Tag Archives: mortgage

Wednesday’s Academic Roundup

Posted on by

Friday’s Government Reports Roundup

Posted on by
  • United States Government Accountability Office releases report: “Collateral Requirements Discourage Some Community Development Financial Institutions from Seeking Membership”.
  • The National Low Income Housing Coalition (NLIHC) released its Out of Reach 2015 report, in which it asserts that low wages and high rents are preventing people from living in many different areas of the country. It states that the most expensive city to live in is San Francisco, where a worker would need to make $40/hour to afford a decent two-bedroom apartment.
  • The Federal Reserve released its Report on the Economic Well-Being of U.S. Households in 2014, which reveals how adult-consumers feel they are doing financially. Though in a number of categories adults’ beliefs on how they are doing went up beneficially, half of all renters that wanted to purchase a home could not afford the down payment and 31% were unable to qualify for a mortgage.

Be Careful What You Wish For GSEs

Posted on by

Genie Lamp

Jim Parrott and Mark Zandi have released a report, Privatizing Fannie and Freddie: Be Careful What You Ask For. The authors go through a very useful exercise in which they break down the cost of reprivatizing. The report opens,

Few are happy with the current housing finance system that has Fannie Mae and Freddie Mac in conservatorship and taxpayers backing most of the nation’s residential mortgage loans. Yet legislative efforts to replace the system have largely faltered, raising concern that we may not have the political will or competence to replace it any time soon.

This has created an opening for those who contend that we should not replace the system at all, but simply recapitalize the government-sponsored enterprises and release them from conservatorship. Fannie and Freddie were remarkably profitable prior to the financial crisis, after all, and have been consistently in the black recently. Why embark on the laborious, risky and now stalled process of fundamental reform when we can simply return to a model that we know can provide steady access to affordable, long-term fixed-rate lending?

While we both have serious concerns with the wisdom of releasing the duopoly back into the market, we thought it useful to set those concerns aside for the moment to explore the economics of the move. The discussion often takes for granted that this path would take us back to the world precrisis, but economic conditions and the regulatory environment have changed in ways that would significantly affect how Fannie and Freddie would function as reprivatized institutions. (2)

Parrott and Zandi conclude that

The debate over whether to recapitalize and release the GSEs into the private market is often framed as a choice of whether or not to return to a prior period in lending. For all its shortcomings, the argument goes, at least we know what to expect in the cost and availability of mortgage credit. But this is a misconception. In releasing the GSEs into the private market again, we would release them into a very different regulatory and economic environment, and they would respond, not surprisingly, by charging very different mortgage rates. (4)

I really have no argument with Parrott and Zandi’s paper, but I would note that their conclusions don’t differ so much from the pre-crisis academic papers that attempted to quantify the increase in mortgage rates that would result from privatizing the two companies — fifty basis points, give or take (see, for example, The GSE Implicit Subsidy and Value of Government Ambiguity).

I value Parrott and Zandi’s paper because it reminds us to keep pushing forward with real housing finance reform even though Congress has not yet made any progress on that front.

Wednesday’s Academic Roundup

Posted on by

Going It Alone on Your Mortgage

Posted on by

walking alone

WiseBread quoted me in When It Makes Sense to Apply for a Mortgage Loan Without Your Spouse. It opens,

You and your spouse or partner are ready to apply for a mortgage loan. It makes sense to apply for the loan jointly, right? That way, your lender can use your combined incomes when determining how much mortgage money it can lend you.

Surprisingly, this isn’t always the right approach.

If the three-digit credit score of your spouse or partner is too low, it might make sense to apply for a mortgage loan on your own — as long as your income alone is high enough to let you qualify.

That’s because it doesn’t matter how high your credit score is if your spouse’s is low. Your lender will look at your spouse’s score, and not yours, when deciding if you and your partner qualify for a home loan.

“If one spouse has a low credit score, and that credit score is so low that the couple will either have to pay a higher interest rate or might not qualify for every loan product out there, then it might be time to consider dropping that spouse from the loan application,” says Eric Rotner, vice president of mortgage banking at the Scottsdale, Arizona office of Commerce Home Mortgage. “If a score is below a certain point, it can really limit your options.”

How Credit Scores Work

Lenders rely heavily on credit scores today, using them to determine the interest rates they charge borrowers and whether they’ll even approve their clients for a mortgage loan. Lenders consider a FICO score of 740 or higher to be a strong one, and will usually reserve their lowest interest rates for borrowers with such scores.

Borrowers whose scores are too low — say under 640 on the FICO scale — will struggle to qualify for mortgage loans without having to pay higher interest rates. They might not be able to qualify for any loan at all, depending on how low their score is.

Which Score Counts?

When couples apply for a mortgage loan together, lenders don’t consider all scores. Instead, they focus on the borrower who has the lowest credit score.

Every borrower has three FICO credit scores — one each compiled by the three national credit bureaus, TransUnion, Experian, and Equifax. Each of these scores can be slightly different. When couples apply for a mortgage loan, lenders will only consider the lowest middle credit score between the applicants.

Say you have credit scores of 740, 780, and 760 from the three credit bureaus. Your spouse has scores of 640, 620, and 610. Your lender will use that 620 score only when determining how likely you are to make your loan payments on time. Many lenders will consider a score of 620 to be too risky, and won’t approve your loan application. Others will approve you, but only at a high interest rate.

In such a case, it might make sense to drop a spouse from the loan application.

But there are other factors to consider.

“If you are the sole breadwinner, and your spouse’s credit score is low, it usually makes sense to apply in your name only for the mortgage loan,” said Mike Kinane, senior vice president of consumer lending at the Hamilton, New Jersey office of TD Bank. “But your income will need to be enough to support the mortgage you are looking for.”

That’s the tricky part: If you drop a spouse from a loan application, you won’t be penalized for that spouse’s weak credit score. But you also can’t use that spouse’s income. You might need to apply for a smaller mortgage loan, which usually means buying a smaller home, too.

Other Times to Drop a Spouse

There are other times when it makes sense for one spouse to sit out the loan application process.

If one spouse has too much debt and not enough income, it can be smart to leave that spouse out of the loan process. Lenders typically want your total monthly debts — including your estimated new monthly mortgage payment — to equal no more than 43% of your gross monthly income. If your spouse’s debt is high enough to throw this ratio out of whack, applying alone might be the wise choice.

Spouses or partners with past foreclosures, bankruptcies, or short sales on their credit reports might stay away from the loan application, too. Those negative judgments could make it more difficult to qualify for a loan.

Again, it comes down to simple math: Does the benefit of skipping your partner’s low credit score, high debt levels, and negative judgments outweigh the negative of not being able to use that spouse’s income?

“The $64,000 question is whether the spouse with the bad credit score is the breadwinner for the couple,” says David Reiss, professor of law with Brooklyn Law School in Brooklyn, New York. “The best case scenario would be a couple where the breadwinner is also the one with the good credit score. Dropping the other spouse from the application is likely a no-brainer in that circumstance. And of course, there will be a gray area for a couple where both spouses bring in a significant share of the income. In that case, the couple should definitely shop around for lenders that can work with them.”

Wednesday’s Academic Roundup

Posted on by

Costly Mortgage Mistakes

Posted on by

Ship on Rocks

Consumer Reports Money Adviser quoted me in Don’t Make This Costly Mortgage Mistake; How to Weigh Your Options Before Your Settle on a Deal (only available in Spanish without a subscription!) (UPDATE:  NOW IN ENGLISH TOO). It reads, in part (and in English),

As with anything you buy, scoring the best deal on a mortgage or refinancing involves shopping around. Yet 77 percent of borrowers applied for a loan with a single lender instead of checking out several to compare costs, according to a recent study by the Consumer Financial Protection Bureau. “People may well put more time and effort into shopping for smaller products such as appliances and televisions than they do in shopping for the right mortgage,” the bureau’s director, Richard Cordray, said in a statement. But the potential savings from doing your homework are significant. If you get a $250,000 30-year fixed-rate mortgage at 4 percent interest from a lender instead of paying 4.5 to another, you’ll save $26,345 over the life of the loan.

We know it can be difficult to find the right mortgage; the process can be intimidating. Following these steps will help you navigate better:

*     *     *

2. Decide which type of mortgage is right for you

Before you shop, determine how much you want to borrow, which type of mortgage you want, and how long a term you need so that you can compare lenders’ products.

Most borrowers go with a fixed-rate mortgage, usually for a 30-year term, to spread out the cost of a home purchase over time while making predictable payments each month, says David Reiss, a professor who teaches real-estate finance law at Brooklyn Law School. Those loans make sense especially when rates are low and for buyers who intend to own their house for a long time.

But also consider an adjustable-rate mortgage (ARM), also called a variable-rate or floating-rate mortgage), Reiss says. It has an interest rate that’s fixed for an introductory period of time, then changes periodically, usually in relation to an index. The introductory rate is often lower than the rate on fixed-rate mortgages. For example, the average 30-year fixed-rate mortgage recently had an annual percentage rate (APR) of 3.5 percent, according to Bankrate.com; the average 5/1 ARM (which adjusts annually after five years) was 2.67 percent.

When the rate adjusts, it can sometimes result in a sizable increase in monthly mortgage payments. “ARMs are appropriate for people who anticipate relocating or paying off the loan before it adjusts,” Reiss says, “or for empty nesters who don’t plan to stay in a home for many years.”

*     *    *

4. Push for a better deal

After you have found the best offer, try to negotiate even better terms. Ask the lender whether he will waive or reduce any of the fees he is charging or offer you an even lower interest rate (or fewer points). You are unlikely to get fees waived from third parties, like those for a title search, government processing fees, and appraiser fees, Reiss says. “But you may be able to cut the lender’s fees, like its underwriting, document processing, and document preparation costs,” he says.

.