foreclosures.

Despite the rise in sales, Lawrence Yun, the Realtors' chief economist, was reluctant to conclude that the U.S. housing market has hit bottom.

While buyers are pouncing on lower prices - especially in places like California, Florida and Nevada - sales are sluggish in formerly stable states like Texas.

"People are responding to lower prices," Yun said, but there is "too much uncertainty" about the housing market's future to mark a definite bottom.

One key unknown is the ability of mortgage finance companies Fannie Mae and Freddie Mac to supply money for loans. The two government-sponsored companies have cut back the availability of mortgages significantly as they cope with mounting losses from foreclosures and officials ponder whether to shore up the two struggling companies.

President Bush last month signed sweeping housing legislation that aims to prevent foreclosures by allowing an estimated 400,000 homeowners to swap their mortgages for more affordable loans, but only if their lender agrees to take a loss on the initial loan.

Even with government help, nearly 2.8 million U.S. households will either face foreclosure, turn over their homes to their lender or sell the properties for less than their mortgage's value by the end of next year, predicts Moody's Economy.com.

Posted by Jeremy Schachter on August 25th, 2008 11:35 AMPost a Comment (0)

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5 questions about the new housing bill

August 18th, 2008 12:12 PM

5 questions about the new housing bill

4 commentsby J. Craig Anderson - Aug. 18, 2008 12:00 AM
The Arizona Republic

The Housing and Economic Recovery Act of 2008, signed into law by President Bush on July 30, has sparked numerous debates over its mechanisms to assist struggling homeowners, future homebuyers and lending institutions. However, some of the complex law's nuances are poorly understood, and certain provisions have received only a passing mention in news reports. In an effort to better explain the law, here are five key questions and answers:

Question: Why does the housing act offer unlimited credit to Fannie Mae and Freddie Mac?

Answer: The law's most far-reaching provision gives financial assistance to the government-sponsored Federal National Mortgage Association and Federal Home Loan Mortgage Association, which own or insure nearly half of the roughly $12 trillion in U.S. mortgage debt. Fannie Mae and its younger brother Freddie Mac have suffered losses totaling about $11 billion in recent months, due in large part to their investments in financially risky sub-prime loans. Both associations purchase loans from lenders and sell them as mortgage-backed securities to the global investment market. The housing act allows the U.S. Treasury to offer Fannie Mae and Freddie Mac an unlimited line of credit until the end of 2009, and it can also buy their stock. The hope is that a federal guarantee will bring gun-shy investors back to the secondary market, which provides the funding for lenders to make future loans.

Q: Which homeowners are eligible for Federal Housing Administration refinancing of their existing mortgage loans?

A: To qualify, a borrower must live in the home, cannot own any other property and must have a high mortgage debt-to-income ratio - most likely 31 percent or more, though there may be exceptions. Applicants also must agree to forfeit no less than 50 percent of the home's future appreciation. They lose even more - up to 100 percent - if they sell within one to five years. FHA must consider the applicant's debt-to-equity ratio, which means borrowers who are significantly upside-down would not likely qualify. The borrower must provide tax returns for the past two years to prove adequate income and must not have any fraud convictions in the past 10 years. Possibly the most significant hurdle is that lenders are not obligated to accept the refinancing plan. Also, there is a $300 billion limit on the cost of insuring all refinanced loans.

Q: What are the terms and conditions of the new $7,500 homebuyer tax credit created under the law?

A: Most importantly, the tax credit is in the form of an interest-free loan and is not a gift or grant. The borrower must repay it within 15 years of purchasing the home. Only first-time homebuyers are eligible, and the tax break only applies to homes purchased between April 9, 2008, and July 1, 2009. The tax credit's full amount is only available to individual borrowers whose annual income is below $75,000 and couples with a combined income below $150,000.

Q: How does the new law affect reverse mortgages?

A: The housing act will have a significant effect on the issuance of home equity conversion mortgages, also known as reverse mortgages. Proponents of reverse mortgages, which allow homeowners age 62 or older liquidate their home's equity over time by deeding the home to a bank upon their death, say the law makes them safer and more accessible than in the past. The law requires reverse-mortgage borrowers to receive "adequate counseling" from a third party not associated with the lender, and it allows the government to create a new counseling program funded by mortgage insurance premiums. It also reduces possible conflicts of interest by forbidding reverse-mortgage loan originators from selling insurance, annuities or other financial products. They may not give or receive incentives from others to sell such products to reverse mortgage borrowers. The law also places a $6,000 cap on origination fees, which will be adjusted periodically for inflation.

Q: What other provisions are included in the bill?

A: One provision that has received some attention is the elimination of seller-funded down payment assistance programs for FHA borrowers, which takes effect Oct. 1. The ban will virtually eliminate no-down-payment offers on new homes. FHA officials have long requested the ban, saying loans issued with down payment assistance carry a default rate three times higher than that of traditional FHA loans. The housing act also places a one-year moratorium on "risk-based" FHA loan insurance premiums, a program initiated in July to charge borrowers based on the likelihood of loan repayment. It streamlines the process for issuing FHA-insured loans on condominiums, and reforms the FHA loan process for manufactured homes. In addition, it authorizes a pilot program to generate alternative credit rating information for loan applicants with insufficient credit history.

Posted by Jeremy Schachter on August 18th, 2008 12:12 PMPost a Comment (0)

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How the housing rescue bill can help you

July 23rd, 2008 5:55 PM

How the housing rescue bill can help you

The legislation, which is likely to be passed quickly, devotes $300 billion to helping troubled homeowners avoid foreclosure. See if you qualify.

NEW YORK (CNNMoney.com) -- The House is expected on Wednesday to pass a $300 billion housing rescue bill aimed at helping troubled homeowners avoid foreclosure and supporting mortgage giants Fannie Mae and Freddie Mac.

If the bill is then passed by the Senate and signed by President Bush, who today withdrew his threat to veto the legislation, thousands of at-risk borrowers will be able to refinance their unaffordable old mortgages into new low-cost fixed-rate loans insured by the Federal Housing Administration (FHA).

The Congressional Budget Office estimates that 400,000 borrowers with $68 billion in loans may benefit from the program - but the bill allows for as many as 1 million or 2 million borrowers to participate in the program.

Here's what homeowners need to know.

Who's eligible?

Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 40% of their gross monthly income on all household debt to be eligible for the program.

They can be up to date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage - and attest that they are not deliberately defaulting just to obtain lower payments.

Before homeowners can get FHA-backed mortgages, they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it's to pay for necessary upkeep on the home.

To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home's appraised value at the time.

How can I apply?

Borrowers can contact their current mortgage servicer or go directly to an FHA-approved lender for help. These lenders can be found on the Web site of the Department of Housing and Urban Development.

How does the refinancing process work?

This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home's current value. In areas where prices have plummented by as much as 20%, that will mean a substantial loss for the lender.

But lenders won't sign off on a workout unless they think that they'll lose less money on that than they would by allowing a home to go through the costly foreclosure process.

Each loan will have to be underwritten by an FHA lender on a case-by-case basis. That means the banks will do a new appraisal to determine the home's current value, as well as examine and verify income statements, bank accounts, job histories and credit scores.

Based on that new appraised home value, the FHA lender must determine how much the original lender has to reduce the original mortgage, so that it will reflect 90% of the home's market value.

If the original lender agrees to the writedown, the new lender buys the old loan and takes over the reworked mortgage.

As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally, it pays the FHA an up-front premium equal to 3% of the mortgage principal.

What does it cost?

There should be little up-front costs for borrowers to bear. Loan origination fees will vary by lender, but these can usually be paid by the borrower over the life of the loan in the form of a slightly higher interest rate.

However, the refinanced loans do come with many strings. For one thing, borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5% of the principal annually.

Borrowers also agree to share any profits from future home-price appreciation with the FHA. To do that, they'll pay a "3% exit fee" of the mortgage principal to the FHA when they resell or refinance.

Plus, they'll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs.

After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.

What will I save?

Savings depend on what borrowers are paying for their present loan and where they live, but for most people it will be substantial, even after factoring in the FHA fees.

In areas that have sustained huge price drops, such as Sacramento, Calif., where prices have fallen by about 30% over the past year, some loans might be reduced by more than 40%.

Additionally, the FHA loans carry reasonable interest rates, which are fixed for the life of the loan, as opposed to a subprime adjustable-rate mortgage that can jump higher every six months

Posted by Jeremy Schachter on July 23rd, 2008 5:55 PMPost a Comment (0)

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Sneaky ways you're ruining your credit score

July 17th, 2008 5:39 PM

Sneaky ways you're ruining your credit score

by Marie Claire, on Thu Jul 3, 2008 8:03am PDT

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The most obvious way to blow your credit score is to make a late payment. Even if your credit score is solid, a single missed payment could cost you as much as 100 points, say many financial advisers. According to the Fair Isaac, the company that calculates your FICO score, payment history accounts for 35 percent of your total score. And that credit score will help determine what kind of rates you can score when applying for home or car loans. So first things first: Figure out your credit score.

Your FICO score, a number between 300 and 850, is based on five criteria:

payment history
amounts owed
length of credit history
new credit
types of credit used

You can find out yours at myfico.com. According to Experian National Score Index, one of the major credit bureau companies, the average credit score in America is currently 692.

But even if you pay your bills on time religiously, your credit score may be endangered. Here are ways charge card sins could cost you some precious credit score points.

1. Not asking for what you want
Don’t accept everything your credit card company offers as written in stone. If you don’t want that credit line increase, ask them to reduce it back to your old one. Had one late payment? If your record is squeaky clean, ask them nicely to remove the blemish from your credit history (which, remember, could cost you up to 100 points on your credit score). They could say no, but they could very well say yes because they value you as a customer. Ask anyway. Your credit score will thank you.

2. Accepting credit line increases
Being the responsible, on-time bill-payer that you are, your credit card company rewards you by upping your credit line. This isn’t necessarily a bad thing, but remember how much you can afford to reasonably charge. Resist the urge to spend more or risk being unable to meet your new minimum payments.

3. Consolidating your accounts
So you’re considering transferring all your credit card balances to one card so you’re only dealing with one bill every month. It sounds sensible, right? A big no-no, according to the keepers of the credit score. Think of it this way: One big balance looks a whole lot worse than multiple low balances. Appearances are everything.

4. Canceling a Credit Card

We are often led to believe that taking a pair of scissors and snipping that charge monster to shreds is a good thing. But don’t cut up those old cards so quickly. Your credit score takes into account credit history. Get rid of an old standby in your wallet and you could erase all those years you were an excellent bill payer.

Posted by Jeremy Schachter on July 17th, 2008 5:39 PMPost a Comment (0)

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