This morning, RealtyTrac released its Q3 2007 foreclosure data for the United States.

The leading cities for foreclosures are:

1. Stockton, CA (1 per 31 households)
2. Detroit, MI (1 per 33 households)
3. Riverside/San Bernardino, CA (1 per 43 households)
4. Fort Lauderdale, FL (1 per 48 households)
5. Las Vegas, NV (1 per 48 households)
6. Sacramento, CA (1 per 48 households)
7. Cleveland, OH (1 per 57 households)
8. Miami, FL (1 per 60 households)
9. Bakersfield, CA (1 per 64 households)
10. Oakland, CA (1 per 71 households)

Looking more closely, we can see pattern.

California, Nevada, and Florida are well represented and that makes sense.  Between 2002 and 2006, these areas were popular with speculators, many of whom used 2- and 3-year adjustable rate mortgages that did not require income verification, nor did they require downpayments in excess of 5 percent.

These loans are now adjusting and in 2007, mortgages for investors are more stringent.  They typically require a 10-20% equity position and verifiable income. 

With no mortgage options, no buyer bailouts, and no means to pay the bills, many speculators are choosing to walk away from their investments.  Hence, the high foreclosure rates in California, Nevada, and Florida.

Rounding out the top 10 are Detroit and Cleveland. 

Foreclosures in these cities make sense, too.  Both have been decimated by job losses in the auto and manufacturing industries and without jobs, homeowners can’t pay the bills.

In other words, foreclosures are often not the result of a “bad mortgage”, but instead a “bad investment” or a “bad economy”.

The entire list of foreclosures by MSA are available on RealtyTrac’s Web site.

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The Federal Open Market Committee is widely expected to lower the Fed Funds Rate next week. 

For holders of credit cards and home equity lines of credit, this is good news. 

Both of these financial products feature interest rates tied to Prime Rate. Prime Rate is tied to the Fed Funds Rate. 

When the Fed Funds Rate comes down, therefore, so does the rate of borrowing for credit cards and HELOCs.

For mortgage rate shoppers, a drop in the FFR could be bad news.

When the Fed lowers the Fed Funds Rate, it signals that the U.S. economy is weakening and that tends to weaken the U.S. dollar.  When the dollar weakens, the value of dollar-denominated securities weaken, too.

Mortgage bonds are denominated in dollars, of course, so when the dollar loses value, mortgage bonds lose value as well.  This causes mortgage rates to move higher.

After the Fed’s last meeting, it lowered the Fed Funds Rate by 0.500% and, predictably, mortgage rates headed higher in response.

According to Bloomberg, as of this morning, market players are predicting with 90 percent certainty that the Fed will lower the Fed Funds Rate by at least a quarter.  That means that the currently low level for mortgage rates may not last much longer.

Popularity: 1% [?]

Mortgage calculators are ubiquitous on real estate-related Web sites but that doesn’t mean that they’re helpful.

See, Internet-based mortgage calculators take three figures into consideration when determining “how much home can you afford”.

• Income
• Debt
• Downpayment/Equity

Next, the calculator figures in your downpayment, multiplies your income by a factor of .38 and spits out an answer: “You can afford x amount of a home.”

By contrast, a true mortgage approval takes twenty-six factors into consideration. 

Mortgage calculators like the one above specifically don’t ask about:

• Credit score
• Recent bankruptcies
• Collection items
• Outstanding judgments or liens
• Intended use of property (i.e. investment property)
• Type of property (i.e. non-warrantable condominium, 6-unit)

And this is why mortgage calculators are dangerous and misleading. 

Even assuming a person’s credit history is “perfect”, mortgage calculators can still steer you wrong.  That’s because mortgage calculators ignore “compensating factors”.

A “compensating factor” on a home loan application is an exceptional strength that cancels out an exceptional weakness that would otherwise cause the loan to be denied. 

One example is a person whose monthly debts are relatively high versus their income.  This person can be still be approved for a loan if the equity position in their home is very strong.  The large percentage of equity compensates for the relatively low income and, thus, a loan that may have otherwise been denied can now be approved.

Compensating factors are an important part of the mortgage approval process and the online calculators just can’t account for it.

The best alternative to Web-based mortgage calculators is to speak with a human mortgage calculator — otherwise known as “a trusted loan officer”. Only a human can tell you both how much home you can afford, and for what loan amount you would be approved.

Popularity: unranked [?]

Effective November 7, 2007, the Federal Housing Administration is expected to ban home buyers’ use of seller-financed Downpayment Assistance programs. 

DPAs are (were?) very popular in FHA mortgage circles as a way to help buyers finance their new homes.

FHA loans currently require a downpayment of at least three percent on a home purchase.  That three percent, however, is not required to come from the buyer’s own funds; it can come from a “gift” as long as the gifter is a family member or a non-profit organization. 

Downpayment assistance programs are the latter, incorporated as non-profit organizations.

Typically, DPA programs works like this:

• Buyer makes an offer for a home
• Seller accepts the offer
  Seller contributes the necessary three percent to non-profit organization
• Non-profit organization “gifts” the three percent to the buyer while keeping a $500 service fee
• Buyer buys home with three percent gift as downpayment

The main reason cited for the ban is that downpayment assistance programs push home sale prices three percent higher than they otherwise should be.  The extra three percent is not “home value” — it’s “help” and is repaid over time in the form of a higher loan amount.

One study cited by FHA and used to pass the ruling said that home buyers participating in downpayment assistance programs go delinquent with two times the frequency of home buyers that don’t.

According to the Washington Post , there are more than 200 charities nationwide currently offering such programs.

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In a study of 2,036 U.S. adults commissioned by Visa USA, nearly half of all Americans are losing track of their money. 

An average of $45 in cash is “lost” each week in what Visa dubs “mystery spending”, Visa’s version of “I know I had this money in my wallet but I can’t figure out what I spent it on.”

Averaged out over the course of a year, mystery spending accounts for $2,340 — enough to fund a Roth IRA or other investment plan.

According to the study, events most likely to cause “mystery spending” include:

• Out for a night on the town (58 percent)
• Grocery shopping (55 percent)
• Out with children (50 percent)
• Shopping during a sale (40 percent)
• Shopping with friends (33 percent)

How people spend money isn’t the point of the survey but it does raise an interesting point about how careless we can all be with our dollars. 

On one hand, we wonder how will we fund retirement, or pay for college, or send our children to tennis lessons.  On the other hand, we aren’t even aware of how much cash we’re spending and where we are spending it.

For example, if the average American saves the $2,340 annually at 8% instead of “mystery spending” it, that money could grow to $31,000 in 10 years, $91,000 in 20 years, and $204,000 in 30 years.

Being aware of your money is the best way to control it.

Source
Half of All Americans Say They Lose Track of $2,000 In Cash Each Year
September 10, 2007

Popularity: 2% [?]

Yesterday was a rather drab day in mortgage circles — not much happened and mortgage rates idled.  The bigger story was how liquidity appears to be slowly returning to some areas of the beaten-down mortgage market.

Specifically, liquidity is returning to prime, fixed-rate, full documentation jumbo loans and pricing appears to be improving (slightly).

The “prime” designation loosely correlates to a salaried employee with a credit score of at least 720.  This class of borrower is a much lower risk than a sub-prime borrower who is generally categorized as having a credit score below 620.

The higher a homeowner’s credit score, the more likely he is to make on-time mortgage payments.

Jumbo loans differ from Fannie Mae/Freddie Mac conforming loans based on the amount borrowed.  Jumbo loans meet the following loan size criteria:

• Home, condo or townhome: Over $417,000
• 2-unit: Over $533,850
• 3-unit: Over $645,300
• 4-unit: Over $801,950

As more investors express a willingness to buy jumbo mortgage bonds, we can expect jumbo mortgage interest rates to improve, and we’ll maybe even see that improvement spill-over into other product types — including sub-prime loans.

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As mortgage guidelines loosened between 2002 and 2006, homeowners often used their home equity to retire credit card and other consumer debt.  They did this by increasing the size of the mortgage and taking “cash out” from their home.

As you’d expect, this type of mortgage transaction is called a “cash out” refinance.

Well, now that mortgage guidelines are tightening, it’s growing more difficult for a homeowner to engage in this type of home loan. 

Mortgage lenders are restricting the total amount of equity that can be withdrawn from a home, usually as a percentage of the home’s value.

This may be one reason why the amount of credit card debt is rapidly increasing among Americans. 

Throughout May and June, for example, credit card balances increased 12% and 8% respectively even as consumer spending remained relatively flat.

Therefore, we can hypothesize that Americans — unable to “cash out” from their homes — are putting more money on their credit cards and slowly reaching their collective credit limits (upon which the borrowing stops).

When the borrowing stops, spending stops, too, and this has the impact of slowing down the economy. 

A slower economy, of course, reduces inflationary pressures and that makes the U.S. dollar stronger to international investors.  That strength, in turn, creates buying pressure on mortgage bonds which pushes mortgage rates down for everyone.  Naturally, lower rates encourage more borrowing.

Yes, it’s a cycle.  And it’s one worth watching.

Popularity: 1% [?]

If you own a home and somebody else depends on your income, consider that the leading cause of home foreclosures is not “adjustable rate mortgages”.

As cited many times over (including by a Harvard law professor), the answer is medical bills.

Even for the insured, medical expenses can dramatically impact a family’s finances and push it into bankruptcy. 

Over one million families discovered that sad fact in 2004 and medical bills have not gotten any cheaper, says the Bureau of Labor Statistics.

Death is another major cause of foreclosure. 

When a family’s primary wage-earner dies, the secondary wage-earner is now obligated to pay the family’s monthly obligations and that may include a mortgage payment.  Sadly, that income may not be enough to cover the bills.

A strong life insurance policy can offset bills, ease transition periods, and even pay off the home’s remaining mortgage obligation. 

Whether you’re a first-time buyer or a seasoned investor, consider protecting yourself and your family with adequate medical and life insurance coverage, as well as taking preventative health care steps. 

There are resources online to help you determine what coverage is necessary, but the best place to start for this highly personal discussion is with your personal financial planner.

Life is a series of surprises and it’s never too soon to be prepared.

(Image courtesy: NCSALL)

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Before paying down your mortgage balance with extra principal payments, be sure to plan carefully.

The biggest risk in lending for banks is that you will suddenly stop paying your mortgage.  In that event, the banks hope that you owe them as little as possible against the value of the home. 

That way, your mortgage balance is covered in full and paid off in a discounted sale via foreclosure.

The fear of foreclosure is why lenders are eager to take your dollars and to help you increase your equity position through bi-weekly payments and other systems. 

When banks encourage you to pay down your principal balance, their hope is that you will voluntarily decrease their risk in lending to you.

Important to remember, though: your interest rate is determined by the risk that you represent to the bank.  When you pay down your mortgage balance with extra principal payments, your risk to the bank decreases. 

However, do you think that the bank will call you to offer you better interest rates now that your risk is lower?

Therefore, before paying extra principal dollars, consider some of your alternatives first:

• Save for college
• Establish an emergency fund
• Fund a retirement plan
• Invest in stocks or bonds
• Pay down credit card debt
• Pay down installment loans

There are many more options, of course, but just remember that you have choices.  Once you give the money to the bank on your first lien, you can’t get it back without a refinance.

Popularity: unranked [?]

Credit “piggybacking” used to be a handy way to boost a person’s credit score in order to help them get a home loan approval.  Starting in September, it’s going the way of the Dodo bird.

Piggybacking involves linking one person’s strong credit rating to another person’s weak credit rating.

By adding the latter as an authorized signer on the former’s credit cards, the weaker credit scores are pulled higher because of better payment histories and lower debt-to-limit ratios.

Recently, credit repair companies began paying people with good credit several hundred dollars monthly to “rent” their credit to people with poor credit scores. 

The agencies charged the low credit scoring group up to $1,000 for the service, promising (and delivering) an increase to their FICO.  Outed by Kenneth Harney in April and under pressure from credit scoring stakeholders, the practice will soon be halted. 

Beginning in September, credit agencies will protect their scoring methods from gamers of the system.

There are no records documented how many people have abused piggybacking and credit scoring loopholes.

The change will negatively impact people that legitimately use authorized accounts, including children and spouses. There are an estimated 41 million people in that category. 

There are also close to 2 million people that only have authorized accounts in their credit history.  For these people, their credit history is about to go blank.

Source
Can you ‘piggyback’ on a credit score?
Liz Pulliam Weston
MSN Money, June 18, 2007

(Image courtesy: David L Nelson)

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