In an historic development the willingness of the United States government to fulfill financial obligations has been called into question by a major ratings agency due to “political risks” and a “rising debt burden.”

“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” said the S&P in a statement. “The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options.”

A lower credit rating could impact mortgage loans, auto financing, and the cost and ability of the federal government to borrow money.

Standard & Poors Drops US Credit Rating is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: auto, credit, financing, loan, mortgage, rating, Standard & Poors, tax

The usual answer is a fat “no” after which comes a discussion of foreclosures, diving credit scores, ugly credit reports, deficiency judgments, loan denials and higher interest costs for mortgage loans and automobile financing.

And yet there’s a strange and somewhat logical theory floating around that not paying a mortgage could be a plus. The “excess liquidity theory” works like this: If you don’t pay your mortgage you’ll be foreclosed, but for a few months at least you’ll have lots more cash — money that can be used to live better and pay off other debts, such as credit cards and auto loans.

Mortgage lenders aren’t thrilled with the excess liquidity theory — and in no case should anyone expect a lower mortgage quote, a better credit score or think that foreclosure is a joy — but there may actually be some truth to the idea of better personal cashflow.

Timing

The foreclosure process has slowed to a crawl. RealtyTrac reports that nationwide it now takes an average of 400 days to process a foreclosure from initial default to the loss of a home — and better than 900 days in New York and New Jersey.

In other words, home loan borrowers might have months if not several years to live without mortgage payments before they’re tossed out on the street. During that time they’ll still want to have a car and use a credit card so those payments will be made.

New Study

Now, a new study by TransUnion finds that auto and credit card delinquencies are less likely among those who are paying all of their bills except for their mortgage.

Looking at this information, TransUnion says:

The study did not find any strong evidence supporting the widely accepted “excess liquidity theory,” which suggests consumers who stopped paying their mortgage loans during the recent recession had an increased cash flow in the short term, and therefore could repay other debts. In fact, consumers in the foreclosure process performed similarly, if not better, on certain accounts when they opened them further in the foreclosure process.

“There appears to be a pocket of opportunity among mortgage-only defaulters that is not the result of excess liquidity, but rather the unique circumstances of the recent recession,” said Steve Chaouki, group vice president in TransUnion’s financial services business unit. “This new market segment that the recession created is an important one for lenders to understand. They have the potential, today, to be stronger and more reliable customers.”

Additional evidence suggesting the “excess liquidity theory” was not in effect during the recession was witnessed when comparing consumers who were 120 days past due on their mortgages, but opened new auto loans at various times after their delinquency. The percentage of consumers delinquent on those auto loans decreased as more time passed.

A Different View

I disagree. Looking at the same chart it seems very clear that people in the midst of a mortgage default are more likely to make other payments, thus proving the excess liquidity theory. This is NOT to recommend a mortgage default, merely to consider how people behave in such circumstances.

What do you think?

Is it good not to pay your mortgage loan? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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FICO Labs, part of Fair Isaac, the company closely associated with development of the credit score concept, says it has created a mathematical model which has “the ability to identify borrowers who are over 100 times more likely to default strategically than others.”

“FICO Labs researchers,” says the company, “have found that, as a group, strategic defaulters tend to be more savvy managers of their credit than the general population, with higher FICO Scores, lower revolving balances, fewer instances of exceeding limits on their credit cards and lower retail credit card usage. This indicates that strategic defaulters display a different type of credit behavior than distressed consumers who miss payments.”

Forgive me, but does this not also sound like the decisions of someone with sane financial practices? And don’t people who handle credit well, by definition, handle credit differently than distressed borrowers, people who have lost their jobs, gotten divorced, had an auto accident or faced a health emergency?

Among current borrowers — those not delinquent on any loans — FICO says:

• “The riskiest borrowers were found to be 110 times more likely to commit a strategic default than the least risky borrowers.
• “The riskiest 20 percent of borrowers included 67 percent of those who later committed strategic default. In other words, a servicer could reach two-thirds of those who would commit strategic default by targeting just 20 percent of its borrowers.”

According to TransUnion, “the percentage of consumers current on their credit card payments and delinquent on their mortgages first surpassed the percentage of consumers current on their mortgages and delinquent on credit cards in the first quarter of 2008 (Q1 2008). Although many industry analysts believed that a reversion to the conventional payment hierarchy would ensue once the recession had concluded, this has not been the case.”

“The reversal of the traditional payment hierarchy was driven in large part by home value depreciation and rising unemployment, both of which speak to consumer willingness and ability to pay their mortgages versus their credit cards. Home value concerns and stubbornly high unemployment continue to drive this dynamic, though the decline in the number of consumers delinquent on mortgages and current on credit cards may be a sign that the divergence in the payment hierarchy has peaked,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit.

Consequences

None of this amazing.

Think of the consequences associated with various types of non-payment.

1. You don’t make an auto payment and in the middle of the night a large person from the finance company hot-wires your car and you can’t get to work the next day.
2. You don’t make a credit card payment and your credit is cut off. Suddenly you can’t get food.
3. You don’t make your mortgage payment, and, well, in many cases nothing happens for months.

Hawaii

To understand why imagine that you live in Hawaii. You don’t pay your mortgage for three months. The lender files to foreclose. Do you instantly lose your home? Not hardly. According to RealtyTrac the typical Hawaiian foreclosure takes 11 months. That’s 14 months of mortgage-free living.

Soon however, Hawaii foreclosures will take longer. Why? The state House has approved HB 894, a bill that would extend the foreclosure process by five months — and the vote was 50 to 1.

The argument here is NOT that anyone should purposely or willfully default on their mortgage, rather it’s the observation that one should hardly be surprised that a growing number of homeowners are changing their financial attitudes. You just don’t need a mathematical model to see that.

Consumers with bad credit have a tough time getting loans and now, perhaps, people with good credit will also have a tough time because a large number of walk-away homeowners also have good credit. This is like saying we should be suspicious of people who drink milk because — statistically — as children a majority of bank robbers drank the stuff.

Can We Predict Mortgage Loan Walk-Aways? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: auto, credit, credit card, Fair Isaac, loan, mortgage, payment, strategic, walk-away

The unique $8,000 credit for new buyers and $6,500 credit for existing homeowners helped inject stability into the slumping housing market during 2010.

Consumers and some industry observers have pushed for a renewal of the program to prop up the slow-moving economy. While that doesn’t seem likely, the surprising reality is there’s one segment of the public that can still capitalize on the benefits: those who have been serving our country abroad.

Qualified service members who have been on extended duty have until April 30 to ink a purchase agreement and until the end of June to close on the home. Service members must have spent at least 90 days abroad anytime from Jan. 1, 2009, to April 30, 2010.

Beyond that, qualified service members have to meet the same basic requirements as their civilian counterparts. Among those major guidelines:

• First-time buyers and their spouses have to be exactly that — first timers. To meet the definition, the borrower cannot have owned a home in the last three years.
• Individuals cannot have an annual income greater than $125,000. Married couples cannot have a joint annual income greater than $225,000.
• The purchase price of the home cannot exceed $800,000, which is certainly plausible, even with a VA loan, in some of the nation’s more high-cost areas

For the $6,500 tax credit, existing homeowners basically have to meet the same criteria. They also must have lived in their current home for five of the last eight years.

The tax credit can be applied no matter the loan product, be it VA, conventional or FHA. But a VA loan will often represent the simplest, cheapest and most effective path to homeownership for military borrowers.

Military borrowers across the board will likely need a credit score of at least 620 in order to secure financing.

___________________________________

About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, including Bigger Pockets, Mortgages Unzipped and Scotsman Guide. A former newspaper and magazine writer, he is also content director for a leading VA lender.

Time Winding Down for First-Time Military Borrowers To Get Tax Credits is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: $6500, $8000, borrower, buyer, credit, first-time, military, tax, VA

Zillow reports that US homeowners lost $1 trillion in 2009 and it expects that losses will total $1.7 trillion in 2010. Specifically, Zillow estimates that values dropped by $1 trillion in the second half of 2010 compared with $600 billion for the first six months of the year.

“By comparison,” says Zillow, “from 2001 to the end of September 2010, the war in Iraq has cost $750.8 billion.

Only 31 of 129 markets tracked by the company showed gains in 2010. Negative equity for mortgages properties — situations where the loan balance was greater than the value of the home — reached 23.2 percent in the third quarter of 2010 versus 21.8 percent at the end of 2009.

Tax Credit Impact

“Despite a strong start to 2010, by the end of the year homes lost more of their value in 2010 than they did in 2009,” said Zillow Chief Economist Stan Humphries. “Government interventions like the homebuyer tax credit helped buoy the market during the second half of 2009 and the first half of 2010, but we saw a renewed downturn in the last half of this year. It’s a testament to the nearly irresistible force of the overall market correction that government incentives can only temporarily hold back the tide, and that the market will ultimately find its natural equilibrium of supply and demand.”

However, the reason the tax-credit for first-time homebuyers could only “temporarily hold back the tide” was not because it was ineffective but because it ended with sale agreements made no later than April 30, 2010.

Looking Ahead To 2011

“Unfortunately,” says Humphries, “with foreclosures near an all-time high in late 2010 and high rates of negative equity persisting, it does not appear that the first part of 2011 will bring much relief.”

US home values fall $9 trillion since 2006, says Zillow is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: 2009, 2010, cost, credit, equity, first-time, home value, homebuyer, Iraq, tax, trillion, Zillow

A report by the Treasury Department’s Inspector General for Tax Administration shows that nearly 1.8 million taxpayers filed claims under the government’s First-time Homebuyer Tax Credit Program for 2009. Many received an individual credit of as much as $8,000 and their group benefit amounted to almost $12.5 billion.

Unfortunately, 959,813 buyers who purchased in 2008 will have to repay their money because — as we have explained — the 2008 “tax credit” was actually a 15-year loan.

However, there are additional claims that were filed in 2009 and 2010, meaning that the total number of homeowners making repayments to Uncle Sam will likely exceed 1 million.

So what went wrong? How could so many people — and there will be more — wind up owing money?

Qualifications

To stimulate the homeownership market the government has offered several tax credits for “first-time” homebuyers during the past few years. In general, a first-time homebuyer for purposes of the programs is defined as someone who has not owned property for at least three years. In addition, there have been other qualifications as well.

• In 2008 under President Bush there was a first-time homebuyer “credit” of up to $7,500 for married couples and single taxpayers but no more than $3,750 for married individuals filing separately. This money, however, was actually a loan which had to be repaid over a 15-year period.
• In 2009, under President Obama the credit was raised to $8,000 and no repayment was required. The money is an outright grant. However, there are other standards which have to be met, such as owning the property for at least three years.
• In November 2009 the deadline for the first-time homebuyer credit was extended from December 1, 2009, to contracts made before April 30, 2010 but which closed no later than June 30th. (For those on active-duty military service the deadline is April 30, 2011.)
• In 2010 the June 30th closing deadline was pushed back to Sept. 30, 2010.

Repayment Required

There are a number of events that could set off a repayment demand by the IRS.

First, the borrower was not a “first time” purchaser as defined by the rules.

Second, the property of a 2008 buyer ceases to be the main home before the end of the 15-year recapture period.

Third, the home of a 2009 or 2010 buyer ceases to be the taxpayer

1 Million First-Time Home Buyers To Owe IRS is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Credit & Underwriting Standards Tighten for VA Borrowers is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: credit, credit score, loan, mortgage, Notice of Value, NOV, underwriting, VA

The $8,000 tax credit (along with its $6,500 companion credit for existing homeowners) spurred an uptick in sales and helped prop up the flailing housing market. Down to the wire, buyers scrambled to get under contract as the program’s April 30 deadline neared. The National Association of Realtors’ pending sales index rose 6 percent last month, beating the 5 percent figure estimated by economists in a Dow Jones survey.

In all, more than 2.5 million buyers took advantage of the program to join the ranks of American homeowners. Economists and housing industry experts are now bracing for the inevitable drop-off to follow.

“This is the last hurrah for the housing market for a while,– Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit, told Bloomberg’s Businessweek. “There will be a temporary hangover that will last a few months. The recovery will be a slow process that will take a few years.”

While they might not constitute a full-blown “hurrah,– there’s still one group of prospective home buyers waiting to provide their own tax credit-fueled boost to the housing market: Military members.

Special Rule For Active-Duty Service Members

Active-duty service members who were serving outside the U.S. on extended duty while the tax credit program was going have an extra year to take advantage. Those who meet the requirements have until April 30, 2011, to purchase a home and until June 30, 2011, to close while utilizing one of the two tax credits.

Like their civilian counterparts, service members who qualify have to meet the program’s straightforward criteria, including:

• Individuals can’t have an annual income greater than $125,000; married couples who file taxes jointly cannot have an annual income greater than $225,000
• First-time home buyers (along with their spouses) cannot have been homeowners during the past three years
• The purchase price of the home cannot exceed $800,000

Service members may also qualify for the $6,500 seller’s tax credit. They have to have lived in the same residence for five of the previous eight years. Beyond that, all the requirements are the same.

These tax credits represent a uniquely powerful purchasing opportunity for military members, many of whom are eligible for a low-cost loan guaranteed by the Department of Veterans Affairs. VA loans come with no down payment or private mortgage insurance and have helped more than 18 million service members become homeowners since World War II.
_____________________

About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, including Bigger Pockets, Mortgages Unzipped and Scotsman Guide. A former newspaper and magazine writer, he is also content director for a leading VA lender.

First-Time Home Buyer Credit Still On For Vets is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: 2010, 2011, active-duty, credit, first-time, miliary, personnel, tax, VA, VA loan, vets

Written by Clifford V. Rossi, a business professor at the University of Maryland, Anatomy of Risk Management Practices in the Mortgage Industry: Lessons for the Future “contends that expansion into riskier products by mortgage firms that subsequently suffered large credit losses was a strategy intended to grow the franchise and along with it the attractiveness of the firm to investors.”

The goal was to increase the “attractiveness of the firm to investors.” In other words, company stock. “If executives could not earn a higher return on invested capital,” explains Rossi, “they would be replaced through a takeover by executives who could. This message was consistently and convincingly hammered home by Wall Street analysts to every increasingly anxious CEO and CFO.”

The report says that new loan formats were developed in an environment where the true extent of lender risk was not understood.

Multiple Causes

Rossi says “no single factor was responsible for the significant expansion of credit and mortgage products during the period leading up to the mortgage crisis. However, there are indications that greater risk-taking could be attributed to the following factors:

• “An over-reliance on performance metrics not adjusted for risk which would lead management toward riskier products
• “Data and analytical limitations and blind spots that led risk managers to grossly underestimate credit losses
• “Cognitive biases among senior business managers that over time led them to take greater risks, and in the process reduced the effectiveness of risk management practices
• “Incentive problems leading to regulatory actions that wound up not being in the best interest of the taxpayer.”

Bad Timing

Rossi says non-traditional mortgage products were introduced during a period when home appreciation was strong and interest rates were near historic lows.

“This favorable economic environment,” says Rossi, “contributed to a period in which mortgage default rates were very low by historical standards. As a result, the economic environment tended to bias loss estimates downward in a real
sense. This contributed to further mortgage expansion and vast understatement of potential losses due to risk layering and the expansion of nontraditional mortgage products such as option ARMs and piggyback HELOCs. The development of new products and the expansion of risk parameters on existing products came at perhaps the worst time. With virtually no historical experience with these new risk combinations and that which existed largely coming from a benign economic environment, risk models would have little hope to accurately reflect expected loss, let alone loss levels during an extreme event such as the financial crisis.”

Translation: Industry leaders should have listened to stock brokers who always remind us that past performance does not guarantee future results.

No Doc Loans

Another interesting point made by Rossi concerns the increased use of no-doc and low-doc mortgage applications.

“As underwriting standards on income documentation and LTV loosened, allowing for both limited or no income verification and low equity stakes in the property, traditional borrower sentiment toward home ownership changed. Renters were increasingly able to become homeowners with little downpayment and with creative cash flow structures that provided short-term payment capacity. As long as home prices continued to rise, a borrower in such a situation could refinance out of one loan and into another, or sell the property without loss. But once home prices peaked, particularly for those purchasing their home at or near the top of the cycle and possessing limited equity in the property, borrowers became stranded in the home with few alternatives. In such cases, borrowers ruthlessly exercised their default option as historically important ties to the home were outweighed by excessive payment burdens coupled with negative equity in the home. At the same time, widespread lapses in controls of counterparties as evidenced by a spike in mortgage fraud aggravated a growing credit problem.”

This is an area where I disagree with Rossi. While there was surely a lot of mortgage fraud, there was also a lot of predatory lending where — for example — borrowers who qualified for better financing were sold high-cost subprime mortgages. Unfortunately, the term “predatory” does not appear in the report. Also among the missing is the word “fiduciary,” as in the lack of an obligation under federal rules by lenders to get the best possible rates and terms for borrowers.

That said, the Rossi report is unusually well-done and should be read by anyone who wants a better understanding of the motivations which led to the mortgage meltdown. It’s a step forward, helpful and insightful.

Stock Prices At Heart Of Mortgage Crash is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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However, there are situations where owners run into tough times because of the loss of a job, divorce, an accident or medical costs. In such cases there are always nearby friendly hard-money lenders to provide the financing you need — at a cost.

Hard Money Loans

To understand how hard money financing works lets take an example where owner Wilson needs to refinance.

The Wilson property is worth $300,000 and Wilson has $160,000 in equity and $140,000 remaining on the mortgage. With a job and good credit Wilson can refinance the property with a new $210,000 loan at 5 percent plus 1 point in today’s market.

A point is worth 1 percent of the loan balance and is paid or credited at closing. In this case Wilson deducts the point (1 percent of the amount borrowed or $2,100 in this case) from the loan amount leaving $207,900 before closing costs and the repayment of the current loan. After paying off the existing loan of $140,000, Wilson has $67,900 before closing expenses.

Wilson now has a $210,000 mortgage at 5 percent interest. Paid with a 30-year schedule, the monthly cost for principal and interest is $1,127.33

But let’s say times have gotten tough for Wilson. His employer of 20 years has gone bankrupt and his medical insurance lapsed just before he was diagnosed with a disease that will cost $40,000 to treat. His credit is shot and his savings are gone.

Tough Terms

Filling this void are hard money (HM) lenders, sometimes described as lenders, individuals or investment groups. They will loan money but under different and, er, unique terms. In this case they might make a loan equal to 60 percent of the property or $180,000. Seen the other way, they want Wilson to have 40 percent equity. In a strong market HM lenders might accept 25 percent equity, while in slow markets they might only finance properties with 50 percent equity.

In addition, the interest rate will be 15 percent. There will be 5 points at closing.

HM lenders don’t care about income, they care about equity and the value of the property. In this example it’s the 40 percent equity that’s central to the transaction. If Wilson does not make his payments, the HM lender will swoop in and take the property through foreclosure.

At closing Wilson is set to receive $180,000 less 5 points. That means Wilson is actually getting $171,000 — the points are equal to $9,000 up front. Wilson uses his loan to pay off his existing $140,000 mortgage and then has $31,000 remaining before closing costs.

Wilson also has a $180,000 mortgage at 15 percent interest. The monthly cost for principal and interest with a 30-year schedule is $2,276.00 — TWICE the cost of the conventional payments for a bigger loan.

Why would anyone deal with a hard money lender? Is it a foreclosure scam, the step just before losing a home? Because of poor credit the regular lending system has been cut off to Wilson — and remember that the regular mortgage system has not always been so great, think of toxic loans. In difficult circumstances desperate borrowers turn to lenders with tough terms, terms HM lenders can only get because the borrower is so needy.

Is a hard-money loan a predatory mortgage? Assuming that all terms and conditions are plainly known and understood by the borrower, and provided there are no clauses which instantly raise interest rates if a payment is missed, call the loan when a payment is late or have hidden fees and charges, then no. Rather than being predatory, a hard-money loan in the best circumstances is simply a form of financing with hard terms reflecting the borrower’s poor credit.

What’s a Hard Money Mortgage? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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