Part Two 

Last issue's article described the Obama administration's plan for scaling down the federal government's involvement in housing finance.  The plan calls for a phasing out of Fannie Mae and Freddie Mac, and for a smaller FHA.

There are three areas that need to be examined a bit more closely, however.

The first is the fact that four mega-banks that now dominate a sliver of the market will dominate most of it.  These four banks now account for half of the strictly private market and 60% of total loan originations (Source: Inside Mortgage Finance).  The market power of the big four is now constrained by agency support to several thousand smaller loan originators.  As this support is removed, the dominance of the big four will grow.  A slow ramp-up should prevent this by creating new loan origination channels that small players can exploit as well as large ones.

The second issue is that the administration's proposal has nothing in it that would make it easier for borrowers to shop the market.  Perhaps the authors of the new plan believe that improved disclosure requirements under Truth in Lending (TIL) and the new Consumer Protection Agency (CPA) will deal with that problem.

The third issue is the lack of a plan to fix the major structural deficit of the private secondary market.  Every individual mortgage security is a stand-alone entity secured by whatever reserves or insurance protections are embedded in that security.  If these reserves are excessive on 99 securities and deficient on one, that one will fail. This can raise questions about the soundness of all the others, making it extremely vulnerable to a spreading loss of confidence.

Any new plan should address that problem by requiring that all mortgage-backed securities be full and unconditional liabilities of the insurers.

 
Housing affordability is at an all-time high, according to records dating to 1970 from the National Association of Realtors (NAR).  Average monthly payments, based on home prices and mortgage interest rates, dropped to 13.1 % of the median family income in January, the most recent month available, from 23.2 % in 2006 at the peak of the housing bubble.

FICO credit scores for loans insured by the Federal Housing Administration, rose to an average of 703 in February, up 10 points from a year earlier, on the scale of 300 to 850. FICO scores, developed by Fair Isaac Corp. (FICO), for FHA loans averaged 647 in February 2008. They climbed after the FHA imposed minimum scores for the first time in October and banks added stricter credit overlays.

The weighted average FICO score for a home purchased with a Fannie Mae mortgage was 762 last year, up from 716 in 2006.  Fannie Mae loans, which usually require a 20% down payment, had an average 68% loan-to-value at origination.  

Recently, the National Association of REALTORS® launched a special "Call to Action" regarding the protection of the Mortgage Interest Deduction (MID).

To give a brief background, individuals are permitted to deduct mortgage interest paid on mortgage debt of up to $1 million.  The deduction is available for interest on mortgages for a principal residence and one additional residence.  The $1 million limitation represents the combined allowable debt on two residences. Mortgage interest on up to $100,000 of debt on home equity loans or lines of credit also qualifies for the deduction.

As part of its FY 2011 budget, the Administration has proposed limiting the value of the MID for upper income taxpayers by, in effect, converting the deduction to a 28% tax credit for those individuals who are currently in the 33% or 35% tax brackets. Individuals with incomes below $250,000 would generally not be directly affected by this proposal.

The mortgage interest deduction (MID) is a remarkably effective tool that facilitates homeownership.  While only about 30% of all taxpayers in any given year itemize their deductions, more than 3/4 of homeowners utilize the deduction over the period they own their home.

Source: MyFICO.com 

Credit score facts & fallacies - Part II

Fallacy: My score determines whether or not I get credit.

Fact: Lenders use a number of facts to make credit decisions, including your FICO® score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.

Fallacy: A poor score will haunt me forever.

Fact: Just the opposite is true. A score is a "snapshot" of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates.

March 2011 LPS 

30% of loans in foreclosure have not made a payment for at least two years. 47% of those in foreclosure have not made a payment for at least 18 months. 

PMI Distressed Markets

Jackson MSA and Flint MSA have now been removed from the PMI distressed markets list. 

FHA Mortgage Insurance Premiums  

The new FHA Mortgage Insurance Premiums went into effect on Monday, April 4th.

The new premium is increasing 25 Basis Points that on a $175,000 mortgage will equate to a roughly $36 increase in the monthly payment. 

BIG BUCKS - 3 of the 5 richest people in the world today are Americans, but for only the 2nd time since 1994, the globe's richest person is not an American.  Mexico's Carlos Slim (worth $74 billion) is ranked #1. (Source: Forbes)  
   
IS THAT ENOUGH? - 72% of American workers surveyed believe that they will need to accumulate no more than $1 million to enjoy a comfortable lifestyle during their retirement years. (Source: Employee Benefit Research Institute) 

DOUBLE-DIGIT - The average interest rate nationwide on a 30-year fixed rate mortgage was at least 10% for the 12 consecutive years of 1979-1990. (Source: Housing and Urban Development)

HISTORICALLY LOW - The average interest rate nationwide on a 30-year fixed rate mortgage was 4.81% last week, 64 basis points higher than the 4.17% record low set in mid-November 2010. (Source: Freddie Mac)    

Bill, 

My family and I are doing well in our new home.  You certainly did provide us with excellent service during the mortgage process and closing.  Our loan servicing by WF has been good thus far. When our family and friends begin looking for mortgage service we will be promoting your services! 
 
Regards,
 
Michael M.  

--------------------------------------------------

Candace,

We want to thank you for all your hard work during these past few months.  We would never have been able to navigate such a complex process without your expertise and assistance.  Your perseverance, despite our setbacks, allowed us to find a home that was a good match for us.  Your help in securing our financing was invaluable!  We would not hesitate to engage your services again for future home purchases and we will recommend you highly to everyone!

Sunshine & Phil