Points of Interest ©

One of the most common mistakes consumers make is assuming that 'settling' with a creditor is a great way to save a little on what they owe.  Unfortunately, they don't realize that in the credit scoring algorithms a 'settled' indicator is actually derogatory.

Yesterday, in a low-key ceremony, President Bush bit the bullet and signed the housing bill.  The lack of pomp and theatrics signals the lack of enthusiasm for this bill.

One of it's key componenets which has been given very little press is the elimination of the down payment assistance from sellers.  With this program sellers can contribute as much as 6% to a non-profit which in turn contributes the same amount minus a processing fee to the purchaser's down payment and closing costs.

"Eliminating charitable down payment assistance will slam the door on over 100,000 teachers, firefighters, working families and others who rely on these programs annually to become homeowners. The decision was based on suspect data that was never independently and publicly verified.  In fact, just months ago, two different federal courts threw out a similar policy on the grounds that it was unsupported by either verifiable data or a valid policy rationale.", says Ann Ashburn, President of AmeriDream, Inc.

This provision is now due to expire October 1, 2008.  Anyone who believes they are a candidate for home ownership and needs this program should have something ready to go by September 30, 2008.

So why would the current adminstration effectively shoot itself in the foot regarding the housing situation by eliminating a number of buyers who might otherwise bring some balance into the supply and demand ratio of available listings?

Could it be that with all these interventions and acronyms (TAF, SIV) our government only wants to buy time.  Today, the Federal Accounting Standards Board (FASB) delayed the implementation of rules requiring banks and other financial entities to bring their off balance sheet structures back on their balance sheets.  Then we would know what they were up against.  Then we could begin to heal.

But there is an national election on the horizon....

This from Mr Practical :

"The government’s strategy is to buy time.  It always is.  Time allows it to slowly drain wealth from the poor/middle class and re-distribute it to the rich who own the financial system.  The only important thing to me and what I think Minyanville is all about is to try to help people not be one of them."

"I do not think that the headwinds have diminished," Gary Stern, the president of the Federal Reserve Bank of Minneapolis, told the Financial Times.  "If anything, I think that they are picking up a little steam." 

To pay for this government largesse, the congress added an additional $800.0 BILLION to the statutory limit on national debt.  That takes the ceiling or "high credit limit" to $10.6 TRILLION.

Unlike the congress, we can't unilaterally raise our own credit limits, but I am sure that there are a few of us that would find that feature helpful.

The new housing bill moving through congress is not just for troubled homeowners.  If that's what you thought you could be missing out on any number of benefits.

Expected to be soon passed by the Senate, the bill does make provisions for certain overextended borrowers.  But it also includes handouts for first time buyers, existing homeowners with equity, returning veterans and senior citizens looking to tap their home equity without the big fees normally associated with reverse mortgages.

FIRST-TIME BUYERS.  If you are looking for your first home in Fairfax or Loudoun counties, you're in luck.  You may be eligible for what amounts to an interest free loan from the government.  Here's how it works:  first-time buyers of primary residences are eligible for a $7,500 tax credit with certain income limitations.  But you have to pay this back over the next 15 years, in equal amounts when you file your tax return.  That's an interest free loan!  Better yet, it's retroactive to April 9, 2008.  There is a time limit and this provision is set to expire July 1, 2009.  If your shopping, be sure to settle before June 30, 2009.

ADDITIONAL DEDUCTION.   If you are a homeowner who does not itemize and takes the standard deduction, then this one is for you.  You will now get an additional deduction of $500 if single, or $1,000 if married and filing jointly.  This will probably benefit those with small or no mortgages.  There is a property tax limitation test, so be sure to understand the deduction.

REVERSE MORTGAGE CHANGES.   Now those of you who are 62 or older and have equity in your homes may tap that resource at reduced costs.  Origination fees will be limited and no borrower can be forced to buy an annuity or another insurance product as a condition for receiving the loan.  Perhaps, most importantly the limit that can be borrowed has been increased from $400,000 to a nationwide cap of $625,500.  For many seniors that are on a fixed income, the ability to utilize their equity for the increased daily living costs may be a huge relief.  Still, you must do your homework and understand the program completely.

JUMBO LOANS REDEFINED.  Until recently, conforming loans were limited to $417,000 and were purchased by Fannie Mae and Freddie Mac.  Any loan amount above that limit was a "jumbo loan".
Earlier this year that limit was increased to $729,750 on a temporary basis.  This new bill makes the provision permanent, but reduces the max loan amount to no more than 115% of the local median home price and in no case more than $625,500.

BREAK FOR OUR VETERANS.   Lenders wanting to foreclose will have to wait 9 months instead of 90 days before proceeding on homes owned by someone returning from the military.  Lenders will also have to wait a year before rasing the rate on anyone returning from military service.

Reprinted with permission of Vienna-Oakton-Homes.com.

This past week I heard from three different sources that the prevailing opinion among consumers is that it was almost impossible to get a loan.

Not true!

While you have to do a little more than show up to closing as many borrowers did during the 2004, 2005 and 2006 go-go years, loans of various types are still plentiful and being funded every day.

The loan de jour, if you will, is the FHA 30 year fixed, though it comes in several types of adjustable rate scenarios including a 1 year, a 3/1 and a 5/1 ARM.  These loans all require full doc and have certain minimum credit standards.

You can do a 95% cash out refi to $729,750 in the metropolitan area with a credit score as low as 580!  That's incredible!

With scores that low there may be adjustments to the price depending upon the circumstances.  But an adjustment for risk can always be expected and isn't a new development.

A borrower can still evaluate the merits of any of these combinations: jumbo and conforming, ARMs or fixed, interest only or fully amortizing.  MetFund is actively closing these loans.  Yes, you have to possess a decent credit score and no, we won't lend you the full 100% of the sale price or value, but loans are available.  Call us with any questions or comments.

I heard it reported on tv so it must be true...  This was from a fairly reliable source: 

Over the past decade Fannie and Freddie have spent nearly $200 million lobbying the lawmakers and regulators who are now backstopping their debt.  If they are having financial problems perhaps they should first stop throwing money at the K St law firms.

Todd Harrison on Minyanville.com has found Franklin Raines, former head of Fannie Mae.  He notes that the $2 miilion payment made and return of the $22.7 million in stock did not come out of his pocket.  No, his pockets are still bulging because it was covered by insurance.

For the first hour everything ran like clockwork.  In press rooms around the country, pre-releases of the Fed Chairman's testimony were taken down off the Federal Reserve's web site and immediately transcribed into "breaking news" bulletins highlighting the Fed head's main points.  Their role in the scheme complete, bored reporters played solitaire on their computers, ate doughnuts and watched viral You Tube videos of cats falling out of trees while televisions in the background ran images of Bernanke delivering the words exactly as scripted.

The Fix works both ways.  On one side, politicians get to glide through the televised spectacle of these kinds of hearings essentially worry-free, with only minor facial twitches and occasional jitters caused by the interaction of Prevacid with Klonopin.  On the other, the press gets to kick back and ride The Fix into the next deadline with pre-scripted stories and mock outrage.

But Good Lord, not on this day.  Clearly, some fool forgot about Kentucky Senator Jim Bunning, or "Crazy Jim" as some of the Bluegrass State locals call him.  And for that, there will be hell to pay.

If some low level Senate staffer had simply bothered to check the Senate Q&A lineup, they would have seen Senator Jim Bunning's name lurking on there and this whole unmitigated disaster could have been avoided.  Well, too bad.  Even as you read this, some poor bastard in Washington D.C. is tearfully clearing out his desk, his staff-issue Blackberry confiscated.  If his office land line hadn't already been disconnected he would be able to hear his landlord personally tell him about the eviction, but he'll find that out soon enough.  So, what should have been a walkover for the Fed Chairman instead devolved into Ben Bernanke's own personal Waterloo.

The first delivery from Bunning, a former Hall of Fame pitcher, came screaming hard at Bernanke, like a stray slider, boring up and in, seeking one of two things: either a human jawbone to splinter, or the dead space between the batter's head and the backstop.

"The Fed wants to be the systemic risk regulator.  But the Fed is the systemic risk," Bunning said.  "Giving the Fed more power is like giving the neighborhood kid who broke your window playing baseball in the street a bigger bat and thinking that will fix the problem.  I am not going to go along with that and will use all my powers as a Senator to stop any new powers going to the Fed."

It was an awful scene.  Bernanke visibly flinched.  How could this be happening?  How could something so simple, so right, so scripted, go so wrong?  Behind the scenes, some Senate staffers fainted and others vomited into trash cans while the more seasoned veterans lobbed angry accusations at one another, "Who forgot Bunning!  Why is Bunning not on board!"

But it was too late.  By this time, Bunning was already deep into Fannie Mae (FNM) and Freddie Mac (FRE).  "Let me say a few words about the GSE bailout plan," Bunning continued.  "When I picked up my newspaper yesterday, I thought I woke up in France.  But no, it turns out socialism is alive and well in America.  The Treasury Secretary is asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants.  The Fed’s purchase of Bear Stearns’ assets was amateur socialism compared to this.”

~  Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:  There May Be Strangers Among Us    Minyanville.com

This recent action of our government is not unprecedented.  We have been here before.

See if this sounds familiar:

"If the federal Reserve had an inflationist attitude during the boom, it was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash - the final week of October - and in that brief period added almost $300 million to the reserves of the nation's banks. During that week the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks. Instead of going through a healthy and rapid liquidation of unsound positions, the economy was fated to be continually bolstered by governmental measures that could only prolong its diseased state."
- America's Great Depression, by Murray N. Rothbard

Wow!  Tough love.

Should we start a drumroll for the nationalization of Fannie and Freddie?  It seems like Bernanke, Paulson and band have gathered and it's a real possibility.

The irony is thick because Fannie was privatized in 1968 in order to balance the budget!  Now our government may have to take it back on it's balance sheet just like the banks and wall street are having to bring their off balance sheet vehicles back.

It would actually be funny if it weren't the truth.  It's gotta be painful for those employees and shareholders.  A Washington Post story today describes the pain and disbelief that many are going through at the two institutions.  But it's this disbelief that speaks to the depth of denial in the marketplace today.

For 40 years investors have been making money with the government sponsored Fannie.  And I have no problem with that.  In fact, very supportive of our ability to invest in companies as we see fit.  But now, as this problem erupts and the investors can't seem to profit any longer the debt and future obligations are being forced onto the backs of taxpayers.  Where's the outrage?  Where's the shame?  Where is free market capitalism, Larry Kudlow?  I feel like taking the proverbial baseball bat to the idiots that allowed this to happen, what about you?

Let's take a moment to review the latest news flow and make some comments.

"The credibility of the Federal Reserve and Treasury--and psychology surrounding the faith in the system--is being tested in a big, bad way. Given the proposed rescue plan in Fannie (FNM) and Freddie (FRE), not to mention the action in the banks (BKX -7%), today's close is massive in terms of investor psychology."  
                                                                    ~ Todd Harrison  Minyanville

Let's not forget the FDIC's takeover of IndyMac.  There's only so many fingers to stick in financial dike.

The Fed had to do something didn't it?  It's $5 TRILLION of US mortgages.  Didn't we know something was fishy when Franklin Raines was outed under the dark cloud of scandal?

The WSJ poses the question "Are the Hunters Low on Magic Bullets?"

Is this the beginning of the end of capitalism and the dawn of socialization in America?

You don't think there's deflation?  Even the value of a human life is going down (13% in the last 5 years)  according to the current administration.

Every time you give a creditor permission by way of application to check your credit it posts a record of an inquiry in your credit profile.  A record is kept of which creditor reviewed your credit and the date.

Credit scoring models take the number of credit inquiries into account when compiling your score.  Analysis has shown that those consumers who have more inquiries are a higher credit risk.  Therefor, the greater the number of recent inquiries, the lower your score.

It is very difficult to tell exactly when the number of inquiries becomes detrimental.  But the best strategy may be to apply for new credit only when you need it and then only sparingly.

Two situations that come to mind are the in store offers for discounts when you open a new credit account or when shopping for a new car and you are giving your social security number to the salesperson.  In first case you may save a few dollars up front but it may cost you more in the long run.  In the second example, negotiate your best transaction while resisting the salesperson's desire to run your credit.

Now you have the information to stop making the top five credit mistakes that most consumers make.

There is a common belief among consumers that all you need do is pay your debts on time to reach the highest credit scores possible.

What's not commonly known is that almost a third of an individual's score is determined by the amount of revolving debt they have at any one time.  If you have balances that are near the high credit limits of your revolving debt your credit scores could be severely impacted.

In order to minimize this factor you should keep your balances at 10% or less of the high credit limit.  The 50% level is a crucial threshold but while 30% is relatively better than 50%, anything more than 10% is less than ideal.

To read more about debt ratio levels and how they affect credit scores, please read that section in Mistake #1

Don't miss the final Mistake #5:  Applying for Too Much Credit

You don't have to be a credit expert to realize that missing a payment is a bad thing.  Common sense tells you it's a bad thing.  The whole credit scoring process is designed to predict how likely you are to pay your bills when due in the future.

That means your current payment history is a large component of your credit score.

Missed payments now is a predictor of future late payments.  The Fair Isaac credit scoring model evaluates late payment history in three layers:

Severity of the late:  a thirty day late is not nearly as bad as a 90 day late though neither will help your score.  The more tardy the payment, the more damaging it is to your score. 

You want to do whatever possible to avoid going past 90 days as this is where a sharp drop off in scoring occurs.  Going 90+ days late will wreak havoc on your credit scores.

If you have gone late get caught up as soon as possible.  Don't let it roll.

How Recent is the late:  Did the late payment occur in the last 24 months.  Credit scoring models place a great deal of emphasis on the most recent two years of payment history.

Late payments from earlier this year will have more impact than those from three years ago.  To relieve the downward pressure you must get current and stay current.

Frequency of late payments:  Consumers that are late frequently are penalized much more than those who occasionally miss a payment.  Make your payments on time to avoid this trap.

Many online banking solutions exist to automatically make the minimum payment due on time.  If you seem to be someone who just can't get the payments there on time this may be a possible solution for you. 

Tomorrow, we will review Credit Mistake #3:  Why settling accounts may actually cost you more.

The stakes regarding your credit and how it affects the cost of money you borrow has never have been higher.  This is an effort to educate consumers to credit and some of the factors that affect their credit scores.  We've compiled a list of what many consider to be the top 5 biggest mistakes and explain why they are bad and how to avoid them.

Top 5 Credit Mistakes

Here you'll learn why:

    Closing credit accounts is bad

    Missing a payment that is due really hurts

    Settling an account actually costs more

    Making credit card payments on time isn't really enough

    Getting new store credit cards is a bad deal

Mistake #  1:  Closing credit card accounts.

This can hurt almost as much as missing a payment and is also number one on the top 5 credit scoring myths.  There are two important rules why you should not close credit card accounts:

1.  Eventually, after no use the accounts will fall off of your report.  Credit information is subject to rules regarding how long that info stays on your report.  For the most part, info will stay on your report for 7 years from the DLA or Date of Last Activity.

If you closed your account the DLA stops updating and eventually the positive info is dropped from your report.  If you can help it you never want to get rid of old, positive information.  This kind of positive data actually helps your credit scores.

You can prevent a creditor from closing an old account of yours by occasionally using it to buy a small item and paying it in full.  You'll ensure that the account is never closed and the old, positive info keeps contributing to increasing your credit scores.

2.  You could cause a spike in your available credit ratio and tank your scores.

The ratio of available credit compared to the debt you owe is a very important component in calculating credit scores.  This is referred to as your debt-to-limit ratio.

For example, let's say you have three different cards with three different limits of $500, 1,000 and $1,500 for a total $3,000 credit limit.  And you have balances on the cards of $200, $800 and $300 respectively.  You would have a utilization ratio of 43% or (200+800+300)/(500+1,000+1,500).

But let's assume that you pay and close the third account with the $1,500 limit.  Your debt-to-limit ratio jumps to 67% or (200+800)/(500+1,000).  And remember, when this ratio goes higher your credit score goes lower.

Sometimes consumers will close all their accounts except for the ones they are currently using causing their utilization ratios to spike.  BIG mistake!

Come back for the next discussion of the top 5 credit mistakes.