Monthly Archives: July 2012
The Obama administration has been pressuring Edward DeMarco, the acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, to allow principal reduction on underwater mortgages.
The reason the Obama administration wants Fannie Mae and Freddie Mac to lower the principal is to help reduce the amount of homes resulting in foreclosure.
However, DeMarco has stood his ground and refused to allow Fannie Mae and Freddie Mac to lower the principal balance of underwater mortgages, as it will be coming from the tax payers’ dollars.
Currently, Fannie Mae and Freddie Mac back or own approximately 60% of all mortgages.
The main reason for DeMarco’s refusal in lowering the principal balance is to protect the tax payers’ dollars. According to an article in the LA Times by Jim Puzzanghera, tax payers have contributed $188 billion to the two companies in order to keep them afloat. As of today, $46 billion in dividends has been paid back to the Treasury Department in exchange for the assistance.
DeMarco also believes this program could worsen the underwater mortgage situation, because homeowners may decide to stop paying their mortgages altogether in order to have their principal balance reduced with this program.
DeMarco also explained that Fannie Mae and Freddie Mac offer a variety of programs that will help underwater mortgages. There are programs that lower monthly payments to ease the burden on homeowners that owe more on their home than what it is worth.
From just past experiences, it seems when the government steps in to help our housing situation, there is a negative snowball effect that makes it worse than before. There are programs available to help homeowners in need of lowering their monthly payment, interest rates, and terms.
One of the main programs that helps lower the interest rate and monthly payment of underwater mortgages that are Fannie Mae and Freddie Mac owned is the HARP II program (Home Affordable Refinance Program).
Overall, using more of the tax payers’ dollars to help struggling mortgages is not the solution. DeMarco has made a wise decision in respecting the tax payers’ dollars and realizing that the positive outcome does not outweigh the negative.
Your FICO score is a main determinant of whether you will be approved to purchase a home or not.
What is a FICO score?
A FICO score is a calculation derived from different data in your credit report that determines your risk in receiving credit.
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Types of credit used
Each of these five categories provide important information that help determine a FICO score.
Once you understand what the main categories are in determining your FICO score, the next step is managing your credit so you can improve your score and eliminate debt.
Here are tips to fix your credit score by category and maintain good credit:
- Pay your bills on time
In order to build a strong credit score, you need to be current on all bills and avoid delinquencies. Even if you are a couple of days late, it will still negatively affect your credit score. If you have been late on a payment, start today and become current on all bills. You need to start building consecutive months where you are on time with all payments.
- Pay collections accounts
According to the FICO website, you need to be aware that paying off a collection account will not immediately remove it from the credit report. A collections account will be reflected on your credit score for 7 years.
- Keep low balances on credit cards and other “revolving credit”
You never want to max out a credit card, or become close to reaching the limit. A good rule of thumb is to never exceed half of your credit limit. Creditors want to see that you can manage credit and don’t max out ever credit line you receive.
- Pay off debt rather than moving it around
Paying of your credit cards is the most effective way to improve your credit score. When you are paying of a credit card, don’t keep using it as this is counterproductive.
- Don’t close unused credit cards as a short-term strategy to raise your score
This does not improve your credit score.
Length of Credit History
If you are trying to build your credit and have been managing it for a short time, you don’t want to open several new accounts rapidly. When consumers open too many cards too soon, it can appear risky and lower your score.
- Re-establish your credit history if you have had problems
In this economy there are numerous people who have ruined their credit due to financial hardships or other circumstances. One of the most important things when trying to improve your credit after a hardship is to re-establish credit by opening new accounts and showing stability. This will take time but in the long-term managing a new account responsibly will raise your score.
Types of Credit Use
- Have credit cards- but manage them responsibly
Credit cards are not the problem, the lack of control and irresponsibility from consumers that is the problem. Having a credit card is okay as long as you are making timely payments, preferably in full each month.
When buying a home with financing, you typically need a minimum of three credit lines to qualify. This may be a car loan and two credit cards. If you are paying those on time and managing responsibly, you will be raising your score.
- Closing an account doesn’t make it go away
A misconception that is often thought by consumers is closing a credit card will remove it from your report. This closed account will still show up on your credit report and can sometimes still be considered in the FICO score.
In today’s economy with many underwater mortgages, many homeowners are opting to short sale their home when unable to refinance or sell for profit. A short sale is when the bank agrees to allow a home to sell for less than the outstanding debt of the mortgage. If the mortgage value is more than what the property was sold for, then that would be considered a short sale.
Many homeowners are turning to this route to avoid foreclosure, and to get out of a situation where they owe more than what their home is worth.
But, how does a short sale affect one’s credit? Many homeowners want to know this answer and what the long-term effects will be.
When doing a short sale, it typically affects your credit in the same way as a foreclosure would. They both damage your credit, and will take years to rebuild.
According to an article in the LA Times by Liz Weston, “If your scores weren’t that high to begin with—say 680 in the 300-to-800 FICO scale—it would take about three years for them to return to their old levels. If they were high, say 780, it would take about seven years.”
According to Fair Isaac, here is a breakdown of how late payments and a short sale can affect one’s credit:
30 days late: 40 to 110 points
90 days late: 70 to 135 points
Foreclosure, short sale or deed-in-lieu: 85 to 160
Bankruptcy: 130 to 240
Keep in mind, the years to rebuild credit also depends on how the individual manages their credit after the short sale.
When it comes to buying a home after a short sale the time frame can range between two and seven years depending on the circumstances of the individuals.
For example, if buying FHA after a short sale and the homeowner never had a late payment during the whole process, they may be able to buy with no waiting period.
However, when buying a conventional loan, the time frame ranges from two to seven years. One would need to speak to a mortgage professional in order to determine the length needed to wait based on specific situations.
As mortgage planning specialists, we advise checking with a lender first to see if you are qualified to refinance your current mortgage and reduce the monthly payment with a better interest rate or lengthening the term.
If you are unable to refinance and want to short sale, speak to a mortgage professional and real estate agent who specializes in short sales. Short sales require specific guidelines and you should make sure you are working with a professional that understands the complexity.
This last month, the percentage of foreclosed homes that made up the market accounted for 24.5%. This number is still relatively high; however, it is drastically lower than the highest percentage back in February 2009 which was 56.7% according to author, Alejandro Lazo, from LA Times.
The new data from DataQuick reported that the sales in the region last month were up 7.5% and the median home price increased by 5.3% in comparison to the same month last year.
Now, why are we seeing an increase in home prices? The real estate market is an extremely competitive market right now. Interest rates are at historic lows as well as home prices.
With those two combinations, we always discuss how that makes up a buyers’ market. It is truly in favor of buyers right now and many are taking advantage. Many homes are receiving multiple offers which are helping to increase the value of homes.
Indicators all point towards an improved housing market with fewer foreclosures.
In yesterday’s post, we even discussed how Fannie Mae is implementing new programs to help homeowners avoid foreclosure to ensure fewer hit the market.
According to the LA Times article, Alejandro Lazo stated, “California has a much more streamlined way of dealing with foreclosures as it does not require a court order for a home to be repossessed by a lender. That distinction has helped California…bounce back from the mortgage meltdown better than other hard hit states like Florida.”
Overall, we are seeing positive signs as fewer foreclosures are making up the resales in the real estate market. In the Southland we have also seen an increase in median home prices slightly. These are good signs towards improvement, and hoping the trend continues.
There is new discussion about the down turn of FHA loans and their increase in foreclosures. The mortgage market is stabilizing; however, FHA backed loans have been increasingly defaulting. In the quarter ending March 31, the FHA delinquencies that were 90 days or more delinquent increased to 27%.
The main question is why are FHA loans defaulting?
A publication from Inside Mortgage Finance explained that FHA-backed loans made up more than 29% of the market for home purchases in the first quarter of 2012.
FHA home loans are great options for first time homebuyers who do not have a great deal of money saved up to buy conventional. FHA loans make it easier for younger individuals or lower income individuals to purchase a home.
An FHA loan only requires 3.5% down payment to better assist home buyers with less income and assets. The credit scores are a littler more flexible as well. With that criteria in place, FHA loans can be considered a little more risky for lenders at times. Because home prices are declining, homeowners are becoming underwater and owing more on their property.
By no means is an FHA loan a risky loan for a home buyer to receive, but as with any loan, only purchase what you can afford (not what you think you will be able to afford). Buy conservatively to avoid facing any defaults on your mortgage.
One of the main concerns is FHA’s emergency reserves. Because of the losses on their books from delinquent home loans, their reserves are diminishing. According to CNN Money, FHA emergency reserves dropped to .24% where the ratio is supposed to be 2% as mandated by congress.
However, FHA is hopeful in that their books are going to turn around and fewer delinquencies will be recorded. Only time will tell, but let’s hope for the best with fewer delinquencies.