Approved Advisor

Congress moves closer to licensing mortgage brokers

• Senate Banking Committee OKs proposal

• ’The rules governing mortgage brokers and lenders are inadequate’

The Senate Banking, Housing and Urban Affairs Committee has approved legislation by U.S. Sens. Dianne Feinstein, D-Calif., and Mel Martinez, R-Fla., to establish minimum national licensing and oversight standards for America’s mortgage brokers and lenders.

The bill (S. 2595) is designed to ensure that all mortgage professionals are trained in federal lending laws, ethics, consumer protection, and the sub-prime mortgage marketplace, according to Ms. Feinstein’s office. It would also create a national database for consumers to use to verify the credentials of their brokers and lenders.

The legislation was included in landmark housing reform and foreclosure prevention legislation approved by the committee.

“No state has been hit as hard as California. Last year there were nearly 500,000 foreclosures in California, and another 500,000 California homes will be at risk as adjustable-rate mortgages reset in the next couple of years,” says Ms. Feinstein.

“And we know that today the rules governing mortgage brokers and lenders are inadequate,” she says. “There is just a thin patchwork of regulation that varies from state to state. This legislation will create basic minimum standards for states to utilize to protect consumers.

Mr. Martinez says the legislation would help prevent another mortgage meltdown.

“The lack of coordination between regulators exposes consumers to predatory loan originators,” he says. “A nationwide system to keep track of those who’ve violated the law, had their license revoked, or failed to fulfill appropriate requirements will benefit families and the marketplace.”

Highlights of the legislation:

• Would require that residential mortgage loan brokers and lenders obtain a state license, and provide fingerprints, a summary of work experience, and consent for a background check to authorities.

To obtain licensing an individual must:

• Have no felony convictions;

• Have no similar license revoked;

• Demonstrate a record of financial responsibility;

• Meet a minimum net worth or bonding requirement;

• Fulfill education requirements (20 hours of approved courses, to include at least 3 hours related to federal laws, 4 hours on ethics and consumer protection in mortgage lending, and 2 hours on the sub-prime mortgage marketplace); and

• Pass a written exam (minimum score of 75 percent required to pass).

The bill would also require the Federal Reserve, Treasury Department, and FDIC to register all residential mortgage loan originators employed by national banks within one year of legislation’s enactment.

And it would require state regulators to develop a satisfactory licensing system within one year of legislation’s enactment. If this does not occur, the Housing and Urban Development Secretary is given discretion to develop the national registry and license, generating revenue for its implementation by charging fees to license applicants.

Copyright Central Valley Business Times © 2008

FTC Nabs Company for Credit Repair Violations

WASHINGTON, D.C. – A home-buying consulting business that offers credit repair and home-buying consulting services has agreed to settle with the Federal Trade Commission for alleged federal law violations, including illegally charging an advance fee for credit repair and falsely claiming that they can remove negative information from consumers’ credit reports, even if the information is accurate and timely. At the Commission’s request, the U.S. Department of Justice (DOJ) filed the FTC’s complaint and proposed settlement in federal court.

According to the complaint, consumers are led to Home Buyers Consulting Network, Inc. (HBCN), which is based in Raleigh, North Carolina, through its Web sites and by a company that sells lists of foreclosed properties and suggests that its customers call HBCN if they need credit repair or access to zero or low down-payment home financing. In sales pitches for its credit repair services alone, and in conjunction with pitches for its home-buying consulting services, HBCN makes claims such as: “Our program offers the ability to REPAIR, RESTORE, or ESTABLISH your credit so that you may be able to qualify for 100 % home financing, lower interest rates and better quality credit.” HBCN also offers a “money back guarantee . . . to increase your credit score by 50 to 100 points or delete six derogatory items (from a consumer’s credit report).” HBCN also promises consumers help with finding a home to buy, through a referral to its purported network of realtors and lenders, the complaint stated.

Before performing the promised credit repair services, HBCN’s representatives typically require advance payment of at least $99 for those services, and $399 for bundled credit repair and home-buying consulting services. They also require additional advance payments for credit repair services, typically ranging from $19 per week to $49 per month, and promise to refund all but a $99 fee if consumers do not receive the promised results, provided that the consumers work with them for a period ranging from six months to a year.

HBCN, d/b/a Home Buyers Network, Good Credit Company, GoodCredit.com, and 0downhomebuyers.com, and Douglas Andersen Moore a/k/a Douglas A. Moore, HBCN’s president, CEO, and majority shareholder, are charged with violating the Credit Repair Organizations Act (CROA) and the FTC Act by falsely representing that they can obtain permanent removal of derogatory information from consumers’ credit reports, including bankruptcies, even where the information is accurate and not obsolete. They also are charged with violating CROA by requiring advance payment for their credit repair services; not including on their consumer contracts conspicuous statements about the consumer’s right to cancel the contract without penalty or obligation at any time before the third business day after the consumer signed the contract; and not providing, before the contract was signed, the written statement of consumer credit file rights under state and federal law, and the written “Notice of Cancellation,” both required by CROA.

Under the proposed settlement, the defendants are barred from further CROA violations, and from further misrepresentations affecting a consumer’s decision to buy anything from them, including credit repair services. They also are barred from selling, renting, or otherwise disclosing personal information about anyone who was a client before the order is entered, and from using or benefitting from that information.

The settlement contains a $573,000 civil penalty that will be suspended, and, for consumer restitution, a $40,000 monetary judgment that will be suspended upon payment of $10,000. The full civil penalty and judgment amounts will be imposed if the defendants are found to have misrepresented their financial condition. The settlement also contains standard record-keeping provisions to allow the FTC to monitor compliance with its order.

This case was brought with assistance from the North Carolina Department of Justice, Office of the Attorney General, and the Better Business Bureau Serving Eastern North Carolina.

The FTC advises that only time, a conscious effort, and a personal debt repayment plan can improve your credit report. The first step is to learn what information is in your credit report. If you find errors or mistakes, federal law gives you the right to have them corrected – free of charge. Federal law requires that the nationwide consumer reporting companies – Equifax, Experian, and TransUnion – provide you with a free copy of your credit report once every 12 months, if you ask for it. To order your free report, visit annualcreditreport.com, call 1-877-322-8228, or complete and mail the Annual Credit Report Request Form. Other credit repair information is available at http://www.ftc.gov.

The Commission vote to authorize staff to refer the complaint and stipulated final order to the DOJ for filing was 5–0. The complaint and proposed stipulated consent order were filed in the U.S. District Court for the Southern District of New York on May 14, 2008, and are subject to court approval.

Realtors Agree to Stop Blocking Web Listings

(New York Times) WASHINGTON — The Justice Department and the National Association of Realtors reached a major antitrust settlement Tuesday that government officials said should spur competition among brokers and ultimately bring down hefty sales commissions.

The deal frees Internet brokers and other real-estate agents offering heavily discounted commissions to operate on a level playing field with traditional brokers by using the multiple listing services that are the lifeblood of the industry, government officials said.

The Justice Department sued the National Association of Realtors in federal court in 2005 on antitrust grounds, charging that its policies were stifling competition and hurting consumers. That case was scheduled to go to trial in Chicago in July.

The settlement “is a win for consumers, certainly, who will now have the benefit of unrestricted competition,” Deborah A. Garza, deputy assistant attorney general for antitrust, said in an interview. “There inevitably will be more efficiency and more competition in the market.”

Real estate agents earned $93 billion in commissions in 2006, with a median commission of about $11,600, Justice Department officials said. Internet brokers, offering pared-down services, provided average rebates of 1 percent on commissions that normally ran 5 or 6 percent, translating into thousands of dollars per sale.

Consumer advocates hailed the settlement as an important and somewhat surprising step by the Bush administration, which has staked out a position on many antitrust issues seen as favorable to business interests.

“I was very pleasantly surprised,” said Stephen Brobeck, executive director of the Consumer Federation of America, which tracked the case. “Given the reluctance of anyone in Washington before the Justice Department to improve competition in the real-estate industry, this settlement represents a milestone.”

The National Association of Realtors, with more than 1.2 million members, said that the settlement was “a win-win” for both the real estate industry and consumers. It noted that the association admitted no wrongdoing and paid no fines or damages as part of the deal.

Laurie Janik, the association’s general counsel, said in a telephone interview that the settlement would have no real impact on home buyers or sellers.

“I don’t think they’ll see anything different,” she said. “This lawsuit never had anything to do with commission rates, or discount brokerages.”

She added that the lawsuit and the settlement arose from misunderstandings about the way the Realtors’ association works. “This was a five-year education of the Department of Justice, unfortunately, and the real estate industry had to pay for that education,” she said.

Since the 1990s, online real estate brokers have offered a popular and cheaper alternative to the bricks-and-mortar variety. But such brokers, known in the industry as “virtual office Web sites,” complain that the industry’s practices have denied them the chance to make full use of the multiple listing services to determine what homes are for sale.

The agreement between the Justice Department and the Realtors’ association must be approved by a federal judge, probably this summer. As now structured, the deal bans the Realtors’ association from treating online brokers as different from traditional brokers or discriminating against them, and it ensures that they will not be excluded from membership in the listing service based on their business model.

In one instance, the Justice Department said an unnamed online broker was forced to shut down its Web site because all the traditional brokers on the local listing service, in response to the national association’s policy, had withheld their listings from the online broker.

After the Justice Department sued the Realtors’ association in 2005, the group suspended the exclusionary policy. Officials said the settlement would ensure that online brokers are given full access and that its policies are made uniform.

“For us, it’s a great result,” said Pat Lashinsky, chief executive of ZipRealty in Emeryville, Calif., which offers online users rebates of up to 20 percent off standard sales commissions. “We think it’s a great result for consumers.”

Norman Hawker, a business professor at Western Michigan University who organized a symposium on the Justice Department litigation as a senior fellow for the American Antitrust Institute, predicted that the settlement would ultimately mean a drop in sales commissions of 25 percent to 50 percent as a result of increased competition.

“It’s pretty clear that there was an enormous amount of discrimination against brokers who were trying to use innovative business models,” including discounted fees and virtual offices on the Internet, he said. “There are lots of entrepreneurs who have been looking for a green light in the form of this order to begin offering discounted rates. It has the potential to be a big step forward for consumers.”

NY Times ERIC LICHTBLAU May 28, 2008

WASHINGTON — Could the controversial mortgage industry practice of listing hundreds of local real estate markets as “declining” — and restricting lending through higher down payments or credit scores — be scrapped?

The two biggest players in the home mortgage field, Fannie Mae and Freddie Mac, did precisely that on Friday. Reversing its policy of penalizing buyers in troubled real estate markets with 5 percent higher down payments, Fannie switched to a nationally uniform policy of charging borrowers the same minimum down payments irrespective of location. A spokesman for Freddie Mac, Brad German, said his company would be “suspending” its declining markets policy indefinitely, as well.

Starting June 1, mortgage applicants who are underwritten by Fannie Mae’s automated system online will qualify for 3 percent minimum down payments, wherever the property is located. Borrowers whose applications require “manual” underwriting will pay 5 percent minimum down. Under Fannie’s prior system, applicants buying houses in designated declining markets had to contribute 5 percent extra in upfront equity compared with borrowers in nondeclining areas.

Freddie Mac’s policy, which never employed a list of specific areas designated as declining, relied instead on lenders to flag applications using appraisal data or home price indexes. Freddie’s policy also required 5 percent higher equity contributions up front.

Critics — ranging from the National Association of Realtors to consumer advocacy groups — had charged that Fannie’s policy served to further depress sales and real estate values in areas tainted as declining. Critics also argued that many metropolitan markets experiencing price decreases contain submarkets performing relatively well, and do not deserve to be underwritten as high risk.

Marianne Sullivan, Fannie Mae’s senior vice president for single-family credit and risk management, said the policy reversal was possible because of improvements to the company’s automated underwriting system — allowing it to “assess each loan more precisely,” wherever the property is located.

That change was welcomed by national real estate and housing groups. Dick Gaylord, president of the National Association of Realtors, said the termination of a policy that “stigmatized” certain communities will “help stabilize the credit markets.”

David Berenbaum, executive vice president of the National Community Reinvestment Coalition, said his group hopes the revised policies at Fannie and Freddie will prove to be “a model for others to follow.”

Whether that happens anytime soon, however, is far from certain. Private mortgage insurers, who provide loss protection to lenders on loans with low down payments, have virtually all adopted highly restrictive policies affecting ZIP codes or metropolitan areas they designate as distressed or declining.

MGIC, the largest-volume insurer, recently expanded its list of distressed markets along with a series of cutbacks on specific types of low-equity loans. As of June 1, MGIC will not insure condominium unit mortgages in the entire state of Florida. It has also abandoned cash-out refinancings and loans on investment properties.

PMI Group, another major underwriter, has banned cash-out refis or investor loans in areas it judges to be distressed. Genworth Financial will not consider applications on second homes anywhere in Florida. AIG United Guaranty no longer will write insurance on condominiums in any of hundreds of ZIP codes around the country that are on its declining markets list.

Asked whether his firm might re-evaluate its declining markets restrictions in light of the abrupt changes at Fannie Mae and Freddie Mac, Terry Souers, a spokesman for Genworth Financial’s mortgage insurance unit, said: “We’re aware of their actions and will take them into consideration to see if additional steps are necessary.”

But Michael J. Zimmerman, senior vice president-investor relations for MGIC, scotched hopes for any quick abandonment of declining markets restrictions at his company.

“We’re not contemplating any changes,” he said in a telephone interview. MGIC, which reported a $1.4 billion loss for the fourth quarter of 2007 and a $34 million loss for the first quarter of this year, has been hit hard by claims following foreclosures and extended delinquencies in once-booming housing markets.

What’s the trend line here? Fannie Mae’s and Freddie Mac’s policy switch should open the door to some additional low-down-payment mortgages — and home sales — in local areas once tagged as declining.

But without the participation of private mortgage insurers — who report solely to stock market investors rather than Congress — many borrowers will likely have to turn to the Federal Housing Administration, which accepts 3 percent down, does not have declining markets restrictions, and whose loans can be purchased by Fannie Mae and Freddie Mac.

© 2008, The Washington Post

A First-Time Homebuyer is an individual who has had no ownership interest (sole or joint) in a residential property during the three-year period preceding the date of the purchase of the Mortgaged Premises.

When Homeownership Education is required, at least one credit qualifying borrower must participate in a homeownership education program and their completion documented in the file. The following programs are usually acceptable to Approved Funding:

Internet homeownership education programs that have been developed by mortgage insurance companies.

• AIG United Guaranty’s The Road to Home Ownership®
  
  • (https://www.ugcorp.com/rtho.html)
    
• Genworth Financial’s homebuyer education series
  
  • (http://mortgageinsurance.genworth.com/EmergingMarkets/HomebuyerEducation.aspx)
    
• MGIC’s Buyers Ed program
  
  • (http://www.mgic.com/education/buyersed.html)
    
• PMI’s homebuyer education at
  
  • (http://www.pmius.com/expanding_markets/homebuyered.html)
    
• RMIC’s pre-homeownership education course
  
  • http://www.rmic.com/productsandservices/prehomeownershiped/borrowereducation/Pages/default.aspx)
    

Homeownership education programs that meet the standards of the National Industry Standards for Homeownership Education and Counseling (www.homeownershipstandards.com) or The Department of Housing and Urban Development (http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm?weblistaction=summary).

Homeownership education and counseling programs provided by the following national organizations:

• NeighborWorks® America
  
  • (www.nw.org)
    
• Housing Partnership Network
  
  • (www.housingpartnership.net)
    
• National Council of La Raza
  
  • (www.nclr.org)
    
• National Urban League
  
  • (www.nul.org)
    
• Local Initiatives Support Corporation’s (LISC)
  
  • (www.liscnet.org)
    
• The Enterprise Foundation
  
  • (www.enterprisefoundation.org)
    
• National Coalition for Asian Pacific American Community Development
  
  • (www.nationalcapacd.org)
    

A copy of the certificate documenting the Borrower’s completion of an approved Homeownership education program must be included in the loan file. The Homeownership education certificate must be Borrower and property specific and include the counseling provider and the trainer’s name. Homeownership education may not be provided by a party involved in the sale or financing of the property or anyone directly involved in the loan origination, processing or mortgage approval process.

WASHINGTON, DC – Fannie Mae announced a new, national policy on down payment requirements for conventional, conforming mortgages the company will purchase or guarantee. Starting June 1, 2008, Fannie Mae will accept up to 97 percent loan-to-value ratios for conventional, conforming mortgages processed through its Desktop Underwriter® (DU®) automated underwriting system, and 95 percent loan-to-value ratios for loans underwritten outside of DU, in all geographic locations in the United States. The new national down payment policy will supersede the policy the company adopted in December 2007 that required higher down payments in markets where home prices are declining.

“As another part of our ‘Keys to Recovery’ initiative, we are today announcing that we will be equalizing the down payment requirements for borrowers in all parts of the country, regardless of local market conditions,” Marianne Sullivan, Senior Vice President, Single-Family Credit Policy and Risk Management, said. “This new down payment policy reinforces our goal to support successful home-owning, not just home-buying, as we seek to bring liquidity to all communities and help the housing market recover.”

The new national down payment requirements of 3 or 5 percent will apply to loans for purchase of single-family, primary residences. Down payment requirements will vary for other occupancy, property and transaction types. The company will implement systems and operational changes over the summer to accommodate the new national policy.

“We are able to adopt this new, national down payment requirement, even in markets where home prices are declining, because our new automated underwriting risk assessment model DU Version 7.0 will limit risk layering and assess each loan more precisely,” Sullivan added. “At the same time, we believe that equity matters, especially in this market. Down payments are a critical success factor in homeownership — and responsible lending is good business.”

Since the housing correction began, Fannie Mae has expanded its mortgage guaranty business to serve the market’s urgent need for stability, liquidity and affordability. The company also undertook steps to help protect borrowers, manage the increased credit risk in the market, and fortify the company’s capital position. Among these steps, the company has continued to assess and establish new pricing, eligibility and underwriting criteria for its business that more accurately reflect the current risks in the housing market and guard against the potential for foreclosure. These changes have been incorporated into DU and have included adjustments to credit risk assessment, loan-to-value ratios and down payment requirements, among other factors.

Among the changes in response to market conditions, in December 2007 Fannie Mae adopted a “Maximum Financing in Declining Markets Policy” that restricted the loan-to-value ratios on properties in markets where home prices are declining, essentially requiring higher down payments in these markets. The new single national down payment policy announced today will supersede that policy.

Fannie Mae Senior Vice President Jeff Hayward stressed the company’s commitment to special affordable lending programs to support homeownership for families of modest means. “We are stepping up to provide more liquidity and affordability to some of the most distressed communities while also seeking at least a 3 percent down payment investment through our Desktop Underwriter system from borrowers to help ensure their success.”

Fannie Mae will continue to provide support for homebuyers that need down payment assistance, and will continue to allow loans with Community Seconds® up to a maximum 105 percent combined loan-to-value ratio. Community Seconds allow a borrower to obtain a second-lien mortgage to help cover down payment and closing costs, with funding typically provided by a state or local housing agency; an employer; or a nonprofit organization. Fannie Mae also offers MyCommunityMortgage® and Flex mortgage products, which permit down payment assistance programs in the form of gifts and grants.

“We recognize that down payment assistance programs remain a viable tool for borrowers who can afford a mortgage long term, but might need a little help getting started,” Sullivan said.

As part of its “Keys to Recovery” initiative, Fannie Mae is expanding its partnership with the National Council of State Housing Agencies. The company will provide up to $10 billion in financing to help Housing Finance Authorities (HFA) serve first-time homebuyers of modest means. In some cases, Fannie Mae will purchase HFA mortgages that have greater than 97 percent loan-to-value ratios.

The first “Keys to Recovery” initiative that Fannie Mae announced on May 6, 2008 also includes: streamlined refinancing for Fannie Mae borrowers whose mortgage balances exceed the value of their homes; improved pricing for jumbo-conforming mortgages to help borrowers in high-cost areas; and a neighborhood stabilization initiative with the Center for Community Self-Help for targeted areas with high home foreclosures.

New registry makes it easier for regulators to spot the mortgage world’s con artists

Boston Globe – By Michelle Singletary – May 7, 2008 – There are lots of proposed remedies to prevent another mortgage catastrophe like the one we’re going through now. Most of the suggestions I’ve seen won’t fix the loopholes that allowed so many borrowers to take on loans they couldn’t afford.

But there is one solution that may help stem fraud in the mortgage industry and reduce the number of unscrupulous or unlicensed brokers and loan officers.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators have launched the Nationwide Mortgage Licensing System, to help state officials keep track of individuals and companies. The system streamlines the regulatory process by allowing state-licensed mortgage lenders, brokers, and loan officers to use one form to apply for, amend, update, or renew their licenses online. The registry brings uniformity and transparency to the mortgage industry.

Often, unsavory individuals and companies can continue their unlawful practices because there are no uniform rules. What they are prohibited from doing in one state might be allowed in another.

Clearly, this new registry won’t catch people who choose to escape detection by not applying for a license. But the database could be used by responsible lenders, brokers, and eventually consumers to check whether someone who claims to have a state license to arrange loans actually does.

With the mortgage registry, applicants have to disclose a great deal of information, ranging from their Social Security number to any criminal or civil actions against them. They also must provide fingerprints and identify affiliations with lenders, brokerages, and title companies.

The database is also designed to track those who do business under various names.

“From this single record it allows the regulators to see the entity exactly the same as other regulators,” Matthews said.

What a great tool this will be once all the states participate. Imagine state investigators being able to check the status of a questionable applicant nationwide without having to search databases in 50-plus jurisdictions.

This uniform licensing source will be a crucial tool for regulators trying to determine if someone is participating in an unlawful activity that got them banned from mortgage activity in another state.

So far, seven states -Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York, and Rhode Island – are participating. By year’s end, 18 state agencies are scheduled to be part of the system, although 42 state agencies representing mortgage regulators in 40 states have indicated their intent to come on board.

Matthews said he expects all 50 states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands to be part of the registry in three to five years. By 2009, consumers will have access to the database, he said.

Michelle Singletary is a columnist for The Washington Post.

By: Shmuel Shayowitz

[As featured in the Hamodia Newspaper] With mortgage rates still at very low levels, many are taking advantage of mortgage refinancing. A refinance is essentially the replacement of an existing debt obligation with a new lien bearing different terms. Still, many homeowners are sitting on the sidelines not pursuing the benefits of significant opportunities easily available to them.

For some, a difficult mortgage experience when they bought their house, leads them to believe a refinance will be even more disastrous. For others, they simply don’t realize that they can save hundreds of dollars a month (and tens of thousands of dollars over the life of a loan) by refinancing. For the rest, they simply haven’t been educated as to the tremendous fiscal opportunities available to those with a home.

While there are many reasons people hesitate to take action on a refinance, I have boiled it down to three core “refinance myths”, which prevents homeowners from taking action.

Refinance Myths

1. The interest rate needs to be a full point lower in order for the refinance to be worthwhile
   
2. You will get a better deal if you go directly to the bank that is servicing your mortgage now
   
3. A refinance process is long and cumbersome, and it is more difficult to qualify for
   

Unfortunately, there is no iron clad rule of thumb that can be applied to all homeowners alike. I like to tell people, it’s not a matter of “Does it pay to refinance”, rather, “When does it pay to refinance”. Most people think the only refinance opportunity to consider is one which will lower the interest rate on their mortgage. Must to their surprise it is no longer the case, and probably the least utilized method these days. Furthermore, over 70% of loans are now generated by non-banking institutions that are able to provide discounted costs, and an overall quicker process. These have resulted in cheaper, easier and more advantageous refinance opportunities.

There are really four refinance categories that should be explored by every potential homeowner. They are lower rates, product or program changes, debt consolidations, and finally strategic equity.

Lower Rates

This is the classic interest rate refinance loan to get a lower rate and potentially lower monthly mortgage payment. It is important to note that even with a higher rate on the new loan you can still lower your monthly payment. That would work in a scenario where someone has paid off a significant amount of principal from their original mortgage. In that case, despite paying down your loan balance, the monthly payment remains the same as when you first obtained the loan. Furthermore, the old adage of needing at least a 1% drop in the interest rate for it to pay is certainly no longer applicable. That philosophy really only was true when closing costs were controlled by the savings banks, and the fees were exorbitant. Today, closing fees are significantly cheaper, and in most cases are a preset number. Depending on your loan size, a rate drop of even .25% with basic closing costs can save you thousands of dollars a year.

Debt Consolidation

This is the refinance that uses loan proceeds to lower or transfer payments from higher interest rate account, to lower, or more tax efficient payments. Typical examples include paying off or lowering an outstanding home equity or credit card. It is critical that all of your outstanding debt be carefully evaluated and considered for maximum benefit. I can’t tell you how many people call me for a “rate and term refinance”, and after I review their credit report with them, they first realize that they are paying close to 20% on some credit card loans that are also not tax deductable.

Product or Program Change

This is where a borrower changes their loan term or program to maximize their long term or short term objectives. An example would be changing from an Adjustable rate to Fixed Rate loan, or changing the term/years of your loan (ie: 30 year, 15 year, Interest-only, etc). The objective would be to either save money today by extending the years and repayment, or lower the total payments over the life of the loan. While a 30 year fixed mortgage may give you the security over the life of the loan, a 40 year mortgage would provide for a cheaper overall monthly payment. There are many things to consider when evaluating the product or program for use. Many people take for granted that a 30 year fixed is the one and only product that they should consider, when that simply is not always the case.

Strategic Equity

Strategic Equity is simply the process by which you use the existing equity in your home for various opportunities such as investment potentials, retirement benefits, long term financial planning, etc. Many homeowners don’t realize the tax and financial benefits available to them as a property owner. Most homeowners believe a loan is something to be paid off quickly. That mentality was very common during the great depression, and is not really the best way to create financial security. Equity should be ulitilized so that you are protected when things are bad, or conversely, to be used when things are good or for a potential investment opportunity.

As you can see, the benefits of a mortgage refinance are clearly not one dimensional. Many of the problems in the mortgage industry today are as a result of inexperienced loan officers and mortgage brokers who cared more about the commission, than the client. As a result, they became glorified application takers and didn’t carefully evaluate loan products for their clients. You need to work with a competent mortgage advisor who will help integrate the loan you select into your overall long and short term financial and investment plan. The objective should not only to get the best rate and deal, but also to minimize taxes, improve cash flow, and minimize interest expense.

S&P: Closed-End 2nds Now a ‘Writeoff’

(S&P) The performance of closed-end second-lien mortgages has devolved to the point where they are “basically a writeoff,” according to Standard & Poor’s managing director Susan Barnes. Speaking at the Mortgage Bankers Association’s National Secondary Market Conference in Boston, Ms. Barnes said closed-end seconds are “performing horribly” but that home equity lines of credit are “better” because they are typically originated by banks, which have stronger relationships with borrowers. S&P recently stopped rating seconds, saying it might resume at some point if it were able to get a sense that the asset class’s performance had become predictable again. The rating agency can be found online at http://www.standardandpoors.com

What Interest Rate Spreads Can Tell Us about Mortgage Markets

By Andrea Pescatori and Beth Mowry

(Federal Reserve Bank of Cleveland) The target for the federal funds rate has been slashed three full percentage points since September, from 5.25 to 2.25 percent. Yet, despite this steep drop, the average interest rate on 30-year fixed-rate mortgages has fallen only about half a percentage point—from about 6.4 to about 5.9 percent—over the same time span. Why has the central bank’s aggressive action had such a small impact on these mortgage rates, and what does this mean?

The Fed does not set mortgage rates, but it does set a nominal target for the federal funds rate, the rate at which depository institutions lend their reserve balances to one another, usually overnight (a very short maturity). The fed funds rate in turn directly affects the price of other fixed-income assets of similar maturities and quality (measured in terms of default risk and liquidity); this is the case for short-term Treasury securities, for example. However, as the maturity of an asset gets longer, the link between its price and the funds rate becomes more tenuous. This is because the price of a long-term bond incorporates not just recent changes in the short-term rates of all relevant assets but their expected future short-term rates as well. For example, the spread between the interest rate on a 10-year Treasury note and the federal funds rate has risen recently because the future path of the federal funds rate is expected to go up.

Once we control for maturity, the spread between securities should tell us something about the role that liquidity and risk are playing in pricing the assets. A good benchmark for the 30-year fixed-rate mortgage is the 10-year Treasury note, because 30-year mortgages usually get paid off in 10 years. The spread between the average prime conforming mortgage rate and the 10-year Treasury note has been heading north since the summer of 2007, reflecting turbulence in the mortgage-backed security market, a secondary market for mortgages. With the housing meltdown, pricing mortgage-backed securities, especially the more sophisticated ones, has become even harder, as risk has increased, and liquidity in the mortgage-backed security market has dried up (just think about the billions of dollars in write-downs). An illiquid mortgage-backed security market, in turn, makes the repackaging of mortgages more difficult. Because mortgages are more difficult to repackage, mortgages themselves become less liquid for mortgage originators, who then seek higher compensation for the loss of liquidity. In fact, although the average 10-year Treasury yield has fallen 93 basis points to 3.59 percent since September (when the Fed started cutting the fed funds rate), the average yield for 30-year fixed-rate mortgages has fallen only 50 basis points to 5.88 percent. As a result, the spread between the average 30-year mortgage and the 10-year Treasury note has widened about 60 percent over the past year. The spread stood at 148 basis points in April 2007 and now stands at 233 basis points, having reached its peak of 262 basis points in March at the time of the Bear Stearns bailout. The risk of a financial meltdown clearly affected the prime conforming mortgage rate and even caused its level to increase. More recent data, though, show the spread retreating from its peak, suggesting that the risk of a financial crisis has decreased (as other indexes also indicate).

Compared to the 1990s, the spread between mortgage rates and treasuries is elevated, which suggests that financial markets are still working through their prior excesses. To find levels higher than the current ones, we have to go back to the 1980s, in particular to the early part of the decade, when the spread reached its historic high. This was a time of great economic turmoil, with a high rate of inflation, two back-to-back recessions, and banking deregulation.

Given the excesses that occurred in the housing and mortgage markets, it is not surprising that market participants are being more cautious. Some potential home buyers are holding back, and lenders have implemented tougher lending standards and are charging more for loans. From January 1972 to April 2008 the median weekly spread is about 160 basis points between the 30-year fixed-rate mortgage and the 10-year Treasury note. If this more normal spread prevailed, fixed-rate mortgages would be around 5 percent today, instead of the current 5.88 percent. Until market participants regain confidence, rate spreads are likely to continue to deviate from their historical norm. Had the Fed not lowered the funds rate, mortgage rates would likely be even higher. Assuming there are no more large shocks, it is likely that the spread will ease back to more normal levels, providing a boost to home buyers, who, after all, care about their mortgage rate, not the fed funds rate.