Credit getting tighter as Banks become more responsible for bad loans

Lenders are insisting on higher credit scores and more documents than required by the Federal Housing Administration and government-backed Fannie Mae and Freddie Mac. Quicken Loans Inc. and Vision Mortgage Capital are among firms saying they are increasing scrutiny of would-be borrowers in response to pressure to cover losses incurred on U.S.-backed housing debt.

And main reason is that Fannie Mae is making banks cover the cost of bad loans.

You’ve got to take measures now to protect yourself,” John B. Johnson, chief executive officer of Birmingham, Alabama- based MortgageAmerica Inc., said during a panel discussion this month. Demands that lenders repurchase bad mortgages from Fannie Mae and Freddie Mac are “casting a pall over the market. I fear that it will face a much longer recovery because of this.

Lenders’ contracts with Fannie Mae and Freddie Mac allow them to force buybacks of mortgages if the loan originators fail to properly vet debt, such as by accepting inflated borrower incomes or appraisals. Flawed paperwork can lead to pressure from Fannie Mae and Freddie Mac even on performing mortgages.

This is having ripples all over industry, but it's what was required to get a loan in 1998.

Pressure from the GSEs has “definitely stanched the flow of credit to the mortgage market, but we had clearly gone too far,” said Richard Eckert, an analyst in San Francisco at securities firm B. Riley & Co. who wrote research on subprime lenders during the housing boom and then joined a hedge fund betting against property loans during the collapse. “We’ve got to return to some kind of happy balance.”

Bank of America Corp. (BAC) has scaled back mortgage lending as CEO Brian T. Moynihan prepares for new capital requirements and grapples with demands that it compensate investors including Fannie Mae and Freddie for losses.

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BofA May Face Fraud Claims for Soured Loans

Bank of America Corp. (BAC) should face fraud proceedings after its Countrywide unit submitted faulty data to back up claims for reimbursement on federally insured mortgages, according to an audit by a U.S. watchdog.

Half of 14 loans reviewed had “material underwriting deficiencies” concerning borrowers that resulted in more than $720,000 in losses, according to a Sept. 30 report from the Department of Housing and Urban Development’s inspector general. Kelly Anderson, a HUD regional inspector general, recommended the agency pursue legal remedies against Charlotte, North Carolina-based Bank of America, the biggest U.S. lender.

“Countrywide did not properly verify, analyze, or support borrowers’ employment and income, source of funds to close, liabilities and credit information,” Kelly wrote in the audit. “This noncompliance occurred because Countrywide’s underwriters did not exercise due diligence in underwriting the loans.”

And...

In one instance, Countrywide said a borrower earned $6,192 a month when pay stubs reflected income of $4,377. In other cases, Countrywide failed to properly review bad loans to ensure they met HUD’s guidelines before submitting claims, the department said.

In a 35-page response to HUD dated July 19, Bank of America Senior Vice President Linda Jacopetti acknowledged that “oversights may have occurred in some instances” and said the unit didn’t intentionally disregard FHA guidelines. There were “isolated occurrences in a handful of cases among thousands of FHA loans originated” in that time, she said.

Lemar Wooley at HUD and Michael Zerega of the inspector general office declined to comment on the report.

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What’s worse for credit score — foreclosure, short sale or deed in lieu?

Well here is the quick answer.

I get this question quite often these days. Homeowners have been led to believe that because foreclosure is so devastating to their credit scores, almost anything else is better.

This is not true — turns out there’s no significant difference in FICO score impact among foreclosures, short sales or deeds in lieu of foreclosure, said Bradley Graham, senior director of scores product management at FICO, which is the trademark credit scoring model created by Fair Isaac Corp. It’s the most widely used scoring system in the country.

And

If you apply for a loan in the future, certain lenders may look more favorably at a short sale than at a foreclosure, but the credit scoring system sees all these defaults as equally bad. Graham said that based on the analysis of the information that lenders share with credit bureaus about those forms of mortgage default, they have about the same weight when determining future risk.

There are two caveats in what lenders report to the credit bureaus, Graham said. The negative impact of a foreclosure, short sale or deed in lieu of foreclosure can be slightly less if the lender does not report a deficiency balance. A deficiency balance is the amount one may owe the bank after a property is sold.

Here's an example in numbers.

Here’s something interesting: The FICO analysis found that the higher your original score, the greater the drop and the longer it will take for your credit to recover to the same level assuming all else held constant. A consumer who started with a 780 score and did a short sale with no deficiency balance could see his score drop to a range of 655 to 675. The FICO scale goes from a low of 300 to a high of 850. A consumer who started with a score of 680 could see a drop to a range of 610 to 630.

For the consumer with the original 780 score, it could take seven years to get back to that level. But at 680, it could take just three years.

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Meet 3 Ratings Agencies That Have Already Downgraded the U.S.

I posted this information this information because a downgrade in the US credit rating usually means higher interest and mortgage rates.  These are not the big three rating agencies that really affect rates.

While the three most well-known ratings agencies, Standard & Poor's, Moody's Investors Service, and Fitch, continue to only warn about a potential downgrade, some of their smaller counterparts have already followed through. Granted, you probably haven't heard about these downgrades because the markets generally only pay attention to the big three ratings agencies. In any event, here's a look at what these smaller players had to say:

Clink here to learn about the credit rating agencies.

Homeownership no longer an aspirational goal: PIMCO

This new trend in demographics will impact years to come.

The idea of homeownership as an aspirational goal may no longer carry much weight as college graduates enter the work force saddled with high student loan debt and older Americans focus on retirement.

Rod Dubitsky, an analyst with PIMCO, said the overall question that looms large over the mortgage industry is: Who is going to buy housing in the next 10 years?

 The a key reason besides jobs...student debt.

And student debts are expected to go even higher, as salaries are dropping, according to Dubitsky. The average median salary for recent graduates fell to $27,000 in 2010, compared to $30,000 in 2007.

Dubitsky said the ability of these borrowers to make their way into the housing market is contingent on whether they have the opportunity to save money. But the statistics on this point remain grim with the average student debt now equal to a 15% down payment on a median-priced home

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Mortgage Tax Deduction in the crosshairs

Don't expect full repeal of the mortgage interest deduction.  But you will have a 1) Phase out over time 2) a repeal on the interest deduction if the mortgage is greater than XXX.

WASHINGTON - Congress should look carefully at the mortgage interest deduction as part of an overhaul of the federal tax code, House Ways and Means Committee Chairman Dave Camp said Wednesday.

Curtailing or eliminating the deduction, which costs the government $93.8 billion in forgone revenue this fiscal year, would help Camp achieve his goal of lowering tax rates. Changes to the deduction would also affect millions of homeowners and the real estate and construction industries.

"It is a very big part of the tax code," Camp, R-Mich., told reporters. "And it's certainly a big part of people's investment decisions, and I think needs to be treated as importantly and carefully as a major provision of long-standing duration in the code should be treated."

He spoke after the first joint tax policy hearing of the Ways and Means Committee and the Senate Finance Committee since 1940. The committees discussed the tax code's treatment of corporate and household debt as they prepare for a broad rewrite of the tax system.

Critics of the mortgage interest deduction say it encourages homeowners to take on excess debt. Camp said he doesn't know how or whether he plans to propose changing the treatment of debt and equity financing.

Link here

Americans Shun Cheapest Homes in 40 Years as Owning Loses Appeal: Bloombreg

Due to the bubble and now decreasing home prices a strange dynamic is happening.  You have 30% of home sale now cash, which way above historical lows.  And you know you have people that could purchase a house renting, which decrease your pool of buyers.  

The most affordable real estate in a generation is failing to lure buyers as Americans like Pauli sour on the idea of home ownership. At the end of 2010, the fourth year of the housing collapse, the share of people who said a home was a safe investment dropped to 64 percent from 70 percent in the first quarter. The December figure was the lowest in a survey that goes back to 2003, when it was 83 percent.

“The magnitude of the housing crash caused permanent changes in the way some people view home ownership,” said Michael Lea, a finance professor at San Diego State University. “Even as the economy improves, there are some who will never buy a home because their confidence in real estate is gone.”

This is very detailed article and I would read the whole article.  However, this article says real estate is the best the buy in four decades, I have major issues with that statement.  I think it was much cheaper in the early 1990's, currently there is too much mortgage interest rate risk if rates go back above 7%

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S&P cuts U.S. rating outlook to negative

If the credit rating agencies downgrade the Federal US credit rating, then this has huge impacts in the mortgage industry.   As borrowing becomes more expensive in the US, then this will make borrowing money for mortgages more expensive.

The rating agency effectively gave Washington a two-year deadline to enact meaningful change, just days after House Budget Committee Chairman Paul Ryan and President Barack Obama each outlined their plans for slashing debt. S&P nonetheless kept its best rating, AAA, on the U.S.

Relative to Triple-A-rated peers, the U.S. has very large budget deficits and rising government indebtedness, and the path to addressing those issues is unclear, S&P analysts said.

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Where are mortgage rates going from here?

Two very opinionated people: Gary A. Schilling and Peter Schiff:

Click here to watch the video

Cash becoming more popular to purchase Homes

Cash was the top source of financing home purchases in September, as more homeowners look to deleverage their debt. According to a recent Campbell/Inside Mortgage Finance survey, 30.5% of home purchases during the month were financed with cash, up from 24.4% in January.

The survey attributed this jump to the amount of distressed properties on the market being purchased and a decrease in the number of first-time homebuyers. Distressed properties are more likely to be bought with cash because they are at a lower valuation and don't require as much financing, and first-time homebuyers do not typically have enough cash on hand to buy homes without financing.

As of September, real estate-owned and short sale transactions accounted for 47.5% of market purchases, according to the Federal Reserve Bank of Cleveland. First-time homebuyers accounted for 34.4% of purchases, down from 42.4% in June

This also a sign that credit market is showing some tightening.  

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National Assn. of Realtors wants FICO credit scoring model revised

This is an scenario on you how your credit score can change, even if you did nothing.  This assumes your credit score starts in the 750's.

Suddenly you get a notice from the bank that because of "market conditions," your equity line limit has been cut from $60,000 to $35,000, slightly above the $30,000 balance you've got outstanding. Then one of your credit card issuers hits you with more bad news: Your $20,000 limit has been reduced to $10,000. Your balance on the card, meanwhile, is about $9,000.

What happens to your credit scores in the wake of the bank cuts? You might assume that nothing happens; you haven't been late, you haven't missed a monthly payment. You're a good customer.

Wrong. Depending upon your overall financial situation, your credit scores could plunge into the upper 600s. This in turn could put you out of reach for a refinancing at a favorable interest rate or hamper your ability to buy a new home and sell your current one.

And the solution.

In a major policy move, the realty association is calling upon Fair Isaac to "amend its formulas to avoid harming consumers whose utilization rates increase because their available lines of credit" are reduced despite on-time payment histories. The group wants FICO to either ignore the utilization rate altogether for such.

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Home Ownership Gets Tougher as Lenders Restrict FHA Mortgages

This is what I've been hearing from people who are refinancing or trying to purchase a house.  Credit has become very tight and that's puts a lot of pressure on home prices.

Mortgage lenders including Wells Fargo & Co. and Bank of America Corp., the two largest, have raised the minimum credit score on FHA-insured loans that they will buy to 640 from 620. About 6.3 million people fall within that range, according to FICO, which created the formula for the ratings.

The higher hurdles for FHA loans, used in about a fifth of U.S. home purchases, add to challenges for a housing market already struggling with record-low sales and surging foreclosures. While lax lending fueled the bust that led the U.S. into recession, the new requirements will stifle the real estate recovery needed to revive the economy, said Ron Phipps, president of the National Association of Realtors.

And why are lenders doing these changes.

Reducing Risk

FHA lending to the riskiest borrowers has declined in the past two years. Only 3.8 percent of FHA loans had scores below 620 or no score in the quarter ended Sept. 30, down from a peak of 50.4 percent in the period through Dec. 31, 2008, according to a Nov. 4 agency report to Congress. A score below 620 was typically considered subprime before the credit crisis, meaning the borrower had a bad or limited credit history.

The U.S. home-ownership rate remained at a 10-year low of 66.9 percent in the quarter ended Sept. 30, in part because of rising foreclosures, the U.S. Census Bureau reported Nov. 2. The rate reached a record high of 69.2 percent in the second and fourth quarters of 2004.

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