What does todays Fed Rate Cut mean to my Mortgage?

The Federal Reserve surprised everyone Tuesday with an emergency intersession rate cut of .75%, the deepest cut in the Fed Funds Rate since 1984. The Fed Governors are acting in direct response to recent reports that the country is on the brink of recession.

If you have credit cards, auto loans, HELOCs, or an Adjustable Rate Mortgage, the Fed’s decision to cut this key interest rate is great news. For long-term mortgage rates however, this could signal the beginning of the end for the lowest 30-year home loan rate borrowers have experienced since 2005.

Let’s look at the impact of a few recent Fed Funds Rate cuts and the corresponding impact to home loan rates to see what this could mean for you:

Period	Fed Funds Rate Cut	Impact to Home Loan Rates
January to June 2001	Down 2.25%	Rose 0.10%
October to December 2001	Down 0.75%	Rose 0.45%
May to August 2003	Down 0.25%	Rose 0.78%

Rates are predicted to be cut again when the Federal Reserve meets at the end of this month. Many believe Tuesday’s action was taken because of a dramatic downturn in the stock market, where the Dow dropped 464 points, the worst single day drop since September 11, 2001. Since the Fed’s announcement, the Dow has recovered much of those losses but volatility is likely to remain a consistent theme throughout the week.

If you are waiting for long-term mortgage rates to fall further from here, don’t count on it. Your best chance to lock in the lowest mortgage rates since 2005 is now. Getting your application in process will allow you to capture a rate near all time lows and, with many experts predicting home values could continue to decline, waiting could kill your chance to capture a great rate if your home doesn’t appraise.

This is an unprecedented market and things are moving fast. Regardless of your current mortgage, please give me a call so that we can review your current financial situation in light of these market movements.

Social Lending Sites?

You’ve heard of social networking sites like MySpace and FaceBook…but have you heard of social lending sites?

Over the past few years, several websites have sprung up that combine features of the omnipresent social networking sites, and commerce sites like eBay. These sites allow individuals to become either a borrower from or a lender to the online community. The website collects basic financial information from would be borrowers, as well as the intended purpose for the money. The site then posts a short profile of the borrower, so that other members of the community can choose to lend money to them or not.

The very first created was www.Prosper.com, which allows individuals to borrow and lend small amounts of money, for any variety of purposes. Recent posts include families wanting to start a small business and a father seeking to pay off his son’s medical bills…you can see their pictures and read their stories. The maximum loan amount is $25,000 – and lenders can borrow as little as $50 towards someone’s total desired loan amount, and determine what rate they are willing to lend at based on the individuals credit standing and risk profile. Prosper encourages lenders to fund small amounts towards many individuals loans, to help minimize risk of default. Why consider it? Although risk of default is certainly a potential – because these are generally individuals unable to borrow via more traditional methods – it is quite a learning experience, and the rate of return will be higher than via a traditional savings account.

Another similar site is www.Zopa.com – also a social lending site, but with a few key differences. If a borrower request is approved, Zopa funds it directly, raising funds by offering Certificates of Deposit (CD) to be purchased with attractive rates of return. If you purchase a CD, you are required to choose at least one borrower request to sponsor. By sponsoring a borrower you marginally reduce the interest rate earned on your CD, which in turn is used to reduce the rate that the borrower is paying. Best of all, your money and your rate of return is guaranteed and insured.

Perhaps the most intriguing of the social lending sites, www.Kiva.org is a blend of charitable giving and online lending. This site specializes in very small loans made to individuals in third world countries. The loans requests and photos are fascinating…who knew that a cow could be purchased for only $500, or that you could literally purchase tons of coffee and cocoa for $1000? The downside to Kiva is that the loan is not repaid with interest, and because it is a loan and not a charitable contribution, it is not tax deductible. But the upside – helping those in developing countries create and expand their businesses, provide for their families and improve their countries economy as a whole – well, this offers a substantial rate of return, just of a different type.

And consider getting your kids involved. Parents can use sites like these to help instill a sense of giving back, as well as a broader view of the economic world. Start with a small amount of money, and let them decide who to lend it to and why. When the loan is repaid, turn around and lend it again. It’s never too early to get kids involved in the process of understanding money, lending, and the world around them as a whole.

National Mortgage Licensing Registry Officially Launched

Written by: Chris Garcia, Team Business Manager
www.michellesgarcia.com

On January 2, 2008, the Nationwide Mortgage Licensing System (NMLS) was officially launched by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR). Based on the registry used to regulate securities brokers and dealers, the NMLS database, according to a presentation on its website, “is where state-licensed mortgage lenders, brokers, and loan officers have the ability to apply for, amend, update, and renew licenses.”

According to Forbes, “The [NMLS] database will include unique identifiers for each company, its branches, owners and loan officials. Similar to Social Security numbers, these identifiers will follow that firm or person throughout the industry.” Reports suggest that by next year, consumers will be able to check credentials of a mortgage loan officer or lender through this system.

Participating states include: Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York and Rhode Island. More than 35 states are reportedly slated to join by the end of 2009. In all, 42 states have signed a statement of intent to participate in NMLS, although NMLS anticipates participation from all 50 states eventually.While all states require that mortgage companies be licensed, licensing standards vary in each state. If you are a current licensee in one or more of these 7 “participating” jurisdictions, the NMLS says that you must transition your license information on the System according to the transition plan outlined for each state.

For more information, visit NMLS and watch its interactive overview presentation or call (240) 386-4444 from 9:00 a.m. to 6:00 p.m. EST.

To schedule an appointment with a Trusted Mortgage Advisor, please visit www.michellesgarcia.com to set an appointment.

What’s Going On?

Anyone watching or reading the financial news over the last few weeks has seen a lot of angst and consternation over the state of the mortgage industry. In fact, one of the larger lenders in the US, American Home Mortgage, was forced to shut down operations recently. But why? What is happening, what does all this mean to you and most importantly… what should you be doing do right now to make sure you are protected?

Here’s the scoop.

Over the past several years, many loans were made to homeowners with somewhat 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 that they were somewhat riskier in nature than A credit, prime, or traditional loans. Another type of “non-conforming” home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417K, which is the current maximum loan that can be done using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done – it’s called a “jumbo loan” – but the end money comes from private institutions, not from the large government sponsored entities of Fannie and Freddie.

Most non-conforming loan product rates popped significantly higher recently. Here’s what happened.

The end investor for Subprime or Alt-A loans will charge a premium for taking on a pool of these loans, because they know that traditionally, they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure has been on the rise – partly due to the fact that with credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell in order to get out of trouble. So now, these end institutions are demanding a much higher “risk premium” for taking on these pools of loans, as they see the rates of default are climbing higher.

But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101K for a $100K loan that will bear interest, they may only be willing to pay $95K for that $100K mortgage to account for the risk. Multiply that times thousands upon thousands of loans…and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a “liquidity crisis”, and is exactly what happened to American Home Mortgage – there was no mismanagement, but they simply got caught holding too many “hot potato” loans, forced to sell them at massive losses…and eventually they had to make the decision to close the doors and stop the bleeding.

Further, even when a lender is able to take some losses, they may be subject to a “margin call”. This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset that they are secured on is now diminished. This is exactly like margin calls in the Stock market. If you have a loan against a Stock that is losing value, you will get a “margin call” and need to pay down the loan, as the underlying Stock is losing too much value to be considered adequate collateral any longer. So for the big lenders, as their portfolio is losing value due to increased risk premiums and losses…the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, which then exacerbates the problem.

In response to seeing this situation play out in the demise of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared – and likely over-prepared – for increased risk premiums down the road. Even though loans above $417K are not presently suffering from increased delinquencies like the Subprime and Alt-A loans are, these rates popped higher as well, because they are being purchased by smaller private entities that can’t afford to take on any margin of risk.

What happens next?  The major damage is probably already done, and the present situation will likely settle out over the coming year.  Lenders will stop pulling products off the shelf, and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize.  

But here are a few important things YOU should do right now:

ONE:  Even if you are not presently in the market for a home loan of any type, make sure that your credit standing is as solid as possible. Many people in the market for a home loan didn’t expect they would have a need, and didn’t plan in advance to ensure their credit would qualify them for the best possible financing. With no immediate need for a home loan, time is on your side… why don’t we take a few minutes together and just make sure you are prepared, should a need arise down the road?  Call or email me right away.

TWO:  If you are in the market for a home loan, or know someone who is - understand that now is the time to be working with a real qualified professional who can keep you informed of changes in the market and get your loan funded quickly. Now is NOT the time to be playing the risky game of trying to scour the entire nation to find someone who promises to save you a paltry amount on costs, or deliver a rate that seems too good to be true.

Your home and your financing are just too important, and times have changed. We are here to help and advise during these volatile times – and would welcome emails from you, your friends, family, neighbors or coworkers. Contact us at chris@MichelleSGarcia.com

Who really loses?

By: Chris Garcia, Team Business Manager

Over the past several months a steady stream of large financial companies have given notice of large losses that they are sustaining as a result of the credit crunch and sub-prime mortgage market issues. So the question is, who really loses when a company or in this case an industry loses a lot of money?

Clearly, it is rarely the CEO of the firm. And obviously, it is initially the shareholders in the company, as the value of their investments plummet. But who really pays the price in the end…and how? Well, as many Americans are finding, the buck stops with the consumer.

Home Loan Rates

Although home loan rates overall remain fairly low, Fannie Mae and Freddie Mac–the two large government sponsored companies that form the framework for most conventional home loans–have announced a series of changes over the past sixty days. Many of these changes deal with stricter underwriting standards and guidelines, but several are price increases as they work to cover losses incurred based on previous loans.

Price increases are generally not paid in cash, but rather are reflected by a higher interest rate on a new loan – which is why it is crucial that you clearly understand the rates and terms that you qualify for, when you are shopping for a new mortgage.

Credit Cards

It’s pretty common practice for credit card issuers to hike rates if a payment is missed or the card is charged over the limit, especially if that consumer had an average or below average credit rating. But it is becoming increasingly common that issuers are starting to place these ‘hair trigger’ rate resets on consumers with solid credit ratings. The reason? You guessed it, most of the credit card issuers are the same large financial companies that are being hurt by the overall strife in the financial markets.

Many of these companies fear that the financial issues related to the mortgage industry will spill over into the revolving credit card markets, as it only stands to reason that a consumer, if faced with either paying their mortgage or their credit cards, will probably choose their mortgage. So as foreclosures rise, credit card late payments and losses will ramp up accordingly.

How to Protect Yourself

The best defense you can take is to proactively monitor and safeguard your credit – and I would encourage you to call me for an analysis of your current credit standing, as I may be able to make suggestions that could help right away.

Additionally, when it comes to your credit cards in particular, make sure that you do not give that lender reason to bump your rates. If they do, call their customer service lines to ask them to reverse course, or risk losing your business. If your credit score is strong, you will greatly increase your chances of winning this fight, or being able to simply follow through on your threat and take your business elsewhere. This will at least help mitigate the chances that YOU will have to help subsidize the massive losses being experienced by some of the largest banks in the US.

New Year’s Resolution Idea

Check all of your credit cards that you carry balances on to confirm the current rate. You may be surprised to see that some of these rates are higher than you recall. Remember that credit card rates can be changed very frequently and easily by the issuer, and rarely in your favor. And even better – give me a call to check your overall debt structure, and let’s ensure that it makes sense based on your current financial goals.

The Credit Crisis and What It Means To You

By Chris Garcia, Team Business Manager

Barry Bonds may have broken the all-time home-run record recently, but you wouldn’t know it by looking at the headlines. The only “Bonds” the media seems interested in are mortgage bonds – specifically mortgage-backed securities.

To date, subprime mortgages have been credited for bankrupting well over 110 lenders and seriously damaging operations at many major mortgage firms. They’ve reportedly wiped out 5 hedge funds, tens of thousands of jobs, and have led to millions of foreclosures with millions more on the way. And, as if that weren’t enough, subprime mortgages are also blamed for massive volatility in the stock, bond, credit, futures, and real estate markets here in the US. And it’s this volatility that is now spreading like a virus into other major financial sectors around the globe. Some say losses in the mortgage securities market alone could reach hundreds of billions of dollars this year.

This means that, for any American looking to buy, sell, or refinance their home, they are confronting a very different market from the one that existed just 6-12 months ago. The US Federal Reserve has already begun pumping billions of dollars into the US banking system in order to address what is clearly a credit crisis that will change how we borrow money for years to come! 

How did this happen?
The recent real estate boom was fueled by a period of record home appreciation and historically low interest rates. Banks, in order to compete, loosened guidelines and began offering more funding to more borrowers through riskier, non-conforming or “exotic” mortgages.

 These ideal lending conditions persisted for several years, supported by high demand, historical real estate data, home prices, and massive trading volume/profits on mortgage-backed securities and other financial instruments on Wall Street.  

Then, in 2006, a slowdown in real estate led to a deterioration of home values, an increase in inventories, and ultimately to today’s tightening of credit guidelines, leaving many investors unable to sell or refinance out of their existing positions. Many Americans who had tapped into their equity were suddenly tapped-out and overextended as home values fell. Foreclosures followed in record numbers and a re-valuation of mortgage bonds and other financial instruments created the credit/liquidity domino effect we’re now experiencing. 

Unfortunately, it’s going to get a lot worse before it gets better. According to the latest estimates, over 2 million subprime and Alt-A adjustable rate mortgage (ARM) holders will face payment increases of up to 30%-100% when their loans reset in the next 2 to 18 months. These loans make up less than 40% of the total mortgage market, but the negative effects, as we have seen, of increased foreclosure activity can have a ripple effect throughout the industry and around the globe. 

What does this mean to you and your mortgage? 

Sellers: If you’re planning on selling your home, be prepared for an even smaller pool of qualified buyers. While some experts predict a settling of this credit crisis over the coming year, tightened credit guidelines and diminishing mortgage products could knock out as many as 15%-30% of potential qualified buyers. Now is not the time to sit and wait for the best possible price. Have a serious talk with your Real Estate Agent. Having experienced buying/selling transactions in your area, he or she can help you price your home accordingly. He or she can also help ensure that your buyers are pre-approved and stay pre-approved throughout the entire transaction. 

Buyers: Get pre-approved by your mortgage professional. While there are a lot of great deals out there, getting credit is becoming tougher and tougher, and it’s taking longer and longer to complete a transaction. Remember, what you qualify for today could change tomorrow in a volatile market. For those looking to refinance, keep this in mind. There is no time to delay! Communicate with your lender. Don’t do anything that could negatively affect your credit, and make sure you get all your documentation in on time. 

ARMs Borrowers: If your ARM is scheduled to reset in the next 2-18 months, you need to schedule an appointment with a mortgage professional right away. Whether your ARM is subprime, Alt-A, or even if you have a pre-payment penalty, don’t let a default or foreclosure situation sneak up on you. Did you know that your monthly payments can increase anywhere from 30% to 100% once your loan resets? At the very least, give yourself the peace of mind of knowing what your adjusted payment will be. A good loan officer can help calculate the numbers. 

Borrowers with less-than-perfect credit: Each week it seems lenders are shedding more and more mortgage products. Many lenders have stopped offering No-Doc loans and are reducing all forms of Stated-Income loans. While it might be challenging, borrowers with credit issues need to see a loan expert. Often they have credit repair resources and other strategies to help you reach your financial goals. 

Finally, don’t let the headlines get to you. While all looks bleak and scary now, there’s an important concept to embrace: all markets, while cyclical in nature, are self-correcting, be it credit, real estate, stocks, or bonds. For the last 6 or 7 years, real estate was booming and riding high. The correction we’re experiencing now – while it seems harsh and could get much worse – is, in a sense, “natural” and directly related to the extremely loose guidelines and perhaps overzealous lending and leveraging during the boom cycle.

If you or someone you know would like to learn more about the credit crisis and how it could affect your financial goals, please email me chris@michellesgarcia.com to set up an appointment. We would be happy to speak with you about it!   

Protecting Your Credit During Divorce

By Chris Garcia, Team Business Manager

 When a marriage ends in divorce, the lives of those involved are changed forever. During this time of upheaval, one thing that shouldn’t have to change is the credit status you’ve worked so hard to achieve. 

Unfortunately, for many, the experience is the exact opposite. Unfulfilled promises to pay bills, the maxing out of credit cards, and a total breakdown in communication frequently lead to the annihilation of at least one spouse’s credit. Depending upon how finances are structured, it can sometimes have a negative impact on both parties. 

The good news is it doesn’t have to be this way. By taking a proactive approach and creating a specific plan to maintain one’s credit status, anyone can ensure that “starting over” doesn’t have to mean rebuilding credit. 

The first step for anyone going through a divorce is to obtain copies of your credit report from the 3 major agencies: Equifax, Experian®, and TransUnion®. It’s impossible to formulate a plan without having a complete understanding of the situation. (Once a year, you may obtain a free credit report by visiting www.AnnualCreditReport.com.) 

Once you’ve gathered the facts, you can begin to address what’s most important. Create a spreadsheet, and list all of the accounts that are currently open. For each entry, fill in columns with the following information: creditor name, contact number, the account number, type of account (e.g. credit card, car loan, etc.), account status (e.g. current, past due), account balance, minimum monthly payment amount, and who is vested in the account (joint/individual/authorized signer). 

Now that you have this information at your fingertips, it’s time to make a plan. 

There are two types of credit accounts, and each is handled differently during a divorce. The first type is a secured account, meaning it’s attached to an asset. The most common secured accounts are car loans and home mortgages. The second type is an unsecured account. These accounts are typically credit cards and charge cards, and they have no assets attached. 

When it comes to a secured account, your best option is to sell the asset. This way the loan is paid off and your name is no longer attached. The next best option is to refinance the loan. In other words, one spouse buys out the other. This only works, however, if the purchasing spouse can qualify for a loan by themselves and can assume payments on their own. Your last option is to keep your name on the loan. This is the most risky option because if you’re not the one making the payment, your credit is truly vulnerable. If you decide to keep your name on the loan, make sure your name is also kept on the title. The worst case scenario is being stuck paying for something that you do not legally own.  

In the case of a mortgage, enlisting the aid of a qualified mortgage professional is extremely important. This individual will review your existing home loan along with the equity you’ve built up and help you to determine the best course of action. 

When it comes to unsecured accounts, you will need to act quickly. It’s important to know which spouse (if not both) is vested. If you are merely a signer on the account, have your name removed immediately. If you are the vested party and your spouse is a signer, have their name removed. Any joint accounts (both parties vested) that do not carry a balance should be closed immediately. 

If there are jointly vested accounts which carry a balance, your best option is to have them frozen. This will ensure that no future charges can be made to the accounts. When an account is frozen, however, it is frozen for both parties. If you do not have any credit cards in your name, it is recommended you obtain one before freezing all of your jointly vested accounts. By having a card in your own name, you now have the option of transferring any joint balances into your account, guaranteeing they’ll get paid. 

Ensuring payment on a debt which carries your name is paramount when it comes to preserving credit. Keep in mind that one 30-day late payment can drop your credit score as much as 75 points. It is also important to know that a divorce decree does not override any agreement you have with a creditor. So, regardless of which spouse is ordered to pay by the judge, not doing so will affect the credit score of both parties. The message here is to not only eliminate all joint accounts, but to do it quickly. 

Divorce is difficult for everyone involved. By taking these steps, you can ensure that your credit remains intact.

Note: This is not to be construed as legal advice.
If you have any questions please contact me at chris@michellesgarcia.com.