The Federal Reserve is in the midst of considering a plan that would curtail the types of subprime products lenders can offer, prohibit certain misleading disclosures, and limit the compensation of mortgage brokers. What makes this news somewhat significant? The Federal Reserve’s plan is forward thinking, and despite being reactive, is perhaps one of the only positive news stories to break in recent months surrounding the turmoil over subprime lending.

Rather than wasting time pointing fingers at who is to blame for the current situation the entire country is in, or gaze in shock at the billions of dollars that large financial institutions are writing down from their balance sheets, the Fed is attempting to impart positive and sound change on the lending market. These potential rules would only apply to loans going forward, not the subprime adjustable-rate loans that became extremely popular during the recent housing boom.

Some of the highlights of the Fed’s new proposal are:

• Mortgage Brokers or creditors would be banned from coercing or influencing home appraisers to misrepresent the value of a home and would prohibit certain practices from loan servicers, such as failing to promptly credit payments to customers’ accounts.
• The Fed staff proposal targets high-cost loans secured by a consumer’s principal dwelling. The proposal states these loans shouldn’t be made without regard to a borrower’s ability to repay, without verifying the income and assets of the borrowers, with a prepayment penalty in certain circumstances, and without establishing that borrowers pay insurance and taxes on the property.
• The Fed looks to “generally” ban lenders from “directly or indirectly paying mortgage brokers in connection with consumer credit transactions secured by a consumer’s principal dwelling, unless the mortgage broker enters into a written agreement with the consumer” and provides certain disclosures. Creditors wouldn’t be banned from paying brokers if the compensation isn’t determined by the borrower’s interest rate.
• Lenders would be banned from structuring traditionally “closed-end” mortgage products as “open-ended.” Fed staff believes this is necessary to prevent lenders from trying to evade the new protections.
• Prepayment penalties on high-cost loans would be changed so that they expire at least 60 days before an adjustable-rate loan resets from its starter rate into a higher rate. Many prepayment penalties on subprime adjustable-rate mortgages ran right up to or beyond the reset date.
• The plan would ban seven marketing practices, including marketing loans as having “fixed rates” when the fixed rate is for only a limited period of time. Lenders would also be banned from “advertising claims of debt elimination if the product would merely replace one debt obligation with another,” according to the proposal.

The Federal Reserve’s proposal is aimed at eliminating many of the lending practices that proliferated during the recent housing and credit boom.The Fed has never used this authority this broadly before, and it has been under constant criticism this year for not acting more aggressively as lending standards deteriorated in recent years.

Thank you to the Wall Street Journal for inspiring this blog post.

You read about it every day, literally. You hear about subprime mortgages, a credit crisis, and tightening of the credit and financial industry. What do these things actually mean? Do you really know, or have your eyes glazed over after reading headline after headline (after headline…) about subprime mortgages? Let’s take a look.

[Read more…]

There is a large, and growing group of people who are crying foul, that is, renters. It was only a matter of time before the economic tsunami of the “credit crunch” overwhelmed innocent victims, and we give Kelly Evans of the Wall Street Journal kudos for breaking the story.

Our Caution: We are highlighting, and commenting upon, a very well written piece of work by the Journal, however, we maintain that Boston city-center foreclosure rates are extremely low, and that the Boston downtown real estate market is strong, there are statistics to prove this. This piece is more a look at a pan-US situation (major downtown city-center areas excluded), and should not be looked at as speaking specifically to the Boston market itself.

Essentially, we’re dealing with two main threads that combine to be a potent force that is impacting renters in a housing and mortgage market that they chose (or rather attempted) to avoid.

1. Many single- and multi-family homes held by investors that were rented out are being foreclosed,
2. Homeowners falling behind on their mortgage payments are returning to the rental market, increasing competition for units.

What we end up with is a situation where renters are being evicted because the apartment or homes that they are renting are foreclosed because owner investors cannot keep up with the mortgage payments.

Often, the tenants’ first inkling of trouble occurs when they get a letter from the bank directing them to leave the premises.

“They just don’t know what to do — they leave town, move in with their mothers, end up in shelters,” says Janet Merrill, an attorney with the Massachusetts Justice Project, a Worcester legal-services agency that runs a hotline for low-income people.

Ms. Merrill’s group gets four to five calls a day from renters facing eviction resulting from foreclosure. One caller recently received a letter from a bank saying her six-unit apartment building had gone into foreclosure and ordering her to vacate her unit by October 31st.

In many cases, the homes and apartments entering foreclosure are owned by investors who got low-rate teaser mortgages and intended to hold the buildings for a few years and then sell them at a profit — before their mortgage rates rose. Now, with the housing market badly depressed in many markets, the owners can’t sell the homes or afford the higher mortgage payments. Many are defaulting.

In an ideal world, you’d like to see the market correct the situation on its own, but what we have here is a situation where rents that are needed to sustain a mortgage (one with terms that an owner investor cannot support) cannot economically be absorbed by the renter market. Pure economic supply and demand cannot properly adjust, at least in the short term, for such mistakes caused by the lack of foresight on the owner investor’s part, and the carelessness of a lender to finance such a situation where too much is dependent on the future, which is by nature, uncertain (i.e. the lender, nor the owner investor, could have accurately predicted that markets would soften, days on market would increase, and it would be difficult to sell a home with no loss.).

Much of the recoiling and tightening of mortgage standards, essentially the hoops that you have to jump through in order to get home financing at present, will continue to be adjusted as lenders recognize their carelessness and implement systems and mechanisms that should have been in place from the beginning.

A few days ago, Michelle Singletary of the Washington Post wrote an op-ed piece entitled “A 400 Percent Return in 7 Days? Riiiight.” After briefly discussing the difference between pyramid promotions – which are illegal – and multilevel marketing schemes – which are not, Singletary moves on to describe a suspicious meeting she recently sat in on.

The speaker was a representative of Financial Independence Group, a multilevel marketing scheme that preys on homeowners. Basically, you have to pay to join, but you have the potential to earn 400 percent of your initial membership fee if you can convince five more people to join…and if two of those five refinance their homes through Financial Independence.

Of course, Singletary did some snooping around, and found out some things that seemed rather suspicious. For instance:

• Financial Independence claims not to be a mortgage broker, yet they send out applications requiring employment history and other information needed to process a loan.
• Financial Independence’s application also requires a $425 application fee!
• Members are encouraged to dunk their home equity into risky investments.
• Members can also earn “by giving wealth-building presentations.” (Read: by deluding other homeowners.)
• In order to find out more about membership, you have to become a member.
• The company has supposedly been in business for 10 years, yet Singletary couldn’t find any record of the company earlier than 2006.
• Although Financial Independence’s purpose is supposedly to provide financial advice to members, they refused to give Singletary the names and credentials of their financial advisors.
• In fact, every time Singletary asked for more specific information about the company, her questions were sidestepped or outright refused.

Reading this article, it is obvious how important it is for homebuyers and homeowners to know what to look for in a mortgage broker. As with any business that has the potential for lots of money, scams abound, and it is far too easy to get taken advantage of.

Here are a few ways to protect yourself from dishonest mortgage schemes and services:

• Always make sure the person you are giving your information to is licensed, whether they are a mortgage broker or a loan originator.
• Always check all the details of the deal you are being offered. If the mortgage broker sidesteps your question or redirects your attention to how happy the new loan is going to make you, get out fast!
• Avoid anything with an abnormally high price tag, such as home-buying seminars, membership applications, and financial “advice.”
• Always check brokers or other businesses out with the Better Business Bureau before committing to anything. Often even a simple Google search can dig up dirt on a shady company.

Whether you are buying a new home or refinancing an old one, doing your homework can help you make sure that you never get “taken” by an unscrupulous mortgage broker!

Thank you to Logan Chierotti, from www.ColoradoHomeHelper.com, for contributing this blog post.

The Wall Street Journal recently published a short, but rather pertinent, piece on requesting credit reports and their impact on credit scores.

Question: If I request a copy of my credit report will that hurt my credit rating if I want to apply for a mortgage? One bank said I should not ask for multiple credit reports during the year because that would show up as multiple hits against my credit report and could lower my credit rating.

Answer: Requesting a copy of your own credit report is generally considered a “soft” inquiry, which shouldn’t hurt your credit score. Other types of soft inquiries include ones that are initiated by lenders who want to make you a preapproved offer, or by prospective employers or insurers who want to check your credit report.  “Hard” inquiries, where lenders pull your credit report in response to your application for credit, may contribute to a lower credit score depending on what else is in your credit report.  Fair Isaac, the maker of the FICO score, notes that its scores ignore all mortgage and auto-loan inquiries made in a rolling 30-day period prior to scoring and typically counts mortgage and car-loan inquires older than 30 days as one inquiry when they are made within a 45-day period.

At the end of 2006, with the passing of its omnibus tax bill, Congress made private mortgage insurance for middle-income home buyers tax deductible in 2007. Private mortgage insurance, or PMI, is required when a homebuyer puts down less than 20% and protects the lender in the event of foreclosure.

In recent years, home buyers have been using piggyback loans to avoid having to pay PMI. A piggyback loan is when the borrower uses a first loan for 80% of the value of the home, a second mortgage (typically an adjustable rate loan) for up to 15% of the value of the home with a five percent down payment. Because neither loan is for more than 80% of the home’s value, PMI is not necessary. Now, with PMI being tax deductible, the need for a piggyback loan is significantly reduced for middle-income borrowers.

However, like most changes to the federal tax law, there are some caveats:

1. The tax deduction only applies to mortgages that are closed or refinanced in 2007.
2. The full deduction is limited to homeowners with an adjusted gross income of $100,000 or less. The deduction is still available to those who make up to $110,000, but at a reduced rate. No deduction is available for those who earn over $110,000
3. Congress has only made this deduction available for the 2007 tax year. While it is expected to be extended, it is not guaranteed, and;
4. Investors are barred and home owners also need to itemize their returns to be eligible.

Mortgage rates have fallen on news of the housing market slowdown – 30-year fixed-rate mortgage declined to 6.22 percent from 6.30 percent, which is on par with rates a year ago.

NEW YORK (CNNMoney.com) — Mortgage rates fell in the past week as lenders showed concern for the effect the slowing housing market would have on the economy, according to a survey released Thursday.

No doubt about it, interest rates have been steadily moving up from the once lows that we saw not too long ago. Given the situation, many home owners are faced with increasing loan payments. Look to the following four tips and tricks to aid you in this time of rising interest rates.

1) Think both realistically and creatively on the use of home-equity lines of credit. Typically, borrowers can save interest on a month-to-month basis by moving balances from a home-equity line of credit to, a credit card for instance, oftentimes finding zero percent, or very low, interest rates. A borrower can make this work, however, a borrower must be attentive to detail (i.e. the small print), and moving money around at the proper times given the situation.

2) Consider a fixed-rate second mortgage to replace a large home-equity line of credit. Typically, borrowers can find a lower rate by ferreting out the details on this one., and perhaps remove the possibility that a rate hike will increase your costs, and set a fixed term so you fence in just how long you will be paying for the home improvements, or the condo development project that you took on.

3) Be on the lookout for mortgage brokers who will entice you to come back by offering home-equity credit lines with interest rates of prime plus zero or even below prime. If you do your research, this might allow you to get over that hump.

4) If you have an option loan, consider the idea of using the option to make interest only payments, while you go out and look for a better (longer term or fixed) rate. You will not build equity while doing this, perhaps one of the main reasons for buying a condo, but you will not hurt your credit by doing this.