Get ready for even tougher documentation on loans ?

In 2009, Freddie and Fannie spent a lot of time idenfying bad loans. They are digging in and forcing banks to buy back bad loans that had some type of incorrect or incomplete documentation. As defaults on sub-prime loans have begun to improve, defaults on conventional loans has risen. Since most conventional loans are resold to Freddie and Fannie, they are seeing the biggest problem. As these loans get pushed back to banks, there will be repercussions into the documentation from borrowers. Fortunately, the bad loans tend to be from 2007 and 2008, before most documentation standards were raised. So, there probably will be additional increases in documentation required, but we may have seen most of the requirements already.

Fed to stay the course in mortgage buyback plans

Yesterday the Federal Reserve Board, reiterated its plans to discontinue its program to purchase huge quantities of mortgage backed securities. For the past several months the Fed has kept mortgage rates artifically low by buying large quanities of these instruments. At the end of March, they will discontinue the program. This will allow mortgage rates to be set by normal market processes.

What does this mean? Well, that is the big question. It may not mean a whole lot given that they have already begun to ramp down the purchases, very slowly over the past several weeks. But when the purchases stop, we will see the real impact that they have had. It is a given that rates will go up, but with overall interest rates so low, mortgage rates may not climb much until the economy picks up - and that may be several months away. Time will tell..........

Where is the FHA headed?

The FHA has a dilema on it's hands. Recently the FHA has been a huge player in insuring loans - as many as 20% of loans in the last few months. This is much different than in the early 2000's when they only insured 2%. Then, most borrowers bypassed the FHA and pursued sub-prime loans. Now that these have dried up, people are returning to the FHA loans for the financing they need. The problem is that default rates are climbing for FHA loans.

Now, the dilema, is that the FHA needs to tighten the qualifying rules to control defaults, at the same time they need to encourage lending to help the still unstable housing market. We'll have to wait to see how this unfolds.

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What is a FICO score ??
FICO stands for Fair Isaac Corporation. They invented credit scoring. Your FICO score is a way for lenders to evaluate your potential to repay a debt. The FICO score is a number from 300 to 850. Anything below 620 is considered a bad credit risk. Between 620 and 720 is considered a marginal credit risk and anything over 720 is considered an acceptable credit risk.

There are 5 main areas to the scoring. I'll give an overview today and then more details in future postings.

1) the first area is your past history of payments on debts. If you are on time with all debt payments, you get a high score.

2) The second area has to do with credit balances on credit cards. (not total $, but the percentage of your allowable limit). The more you use/carry, the lower your score.

3) the length of time you've had credit. The longer you have had a single line of credit the higher the score.

4) the number of times someone inquires into your credit score, the lower the score. Generally this occurs at your request, when applying for a new credit card or some other line of credit. Lots of new credit requests, means a lower score.

5) Different types of credit impact your score differently. More on this later.

Stay tuned as we delve more into this in future postings.

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more details on new Good Faith Estimates

Just a little more clarification on the new Good Faith Estimates - mentioned in my previous posting.... There are 3 areas that are impacted: 1) the fees collected by the lender/broker as "origination fees" cannot change once provided in the GFE, 2) fees collected for recording, title, etc. cannot change by more than 10%, 3) fees on services selected by the borrower, have no limits on the changes since they are selected by the borrower.