Toby White Blog

Definite Uncertainty

20081009

Here is the Definite part:

I am starting my 25th year in the mortgage business, and these times are wild. Thank you to all who have been clients over these decades!
Recently every call I receive starts with the question, "Are you still in the mortgage business?"
I actually enjoy my career helping people make decisions about what usually amounts to the largest financial decision most ever make and prefer to not even think about doing anything else, so yes, you can count on me being here for you.

Here is the Uncertainty:

Financial markets, like stock markets, like stable conditions.
What we have experienced has been anything but stable, and there has been and will continue to be a great deal of pain before things get better.
Incredible events have taken place in the last few weeks; Washington Mutual, Wachovia, Lehman Brothers all going the tubes, the incredible infusion of Treasury dollars to prop up AIG and the guarantees (I assume) that have been made to Bank of America and Wells Fargo to take over the sick and ailing institutions that they purchased.
And then the $700,000,000,000.00 (holy cow, that's a lot of zeros!) bailout that had to be voted on twice, the second time with pork barrel goodies just to pass the house.
Well, as you can see, the economy is anything but stable, and that is why there are jitters in the mortgage business.
As of this morning there is still money to lend for good loans that meet the underwriting guidelines. Everything is being scrutinized in the loan files, but closings and fundings are taking place.
Rates which should be down aren't, again based on the uncertainties out there in the markets.

Back to the definites:
The National Association of Realtors have reports a nationwide jump in sales of 7+% last month. I have a very reliable source who reported a large real estate firm has confirmed that september had the highest unit volume here in South Florida in the last 3 years.
Things are happening, and there are deals to be had in the marketplace. I realize that these are not easy times, but fortunes are made in down markets; just look at what Warren Buffett has done in the last few weeks. Five billion into Goldman Sachs, not to mention his large position increase in Wells Fargo. It just shows that every dark cloud has a silver, and sometimes a gold lining.

Consolidation in the market

20080918

Hurricane Ike didn't hit the Texas coast, instead the real hurricane hit Wall Street. Merrill Lynch being sold to bank of America, Lehman Brothers going bankrupt, now Washington Mutual has ousted its leader and has put itself up for sale, and today Morgan Stanley is scrambling to find a buyer.

How does all this affect the real estate and mortgage market?

Simple; as the old Mamas and Papas song goes, "the darkest hour is just before dawn" applies here. Do not bet against America. We have been resilient before and we will again. It does look bleak out there, and there are many fewer options for financing today than there were two years ago, but that's what caused the problem in the first place. People who had no business buying homes did and what we have today is the result.

If you can show stable income, have money for a downpayment, and have paid your credit as agreed, you can get financing for real estate. You just can't get the stated 100% investor loan any more, and hopefully, it will never be available in the future.

Consolidation only means that there will be fewer options for borrowers, and you will have to be a real buyer to buy real estate, and a bonafide investor to purchase an investment property; gambling days are long gone, and from the looks of what is happening on Wall Street, we all lost.
At least for the time being.

Foreclosure Bargains: three things you must do

20080808

In 2003 one could point to any piece of real estate, buy it for the asking price and make money by reselling it a year later. In this market, the rules have changed.

In the CNN Money article on how to buy a foreclosure, the discussion is about the three stages of the foreclosure process where one can get the best deal.

The bottom line is that now is a great time to buy real estate, but you have to be ready to do business.
1. You must be pre-approved by a lender, not just pre-qualified.
2. You must have a very firm grasp of the values in the area you want to buy.
3. You have to know about the title status of a property.

Please call us in Fort Lauderdale for real estate help if you have questions about the process.

Realistic and Rosy

20080804

Real Estate was hot in Florida over the last several years, and then the unsustainable price increases finally became just that, unsustainable. The result is that the last year has seen a reduction in values all over South Florida. This hurts. But there does seem to be a silver lining in this very dark cloud. You see as the values and prices erode, more people will be able to afford to come to Florida.

This state is still a great place to live! The sun and the beaches have never changed, and that's what is going to create another baby boomer migration.

"The first of the Baby Boomers are just over 60 now, so over the next 10 to 15 years you'll see a real increase in that group" says Stan Smith, director of the University of Florida's Bureau of Economic and Business Research.

So you see that the lower prices are going to have a good effect on the real estate business over the next decade.
As Florida's population increases, the economy becomes that much more robust; service industries, hospitality industry, and of course real estate services all become more viable.
It is indeed realistic and rosy!

Low rates or high rates?

20080730

Charles Plosser, the president of the Philadelphia Federal Reserve, says inflation has to be tackled even if the financial downturn hasn't been resolved.

Ouch! Just when we need low rates the most, the Fed has stopped lowering the federal funds rate and now is possibly considering an increase. You see the Fed controls the money supply by offering a higher or lower federal Funds rate (which is the rate it lends money overnight to banks), which will either slow down the economy (high rates) or speed it up (low rates).

The issue we have right now is runaway fuel costs which have directly impacted food costs; I don't know about you, but it hurts when I go to the gas station and then the supermarket on the same day.

There are sectors of the economy that are vibrant; look at the iPhone from Apple Computer, heck, anything that Apple is making is selling like hotcakes. High tech is rocking, but as good as that sector of the economy is, there are others, like autos and transportation, that are having severe problems.

I have to disagree with Mr. Plosser, as I can't see increasing rates having as big an impact on inflation since the real price or production has been skewed by oil increases, and given the increase in global demand, high oil prices seem here to stay.

Fannie / Freddie / Fed-up?

20080723

The Federal National Mortgage Corporation (Fannie Mae) and the Federal Home loan Corporation (Freddie Mac) are the two largest mortgage loan securitizers in the world. That is, these two companies buy loans and then sell mortgage backed securities to investors. They have developed the most stringent requirements for loans, and therefor have offered investors the most secure investments. There is trouble in paradise, though. It seems that to be competitive in the gogo years of 2003 through 2005 these companies relaxed their requirements too much and now they are having problems, too.

Approximately half the residential mortgage loans in America pass through the Fannie Mae / Freddie Mac machine. They currently have a number of non performing loans on the books, these are some of the foreclosures you hear about on the news.
As a percentage of the total dollar amount of loans serviced, it seems small, but the problem is it is alot bigger than it should be, hence the liquidity issue.

I know, you are thinking some corporation has made some poor decisions, but how does it affect me?

Here is the bottom line; When the most reliable and stable of the bunch is having real problems, how can the industry get back the confidence with its investors? If it can't get this confidence back, the only way to attract investors is to offer more for their money. Yes, this uncertainty in the market is going to be a contributing factor to the rise in rates.

Let's just hope that Mr. Bernanke's ideas work.

In the mean time, rates have bumped up a bit, but in the 24 years I have been doing this job, we are still less than the median rate for this time period, and people were buying houses, refinancing houses and living at even higher rates.

Concerned? Yes. But worried? Never bet against the US economy.

Fannie Mae and Freddie Mac; are you going to raise the rates?

20080714

Friday July 11th brought turmoil in the mortgage business yet again.
Sparked by the takeover of Indymac Bank, who had made too many the B+C loans resulting in numerous defaults caused by lending people money who probably had no right to be borrowers in the first place finally came full circle and caused the meltdown in Pasadena.
Then of course the question arose about the two largest corporations authorized by congress to securitize mortgages and sell them as mortgage backed securities to pension funds, investors, hedge funds, and anyone else who wanted to invest capital into a somewhat safe haven. I say "safe" because over the years these two organizations have dealt in AA paper that is, the most conservative underwriting guidelines, only lending to the best credit, most stable income and at lower loan to values. It seems that Fannie Mae and Freddie Mac relaxed their standards in the go-go years of 2004-2005 and now they are having liquidity problems, too.
The issue is one of trust.
When even the most conservative organization is having problems, which investor will believe the system is still going to work in the future? The other problem is one of size, and these two companies are directly responsible for half the US home loan market, totaling 5 trillion dollars.
The bond market is the bedrock upon which mortgages are based, likes a stable environment. When there is sudden change in the status quo investors pull their money out which causes the price of bonds to go down, which in turn makes yields go up. Mortgage loan prices are based on bond yield, so mortgage rates tend to climb.
And climb they did. There were three increases on Friday afternoon. Today the market reacted somewhat favorably to Treasury Secretary Henry Paulson's remarks that the US Government will step in to mop up or prop up if need be.

What is the bottom line? Rates are expected to move from where they are. Nobody can tell you where they will end up or how soon they will change, but one thing is 100% sure:
a broker can only tell you what rate you can have now, and how long you can lock it in. If it sounds good to you, take it. These are changing times, I would hate to see a client get hurt with a rate swing if they didn't understand a rate lock.

Five Credit Mistakes you cannot afford to make

20080710

I came across this article by Attorney Jamison and I couldn't say it any better myself!

"Five Big Credit Mistakes" by Edward Jamison, Esq
It's surprising how many consumers make the same credit scoring mistakes over and over again. In an effort to educate consumers on credit and credit scoring, we've compiled 5 common credit scoring mistakes into a list that defines each mistake and explains why they are bad and how to avoid them:

Credit Mistake #1: Closing Credit Cards Accounts
This is probably THE biggest credit mistake that consumers make. What you may find surprising is that closing credit card accounts can hurt your credit score almost as badly as missing a payment. Not only is this the number one on the top five credit scoring mistakes, it's also number one on the list of credit myths.

Ironically, most consumers make this mistake based on poor advice from a mortgage lender as a strategy for improving their credit scores. A word of advice people, when you're dealing with something as sensitive as your credit and credit scores, make sure you do your homework before trusting some of these so called 'industry experts' before following through with their advice.

There are two important reasons why you should not close credit card accounts:
1. Eventually, the accounts will fall off of your credit reports - The information in your credit reports are subject to certain rules in regards to how long it can remain in the report. In most cases, credit information will remain in your credit reports for seven years from the account's DLA or date of last activity. When an account is open, the DLA will continue to update each month and the open account will never reach that seven-year mark. If you close the account, the DLA will stop updating and the clock will start ticking. Eventually the account will be completely removed from your credit reports.

Why would this be a bad thing?

It's simple - you never want to get rid of old, positive information in your credit reports. This information actually helps your credit scores. Credit scores want to see this positive account information. They want to see your long, perfect history of making your payments on time because this information significantly helps your credit scores.

This information significantly helps your credit scores so why would you ever want that history to disappear? You wouldn't! Here's an analogy for you: let's say you made straight A's in high school. What if the record of that perfect scholastic accomplishment were permanently deleted seven years after you graduated? Would you ever want that history deleted? Of course you wouldn't. The same is true for the credit reporting environment.

So, what should you do with old credit cards that you don't use any longer?

What you don't want to do is to let the account become inactive. When this happens, the credit card companies aren't generating any revenue for your account. Eventually they'll close the unused account because you're more of a liability than an asset. You can prevent this from happening by using the card every few months for low dollar purchases like dinner or a tank of gas. When the bill comes in, just pay it in full. If you do this, it will ensure that the account will never be closed and you'll always get credit for your good payment history.

2. You could cause a spike in your revolving utilization and tank your scores - The percentage of your available credit in comparison to the debt you owe is a very important factor in calculating your credit scores. This is often called "revolving utilization," or your debt-to-limit ratio.

For example, if you have an open credit card with a $1,000 credit limit and a $500 balance then you are using 50% of your available credit. This means that you are 50% utilized on this particular credit card.

Now lets add a second credit card to the mix.

Let's say you have another open, but unused credit card account with a $1,000 limit and a $0 balance. This would put your total revolving utilization at 25% because you have $2,000 in available credit limits and $500 in total balances. If you divide your total balances by your total credit limits, you'll get your total aggregate revolving utilization: $500 divided by $2000 equals .25 or 25%.

So how will closing unused credit cards hurt your credit score? When you close an account, the amount of available credit decreases, which could result in a higher revolving utilization and lower your score.

Let's use the example from above and close the second unused credit card account. When you close the account, you remove it from any utilization calculation and now you're stuck with one open credit card account with a $1,000 limit and a $500 balance.
This caused your utilization to go from 25% to 50%.

Remember, you divide the total balance by the total available limit so $500 divided by $1,000 is .50 or 50%. As this percentage increases, your credit score decreases.

When you're talking about several unused credit cards with high limits, you can just imagine what closing credit card accounts could do. I've seen consumers go from a 10% utilization to almost 100% utilization because they closed all of their credit card accounts except the one they were currently using.

Big mistake.

Credit Mistake #2: Missing Payments
It doesn't take a credit scoring expert to tell you that missing payments is a bad thing. The only reason I made missing payments second to Closing Credit Card Accounts is because this one is a no brainer.

It shouldn't take a credit expert to tell you that missing payments is bad. Common sense should tell you that missing payments is bad. Credit scores are designed to predict how likely you are to miss payments in the future. This means that they look at your credit history to view how you've managed all of your credit obligations.

Missed payments is the most powerful predictor of future late payments. The FICO score evaluates previous late payments in three different layers:

How Severe - How severe is the late payment? It doesn't take a statistician to tell you that a 30-day late isn't as bad as a 90-day late. The more severe the late payment, the more damaging it is going to be to your credit scores.

Consumers who have missed payments by a few weeks and then bring their accounts current score much better than consumers that have gone 90+ days past due. In fact, a 90-day past due is the threshold that will wreak havoc on your scores.

If you are unable to avoid a late payment, the next best option is to get those accounts current as quickly as you can.

How Recent - How long ago did the late payment occur?

If you've read some of my previous articles on credit scoring, you'll know that the last 24 months of your credit history are critical because the FICO score places more emphasis on your recent credit patterns. This means that a late payment 6 months ago is going to carry much more weight than a late payment from 4 years ago. To recover from late payments it's important that you get current and stay current.

How Frequent - How often have the late payments occurred? Consumers that miss payments frequently are penalized much more severely than those that have missed a payment here or there in their past.

If you have a tendency to make late payments your credit scores will reflect your bad habits. Make your payments on time and you'll never have to worry about losing points in this category.

Credit Mistake #3: Settling Accounts
One of the most common mistakes consumers make is assuming that 'settling' with a lender is a great way to save a little cash.

Unfortunately, they don't realize what that a 'settled' indicator in their credit reports is actually derogatory.

"Settling" is a term used in the consumer credit industry that means accepting less than the amount you owe on an account. For example, if you owe a credit card company $5,000 but you can't pay them the full amount then they will likely make you a deal for less than that full amount. They have "settled" for less than the full amount, which is likely much less than you contractually owe them.

This may seem like a good idea because you save quite a bit of money but as far as the credit scoring models are concerned, this is just as negative as other severe late payments. The only way to avoid the damage to your credit scores is to arrange a deal with the lender to report the account as 'paid in full' as opposed to 'settled'. If they don't agree then it's in your best interest to figure out how to pay them in full or else be prepared to suffer the damage to your credit for the next 7 years.

It's also important to understand that if the account has already made it to the collection phase, the damage is already severe and settling won't really make a difference. Settling is only an option if the account has already made it to a severe delinquency state.

Credit Mistake #4: High Revolving Utilization on Your Credit Cards
Most consumers believe that making your payments on time is all it takes to have good credit and earn great credit scores. What they don't realize is that almost a third of your score is determined by how much you owe on your credit card accounts. If you have high balances on your credit card accounts, you're credit scores could be severely impacted by your revolving utilization.

In order to score the most possible points in this category, I advise keeping your revolving utilization at 10% or less.

Don't be fooled when you hear some of these celebrity experts telling you that 50%, 30% or even 25% is best. While 30% is considerably better than 50%, 10% or less is ideal. The lower the utilization percentage, the better your score will be. (*To read more about revolving utilization and how it's calculated, please read the revolving utilization bullet in Mistake #1.)

Credit Mistake #5: Excessively Applying for Credit
Whenever you apply for credit your application gives the lender permission to access your credit reports. When they pull your credit reports, it automatically posts an inquiry in your credit record. This inquiry is a record of who pulled your credit report and the date it occurred.

Credit scoring models use inquires to determine if and when you shop for credit. Statistics show that consumers who have more inquiries are higher credit risks than those with fewer inquiries. It is for this reason that the more inquiries you have, the more points you lose in the credit score calculation.

The exact point value of inquiries is a much argued topic and is impossible to give an exact point value because it really depends on all of the other information included in your individual credit file. The best strategy would be to only apply for credit when you absolutely need to.

This means that you should avoid those in store offers of "10% off" in exchange for applying for a store credit card. This may sound like a great idea but the reality is that while you may save a few bucks on your purchase, those inquiries could end up costing you a lower credit score which could result in higher interest rates on auto or mortgage loans in the future.

There you have it. Now that you know the top 5 credit mistakes, you can avoid making the same mistakes that so many other consumers make.

Countrywide is in a heap of trouble

20080625

According to CNN Money:
The Attorney General of Illinois is expected to sue Countrywide Financial. The state says that the lender used "deceptive" lending practices to sell risky loans.

I feel that the entire industry has suffered from the tactics used by Wall Street, and large lenders like Countrywide, who came up with programs that allowed people who had no business buying property to become property owners, and then selling these mortgage backed securities to the investors out there, like the pension funds, hedge funds, and others who were looking for great yields on stable investments.

Unfortunately, these same end investors are the ones who bought jumbo loans (above $417,000) and FNMA and FHLMC paper. Now they are gun shy, and you really can't blame them as they were duped into believing that the mortgage backed securities were indeed secured with stable real estate values. That is why the lenders are now dissecting every loan that is submitted to make sure that the borrowers have the four C's of lending;
Capacity, Credit, Capital and Collateral.

Just like the old days when I first started lending in 1984!