Fed Creates Plan to Help Reduce Foreclosures

The Federal Reserve will take aggressive action to renegotiate mortgages that are likely to enter foreclosure, Fed Chair Ben Bernanke said in a letter to Congress Tuesday.

Under the program, which only affects mortgages owned by the Fed, the central bank will be able to reduce what a home owner owes on a mortgage, lower the interest rate, lengthen the term on the loan, or take other steps that might persuade home owners to keep paying. Borrowers will deal directly with their mortgage servicer.

The Fed says that the mortgages most likely to be affected are those with loan balances that are more than 125 percent of estimated value of the property.

"It's a step beyond what FDIC is doing with its own portfolio," said mortgage expert Alan White, an assistant professor at Valparaiso University School of Law. "Principal write-downs are still the critical issue" in keeping borrowers in their homes.

Source: Washington Post, Neil Irwin and Renae Merle (01/28/2009)

Sell the Payment, Not the Rate

Amidst the current refi boom, competition abounds. Many mortgage providers are offering sub-par, discounted rates to their current customers if they choose to refinance within that company. Homeowners are being bombarded with news about interest rates. Will they continue to fall? Will they return to previous levels? The consumer becomes obsessed with rates, and rates alone. With prospective clients being so rate conscious, how can you compete? Sell the payment, not the rate.

A recent client provided me with a perfect opportunity to put this mantra to the test. This client, we’ll call her Kathy, was referred to me by another client who warned me that Kathy may not be the savviest consumer when it comes to mortgages. Kathy came into my office to meet with me after I had run her credit and processed a pre-qualification. I had outlined a detailed plan for her to pay off her current mortgage and all of her credit cards, which would save her a total of $250 a month.

During our 2 hour meeting, Kathy also expressed that she wanted to take out $3000 in cash. I recalculated the plan and showed her the results on the spot. Still timid and unsure, Kathy asked if she could take the weekend to think it over and talk with some trusted friends and family. When Monday came around, there was no word from Kathy. While talking with the client who first referred Kathy, he told me that Kathy had called her current lender’s refi hotline and had locked in with them!

It took me until that Wednesday to finally track Kathy down and see what was going on. She told me that her current provider had offered a rate 0.5% lower than mine and asked if I could beat it. Right away, I asked if she could fax me the good faith estimate they had provided because I wanted to make sure she was getting an accurate and truthful offer. Not surprisingly, Kathy’s current provider had not given her a GFE, or any other documentation.

Then, when she told me that the offer was only for a rate-term refinance, I knew I could win this client back. Having spent so much time working with Kathy and reviewing her credit profile, I was quickly able to outline a new plan for her, a plan that would now use the competition’s offer as a counterpoint to mine.

Kathy was only focusing on her rate and how that affected her mortgage payment, wearing the blinders that so many consumers wear. When I finished the new outline for the plan, even I was surprised. While Kathy’s current provider’s offer substantially lowered her mortgage payment, it did not address her additional credit card debt. After rolling in all of Kathy’s credit cards, as well as her closing costs and cash out, I determined that my plan would save her an additional $100 a month over her provider’s offer, even though my rate and loan amount were higher!

Some clients may claim that they are concerned with the interest rate because they will end up paying more over the life of the loan if they have a higher rate. While this is true, how many homeowners stay in the same home for 30 years? Studies show that most people move an average of every 7 years. How many times might they refinance within those 7 years. Within 30 years? To the typical homeowner, a refinance is a means by which to take advantage of favorable market conditions on a relatively short term timeframe. A fraction of a point difference in rate is worth only tens of dollars, while changing the structure of the loan can affect a client’s monthly debt by hundreds.

In today’s market, the average consumer is enticed by rates, but it is our job as mortgage professionals to help the client view and understand the bigger picture. If you can’t beat the competition’s rates, provide better service, provide a more detailed, more accurate good faith estimate. Accentuate your strengths. Why should a client choose you? Make your market presence undeniable. Prove that the service you provide is unmatched.

Sell the payment, not the rate. Become a “trusted advisor” to your clients. Take the time to explain the overall financial benefit to them. Overcome the allure of rock bottom rates by convincing your borrowers that the rate isn’t everything. It is up to loan originators to counsel borrowers and steer them away from the focus on rates. Sell the payment, not the rate.

Written by Chad C Moore, VA Home Loan Specialist and VP of Commercial Lending for The Mortgage Market of Delaware.

On Debt Consolidation, Counseling, & Settlement

There’s a lot of confusion these days when it comes to dealing with credit card and other types of unsecured, consumer debt. Most people simply don’t understand the difference between debt consolidation, counseling, settlement, and elimination. They’re looking for a magic wand to wave to make their debts vanish into thin air.

Simply understanding the difference between consolidation, counseling, settlement, and elimination will go a long way to helping you figure out how to pay off your debt.

Debt consolidation. This means taking out a new loan to pay off all of your smaller debts, thereby ending up with one new payment that is less than the sum of the previous debts’ monthly payments. This new loan might be from a bank, your 401(k) plan, an individual or it might be a new credit card. Generally, new debt is not the answer to old debt. This method is unlikely to get you out of debt any faster, save you money, or reduce your payments. In fact, it could make things worse. Most people run up the old debt again and find themselves in twice as much trouble.

Debt settlement. This is also known as debt negotiation and debt elimination. Companies advertising this service on television and radio make outrageous promises that, for a fee, they will help rid you of your debt for as little as half the amount you owe. Here’s how this process pans out: You stop paying your bills which trashes your credit scores. Once you are delinquent, your hired “professional” approaches your creditors with an offer to pay far less than you owe. You run the risk of being sued by your creditors or defrauded by the debt settlement outfit. The IRS may also get involved at some point because the difference between what you owed and what you paid becomes taxable income.

Debt counseling. You sign up with a reputable organization that reviews your finances and puts you on a repayment plan to pay off your debt in three to five years. These agencies have agreements with credit card companies that can lower your interest and get you on a payment plan you can handle. This is the recommended plan if you are in a lot of debt with no end in sight, but be careful! For every reputable agency, there are ten new scams out there. You want a counselor that is certified by the National Federation of Credit Counselors. To find a reputable credit counselor, go to NFCC.org.

There is one last solution to consumer debt– Become your own credit counselor. If you are not past due on your monthly payments and you are determined to get out of debt, there is no reason why you cannot become your own financial advisor. If you’ve got the commitment, I can provide the information. It’s all in the book Debt-Proof Living by Mary Hunt.

*Article by Mary Hunt, author of Everyday Cheapskate.

5 Ways to Improve Your Credit

If you have a less-than-stellar credit score, don’t fret. There are five ways to give your credit score the boost you need!

#1– Pay the MINIMUM due on time each month– Notice I said minimum. You don’t need to pay the balance off every month to get a good score. Don’t get me wrong– if you have extra money to send, go ahead and pay more than the minimum. The thing lenders, landlords, and businesses focus on when sizing you up as a borrower is whether you will be diligent about paying your bills on time. By paying your bills on time, you are proving that you are a good credit risk. Your ability to pay the minimum on time makes up 35 percent of your FICO credit score.

#2– Reduce your debt-to-credit ratio– Another 30 percent of your score is determined by how much outstanding debt you have relative to the total available credit limit on all of your cards. Part of this also includes other debts such as mortgages and auto loans and how much you have left to pay on those, compared to the original loan amount). The lower your debt-to-credit ratio, the better. And there’s plenty you can do with your credit cards to improve that ratio. Let’s say you have two cards. One has a balance of $5,000 and a limit of $10,000, and the other card has a balance of $2,000 and a limit of $8,000. That means you have a total credit debt of $7,000 and a total credit limit of $18,000, which works out to a ratio of 38 percent. Now let’s say you manage to cut your balances in half, so you now have a debt balance of $3,500 and the same credit limit of $18,000. Your new ratio will be 19 percent.

The FICO brain trust says there’s no specific number that qualifies as a “good ratio”, just that lower is better.

Another tactic to lowering your ratio is to boost your credit limit. But please be very careful before you call your credit card issuer and ask for a higher limit. Only do this if you have the willpower not to use that extra money.

#3– Save your credit history– About 15% of your credit score comes down to your credit history. The more history you have, the more evidence FICO has to size up your credit habits. Therefore, it is a big mistake to cancel a card you no longer use, and especially if there is still a balance remaining. When you cancel the card, you wipe out all of that history. Think of it this way: if you were trying to size up two people to entrust with your money, would you lean towards the person you’ve known for ages, or someone you’ve just met? That’s the way lenders think. Besides, when you cancel a card, you lose the credit limit it carries, a move that hurts your debt-to-credit ratio we just discussed.

If you’re concerned you won’t be able to leave an unused card unused, then just tuck it away some place safe or take the scissors to it.

#4– Avoid offers for new cards- Just say “no” to the cashier offering you 10% off your purchase if you sign up for a store credit card. While that will only save you a few dollars at the time, you might be too tempted to rack up that new card very quickly. Too many cards make lenders nervous, and your card count is responsible for 10 percent of your FICO score. The theory is that if you open up a bunch of new card accounts, you are an accident waiting to happen: you have way too many opportunities to ring up big balances you won’t be able to pay.

#5– Get the right mix– While you don’t need 10 cards, lenders nevertheless also like to see that you can handle multiple credit lines simultaneously. An example of what they could consider a responsible array of personal debt would be a credit card or two, one department store card, and an “installment” loan such as student loan debt or a car loan. The idea here is to show them you are responsible enough to juggle a few different types of debt. It’s a bit ironic, but the one thing that makes lenders cautious is if you have no cards or loans; they then have no way of gauging whether you will be a good customer. So your mix of credit cards and loans constitute the final 10 percent of your credit score.

-courtesy of Suze Orman

Closing Costs Increasing for Majority of Borrowers

We often hear clients remark, “why are the closing costs more now than when I refinanced just two years ago?” There is a simple explanation. It is due to the “Loan Level Pricing Adjustments” (LLPA) that have been mandated by Fannie Mae. These pricing adjustments are based on the “risk factor” of the loan. The various criteria used to arrive at such a factor are: credit score, loan-to-value, type of loan and type of property. On a $200,000 loan, the LLPAs could vary anywhere from .25% to 3.00% of your loan amount. This equates to $500 to $6000 additional charges simply due to the various “risk” factors determined by Fannie Mae. Please keep in mind, these are NOT charges that are being pocketed by your mortgage loan officer but charges that are being channeled to Fannie Mae through the chosen lender that is underwriting your loan transaction. It is for this reason, that if you should call a local mortgage company and they quote you a rate, the accuracy of that rate should be called into question unless they have thoroughly evaluated your specific loan scenario. It would be similar to calling an auto dealership and asking how much a red car costs. Do you think the auto salesperson on the other end would provide you with a price? The appropriate “pricing adjustments” should be detailed on your Good Faith Estimate. Using the auto analogy, the Good Faith Estimate is actually your “sticker” costs outlining the various costs associated with that particular purchase. An experienced and trusted mortgage professional will thoroughly evaluate your criteria and provide a detailed Good Faith Estimate.

It is always best to discuss your specific mortgage questions with a trusted experienced mortgage professional. As has been outlined, everyone’s situation is now different and the true costs should be noted upfront in the form of an accurate Good Faith Estimate.