How mortgage credit scores are unfair

 Credit Scoring  Comments Off on How mortgage credit scores are unfair
Nov 302017

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By G. Steven Bray

Your mortgage credit score is based on a credit model developed almost 20 years ago, and Federal Housing Finance Agency (FHFA) Director Watt says that’s not going to change anytime soon.

Many in the credit industry acknowledge that the FICO 4 model, the use of which is required by Fannie Mae and Freddie Mac, is deficient. It doesn’t differentiate between paid and unpaid collections. Nor is it able to distinguish medical collections, which seem to have little predictive value of credit risk. It also poorly models student loan debt, which has ballooned in the last 10 years, and only incorporates negative information for rent and utility payments.

Congress is trying to force a change through The Credit Score Competition Act, which would encourage Fannie and Freddie to consider other credit scoring models, including the newer FICO 9 and VantageScore models.

Watt contends that Fannie and Freddie already consider the same or greater levels of credit data in their computer models that determine whether a borrower qualifies. He also notes the change would be quite expensive. He prefers to wait until after Fannie and Freddie merge their investment security platforms, slated for 2019.

However, Watt fails to mention that Fannie and Freddie impose a minimum credit score, which prevents folks from qualifying regardless of how Fannie and Freddie tune their computer models. Fannie and Freddie also use credit score for determining interest rates and mortgage insurance coverage.

Tax plan shouldn’t stop you from buying a home

 Owner-occupied, Residential Mortgage  Comments Off on Tax plan shouldn’t stop you from buying a home
Nov 272017

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By G. Steven Bray

The tax reform plans currently being considered in Washington could change the mortgage interest deduction, and housing industry leaders are asserting that the change is going to decimate homebuying. Let’s see if the facts support their outrage.

Currently, only 21% of taxpayers use the mortgage interest deduction, and most reside in coastal states where home prices and/or property taxes are high.

If the House tax reform plan were to become law, the loan amount eligible for the mortgage interest deduction would drop from $1 million to $500k, and it would reduce the maximum deduction for property taxes to $10k.

Let’s consider the case of couple with a $300k mortgage. In the first year, they would pay roughly $13k in mortgage interest. If we assume their yearly property tax bill is $7k, they probably would be much better off under the House tax plan. Instead of a $20k deduction, they would get a $24k standard deduction. And remember that mortgage interest declines over the life of the loan, so the advantage of the new plan would increase each year.

Given that the median home price in TX is $269k, most TX homebuyers clearly would be better off under the new plan. Those who would be worse off will be folks who have mortgages greater than $500k and folks in areas with very high property taxes. Thus, any effects to the TX housing industry would be limited to high-end communities.

Rate update: Watch out for tax reform

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Watch out for tax reform
Nov 222017

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By G. Steven Bray

It’s Thanksgiving week, and bond markets are pretty quiet. Rates are bouncing around in a very narrow range as they’re apt to do when everyone is full of turkey. However, that quiet may belie building pressure to move interest rates.

The biggest motivator of movement is the tax reform plan. As it sits now, markets seem cautiously optimistic that something will come of Congressional action. That optimism seems to have placed a floor under rates, but the caution is keeping them from moving much higher.

In simple terms, a large part of the tax plan is tax cuts. Tax cuts typically boost economic growth. Economic growth creates competition for goods (such as employees and raw materials), leading to higher prices for those goods. Higher prices, aka inflation, are the enemy of low interest rates.

At least that’s the way it seemed to work in the past. The world seems awash now in many raw materials, so higher growth might have a minimal impact on their prices. And the Philips Curve, which basically says low US unemployment should lead to higher wages, seems to have less relevance due in part to globalization.

That said, if the Senate next week seems to be coalescing around a tax plan, any tax plan, I expect rates will edge up a bit.

I wish you and your family a blessed Thanksgiving.

Qualifying with rental income from Airbnb

 Loan Guidelines, Residential Mortgage  Comments Off on Qualifying with rental income from Airbnb
Nov 202017

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By G. Steven Bray

With the growing popularity of Airbnb and other short term rental options, Freddie Mac has updated its conventional loan guidelines to allow you to use that rental income to qualify for a mortgage. However, the conditions for inclusion are rather tight.

To use short-term rental income for qualifying, you must have a two-year history of receiving it as documented on Schedule E of your tax return. Freddie contends that short-term rental income tends to fluctuate, so a historical view is needed. You can expect Freddie to take the lower amount or an average of the two years as qualifying income. Also note that short-term rental income for your primary residence, like renting out your home during SWSX, will not count as qualifying income even if you do it every year.

Freddie announced one other significant change to its guidelines for rental income. If you don’t have at least one year of investment property experience, Freddie will limit the amount of rental income that can count as qualifying income to 30% of the net rental income from your investment property. Freddie says the limit addresses the risk that rental income is a new type of income for the borrower.

Freddie says the changes are effective Feb 9th of next year, but some lenders may implement them earlier.

Congress looks to private market to cover flood risk

 Residential Mortgage  Comments Off on Congress looks to private market to cover flood risk
Nov 162017

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By G. Steven Bray

Back in Aug, I reported that on Congress’ to-do list was reauthorization of the National Flood Insurance Program, or NFIP. The program will expire on 12/8 unless Congress does something.

Tues, the House passed what it calls the 21st Century Flood Reform Act. The biggest reforms in the bill are provisions to encourage the private flood insurance market, transferring some of the risk away from the government.

Supporters of the reforms say that it will allow for lower cost policies that could appeal even to folks who aren’t required to have flood insurance. 80% of the flooded homes in Houston didn’t have flood insurance mainly because it wasn’t required. They weren’t located in a recognized flood zone. A lower-cost flood policy that could be bundled with homeowner’s and auto policies could be an attractive option.

Opponents of the bill say it will allow the private market to cherry pick the least risky properties from NFIP, making it financially unsound.

The bill also contains a $1 billion mitigation fund. A Pew Charitable Trust study showed that just 1% of homes covered under NFIP have produced almost a third of the claims due to repeat flooding. The funds will help folks modify their homes to reduce flood risk or to help them relocate.

The bill now goes to the Senate where its fate is uncertain. What is certain is that Congress must act in the next month to avoid disrupting the real estate markets in flood-prone communities.

Rate update: rates caught in an updraft

 Interest Rates, Residential Mortgage  Comments Off on Rate update: rates caught in an updraft
Nov 152017

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By G. Steven Bray

Did you catch the dip in mortgage rates last week? It was sweet while it lasted. Rates bumped back up at the end of the week.

If you didn’t catch it, let’s see what the crystal ball holds for rates going forward. Markets seem focused on two issues:

– The first is inflation. Despite the unprecedented efforts of the Federal Reserve, inflation has been virtually non-existent throughout this recovery. The Fed has a target rate of 2%, and the Fed’s favored measure, the PCE, hasn’t been that high in a long time.

This morning, we got the Oct Consumer Price Index. While this isn’t the one the Fed watches, it has historical significance, and markets pay attention. Several other inflation metrics recently have indicated budding pricing pressure, but the CPI remained pretty tame with core inflation still under 2%. So, while markets wait for the next inflation report, they’ll probably turn their full attention to the second issue.

– And that is tax reform. Given the current positive momentum, rates are feeling an updraft. Granted the House and Senate plans differ, but I don’t think markets are particularly concerned about which plan wins. They only care about the boost that lower tax rates will give the economy. And an economic boost should pressure interest rates higher.

Of course, one scary headline could quickly deflate this momentum. But absent that, I suggest you remain defensive for higher rates.

The death of down payment assistance?

 Loan Guidelines, Residential Mortgage  Comments Off on The death of down payment assistance?
Nov 032017

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By G. Steven Bray

Recent surveys indicate that saving for a down payment is one the biggest hurdles to homeownership. With rising home prices, that hurdle may seem like a moving target. Some homebuyers are turning to down payment assistance programs for help.

Well, Freddie Mac just threw cold water on one popular method of funding these programs. It’s called differential rate pricing or premium pricing. The lender provides assistance equal to 3 to 5% of the loan amount in exchange for a substantially higher interest rate. As Freddie correctly discerned, the result is a no down payment, higher-rate mortgage, which violates current conventional loan guidelines. As of 11/1, Freddie will disallow its use with low down payment loan programs.

I have not heard if Fannie Mae is planning a similar prohibition, but given that both agencies are owned by the government, one has to wonder. FHA officials have been squabbling among themselves for over a year about the legality of premium priced programs. For now, they are permitted.

If you’re struggling to find the funds for a down payment, I suggest you check out my Can I Qualify with limited savings videos for ideas. You also may want to check with your city or county for down payment assistance that doesn’t use premium pricing. Keep in mind that most of these programs have income and purchase price limits, and you may have to repay some or all of the assistance if you don’t stay in the home for 5 to 10 years.