Marc's Mortgage Matter's

With interest rates near rock bottom and home prices down, this ought to be a great time to buy a home. But for most people, it's a lousy time to get a mortgage. Years after the collapse of the real-estate market and resulting financial crisis, it takes nearly pristine credit scores and hefty down payments to get the best rates.

Andy Rash

"Since 2009, credit has become a lot tighter," says Greg Reiter, who follows mortgage-backed bonds at RBS Global Banking & Markets.

For borrowers, this highlights the need to pay close attention to credit scores. New rules unveiled last week should make it easier for consumers to see how their credit scores affect the interest rates they pay. These rules, the result of last year's Dodd-Frank financial-services legislation, require banks and other lenders to disclose to consumers the scores used to determine interest rates charged borrowers, or to deny credit.

The new reality for borrowers can be seen in the FICO credit scores on the loans that banks are giving out and that are backed by government agencies Fannie Mae and Freddie Mac. These days the two agencies essentially finance 75% of all mortgages by purchasing the loans from the banks. In the process, they shape how much it costs to borrow.

FICO scores range from 300 to 850. Pre-crisis, a score of 700 to 725 was deemed solid and a borrower could expect to get a "conventional" mortgage at the lowest rates.

From 2003 through 2006, 82% of Fannie Mae mortgages were for borrowers with a score between 700 and 750, according to data compiled by RBS.

But so far in 2011, only 13% of Fannie Mae mortgages carry that score, and just 1.7% have a score of 700 to 725, according to RBS. This year, 75% of Fannie Mae mortgages are for FICO scores of 750 to 775, up from less than 5% before 2005.

Meanwhile, the median score is 711, according to FICO. "Half the population is locked out" from the best mortgages, says Mr. Reiter. The upshot is that borrowing costs more even with a 730 score and a 20% down payment. Three years ago, if you had 730 it was excellent, today, it could cost an extra 0.125 percentage point per year on a mortgage, just because you have one little nick on your credit report.

For more typical scores, the premiums are even bigger. At 700 to 725, it's usually an extra quarter percentage point, and at 630 -- if a borrower can find a loan -- the additional cost is 1.5 percentage points. If you have a credit score of less than 680, you've got to be worried about approvability.

The news is also grim for those looking to refinance. Based on the level of interest rates, RBS estimates 60% of agency-backed mortgages should be eligible to refinance. But once home values and credit scores are factored in, just 12% are eligible.

These trends show the importance of understanding credit scores. Borrowers sometimes unintentionally make matters worse. For example, closing an unused credit card can actually lower a score in the short term. Check your credit scores at AnnualCreditReport.com. And to learn more about scores, visit the education section of myFICO.com.

The popular press continues to point out that while a record share of Americans want to buy homes, both U.S. government and corporate policies (often working at cross-purposes) are making it more difficult. Of course, it is Wells or Chase or the servicer who bear the brunt of the liability if the loan "goes south," not the newspaper, yet reporters are quick to point out that "Government-controlled Fannie Mae and Freddie Mac have boosted standards so high that some people previously considered prime borrowers no longer qualify. That's limiting a real estate rebound that also has been damped by a state attorneys general probe into foreclosure practices and an Obama administration loan-modification program that has fallen short of expectations." Few want to return to SISA(Stated Income/No Doc) loans being mainstream, but most agree guidelines need to swing back somewhat.

If the results of Fannie Mae's monthly national consumer survey accurately portray their attitudes, Americans appear to have increasingly realistic expectations of the housing market.   Data from the June survey indicate that Americans are resigned to lower house prices and higher rents and have come to expect rock-bottom interest rates. (Fannie's National Housing Survey polls 1,000 home owners and renters each month to assess their attitudes toward owning and renting a home, mortgage rates, homeownership distress, household finances, and overall consumer confidence then compares the results to answers to the same survey conducted monthly since June 2010.)

As expected, mortgage interest rates eased back a little this week. At least some economic optimism was crushed by June's weak employment report, driving home the point that the weak expansion may persist for a while longer yet.

While minutes from the last Federal Reserve Open Market Committee spelled out a blueprint for the Fed to begin removing the extraordinary support provided since the onset of the recession, comments by Fed Chairman Ben Bernanke seemed to suggest that the Fed was considering another round of quantitative easing. However, Mr. Bernanke clarified his remarks on Thursday and essentially that the Fed has no imminent plans for more support, but instead wants to observe the economy to see if stronger growth begins to form. For now, at least, that's a future consideration, and the economic climate is soft, at best. This in turn is good for potential homebuyers and refinancers.

Mr. Bernanke stirred the markets first by saying that "the possibility remains that the economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support." How the markets came to interpret this as any kind of immediate plan for stimulus is beyond us; the remarks are similar to those made any number of times and suggest that the Fed will do what it needs to do if conditions warrant. No Fed Chairman worth his weight would expressly tip his hand as to the intention of the Fed, no would he be likely to say that the Fed is prepared to stand idly by while the economy collapses.

Here's hoping the Fed is correct. There was a considerable loss of economic momentum during the Spring, given the catastrophe in Japan and all kinds of domestic weather-related business interruptions. The end of the Fed's $600 billion bond-buying program may serve to intensify the slowness somewhat, and the debt-ceiling impasse is adding to nervousness. Add to that the fiscal troubles in Greece, monetary policy tightening in China and Irish debt downgraded to junk and it is clear that there is a fair mountain to climb over the next six-month period.

As long as there are domestic and international troubles so fully in play, a sustained or sustainable rise in interest rates seems unlikely. Investor money is sloshing from hope (equities) to despair (bonds), with the see-saw tipping one way or the other, and generally to a greater degree than is warranted. Now seven quarters old (probably eight quarters, actually), the recovery clearly lacks much upward strength, but it does have at least some meager built-in momentum. Will the expected upturn come as the year progresses? Conditions seem to suggest that it is possible, provided energy prices remain level or retreat, and hiring picks up from the near standstill seen in June.

Lower gasoline and food costs could unleash some billions into the economy as we move forward, and there are trillions of dollars being held out there waiting for some clarity as to the state of governments here and around the world. We should also not forget about the effects of changing regulations which govern markets, tax structures and unknown built-in costs from new government policies. Just as consumers are reluctant to spend, given uncertain times, businesses too are reluctant to spend given the uncertainties they face, including unknown final demand.

The welcome dip in mortgage rates this week halted the minor rise which really only lasted about a week. We are still a little above June bottoms, and will remain there next week, when mortgage rates will probably nudge up a couple of basis points. 

A Minneapolis couple decided to go to Florida to thaw out during a particularly icy winter. They planned to stay at the same hotel where they spent their honeymoon 20 years earlier. Because of hectic schedules, it was difficult to coordinate their travel schedules. So, the husband left Minnesota and flew to Florida on Thursday, with his wife flying down the following day.
The husband checked into the hotel. There was a computer in his room, so he decided to send an email to his wife. However, he accidentally left out one letter in her email address, and without realizing his error, sent the email to a different address.

Meanwhile, somewhere in Houston, Texas, a widow had just returned home from her husband's funeral. He was a minister who was called home to glory following a heart attack. The widow decided to check her email expecting messages from relatives and friends. After reading the first message, she screamed and fainted.
The widow's son rushed into the room, found his mother on the floor, and saw the computer screen which read:

To: My Loving Wife
Date: July 15, 2011
I know you're surprised to hear from me. They have computers here now and you are allowed to send emails to your loved ones. I've just arrived and have been checked in. I see that everything has been prepared for your arrival tomorrow. Looking forward to seeing you then!
Hope your journey is as uneventful as mine was.

P.S. Sure is darned hot down here!