Senate considers tax on homeownership

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Jul 292015

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By G. Steven Bray

This really gets my knickers in a knot. The Senate is again considering using fees on Fannie Mae and Freddie Mac mortgages, which represent the majority of market, to fund its spending plans. The Guarantee Fee or “g-fee” is charged by Fannie and Freddie to compensate it for the risk associated with guaranteeing a mortgage. In 2011, Congress raised the fee by 10 basis points to pay for a payroll tax break. This time, the Senate wants to extend the fee hike for 4 more years to help pay for transportation funding.

This is an easy move by the Senate because homebuyers generally are unaware of this special tax. There isn’t a “g-fee” line on the closing statement. Instead, the fee is reflected in the interest rate. What the homebuyer sees is a slightly higher rate or slightly higher closing costs. Either way, it acts as a tax for as long as the homebuyer owns the home.

So far, the House is pushing for a temporary extension of existing transportation funding and hasn’t agreed to the Senate’s fee increase. However, given the invisibility of the tax, it wouldn’t surprise me to see the House go along.

Rate update: Contradictory data leaves rates drifting

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Jul 282015

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By G. Steven Bray

Even though mortgage rates drifted slowly lower last week, I would call the risks of higher and lower rates fairly balanced at this time.

European economies are showing nascent signs of recovery, but China is slowing. The US economy isn’t booming, but it isn’t collapsing. On a more granular scale existing home sales hit their highest level in years while new home sales took a dive. Employment growth continues unabated while wage growth continues to be stagnant.

This contradictory data combined with the typical summer doldrums is leaving markets looking for direction. I doubt they’ll find it in this week’s Fed meeting. While the Fed is widely expected to announce a rate hike in Sep, it’s unlikely it will change its posture this week.

The most meaningful data this week may be Friday’s release of 2nd quarter GDP numbers. While this is backward looking data, markets may view a strong reading as giving the Fed a green light to raise rates in Sep.

But just because the Fed raises rates doesn’t mean mortgage rates are going to rise. The Fed directly influences very short-term rates. Longer-term rates, such as mortgage rates, are more heavily influenced by expectations of economic growth and inflation, and on that we have our contradictory data.

Rate update: Onset of the summer doldrums

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Jul 212015

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By G. Steven Bray

For rate markets, it’s been a summer of headlines and volatility so far, especially Greece and China, so the onset of the summer doldrums feels somewhat odd. The summer doldrums kick in as investors take vacation, and market movement seems to slow down. Fortunately, prior to that onset, market sentiment seemed to have balanced. While investors are still concerned about the effects of a pending Fed rate hike, other factors are pulling rates back, including some weak economic data last week.

This week’s economic calendar provides some housing data but little else. Absent some truly unexpected results, it’s likely rates will hang in a narrow range looking for the next source of momentum. During the doldrums, that could take weeks. I’d say the most likely candidates at this point are US jobs data in two weeks or further weakening reported out of China. The former could move rates either way. The latter could start another rate rally.

Settlement with banks may raise credit scores

 Credit Scoring  Comments Off on Settlement with banks may raise credit scores
Jul 152015

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By G. Steven Bray

Last week we discussed recent agreements between regulators and the credit bureaus designed to reduce errors on credit reports. A separate agreement in Federal Bankruptcy Court may provide further relief.

Bank of America and Chase have agreed to update borrowers’ credit reports to remove so-called “zombie debts.” These are debts that had been extinguished in bankruptcy but that the banks still are reporting as active debts on consumers’ credit reports. The banks were accused of leaving the debts because they were profiting from the practice. They have agreed to update consumers’ reports within 3 months.

Citigroup and Synchrony Financial (formerly GE Capital) also had been charged in the lawsuit. Citigroup said it has made a proposal to plaintiff’s lawyers that’s consistent with the other banks’ agreement. Synchrony agreed to implement similar terms last year, but only on a temporary basis.

Jul 142015

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By G. Steven Bray

If you only paid attention to the headlines today, you’d think Greece won a new bailout deal. It’s not that simple. The Greek parliament has to approve several austerity measures, including pension reforms and sales tax increases, by Wed to move the deal forward. The problem is these measures are harsher than the ones the Greek people rejected in the referendum a week ago. I’m not sure we’ve put this one in the rearview yet. If Greece balks at the measures, we’re looking at a default. If it doesn’t, Europe has kicked the Greek can down the road a little further.

Our other major source of uncertainty last week was the plunging Chinese stock market. The Chinese government implemented extraordinary measures, including a huge backstop of equity buying by the government. The measures seem to have plugged the hole in the dike. Whether the plug is temporary remains to be seen.

As we’ve discussed before, economic uncertainty is a friend to low interest rates. As uncertainty waned last week, interest rates drifted higher again. Absent economic concerns, the momentum in the market seems to be for higher rates. And I don’t see that changing soon without additional unexpected headlines.

Defanging medical collections

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Jul 132015

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By G. Steven Bray

One of the most frustrating consumer credit issues is medical collections. I estimate that half of credit reports I review have at least one medical collection on them. As often as not, the consumer is surprised to hear of the collection, assuming insurance had covered the charge.

Recent settlement agreements between the credit reporting bureaus and 32 state attorneys general may provide some relief. The agreement mandates that the bureaus wait 180 days before reporting a delinquent medical debt on your credit report. This should give you time to work out any issues with your insurance provider. In addition, the bureaus have been instructed to remove a medical debt from your report after insurance pays it.

Another part of the agreements requires the bureaus to have a human review documentation you submit to support a dispute rather than relying on automated systems.

These parts of the agreements may produce measureable relief for consumers, but I’m not so sure about other parts that add reporting requirements. More data may help regulators, but consumers need changes to dispute resolution systems to make the outcomes more accurate and timely. The bureaus have found that credit monitoring services are very profitable, so they benefit from consumer fear of inaccurate credit reporting.

Taming the credit bureaus

 Credit Scoring  Comments Off on Taming the credit bureaus
Jul 092015

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By G. Steven Bray

An FTC study in 2012 found that one in four consumers probably has mistakes on their credit reports. Based on my experience, I suspect the ratio is higher. Errors can range from duplicated accounts to closed accounts still reporting a payment to incorrectly reported collections.

In order to comply with federal law, the credit bureaus provide a process by which consumers can dispute errors, and consumers used that process 8 million times in 2011. The problem is the process has been described as a “merry-go-round of frustration.” Instead of investigating disputes, the bureaus typically rely on automated systems that result in creditors simply verifying that the report matches what’s in their system, which it should because the creditor provided the erroneous information in the first place. Any information or documentation provided with the dispute tends to be ignored.

With any luck, that may be changing. Regulators recently required bureaus to update their dispute systems to allow consumers to file them online with supporting documentation. They also have required the bureaus to submit reports to identify which creditors have the greatest number of disputes. While the latter doesn’t make the dispute process any easier, it may give regulators insights into how and why inaccurate information persists on consumer credit reports.

Recent settlement agreements with 32 state attorneys general may have the greatest effect, and we’ll discuss that next time.

Rate update: Are we seeing a market shift?

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Jul 072015

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By G. Steven Bray

The Greeks just said NO to fiscal responsibility, and investors rushed to the safety of bonds, pushing interest rates down a tad. No surprise here. This part of the script was pretty certain, but the rest of the plotline is less clear.

The talking heads are convinced Greece will leave the Eurozone, but it’s really not in the rest of Europe’s interest for Greece to go. To that end, it’s still possible they craft a solution that allows Greece to save face and just as importantly, allows the Eurozone to claim that it held the Greek feet to the fire. I really think the Eurozone is less worried about Greece leaving than it is about potential contagion. Greece is a very small economy. Italy and Spain also are struggling with reform measures, and their economies are much larger. Leftist factions in both counties are watching the Greek situation carefully. If Greece wins debt relief, you can bet these factions will demand the same.

Because of that and because markets have had ample time to anticipate this situation, I still think the effect on rates will be temporary. However, we had two other headlines this past week that may help shift market sentiment in favor of lower rates.

First, the jobs report last Thurs was surprisingly weak. The headlines, the unemployment rate dropping to 5.3% and 200k+ jobs created, sounded great, but the internals of the report were more troubling. The rate only dropped because 423k folks left the workforce, leaving workforce participation at an almost 40-year low. In addition, wage growth stagnated again, and last month’s surprising increase was revised lower. This left pundits questioning the strength of the recovery again.

Second, the Chinese stock market has been crashing. It’s bad enough that the Chinese government has initiated an equity buying program to stem the fall. If China takes a nosedive, you can bet the rest of the world economies will feel some pain.