Monthly Archives: March 2009
A Few Mortgage Tips To Help You Prevent Foreclosure
Posted March 26, 2009 – 9:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceIf you fall behind on your mortgage payments, there are several steps that you can take to help prevent foreclosure. First, it’s important to understand your mortgage. If you don’t understand the type of mortgage you have, you’ll be unhappily surprised when your payments adjust. Adjustable Rate Mortgages are not fixed, and your payments will change, you must be aware of whether you have a fixed rate or adjustable mortgage to begin making plans. If you have a hybrid adjustable rate mortgage, you’ll need to know when you can expect your payments to increase.
Hybrid and Adjustable Rate Mortgages might be refinanced to a fixed rate if you foresee that you will have difficulty making the new payments. Don’t give up and be persistent. Keep contacting your loan officer and request a refinance for your loan. Other options include devising a repayment plan with your loan officer, and can be used to prevent foreclosure. A repayment plan is effective for those who have fallen behind on their mortgage payments and would like to create a new schedule until they are caught up. You can also discuss a reinstatement plan. This enables you to arrange to pay your past due amount by a certain date, this method is also an effective way to prevent foreclosure.
Forbearance is another option that should be discussed with your loan officer. With a forbearance agreement, your payments would be temporarily reduced, or even suspended for a time period that you and your loan service officer agree upon. At the end of the agreed upon time, you resume your payments and regularly meet any other stipulations that were originally agreed upon.
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No Comments | Tags:Did Lenders Cause Their Own Credit Crunch?
Posted March 19, 2009 – 9:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceIt seems lenders forget basic facts about lending every so often and create a new financial bubble. Perhaps they succumb to the pressure of the investment community or their own shareholders, or perhaps they just start believing their own “innovation” marketing pitch and forget the basics of sound lending practices.
Borrowers have a unique way of telling lenders they have created an unstable loan program: they default. When lenders begin to experience high default rates, they begin to lose money. Once they start losing money, they curtail lending and tighten lending standards. This tightening is the credit crunch.
There are necessary recessions at the end of a business cycle. These pathologic lending practices must be purged from the system or else they will survive to build an even bigger and costlier bubble. Although it is difficult to imagine a bubble bigger than the Great Housing Bubble, it is still possible.
In the aftermath of a financial fiasco, lenders return to the practices that did not fail them in the past. The only program lenders know empirically to be stable is a 30-year, fixed-rate, conventionally amortizing loan based on 80% of appraised value taking no more than 28% of a borrower’s gross income (36% maximum total debt).
The credit crunch facilitated the decline in housing prices after the Great Housing Bubble. Large downpayments came back, and government assisted financing became widely used by first-time homebuyers to overcome the high equity requirements. The credit crunch was not caused by some unexpected or unknown factor; it was caused by the failure of lenders. Credit continued to tighten until lenders stopped making bad loans. The bad loans did not disappear until lenders returned to the stable loan programs with a proven track record. That is how the credit cycle works.
<a href="http://www.thegreathousingbubble.com/author/">Lawrence Roberts</a> is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: <a href="http://www.thegreathousingbubble.com/">http://www.thegreathousingbubble.com/</a>
Read the author's daily dispatches at The Irvine Housing Blog: <a href="http://www.irvinehousingblog.com/">http://www.irvinehousingblog.com/</a> Visit <a href="http://www.articlepool.com/did+lenders+cause+their+own+credit+crunch-32212">Did Lenders Cause Their Own Credit Crunch?</a>.
Home Mortgage Borrowers Are Not That Sophisticated
Posted March 19, 2009 – 9:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceWhen lenders develop new loan programs, they assume borrowers are sophisticated enough to understand the product and disciplined enough to use them properly. Both assumptions are bad, and these bad assumptions caused lenders and investors to lose a great deal of money during the Great Housing Bubble.
Whenever lenders start loaning people money with total debt-to-income ratios over 36% people will default. Whenever lenders start loaning more than 80% of the purchase price, people can sink underwater and when they do, they will default. This is not new. It happened in the early 90s; it happened during the Great Housing Bubble, and it happened for the same reasons: lax lending standards.
Someday the lending community may actually innovate and come up with some financial product that has low default rates which most people can qualify to obtain, or not. Unless you change human nature, there are always going to be people who are too irresponsible to make consistent payments.
People either do or do not make their payments. This is the key to any loan program. New terms and schedules can be reinvented over and over again, and it will always boil down to people making payments. When complicated loan programs contain provisions that make it difficult for people to make payments, like increasing payment amounts, they will default, and the loan program will fail. This is certain.
Whenever lenders create new, “sophisticated” loan programs that require advanced financial management on the part of the borrower, both the lenders and the borrowers fall victim to the Lake Wobegon effect. Everyone thinks they have above average abilities when it comes to managing their finances. In reality, perhaps 2% of borrowers have the financial discipline to handle an Option ARM loan. Unfortunately, 80% of borrowers think they are in this 2%.
The reason for this dissonance between what borrowers know they should do and what they actually do comes from the inherent conflict between emotions and intellect. Eighty percent of borrowers may understand the Option ARM loan (or think they do,) but when the pressures of daily life create emotional demands for spending money on one’s lifestyle, the intellectual knowledge that this money should go toward a housing payment is conveniently set aside. It is this 2% of the most disciplined borrowers who will cut back on discretionary spending to make their full housing payment. Everyone else will make the minimum payment, fall behind on their mortgage, and end up in foreclosure.
Lenders and investors during the Great Housing Bubble made serious errors regarding borrower’s capacity to manage their finances. These errors cost lenders and investors a great deal of money.
<a href="http://www.thegreathousingbubble.com/author/">Lawrence Roberts</a> is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: <a href="http://www.thegreathousingbubble.com/">http://www.thegreathousingbubble.com/</a>
Read the author's daily dispatches at The Irvine Housing Blog: <a href="http://www.irvinehousingblog.com/">http://www.irvinehousingblog.com/</a> Visit <a href="http://www.articlepool.com/home+mortgage+borrowers+are+not+that+sophisticated-32211">Home Mortgage Borrowers Are Not That Sophisticated</a>.
Tips for Choosing a Mortgage Lender
Posted March 19, 2009 – 9:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceWhether you are buying your first home or are an experienced homeowner, you will likely need a mortgage to make such a large purchase. No matter where you live, there will be multiple mortgage lenders who you could use to making buying your house possible. How can you choose the best mortgage lender for your budget? Here are some tips for doing just that:
Shop around for the best rate
When it comes to mortgages, rate is important. Some may argue that it is actually the most important part of choosing a lender. Don’t stop shopping around with just two or three companies; get as many rates as you can. Remember, rates do not just mean the interest rate you will be paying. When you talk to a lender for the first time, they will give you a good faith estimate, which includes interest rate information as well as closing costs. You can expect to spend at least $2000 to $5000 in closing costs and more if you are buying a million-dollar (or more) home. With one mortgage lender, closing costs might be on the low end, while with other mortgage lenders, you could be paying a lot more. These are out of pocket charges, so you have to be prepared to pay them upfront, just like you do with your down payment.
Be prepared with your credit score that lenders can review
When choosing a mortgage lender, one of the best tips to ensure that you find the best one is to be ready with your credit report and score. Most mortgage companies will review this information if you get to the point where you want pre-approval, but you will likely have to pay a fee to get your credit report through them, and too many checks can actually lower your score if they are spread out over several months. You can check your own credit score for free once a year, so before you start looking for a lender, print your credit score and talk to them based on that information. Now, once you actually chose a lender, you are going to have to pay for the official credit check, but there is no need to pay for that until you have chosen a lender. In the meanwhile, get ideas about what the costs could possibly be using the unofficial credit report you have.
Avoid pre-approval that is extremely high
Some lenders will try to encourage people to pick them by pre-qualifying at high rates. You know how much you can afford every month, though. When you only have enough money for a monthly payment of $1000, getting pre-qualified for a million-dollar home is just asking for trouble. Not only could you get in over your head, but you may also be looking at sky-high interest rates and closing costs you can’t afford. The best mortgage lenders will always have your best interests in the back of their minds. Pre-approving you for a higher amount than you can afford is a red flag that this company does not really care about your and your financial situation.
Ask questions
Searching for a mortgage lender is all about asking questions and the more you ask the better. Don’t be afraid of the answers, because it is better to know now than in a few months when you want to buy the perfect home you found. Ask questions not just about cost, but also about what to expect it terms of timeframe, trends, and reliability. If possible, speak one-on-one with the person who is going to work with your on the mortgage, instead of just talking to a secretary or manager. One of the best ways to ensure that you are getting the answers you need is to actually write down your questions. That way, before you hang up the phone or leave the office, you can look over your list and make sure that all of your questions have been answered.
Look online and offline
Lastly, when you are looking for a mortgage lender, remember that there are two different places to search. Online lenders can sometimes be a great option. At many online sites, for example, you can see their rates and the rates of other companies. However, other people find that the best option is to use a lender in their own neighborhood. When you first start your search, don’t limit yourself to only online companies or only offline companies; look at all the companies you can. Even if you aren’t comfortable with working with a company based online, you can still use information from these companies for comparison purposes. The key is to simply keep comparing as much as possible until you find a mortgage lender that is a perfect fit.
Sandy Darson is a freelance writer who writes about topics and financial products pertaining to the mortgage industry such a fixed mortgage available from a <a href=" http://www.absolutemortgageco.com/">mortgage lender</a>.
No Comments | Tags:Predatory Lending in the Housing Bubble - Were You a Victim?
Posted March 17, 2009 – 9:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceThe most egregious examples of predatory lending occurred when interest-only loan products where offered to subprime borrowers whose income only qualified them to make the initial minimum payment (assuming the borrower actually had this income). This loan program was commonly known as the two-twenty-eight (2/28). It has a low fixed payment for the first two years, then the interest rate and payment would reset to a much higher value on a fully amortized schedule for the remaining 28 years.
Seventy-eight percent of subprime loans in 2006 were two year adjustable rate mortgages. Anecdotal evidence is that most of these borrowers were only qualified based on their ability to make the initial minimum payment.
This practice did not fit the traditional definition of predatory lending because the lender was not planning to profit by taking the property in foreclosure. However, the practice was predatory because the lender was still going to profit from making the loan through origination fees at the expense of the borrower who was sure to end up in foreclosure.
There were feeble attempts at justifying the practice through increasing home ownership, but when the borrower had no ability to make the fully amortized payment, there was no chance of sustaining those increases.
The advantage of interest-only, adjustable-rate mortgages (IO ARMs) is their lower payments. Or put another way, the same payment can finance a larger loan. This is how IO ARMs were used to drive up prices once the limit of conventional loans was reached.
Subprime borrowers took out 2/28 loans in large numbers. The majority of these borrowers defaulted on their loans because they could not afford the payment recast. This was predatory lending. Despite the fact that lenders lost a great deal of money on these loans, they wrote the loans to profit from origination fees. Lending for a profit at the expense of borrowers is the definition of predatory lending, and many lenders were guilty of it during the Great Housing Bubble.
<a href="http://www.thegreathousingbubble.com/author/">Lawrence Roberts</a> is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: <a href="http://www.thegreathousingbubble.com/">http://www.thegreathousingbubble.com/</a>
Read the author's daily dispatches at The Irvine Housing Blog: <a href="http://www.irvinehousingblog.com/">http://www.irvinehousingblog.com/</a> Visit <a href="http://www.articlepool.com/predatory+lending+in+the+housing+bubble++were+you+a+victim-32210">Predatory Lending in the Housing Bubble - Were You a Victim?</a>.
Conservative House Financing Is Making a Comeback!
Posted March 16, 2009 – 9:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceExotic loan financing terms took over mortgage finance in the Great Housing Bubble. As people using these loan programs began to default in large numbers, exotic loan programs all but disappeared. This left the 30-year, fixed-rate, conventionally amortized loan as the only game in town.
When people decide they want to buy a house, they figure out how much they can afford, then they search for something they want in their price range. For most people, what they can “afford” depends almost entirely upon how much a lender is willing to loan them. Lenders apply debt-to-income ratios and other affordability criteria to determine how much they are willing to loan. Buyers are generally limited in how much they can borrow because lenders are wise enough not to loan borrowers so much that they default. Borrowers behave much like drug addicts, they will borrow all the money a lender will loan them whether it is good for them or not. Most borrowers are not wise to the differences between the various loan types, and they have limited understanding of the risks they are taking on.
The vast majority of residential home sales have lender financing. The interest rates and various loan terms have evolved over time. After World War II a series of government programs to encourage home ownership spawned a surge in construction and the evolution of private lending terms resulting in the 30-year conventionally amortized mortgage. This mortgage generally required a 20% downpayment, and allowed the borrower to consume no more than 28% of their gross income on housing. These conservative terms became the standard for nearly 50 years. Lending under these terms resulted in low default rates and a high degree of market price stability.
There were experiments with various forms of exotic financing during this period, particularly in markets like California where price volatility required special terms to facilitate buying at inflated pricing. The instability of these loan programs was demonstrated painfully during the deep market correction of the early 90s in California characterized by high default rates and lender losses.
Rather than learn a difficult lesson regarding the use of these alternative financing terms from this experience, lenders sought out ways of shifting these risks to others though a complex transaction called a credit default swap. Once lenders and investors in mortgages thought the risk was mitigated, these unstable loan programs were brought back and made widely available to the general public resulting in the Great Housing Bubble.
<a href="http://www.thegreathousingbubble.com/author/">Lawrence Roberts</a> is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: <a href="http://www.thegreathousingbubble.com/">http://www.thegreathousingbubble.com/</a>
Read the author's daily dispatches at The Irvine Housing Blog: <a href="http://www.irvinehousingblog.com/">http://www.irvinehousingblog.com/</a> Visit <a href="http://www.articlepool.com/conservative+house+financing+is+making+a+comeback-32208">Conservative House Financing Is Making a Comeback!</a>.
Mortgage Interest Rates - How Are They Determined?
Posted March 14, 2009 – 9:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceMortgage interest rates are the single-most important factor determining the borrowing power of a potential house buyer. When rates are very low, a borrower can service a large amount of debt with a relatively small payment, and when interest rates are very high, a borrower can service a small amount of debt with a relatively large payment.
Mortgage interest rates are determined by market forces where investors in mortgages and mortgage-backed securities bid for these assets. The rate of return demanded by these investors determines the interest rate the originating lender will have to charge in order to sell the loan in the secondary market. Some lenders still hold mortgages in their own investment portfolio, but these mortgages and mortgage rates are subject to the same supply and demand pressures generated by the secondary mortgage market.
Mortgage interest rates are determined by investor demands for risk adjusted return on their investment. The return investors demand is determined by three primary factors: the riskless rate of return, the inflation premium and the risk premium.
The riskless rate of return is the return an investor could obtain in an investment like a short-term Treasury Bill. Treasury Bills range in duration from a few days to as long as 26 weeks. Due to their short duration, Treasury Bills contain little if any allowance for inflation. A close approximation to this rate is the Federal Funds Rate controlled by the Federal Reserve. It is one of the reasons this activities of the Federal Reserve are watched so closely by investors.
The closest risk-free approximation to mortgage loans is the 10-year Treasury Note. Treasury Notes earn a fixed rate of interest every six months until maturity issued in terms of 2, 5, and 10 years. The 10-year Treasury Note is a close approximation to mortgage loans because most fixed-rate mortgages are paid off before the 30 year maturity with 7 years being a typical payoff timeframe.
The difference in yield between a 10-year Treasury Note and a 30-day Treasury Bill is a measure of investor expectation of inflation, and the difference between the yield on a 10-year Treasury Note and the prevailing market mortgage interest rate is a measure of the risk premium.
Inflation reduces the buying power of money over time, and if investors must wait a long period of time to be repaid, as is the case in a home mortgage, they will be receiving dollars that have less value than the ones they provided when the loan was originated. Investors demand compensation to offset the corrosive effect of inflation. This is the inflation premium.
The risk premium is the added interest investors demand to compensate them for the possibility the investment may not perform as planned. Investors know exactly how much they will get if they invest in Treasury Notes, but they do not know exactly what they will get back if they invest in residential home mortgages or the investment vehicles created from them. This uncertainty of return causes them to ask for a rate higher than that of Treasury Notes. This additional compensation is the risk premium.
Thus, mortgage interest rates are a combination of the riskless rate of return, the risk premium and the inflation premium.
<a href="http://www.thegreathousingbubble.com/author/">Lawrence Roberts</a> is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: <a href="http://www.thegreathousingbubble.com/">http://www.thegreathousingbubble.com/</a>
Read the author's daily dispatches at The Irvine Housing Blog: <a href="http://www.irvinehousingblog.com/">http://www.irvinehousingblog.com/</a> Visit <a href="http://www.articlepool.com/mortgage+interest+rates++how+are+they+determined-32207">Mortgage Interest Rates - How Are They Determined?</a>.
Prime, Alt-A and Subprime - The Three Categories of Borrowers
Posted March 14, 2009 – 9:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceBorrowers are broadly categorized by the characteristics of their payment history as reflected in their FICO score. FICO risk scores are developed and maintained by the Fair Isaac Corporation utilizing a proprietary predictive model based on an analysis of consumer profiles and credit histories. These models are updated frequently to reflect changes in consumer credit behavior and lending practices. The FICO score is reported by the three major credit reporting agencies, Experian, Equifax and TransUnion.
Borrowers with high credit scores have generally demonstrated a high degree of responsibility in paying their debt obligations as promised. Those with low credit scores either have little or no credit history, or they have a demonstrated track record of failing to pay their financial obligations.
There are 3 main categories of borrowers: Prime, Alt-A, and Subprime. Prime borrowers are those with high credit scores, and Subprime borrowers are those with low credit scores. The Alt-A borrowers make up the gray area in between.
Alt-A tends to be closer to Prime as these are often borrowers with high credit scores which for one or more reasons do not meet the strict standards of Prime borrowers. In recent years one of the most common non-conformities of Alt-A loans has been the lack of verifiable income. In short, “liar loans” are generally Alt-A.
As the number of deviations from Prime increases, the credit scores decline and the remainder are considered Subprime.
The Great Housing Bubble witnessed an unprecedented extension of credit to Alt-A and subprime customers. These loans ultimately went into default and foreclosure. This created a downward spiral of declining prices that is still going on in 2009.
<a href="http://www.thegreathousingbubble.com/author/">Lawrence Roberts</a> is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: <a href="http://www.thegreathousingbubble.com/">http://www.thegreathousingbubble.com/</a>
Read the author's daily dispatches at The Irvine Housing Blog: <a href="http://www.irvinehousingblog.com/">http://www.irvinehousingblog.com/</a> Visit <a href="http://www.articlepool.com/prime+alta+and+subprime++the+three+categories+of+borrowers-32206">Prime, Alt-A and Subprime - The Three Categories of Borrowers</a>.
What is the Option ARM Payment Rate?
Posted March 12, 2009 – 9:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceA negative amortization loan is any loan where the monthly payment does not cover the monthly interest expense. Interest-only or conventionally amortizing loans do not have this feature, and the monthly payments are based on the interest rate charged and/or the duration of the amortization schedule. Since the negative amortization loan breaks down this traditional relationship, there is a completely separate rate calculated for the minimum payment amount.
In general, this rate starts out low and increases gradually each year for the first several years. This is to allow the borrower time to adjust to a higher loan payment amount. These yearly increases are usually capped to prevent dramatic phenomenon known as “payment shock.”
The payment rate is based on an interest rate, but this rate has no relationship to the interest rate the borrower is being charged on the loan balance. The presence of two interest rates is responsible for much of the confusion regarding these loans.
The low starting payment rate is often called a “teaser rate” because it is a temporary inducement to take on the mortgage. There was a widespread belief among borrowers that one could simply refinance from one teaser rate to another forever in a process known as serial refinancing.
The biggest confusion regarding this loan is when people mistake this payment rate for the actual interest rate they are being charged on the loan. This is a natural mistake to make because historic loan programs did not make this distinction. These loans were largely responsible for inflating the Great Housing Bubble. The collapse of this financing method deflated the housing bubble.
<a href="http://www.thegreathousingbubble.com/author/">Lawrence Roberts</a> is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: <a href="http://www.thegreathousingbubble.com/">http://www.thegreathousingbubble.com/</a>
Read the author's daily dispatches at The Irvine Housing Blog: <a href="http://www.irvinehousingblog.com/">http://www.irvinehousingblog.com/</a> Visit <a href="http://www.articlepool.com/what+is+the+option+arm+payment+rate-32204">What is the Option ARM Payment Rate?</a>.
Do You Understand the Three Types Of Loans - Conventional, Interest-Only, and Negative Amortization?
Posted March 11, 2009 – 9:00 pm in: Foreclosure, Mortgage rates, Mortgage recovery, rating agencies, refinanceThere are 3 main categories of loans: Conventional, Interest-Only, and Negative Amortization. The distinction between these loans is how the amount of principal is impacted by monthly payments. Conventional loans pay off the debt, interest only loans neither increases or decreases the debt, and negative amortization loans add to the debt.
A Conventional mortgage includes some amount of principal in the payment in order to repay the original loan amount. The greater the amount of principal repaid, the quicker the loan is paid off. This kind of mortgage has an amortization schedule that determines how fast the loan is paid back. A 30-year term is the most common.
An Interest-Only loan does just what it describes; it only pays the interest. This loan does not pay back any of the principal, but it at least “treads water” and does not fall behind. At some point, an interest-only loan converts to a conventionally amortized loan and the balance is repaid.
The Negative Amortization loan is one in which the full amount interest is not paid with each payment, and the unpaid interest gets added to the principal balance. Each month, the borrower is increasing the debt. These loans are inherently unstable, and most who used them ended up in foreclosure.
Two of the features of all Interest-Only or Negative Amortization loans are an interest rate reset and a payment recast. All these loans have provisions where the interest rate changes or loan balance comes due either in the form of a balloon payment or an accelerated amortization schedule. In any case, borrowers often must refinance or face a major increase in their monthly loan payment. This increase in payment is what makes these loans such a problem.
The Great Housing Bubble was inflated by exotic loan terms, in particular by negative amortization loans. As loan holders defaulted in large numbers, these loan programs were curtailed or eliminated. The withdrawal of financing deflated the housing bubble.
<a href="http://www.thegreathousingbubble.com/author/">Lawrence Roberts</a> is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: <a href="http://www.thegreathousingbubble.com/">http://www.thegreathousingbubble.com/</a>
Read the author's daily dispatches at The Irvine Housing Blog: <a href="http://www.irvinehousingblog.com/">http://www.irvinehousingblog.com/</a> Visit <a href="http://www.articlepool.com/do+you+understand+the+three+types+of+loans++conventional+interestonly+and+negative+amortization-32203">Do You Understand the Three Types Of Loans - Conventional, Interest-Only, and Negati