Marc's Mortgage Matter's

According to the police, a Texas woman lived in an apartment with her dead boyfriend for a week. Know why he didn't marry her? Cold feet.

To the benefit of Treasuries and mortgages, stock markets continued to crater amid less-than-stellar earnings reports, with the downturn exacerbated by new rounds of populist bank-bashing, this time via a unique taxation proposal from the Obama Administration.

The Administration unveiled a proposed tax this week to penalize large banks, particularly those who accepted (or were required to accept) TARP funds, even though it would also ensnare those large banks who eschewed the "offer of assistance" from Uncle Sam. The levy would apply even to those firms which have already paid back TARP funds with interest, and is supposed to rake in some $9 billion per year. The fact that some firms which got plenty of TARP money -- such as auto makers and insurance firms -- are exempted from the tax makes one wonder whether banks are being unfairly targeted. That being the case, and without getting into the specifics of how the fee is levied, we are simply left to wonder: Does anyone really believe that any such new costs won't ultimately be borne by businesses and consumers? Will there be no effect on lending? We'll need to see where this all goes, but can't imagine that it'll provide any economic help.

Perhaps any proposed fee might be dedicated instead of sinking into the black hole of spending which is Washington. Nine billion dollars per year would modify a lot of mortgages -- allowing for the principal balances of thousands of mortgages to be written down, for example. It'll still cost new borrowers more, but maybe this would be better way to chastise banks.

Mortgage borrowers might be forgiven for sometimes feeling like victims of a bait-and-switch scheme.

For the last year or so, news has been trumpeted about historically low interest rates on 30-year fixed-rate loans; the rates tilted near 4.5 percent late last year and are now hovering above 5 percent. But when a borrower calls a mortgage broker to secure such a rate, he or she often fails.

That’s because many borrowers have a credit score below what is considered “prime,” according to Experian, one of the major credit-reporting agencies. On a scale of 501 to 990, Experian puts the average score at 771. (FICO, which developed the most widely used scores for assessing credit risk, doesn’t publish an average figure but says the median credit score is 720, on a scale of 300 to 850.)

And under current guidelines from Freddie Mac and Fannie Mae, the government agencies that set lending standards for most mortgages sold in the United States, only those borrowers with credit scores of 740 or more, and a down payment of at least 20 percent, can avoid extra loan charges that could effectively raise the mortgage rate.

Borrowers with credit scores of 700 to 740 typically face additional charges of one-quarter to three-quarters of a percentage point of the loan amount. On a $200,000 loan, that amounts to $500 to $1,500, which can be paid up front or converted into a marginally higher interest rate.

But for borrowers with credit scores of 680 to 700, the charge is 1.5 percentage points, and for those between 660 and 680, the charge is 2.5 percentage points. On a $200,000 loan, the extra 2.5 percentage point fee can add roughly half a percentage point to the interest rate.

Fannie and Freddie started aggressively increasing prices on loans to higher-risk borrowers in 2008, said Guy Cecala, the publisher of Inside Mortgage Finance, an industry trade publication. In August 2008, for instance, borrowers with credit scores of 680 to 700 incurred a charge of one percentage point of the loan amount, when making a down payment of 20 to 25 percent.

Brad German, a spokesman for Freddie Mac, said this so-called risk-based pricing approach was necessary to protect the agency and the investors buying the mortgage securities against losses from foreclosures. Mortgage lenders, meanwhile, complain that these pricing formulas place too much emphasis on credit scores, which, the brokers argue, don’t accurately reflect a borrower’s likelihood of defaulting on a mortgage.

Michele Raab-Francis, the chief executive of the Safe Harbor Capital Group in Bellport, N.Y., says credit scores of 680 are common among people who have taken on several credit cards with high spending limits — even if the borrowers carry low revolving balances. “If you have 20 percent for a down payment and 10 years of solid employment and savings and a 401(k) but a credit score of 680,” she said, “it’s not right to penalize you based on that alone.”

Mr. Cecala of Inside Mortgage Finance said, “We’re getting to the point where the mortgage market is really for people with the best credit, not the average person.”

Still, there may be hope for borrowers. Last year Fannie Mae and Freddie Mac considerably slowed the pace at which they imposed more penalties on those with lower credit scores. Mr. Cecala noted, too, that in the final quarter of 2009, the average credit score for a Fannie or Freddie loan was 758, down from roughly 761 in the third quarter.

“It seems to suggest the pendulum swung too far, and there are some adjustments being made,” Mr. Cecala said. “They’re also addressing the fact that they won’t have a business if they leave the standards where they were.”

Two blonde girls were working for the city public works department.
One would dig a hole and the other would follow behind her and fill the hole in. They worked up one side of the street, then down the other, then moved on to the next street, working furiously all day without rest, one girl digging a hole, the other girl filling it in again.
An onlooker was amazed at their hard work, but couldn't understand what they were doing. So he asked the hole digger, “I'm impressed by the effort you two are putting in to your work, but I don't get it - why do you dig a hole, only to have your partner follow behind and fill it up again?”
The hole digger wiped her brow and sighed, "Well, I suppose it probably looks odd because we're normally a three-person team. But today the girl who plants the trees called in sick.”