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Wisconsin Real Estate News

Thinking of walking away from your mortgage?

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Many lending institutions are beginning to take action against those who decide to walk away. Fannie Mae, according to an article in Housing Wire, announced:

Borrowers who are determined to have the ability to make their monthly payments but walk away from their homes will not be able to secure a Fannie Mae backed mortgage for seven years after the foreclosure.

Fannie Mae will also take legal action against borrowers who strategically default in order to recoup mortgage debt.

The actual Fannie Mae announcement quotes Terence Edwards, executive vice president for credit portfolio management at Fannie:

“Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”

In a subsequent article it was reported:

If Fannie Mae determines someone strategically defaulted, then they say they will hold the borrower accountable for all associated costs of getting the house back on the market, in areas that lawfully allow deficiency judgments.

Often when a home forecloses, Fannie Mae brokers and contractors discover vandalism and missing appliances and fixtures when they ready the home for resale. The cost of making those repairs and replacements will be included in the determination of the deficiency amount, a Fannie Mae spokesperson said, in addition to the difference in the mortgage balance and the proceeds from the foreclosure sale.

What does this mean to you?

Considering a strategic default? Know the ramifications before ‘walking away’ from your mortgage obligation.

4.5% - Why Are Interest Rates Going Down?

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4.5 percent for a 30 year fixed!  Conventional and FHA.

For months economic experts predicted that after the Fed exited the Mortgage Backed Securities Purchase Program on March 31, interest rates would move up.  But here we are, 2 months later, and rates are at their lowest point of the year.  

Let’s start with some general economic realities.  First, there is a finite amount of cash in the world.  Second, there are only four basic places to put that cash:

  1. In the stock market.
  2. In the real estate market, which includes the financing of real estate (Mortgage Backed Securities).
  3. In the Commodities Market (gold, silver, orange juice, pork bellies, etc).
  4. Or leave it in cash (CDs, money markets, etc).

Cash itself has a near zero rate of return.  Rates on CDs barely outpace inflation.  Commodities are mostly an unknown for the average investor.  So, for the most part, we look at cash moving back and forth from Stocks to Bonds (MBSs) and vice versa.

When the stock market is moving up, investors buy stocks with their cash, which means the cash leaves the bond market.  To attract buyers back to bonds, the bond traders have to offer bonds with higher yields (that is loans with higher interest rates).

When the stock market is trending lower, you hear the expression “flight to quality” towards the safety and stability of bonds.  When more people look to buy bonds, bond traders lower the yields (hence lower rates).

How does this relate today?  Look at the failing economies in Europe and Greece.  Investors are nervous about the impact on our stock market as international partners struggle.  The Dow has dropped nearly 2000 points!  So people are pulling their cash out and buying MBSs at a feverish rate… therefore, lower rates.

Will it last?

Many stock analysts are predicting a rebound in the second half of the year.  That seems to make sense and that is great news for all those homebuyers who need to close by June 30th to get their Tax Credit.  It also is helping all those sellers who went to Contract in April and are house hunting in May!

We are back into a more traditional interest rate forecasting model.  Watch stocks, watch inflation and watch jobs numbers, and you will make wiser decisions.

Five Components of a Good Credit Score

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Everyone knows that you need a good credit score to get a mortgage.  Most even know that your score will affect the rate and fees you pay for your loan; but few are aware that your credit score also is a determinant of your homeowners’ and auto insurance rates and a myriad of other things.

Simply put, your FICO Score has a huge impact on your financial life.  So, how can we get the best possible score?

There are five components to your score:

1. Your Credit History makes up 35% of your score.

This is obvious.  How you have paid your responsibilities before is a good predictor of how you will pay them in the future.  While your credit profile will look back seven  years, the most weight is given to your activity and performance over the last 24 months.  Here’s a little known tip about your credit.  Let’s say, you have a “charge off” for a cell phone bill you didn’t pay 5 years ago.  Today, that “charge off” has little impact on your score.  Many people, as they prepare to buy a home, will just pay the “charge off” to clean up their credit report.  Makes sense, doesn’t it?  However, by doing this, you will move the activity on the “charge off” to now (which is in the two year window), actually lowering your score.  Before you do anything like this, talk to your mortgage professional!

2. Your Amount of Credit makes up 30% of your score.

Now, this is not your total amount of outstanding debt (as you might assume), it is the amount of debt you have divided by the amount of debt you have available to you.  As an example, a client who owes $5000 on their one credit card that has a $5000 limit will have a lower score, than a client who owes $100,000 in credit card debt, but has $250,000 in available credit lines because their percentage of usage is lower.   Optimally, you want to target 30% or less usage of your available credit.   Many people cancel some of their credit cards before applying for a mortgage because they think it will help their application, since (logically) they think less credit availability means they are less likely to “get in trouble” and that’s a good thing.  They are WRONG.  Canceling those cards lowers the amount of available credit, driving their percentage of usage higher, lowering their score.

3. Your Length of Credit History makes up 15% of your score.

This makes sense too.  A consumer who has paid all their bills for 20 years deserves a better score than someone who has paid their bills on time for 20 months.  This is another instance where some people cancel credit cards and it hurts them because the cards they cancel reflect a longer payment history.  Be careful to consider this factor before deleting any account from your credit history.

4. The Types of Credit You Use names up 10% of your score.

Mortgage payments, auto and student loans (really installment debt of any kind) are weighted most.  The payment is typically fixed in amount and due date; therefore, “missing a payment” on one of these accounts usually indicates a problem more than carelessness.  Your major credit cards (like Visa and MasterCard) have variable payments and due dates.  Additionally, there are times when you buy something and return it, but during the time in between a bill was issued.  You get the bill.  You know the item was returned.  So, you don’t make a payment.  The credit card company can still report you for missing a payment (damaging your score).  This is why store-issued credit cards carry even less importance.  They love reporting you late to make it harder for you to get a credit card at a competing store.

5. Your Credit Inquiries make up 10% of your score.

The scoring models now cluster your inquiries.  What that means is that if multiple people within an industry run your credit within a 45 day time period (you’re shopping for a car or mortgage, for example), all those inquiries are treated as one.  But, if you shop for a mortgage and a car at the same time you are trying to increase your credit card limits and get life insurance, your score can be lowered by as many as 55 points.

You need to be aware of what your actions can do to your score.  You need a consultation with a professional.  Give me a call for a referral to an excellent mortgage consultant.