Question of the week: What is an “impound” account and what are the positives and negatives of having one?
Answer: Good timing with this question because in California property tax bills are going in the mail this month with the first half tax payment due by December 10, 2009 and the second half tax payment due by April 10, 2010. Note to those refinancing between now and December, you will have to pay your first half taxes through your escrow, do not just mail in your check to the county as title companies will have to see proof they are paid. Best way to show proof is have the payment sent be escrow as part of closing. For those of you with an impound account, chances are you will have to come up with the funds to establish the new account and pay the payment for December and then get a refund from your current lender.
An impound account, also known as an escrow account, is set up with a lender by a borrower as part of their mortgage. The account is used to collect on a monthly basis funds for homeowners insurance, mortgage insurance (if applicable) and property taxes. For some borrowers having such an account is not an option, if you are applying for an FHA mortgage or a mortgage where the loan amount is greater than 90% of the value of the property an impound account is required. For everyone else, they have the option of establishing an impound account or not.
What are the benefits of an impound account? Primarily is the breaking down of large payments for taxes and insurance to a smaller amount. If you annual tax bill is $5000 per year, rather than paying $2500 in December and $2500 again in April—when by the way many of us also pay Santa Claus and Uncle Sam—with an impound account you would pay in addition to your payment for your loan $417 per month for the taxes to the lender. As well you would include payment for your property insurance, again taking the annual premium and breaking it down to monthly payments. When the property taxes are due the lender will send the funds to the county. When the property insurance is due the lender will send the funds to the insurance company.
Way back when there was little to no control over the impound accounts and lenders would sit on huge reserves for borrowers. In the late 1980s and early 1990s regulations began to be implemented that limited the number of months reserve a lender could have on hand and also mandated that lenders pay interest for the funds to borrower—in California anyway, different states have different laws. No one will get rich off the interest as it is usually less than what banks pay for passbook savings. The point being that impound accounts are much better managed and in the borrower’s favor today than they were in the past.
So the basic benefit of having an impound account is the ability to pay your taxes and insurance in small increments throughout the year, that way assuring your obligations for taxes and insurance are funded and paid when due.
What are the drawbacks for having an impound account? First, it increases the funds needed for closing since there needs to be enough money with the lender when the first tax payment is due. Depending on when the first payment on a new mortgage is due, the amount collected at closing can range from 2 months to 8 months of taxes pre-collected at closing.
The second drawback is the lack of control of your payments for taxes and insurance. While the overwhelming majority of impound accounts are managed properly, there are humans behind the wheel and sometimes mistakes are made. When a mistake is made it is not a pleasant endeavor to unravel paid impounds and missed payments.
My advice to borrowers regarding impound accounts is based upon their ability to manage finances. Do you have the ability and discipline to set aside funds every month for your taxes and insurance, essentially establishing your own impound account? Is your income steady on salary or up and down on commission or through self-employment? If you do not have an impound account through the lender is your financial situation such that you will be able to make large payments in December, April and when your insurance is due?
The most important question is: what makes you more comfortable and is your preference, to make monthly payments or make large payments monthly?
If you do not have an impound account and are a homeowner, note that as of today you have sixty-nine days until your first half taxes have to be in the mail!
Have a question for me? Ask me!
Time is running out on the IRS tax credit! If you are considering purchasing a home this year, are qualified and wish to take advantage of the IRS credit hurry and get into escrow. All escrows must be closed by the end of business on November 30, 2009. Are you qualified? Click this link IRS Form 5405 for Frequently Asked Questions click here IRS FAQ
After eight trading days in a row of mortgage backed securities (MBS) closing higher at closing (reminder: MBS price higher = rates lower = good thing!) today we may see our first negative closing, or not…
Mortgage Backs soared first thing this morning when the Labor Department reported unemployment numbers for September (263,000 jobs lost) as the number was higher than expectations and higher than the number for August. Instantly the pundits started speaking about the recovery not really happening, sky is falling, doom, doom. Bond investors reacted and sold off on stocks and bought mortgage backs.
Then the deep breath was taken and in looking at the trend of jobs lost per month it is the second lowest, to August 2009, number of jobs lost in a month in the last year. While not good to have job lost, and to see an increase from the prior month, the question becomes trend or one time reversal?
One really good part of the conversation that the job loss increase creates is: What is happening with all the money? Banks are flush with cash right now and they are not making loans. Particularly they are not assisting small businesses who are the number one employer in America. Until small businesses can secure lines of credit against their accounts receivables, obtain equipment loans for updating their shops and otherwise be able to borrow some funds when needed to support the growth of their businesses they will not be able to hire more workers.
Of interest in the numbers this week is that personal spending has increased. The American consumer is the primary fuel for our economy. Until Joe starts buying new wrenches and Mary replaces her old hair dryer and Alberto puts new tires on his truck our economic growth is stalled or very sluggish. While this current recession has put some very good financial habits in many American households, habits like saving more and spending frivolously less, we will not find stability until the American consumer begins consuming again. Because of the lessons learned on the wild consumption of the early part of this decade we can expect a more restrained consumer which should lead to a more restrained growth in the economy when it begins.
Of great interest in the numbers was the number for Gross Domestic Product for the Quarter, it shrank only 0.70% well below estimates and 30% less than the previous quarter. Slowing shrinkage is a good thing because until the shrinks stops we can’t grow.
Quickly running through a week of numbers, as mentioned personal spending increased, but consumer confidence dropped and was much lower than estimates—we want to spend today but are not that confident about spending tomorrow. Personal income saw another slight increase, two months in a row, which is positive as employers pay overtime to current workers before higher new ones. Finally home prices across the country climbed about 1% nationwide in July per a report in the Wall Street Journal, that combined with pending sales of existing homes increasing are positive signs for the housing markets and industries.
All this data has led us to a record. This morning the conforming 30 year fixed rate loan priced on the criteria I have used for several years (purchase, 20% down, FICO of 740, single family residence, owner occupied) is at its lowest level in my career. The previous low I have seen was 4.625% in March, May and September of this year—each time lasting a day or so.
Rates for Friday October 2, 2009:
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional 4.5% Down 0.25%
30 year conforming-jumbo 4.875% Down 0.125%
30 year FHA 4.5% Down 0.25%
30 year FHA jumbo 5.00% Down 0.125%
Remember we have true, honest to goodness quality Jumbo rates again! Call for quotes as they vary depending on LTV, FICO and loan amount.
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).
Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected. Numbers provided are for comparative purposes only.
The weather forecast in the paper says our local temperatures will dip below 70 degrees this weekend—I hope so! Of course last week they said we would be in the high 70s and we topped 100 so who knows. I will be spending a good part of the weekend in the home office working on files and numbers for clients, so if you need numbers give me a call!
Have a great weekend, it looks like it will be a great one to buy a home and if you are intending on using the first time home buyer credit you better get into escrow quick!
Dennis
Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.
Follow me on Twitter for market updates throughout the day.
Question of the week: Taxes?
Answer: Pay them.
That was an easy Q&A for the week.
Property tax bills have gone out for California homeowners for the 2009-2010 tax year. The first half taxes, covering July 1, 2009 to December 31, 2009 are due by December 10, 2009; second half taxes covering January 1, 2010 to June 30, 2010. This is an interesting year for tax assessors for a couple of reasons.
First is the volume of transactions that have occurred in the past twelve months. Beyond the normal real estate transactions of individual(s) to individual(s) is the volume of borrower to bank through foreclosure or deed in lieu of foreclosure, bank to individual(s) through sale or auction. What burdens the assessor office is the short term of the holding by some owners. The same property can change hands four times in a few months from foreclosed borrower to bank to investor at trustee sale to new homeowner. Each owner is responsible for a different assessed value and tax bill. Multiply this by a few thousand, throw in furlough days and reduced staffs due to budget deficits and one understands how some tax bills may take a while to correct.
Second is the refund aspect of many of the transfers. Many new homeowners in the last few years have an assessed value below the previous owner. As a result refunds are due…to who? How much? When? Ah, when and how much are the questions most homeowners due refunds are asking as they open their tax bills. When refunds are sent to customers will vary from county to county, if you have questions call the information number on the top of your tax bill.
For those with impound accounts you should see on your monthly mortgage statement the amount being collected for your property tax bill. If you are a new homeowner you might want to call your mortgage servicer to be sure they have received your tax bill and while on the line ask when they usually pay the amount due.
To check your tax bill, supplemental amount owed or due, or if your lender’s check has been posted go to the tax assessor’s website for your county where most of them have links to this type of information.
Taxes? Pay them.
Update on First Time Homebuyer Tax Credit: The Senate passed their version of an extension of the first time homebuyer tax credit. The Senate version must be reconciled with whatever comes out of the House of Representatives, probably next week, before we have what the extension will look like. The Senate version will extend the credit for first time buyers, up to $8000, into 2010, will increase the eligibility limits, will extend a credit of up to $6500 for others buying primary residences; offers must be accepted by April 30, 2010 and close by June 30, 2010.
In the meantime the current tax credit expires on November 30th. With Veteran’s Day and Thanksgiving holidays that leaves about 18 business days for transactions to close for the current version. If you have purchased in 2008 or 2009 and are eligible here are links for you:
Click this link IRS Form 5405 for Frequently Asked Questions click here IRS FAQ
Thanks to Marilyn Kalfus for re-posting on her blog my comments last week about a national lending license. She ran a poll in conjunction with my comments and 80 out of 100 respondents, as I write this, favor a strict national lending license. Are you listening (reading) Barney Frank, Christopher Dodd and the rest of Congress?
While the tax credit has been great for those receiving it, including many of my clients and clients of Stratis Financial, it has been my finding that most of our eligible clients were not buying a home this year because of the tax credit, but rather because they could afford to purchase a home they liked at a price and payment they could afford. As is coming to light the program has significant amounts of fraud, including IRS workers who have made false claims for the credit. We will not know the true health of the housing markets and mortgage markets until the Fed stops purchasing mortgage backed securities and the Federal government stops giving money, beyond the standard tax deductions, to those purchasing homes. Politicians, members of the media and others spent two years pointing out the pricing bubble in housing created by cheap and easy financing that led to the housing market and credit crisis; is the tax credit not doing a similar thing—creating a false price/market for homes in certain price ranges?
For those who have received the credit good timing and I hope you spend the credit wisely. Moving forward however I feel it would be in everyone’s best interest to stop the program. This is not a popular opinion in the mortgage or real estate industries, but then again I was against option ARMs and no-down subprime financing as well. For true recovery to enter our industries we need the market forces to separate from government influence and intrusion and let buyers and sellers find prices that satisfy both.
Busy, busy, busy week in economic news. Mortgage backed securities (MBS) markets broke below a narrow band of resistance and support last week and continued dropping on Monday with no support. An early rally on Tuesday offered an opportunity to pare some losses in rates. The rally continued to pick up steam breaking back into the trading range of early last week on Wednesday. Yesterday and today the MBS market dropped (yesterday) and has climbed (today) and is bouncing around in the the range between support at the 10 and 50 day moving averages and resistance at the 25 day moving average. Confusing? You bet, the market this week has not patterned at all as I thought it would given the large amounts of significant economic news. Here they are, not as released but as they impact the economy and rates.
Another half million people filed for unemployment in a week. While the number was less than expectations and can be good news in that regard, try explaining to one of the 525,000 Americans that their job loss was part of good economic news. Total job loss for the year through September is over 4 million.
Not surprising then is that personal income for September was flat, zero growth after an increase of 0.1% in August. Since unemployment continues to increase and personal income was the same in September as it was in August it means that the slight rise, 0.4%, in the Employment Cost Index for the quarter was mostly concentrated in July and August through higher overtime and benefit costs. With personal income flat in September from August those who were getting the overtime in August saw it continue in September. How many months will employers continue to pay overtime before hiring a new employee or two?
Following the path of our national paychecks (or lack thereof), least surprising of the economic news was the big drop in personal spending. In August personal spending increased 1.4% from July—those with jobs spending the increased overtime. In September personal spending declined by 0.5%, a drop of almost 2%. While 2% may not seem that big, consider the U.S. Gross Domestic Product (GDP) is about $14 trillion. Consider further that consumer spending composes, or historically composes, 70% of our GDP. That means that $9.8 trillion is the contribution of consumer spending. One percent of $9.8 trillion is $98 billion—a lot of money unless you are a member of Congress spending American tax dollars. From August to September American consumers spent about $200 billion less on video games, meals out, haircuts, dry cleaning, shoes, computers, Post Its, Cheerios and Titleist golf balls to name a few goods and services. One month, $200 billion.
Great news! Some media outlets and members of certain political parties could not contain their glee at the news that the GDP for the 3rd quarter (July 1 through September 30) rose 3.5% on an annualized basis! For the first time in 4 quarters (that is a year for those challenged in either calendar or math or both) GDP did not shrink. A recession is defined as two consecutive quarters of economic shrinkage, a recovery is defined as two consecutive quarters of growth. So we are half way to recovery. Or are we?
What do you call growth in a quarter that say personal spending drop, unemployment increase and government spending explode? Take away this summer’s Cash for Clunkers program, a couple of hundred billion from tax credits and spending from the stimulus bill, and other government spending and there was no GDP growth, maybe not a loss but definitely not a $500 billion growth.
So any celebrating over the growth appears to be for your tax money being spent by your government. In a large way. At a growing rate.
Once consumer spending recovers and joins the huge government spending, which is slated to continue at least through 2012 at this point, our economy will be awash in cheap dollars. How will investors react? Higher interest rates to stem and hedge against inflation.
For the week Money flows out of stocks and into bonds today pairing any losses from late last week and earlier this week. Stocks and bonds ripped up and down this week as the pros try to dissect the news presented above. What is a future economy to look like, where is the best place to maximize returns, minimize risk, not lose my fortune…again? For a Friday our mortgage rates are flat from last Friday after bumps and dips.
Rates for Friday October 16, 2009:
30 year conventional 4.75% FLAT
30 year conforming-jumbo 5.125% FLAT
30 year FHA 4.75% FLAT
30 year FHA jumbo 5.125% FLAT
A blue ninja and a bird. No that’s not the punch line to a joke but what the girls are dressing as tomorrow. Dad? I’ll be dressed as a Phillie phan looking for back-to-back World Series victories! Harkening back, 35-40 years for me, was there a better feeling than a full size Milky Way hitting the bottom of your bag? Not being a big fan of nuts back then my Snickers were always on the market, at a discount mind you as my brother and sister knew I did not like the nuts, I had to dump them on the restricted market where my buyers knew they could get them on the cheap. The curse of being the youngest and having a well known abhorrence for certain candy bars Today not so much and I think instead of a junior size 3 Musketeers or two Tootsie Pops I might be able to trade even up for a Peppermint Patty or two Baby Ruths.
Thanks Mike and Sharon for those early lessons in negotiations and market value!
Have fun, be spooky but not spooked!
Question of the week: Can you give us an update and scorecard on changes in regulations affecting consumers so far in 2009?
Answer: I will try!
Raising Loan Limits: These were actually raised in 2008 but Congress extended the loan limits into 2009 and it appears they are with us for a while. Of all the regulations and acts passed since the housing/credit/economic crisis began the raising of loan limits above $417,000 in high cost areas, such as most of Southern California, has had the most positive and dramatic impact on helping the housing market recover, helping homeowners refinance their mortgages and ensuring activity in the mortgage industry. A+
First Time Homebuyer Credit: In 2008 the credit was more of a no interest loan as anyone taking the credit has to pay it back; in 2009 the credit of up to $8000 has been widely successful. Perhaps too successful as this Los Angeles Times article discusses the huge amounts of fraud associated with the program. The credit expires in November, anyone eligible for the credit must close escrow before the end of business November 30, 2009 or they are out of luck. Unless Congress extends the credit, which has not happened and may not as discussed in the LA Times piece. Many of the first time buyers we have worked with this year probably would have bought without the credit, so as to its success in actually attracting buyers who would not have otherwise bought I am skeptical; as well it may have pulled buyers out of future markets to purchase in 2009. Because of the lack of oversight and lack of proof that it has been responsible for dramatically increasing the number of new buyers we otherwise would have had with low rates and prices I give the program a B- .
Credit Card Reform: Passed in May, first rules took affect in August the rest of the regulations take effect in February. Once the bill passed banks raised rates ahead of the bill taking effect, switched card holders from fixed to variable rates which are not governed by the bill, changed rules so interest is charged not on outstanding balances that are not paid off when the monthly statement but instead from the moment of purchase and a boost in fees to borrowers. In effect the passage of the reform to protect consumers spurred banks into action to change their policies ahead of the rules taking effect which has the exact opposite impact the reform desired: it increased the cost of credit, most particularly on those who pay off their balances in full every month. For having yet another “consumer protection” program that had the opposite result of its intention I give the reform a D (it would have been an F but that would have generated more negative email than normal).
Home Valuation Code of Conduct (HVCC): Let’s see we have inexperienced and incompetent appraisers being used by national appraisal management companies who are paying the appraisers less than half of what an experienced, quality, appraiser gets paid, the appraisers are chosen not by ability but by how quick they respond to a request for service and the industry is rife with transactions with horrible appraisals completed by these incompetent, but cheap, appraisers. But it is what is best for the consumer, despite paying upfront for an appraisal that kills any transaction, that according to those who enacted the policy and blog commentators who know next to nothing about the real estate industry or appraisals. HVCC gets a solid F, only because I do not think F- is a valid grade.
Mortgage Disclosure Information Act: When first enacted there were some bumps, and there still are as the rules from the government keep changing so lenders keep changing their requirements. Overall it has added a couple of steps to the process making it a bit more tedious for those of us who have been providing the disclosures all along, i.e. have been compliant with existing laws, but has not tremendously hindered the process. It has added costs to the industry however as more people are needed to ensure compliance. I give this a C, it was unnecessary but the rules have not killed the industry (see HVCC).
New RESPA Regulations: The new RESPA rules for Good Faith Estimates have not yet taken effect and already I give them an F. On my website I have devoted a page to the new Good Faith Estimate and comment on the impact. A major change could be the selection of escrow companies possibly moving from real estate agents to mortgage originators should escrow companies see tremendous negative impact to their revenues as a result of the new Good Faith Estimate, and HUD-1, forms required in mortgage transactions. Ironically the name of the new act is “Rule To Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs.” In then end the exact opposite will occur on all points. As I said this one gets an F and it has not even taken effect yet.
Overall I give the federal government a failing grade on its attempts to “protect” or “help” the consumer, with the exception of the increased loan limits it has failed to protect the consumer or the tax payer.
The single act that could do more to protect Americans from bad lenders, brokers and originators would be to require a national lending license that is as difficult to obtain as the Series 7 license required of stock brokers. With no exceptions nor exclusions every person who originates mortgages, with for a bank, direct lender, broker, or correspondent, would have to have the license. Suspension or forfeiture of the license in one state would prevent an individual from doing the same job in another state or another sector of the industry (currently an individual can lose his license in California from the DRE and no longer work for a broker but can go to a bank or direct lender in California or get a license in another state and just continue to fraud or bad practices with a different company).
Instead of trying to fix an industry that worked very well until the loosening of credit standards by Fannie and Freddie at the direction of Congress, the government should make it more difficult to be an originator.
In the words of Ronald Reagan, the scariest words one can hear are, “I’m from the federal government and I am here to help.”
In the past I have addressed trading ranges, a commodity has a high and low price in the marketplace and generally the price drifts between the upper and lower levels for a while, when the price breaks through either the upper resistance or lower support there is opportunity for a new trading range to be established. For those who understand the trading range skip to next paragraph. For instance the Dennis C Smith Corporation (DCS) over the past two weeks has had a high of $10 and a low of $9.50; everytime the price reaches $10 it bounces of and heads down, whenever it hits $9.50 it bounces off and heads higher. This week DCS had some positive news and forecast for the future was higher revenues on fixed costs so on Tuesday it closed at $10.10, Wednesday it dipped below $10 but then rallied and closed at $10.12, Thursday it hit $10 then bounced up closing at $10.15, today it never dipped and closed at $10.18—DCS stock is rising get on it! So it has broken through the range of $9.50 to $10 and a new range is going to be established with $10 probably the bottom of the range. This will continue until more news or economic situations cause it to create a new range higher or lower.
This past week a lot of convergence occurred in the mortgage backed securities (MBS) market. The top levels of resistance converged on the bottom levels of support, as well the 10 and 25 day moving averages moved lower as the 50 and 100 day moving averages edge higher (moving averages are the average price of the commodity during the period, in this instance the 25 day moving average is the average closing price of Fannie Mae mortgage back securities for the past 25 trading days) . Squeezing in between all these numbers was the daily trading of MBS. All week long the prices would drop at open (bonds: prices drop rates rise) and drop lower and then rally before closing to end the day near flat. Carefully staying within the levels of resistance and support.
Economic news, as usual had some impact on the numbers, but the two biggest factors in the see-saw trading everyday were the money supply and American Corporations. The money supply was affected by A: the Feds continuing to purchase MBS and prop up the market and B: an announcement that next week will be a record auction week of U.S. Treasury bonds, over $150 billion being put up for sale.
One Hundred Fifty Billion Dollars in one week, of your tax dollar backed debt being sold to anyone, or country, willing to purchase the debt. We will see next week how the auction is received by investors, most notably foreign investors who so far have kept betting on America despite hugely mounting debt and deficits and a cracking dam holding back inflation.
Providing some positive news is the American Corporation as this is earnings week. Over 80% of those reporting earnings so far have beaten expectations. Further the news is filled with reports of “profits dropped by…” or “DCS profits for 3rd quarter down…” That is great news. Um, Dennis the news is that profits dropped or are down. The news is that there are profits! Companies are making money. When they make money they can spend money, on things like salaries and hiring. While the jobless claims number increased this past week, the economic fundamentals point to layoffs to slow and hiring to begin in the next couple of months in some parts of the country, and later in others (like California).
Cool website At least I thought so. Job growth and loss from 2004 through mid-September 2009, click the play button on the top left of the map.
For the week despite the flow into stocks by investors rates stayed flat, most likely thanks to the Fed purchasing program of mortgage backed securities..
30 year FHA 4.75% Down 0.125%
30 year FHA jumbo 5.125% Down 0.125%
Is this our last run at summer in Southern California? With temperatures pushing the mid-80s in Long Beach one week before Halloween I certainly hope so! We have ballet classes, rehearsals for Nutcracker, a Green Dragons soccer game, church and I hope some time in the kitchen to develop some good eats—a normal weekend in other words! If you need me for any questions or pre-qualifications please call or email and I will get to you as the schedule permits.
Have a great weekend and don’t forget the SPF 30 so you don’t get burned!
Question of the week: Last week you addressed paying down a mortgage early, can you discuss the effects of not making timely payments on a mortgage or other debt?
Answer: There is perhaps no area in lending that has more false information than credit reporting and credit scores. I will try to be brief (a chorus of “yeah sure!”) and address two separate issues here: 1) delinquent debt leading into mortgage qualifying and 2) delinquent on a mortgage.
Delinquent debt Guidelines for credit scores for mortgage qualifying have gone up, as well the pricing matrices have changed so higher scores receive better pricing. Because of this credit scores, while always important, have become more important in qualifying and funding mortgage applications. Many times I am meeting clients for the first time and they say they pulled a credit report from one of the free on-line services and their score is XXX, when I pull our credit report we often have a different score on all three credit bureaus because of the nature of the reports. Sometimes our scores are lower and sometimes they are higher, but our scores matter and the ones from the free report do not. Why? Because we have to use a company that is registered with the lenders, Fannie Mae, Freddie Mac and FHA so their reports are accepted for lending purposes. Getting a free report on line is nice for a snapshot of what you owe and what may be reporting as negative, but you cannot get a mortgage from one; every mortgage originator must pull their own report and cannot use someone else’s report.
If you have had some challenges in the past and have delinquencies on your report address them right away. Too many times I have met with clients with a poor credit history and they have just walked away hoping to buy again in the future, “when things get better.” Walking away does not make the poor credit history go away and puts you farther from home ownership. I have had many clients over the years with poor credit histories who have said, “what can we do to put our credit in a position to buy a home?” Together we have created a plan and when the clients followed the plan they put themselves into the homes they own today. They confronted their poor credit, made all their payments on time, had the patience and commitment to stay with the plan and are now homeowners.
Good credit starts today and is every day. This means if you want to become a homeowner and have late payments on credit cards, auto loans, student loans, etc. you have to begin making every payment every month. The longer your history of late payments, a thirty day late one month with one creditor, a thirty day late the next month with another creditor, two months later another thirty day late, the longer this string of late payments the harder it will be to get beyond that history and show a history of timely payments. Start this month, make all your payments on time. Then go back and start working on the late payments.
Regarding outstanding collections for medical bills, phone bills in college, ex-boyfriend’s car payment, etc. confront those debts. Contact the companies, tell them you are working on clearing up your credit and bad accounts and want to work with them to bring this to a zero balance. Be friendly, courteous and personal, workers at collection agencies and delinquency departments get yelled at all day every day, when they come across someone accepting responsibility and being friendly they are much more inclined to work with you. Most companies have room to negotiate, be the person that they want to negotiate with.
Bad credit can prevent you from buying a home today, but focus on the vision of homeownership not when that vision will come to pass. You spent some time getting bad credit, you will have to spend some time getting good credit and until you do you will remain a renter. I realize this message is not for most of the people who read my weekly updates, but many of you may know someone who can use the advice. As I said, I have many clients over the years who are homeowners today because of the work and effort they put into a plan we developed together, I am always willing, and enjoy, working with families to put them on the path of homeownership and be able to someday in the future call and say, “congratulations we just funded your loan, you are a homeowner.”
Delinquent mortgage Late payments on mortgages, including home equity lines of credit, are harder to overcome and because of the size of the payments in relation to the household budget are much harder to make up. Most people who miss a mortgage payment are going to miss more than one, and until they are paid current on all mortgage payments, including late charges, have what are known as “rolling 30’s” or 60’s, meaning because they made Septembers payment in October, unless they make another payment in October for October their November payment is the October payment 30 days late, and it goes on. In this current economy many people are missing mortgage payments, and many are not missing them but just not making them. So the question becomes: Which is the best route for me to take, foreclosure, deed in lieu of foreclosure or short sale?
I wish I had a stock answer to this question, unfortunately I do not have a crystal ball and do not know how lenders are going to treat this current mortgage environment two, three, five years down the road. Will they be more forgiving of mortgage delinquencies and foreclosures because of the current environment and prevalence of foreclosures and delinquencies? No one knows, and we will not know until we start submitting mortgage applications with those delinquencies on the credit reports. Here is what I do know mixed with my opinion.
Short sale First, the sooner and cleaner you can get clear of a mortgage that you no longer can afford to pay the better. It creates a clean break on your credit report and the calendar starts to work in your favor as you get further away from the delinquency. In this regard, keeping a mortgage current through a short-pay situation will show no rolling delinquencies, will show the mortgage paid on time and a settlement deficiency on the credit report. People who closed on a short sale one year ago are now one year into no mortgage delinquencies, if they made payments timely into the short sale they have no mortgage payment delinquencies and the one month reported deficiency settlement. While this is not great, or good, it is becoming better due to the passage of time, as well their credit score is not negatively impacted by both the settlement of the balance due and delinquent monthly payments.
Foreclosure The foreclosure process can take quite a long time, especially in California. Because of the regulations governing foreclosure the lender must meet certain deadlines and wait certain periods of time before actually foreclosing on a home. I have seen some cases where people have been in their homes for well over a year before the bank has foreclosed. To get to a foreclosure a borrower must miss at least three payments before the bank files a Notice of Default, or NOD. Once the NOD is filed the bank must wait another three months before filing a Notice of Intent To Sell informing the borrower of a date, time and place they will be selling the home at foreclosure, this date must be at least 30 days from the giving of the notice. The purpose of these time frames is to give the borrower time to bring the mortgage current and avoid foreclosure. Note, to bring the mortgage current all back payments, penalties and fees must be paid to the lender. As well these notices are public, you see them in every daily and weekly newspaper, so anyone going through the process is inundated with mail, calls and people knocking on their door looking to buy the property.
Because of the length of time it takes to get through a foreclosure process the borrower has a significant amount of 30, 60, 90 and 120 day late payments reporting on their credit report. These continue until the foreclosure is finished, at which point a foreclosure is reported on the credit report. Only then can the borrower begin to start a history of good credit.
Deed In Lieu of Foreclosure This process involves the borrower deeding the home directly to the bank and avoiding the prolonged foreclosure process. Sort of like a short sale in that there is no lengthy period of missed payments, sort of like a foreclosure in that the whole balance is reported delinquent and foreclosed. Down the road I am not certain which will be better in the eyes of lenders. If someone is unable to proceed with a short sale, I would advise them to contact the lender and/or an attorney and work out a deed in lieu of foreclosure process to avoid the lengthy foreclosure process and build up of negative credit that results.
While it is sad that we must discuss these various issues, it is an issue that is prevalent in the economy and region. Before making a decision as to which route to take consider the current and future ramifications of any decision using facts and information, as hard as it is try to keep emotions out of the decision.
(You said you would be brief!) Sorry!
The stock market seems to have had a good week, sucking investments from the bond and mortgage markets. As a result we have seen a bump in rates. Between earnings and economic reports investors are buoyed by the economic future enough to get into the riskier markets of stocks and out of the safer investments of bonds.
Core inflation increased more than expected. This is the key indicator for interest rates, and as Fed Chief Bernanke has said they, the Fed, will be aggressive in regards to inflation and keeping it under control. What aggressive means will be seen as the trillions of dollars of debt are being financed by the government and the money poured into the economy.
Further pressuring rates is the slow down of the Fed’s purchasing of mortgage backed securities. As they pull back over all demand drops, prices drop, rates increase. The most mitigating factor that I can think of to offset some this pull back is the huge amounts of cash sitting in the depositories. Despite the billions of dollars from the TARP program banks have not loosened credit and are sitting on large reserves. When will they begin to use the cash and when they do will it be investments or loans? Despite common thought, bankers are not stupid; seeing inflation on the horizon they will benefit their stockholders most by making investments that excel in periods of inflation.
For the week despite the flow into stocks by investors rates stayed pretty flat for conforming loans and a slight uptick for the government loans.
30 year FHA 4.875% UP 0.125%
30 year FHA jumbo 5.25% UP 0.125%
Great week in most of Southern California with the rain. Good time to look at property after it rains so you can see leaks, puddles, and other water issues that we do not often have the opportunity to with prolonged periods of dry weather.
We missed the rain having spent the week in Rancho Mirage, where it has been cooler than normal but very nice! Thanks to George and Sandy for watching Harrison!
Question of the week: Should we pay extra on our mortgage to pay down the principal and pay off the mortgage sooner?
Answer: This question begs for the classic answer in economics, “on the one hand yes…on the other hand no.” Ask twenty mortgage professionals, twenty CPAs, twenty financial advisors and twenty airline pilots this question and you will get about half of each group saying, “yes pay off early so you can save the interest payments” and about half answering, “no do not payoff early use the leverage of our low payment and low rate as long as you can.”
When people ask me this question I answer with several questions of my own to lead them to the answer that is best for their personal financial situation:
· How many more years do you think you will be in your home?
· How many more years are left on your mortgage?
· When do you want your mortgage paid off?
o Is this date a long time after you plan on selling your home?
· How much extra are you thinking of paying every month?
· How many more years until you plan on retiring?
· Do you have any outstanding credit or debt that is at a higher rate than your mortgage?
· Will lowering your interest deduction cause you a disproportionate increase in income taxes?
· Do you think over the period of time that you plan to make the extra payment that you can earn a greater rate of return on investing than the borrowing rate on your mortgage?
· Are there any large expenditures in the future that you will need to cover with a large sum of cash or a large loan? I.e. college tuition and living expenses? Extended health care for a family member? Braces?
· How is your retirement savings plan? Are you on track to have enough money in savings to cover your projected expenses for twenty to thirty years after your intended retirement age?
Answering these questions leads most families to re-think making extra payments on their mortgage and instead use the money they intended to use to pay down their mortgage principal to pay off higher rate debt and increase their savings and retirement accounts.
For those with little to no debt, with the exception of their mortgage, and doing well on their retirement saving, who plan on being in their home beyond the time frame they intend to have the mortgage paid off, the conclusion is to pay down their mortgage for early payoff.
My personal outlook for those not intending to retire in their current homes, and even those who do in many cases, with a low mortgage rate on your home and the very high prospect of inflation in the coming year(s) where interest rates will climb—not only rates for borrowing but also rates paid for savings, CD’s, rates of return on investments, with the power of compound interest and dividend reinvestment homeowners will benefit more from adding extra money to their savings and investment at a higher rate than paying down a mortgage at a lower rate.
If you are paying 5.5% on a mortgage and inflation creates average return on investment rates of 10%, why pay off 5.5% when you can get 10%? When/if the rates of return go below your rate of interest on your mortgage you can re-evaluate and look to pay down the mortgage if it makes sense for how long you will be in your home compared to when the mortgage will be paid off.
Cash is hard to accumulate; once you have paid down your mortgage you have transferred cash from a liquid asset you can easily and cheaply access to equity in your home that is difficult and expense to access. In most cases my advice to those looking to pre-pay their mortgage is to over-pay their savings, investment and retirement accounts first.
On the other hand…..
In the end it is your money and you need to do what makes you feel most comfortable. Ask the questions, analyze the answers, create a plan and stick to it; be ready to adapt to future economic cycles but try to stick to your plan.
Mortgage Backed Securities have continued their positive march up the chart. A significant amount of the gains are the result of the Federal Reserve purchasing program, a $1.25 Trillion commitment to purchase mortgage backed securities to keep rates low. So far the Fed has purchased over $900 Billion and the program has worked as our rates have stayed low.
Also impacting the market, the bond market that is, has been the increasing price of gold, in record territory over $1000 an ounce, and the weak dollar. Much has been made of China’s investment in America with their purchase of debt from the Treasury, as of the end of July China holds over $800 Billion in Treasury securities, Japan $724 Billion and the rest of the world almost $2 Trillion—that was through July so the Treasury auctions of August and September are not in the tally. A weak dollar makes our debt that much more of a bargain to investors.
When the dollar strengthens in the future those who purchased the debt will see an added profit when they sell their dollar based investments and convert to the weaker currency. Remember when you are dealing in a billion, one-tenth of one percent is $1 million, one-tenth of one percent of $100 Billion is $100 million, big numbers for small changes.
In the auctions this week the Treasury sold 3, 10 and 30 year securities. The 3 year auction was disappointing and of interest was that foreign investors made up less than half of the investors—hmmmm a sign of reduced foreign investing later? Lower demand creates lower prices which results in higher rates. The 10 year auction went well and then yesterday’s 30 year auction was disappointing. So a mixed bag in the over-saturated Treasury auctions this week.
A mixed bag is not real good news for interest rates. As I have discussed before when economies and markets turn there is turmoil and mixed data, one day good, one day bad, one report good, one report bad. Mixed results in treasury auctions could be the signal the investors are weary and future demand for the auctions will be low. Unfortunately because of the massive debt being racked up in Washington there will have to be many more auctions for hundreds of billions, trillions, of dollars to finance our government’s expenses and spending. Fatigue at this stage is a warning sign of higher rates as our Treasury continues to flood the market with debt to pay for itself.
On the economic data front initial jobless claims came in yesterday at the lowest number since the first week of the year. Woo-hoo!?? Unless you were one of the 521,000 filing that claim, then it is boo-hoo. As discussed in previous updates, unemployment must slow before it reverses, slowing initial claims is good news wrapped in bad news. One number that tells us the difficulty in turning the economy around is that 3 million Americans are on extended unemployment benefits. These are people who have been on unemployment beyond the normal time frame and are now on the extended benefit program for another 90-120 days. Unemployment will continue to increase into the first quarter of 2010 based on current data, longer in California due to lack of manufacturing industries.
Ben Bernanke, Chairman of the Federal Reserve, said today that once the economy “regains some footing” the Fed will have to raise rates. He gets paid the big bucks to state the obvious, but sometimes the obvious needs to be stated. The question is when is that regaining of some footing going to happen and what will be the Fed’s benchmark to know it? That is what investors are looking for. From the tone of his message I think the Fed will act swiftly and aggressively, I think this because he did not say “when the economy has turned the corner” or “once economic growth begins” but rather “regains footing.” That to me says before growth begins they will act. We shall see.
Friday is the bad day this week, profit taking hits the mortgage back security market as rates continue to deteriorate all morning. As can be seen by the chart we have lost all of last week’s and this week’s gains, all of it this morning. Typically we see late rallies when we see this big of a movement down. However, with the economic news and everyone looking to see when the growth will occur, when the inflation will start to come to market, we never know when a huge drop in prices signals the end of the run and rates have passed the bottom. Does today signal the end and earlier this week was the bottom for rates? We’ll know in the coming days and weeks.
Rates for Friday October 9, 2009:
30 year conventional 4.75% UP 0.25%
30 year conforming-jumbo 5.155% UP 0.25%
30 year FHA 4.75% UP 0.25%
30 year FHA jumbo 5.125% UP 0.125%
Let me know what your mortgage needs are. With the exception of a Green Dragons soccer match I am available on Saturday. Sunday I’m available for phone conversations after noon.
For those in Southern California looks like we may get some rain mid-week, a good time to check homes and listings for leaks and where water pools!
Dennis C. Smith, California Dept. of Real Estate Broker #00966315 Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
Dennis C. Smith, California Dept. of Real Estate Broker #00966315
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
Contact Us | Testimonials | Dennis' Bio | Truth-In-Lending Disclosure Explained | New Good Faith Estimate | Purchase After Short-Sale | Tell a Friend | Home | Loan App Checklist | Site Map | Loan Application | Mortgage Calculators | Customer Login | Are You Pre-Approved? | Daily Rate Lock Advisory | My Blog
Copyright © 2010 Stratis Financial CorporationPortions Copyright © 2010 a la mode, inc.Another XSite by a la mode, inc. | Admin Login| Terms of Use| Site Map
