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Phone: (505) 828-0900
Fax: (505) 828-1197 6310 Jefferson NE
Albuquerque, NM 87109 Email: vaughn@vaughncpa.com
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Throughout history, religious and business leaders warned about the "evils of debt." For the most part, it was acknowledged that debt could be used for both "good and bad" purposes.
Debt borrowed for the purchase of a business, which would return income, or to purchase a home, which provided shelter, were considered "good debt." Debt borrowed for personal consumption or for speculation purposes was considered "bad debt." We are considering home mortgage debt in this article. The Federal National Mortgage Association, or Fannie Mae, was created in 1938 as a government sponsored enterprise (GSE) to provide local banks federal money to finance home mortgages. In 1968, Fannie Mae was re-chartered by Congress as a shareholder-owned company, funded solely with private capital. At that time, government guaranteed mortgages became the responsibility of the Government National Mortgage Association (Ginnie Mae). In 1970, Fannie Mae stock was listed on the New York Stock Exchange.
In 1970, Congress created the Federal Home Loan Mortgage Corporation (Freddie Mac), which also purchases and securitizes home mortgages on the open market. When real estate prices were rising, there were many sub-prime lenders lending money to individuals with poor credit histories. These companies would package the mortgages and sell the packages to Wall Street. As the housing prices started to decline and as the interest rates on these mortgages started to adjust, the borrowers started defaulting on these loans, in part creating the mortgage crisis we are still experiencing. A second area where standards have changed is with appraisals. Historically, home mortgage appraisals required three comparable sales that took place within the last 12 months. Today, the standard appraisal requires five comparable sales that must fall within the three- to six-month period. If there are no comparable sales, a mortgage is very hard to obtain. If there has been a great deal of "short-sale" activity, appraisals will be low and may prohibit financing or refinancing. The tightening of standards in many ways has caused a cascading effect. In some areas, prices are dropping so fast that lenders have issued "danger lists" warning that they will no longer accept loans in the area. The lenders are concerned about the quality of their loans because they have to resell the loans to Fannie Mae or Freddie Mac to obtain funding for new loans. The banks are concerned that if they can't prove that the loan is a quality loan, the loan won't be purchased.
While there are some FHA programs available, those who are delinquent on their mortgages have little choice but to deal with their present mortgage company. A lender may be willing to work with a borrower in the following ways: Resetting the interest rate -this is especially true in situations where clients were able to make payments before the loan rates adjusted. The rate adjustment is limited for a period of anywhere from two to three years. If the borrower cannot make the payment even with the proposed rate adjustment, that borrower will need a compelling reason why a further rate reduction is warranted and why they should remain in the home. For instance, someone starting a new business could make the case that they are a good lending risk because, in the long run, the business will provide added security and income despite requiring an additional rate reduction in the early stage of the business. The rate modification will not be formalized until the borrower demonstrates the ability to repay the loan. Normally, the lender will require the borrower to make at least three timely payments before the modification paperwork will be delivered to the borrower. Those who cannot demonstrate that they can afford the home will be requested to place the home on the market to avoid foreclosure.
How is the interest rate set? The price of the credit for a home mortgage is adjusted for two major factors: 1. Your credit score determines not only what programs you may qualify for but at what price. If you have a low credit scores but currently have a low rate mortgages should not consider refinancing the home short of a compelling reason for doing so. 2. Loan to value (LTV) is the proportion that the new loan balance bears to the total appraised value of the property. To lenders, the LTV is an indication of the likelihood that the lender will have a loss in the event of a foreclosure. Let's say the best rate today is 4.125% for the client with a 720 credit score. Now that individual, with the 620 score for the same loan with a value of 70%, would pay an additional .75% for a total rate of 4.875%, not a bad rate historically. However, the cost of the loan also goes up as the loan to value on the loan increases. If the loan to a borrower with a 620 credit score were increased from 70% to a loan to value of 75%, the rate on that loan would increase by an extra 2.5% or 6.625%. At all levels, those borrowers with a 720 or above credit score receive the best pricing regardless of loan to value percentages. Borrowers with a credit score of at least 640 generally receive the same pricing as someone with a 719 credit score at Loan To Value's of 70% or less. However, as the loan to value increases, the pricing for those below a score of 680 receive substantial adjustments in the price of the loan.Those borrowers with credit scores below 620 pay the highest rates and may be limited to a maximum LTV of 80% of the value of the property. While the FICO score and the loan-to-value are major factors in determining pricing, lenders all have variations in their credit score/LTV pricing and may take into account other factors such as refinancing to take cash out. Often, it is advisable to obtain quotes from multiple lenders before refinancing. Should you refinance? Things to consider. • Your credit score and the loan to value amount of the loan as discussed in the prior section. • The cost of refinancing, which includes administration, document preparation, processing, appraisals, inspections, title searches, along with government fees for recording the lien and deed. • Negotiation-currently bankable mortgage deals are tougher to come by. Make mortgage bankers and brokers work harder for less. Often broker or lending fees can be reduced. • The annual percentage rate (APR), which takes into account not only the interest rate, but also points (one point equals 1% of the loan amount), mortgage brokerage fees, and certain other credit charges the lender requires the borrower to pay, expressed in terms of a yearly rate. • Are there prepayment penalties on the loan-it is estimated that 80% of the sub-prime mortgages have prepayment penalties. Often non-conforming mortgages have prepayment penalties that will kick in if the client pays the mortgage off before a certain number of payments have been made. • Payment of points-payment of points upfront reduces the interest rate charged for the monthly payment. The-payment of points may be beneficial in instances where the you intend to keep the loan until maturity. • Balloon Payments-is the loan fully amortized over the term of the loan? • Can the rate charged on the loan increase in cases where the clients have defaulted? • Position of other creditors-while refinancing the home may yield a reduction in total monthly payments, refinancing to pay unsecured debt such as credit cards effectively securitizes these debts. There are many other aspects to personal debt; we will be happy to work with you on your debt issues; give us a call at 505-828-0900. This notice is required by IRS Circular 230, which regulates written communications about federal tax matters between tax advisors and their clients. The the extent the preceeding correspondence and /or any attachment is written tax advice communication, it is not a full "covered opinion?. Accordingly, this advise is not intended and cannot be used for the purposes of avoiding penalties that may be imposed by the IRS. |
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