MORTGAGES

WHEN YOUR MORTGAGE IS SOLD: Your old lender is supposed to send you a goodby letter no less than 15 days before your first payment is due by the new lender. Your new lender is supposed to send a hello letter within 15 days of the transfer. The notices must include the effective date of the transfer and a name, address and toll free number or collect call phone number for both institutions. For 60 days after the transfer, you cannot be charged a late fee if you sent your payment to the first lender before the due date (might want to send it certified). If the new lender does not comply, they can be sued for up to $1,000 plus damages and attorneys fees. You do not have the right to halt a transfer because you invariably signed away the right once you singed your loan documents. But the terms of the loan cannot change. If there are any changes by the new lender, question why and get an answer in WRITING. If you ever get a hello letter without a goodby letter from your old lender, it might be a scam, so call up to make sure your loan has actually been sold.

ALPHABET LENDERS: You may not have known this, but your mortgage lender has you pegged as an A, B, C or even D risk. If you have a perfect payment schedule, you are probably an A. If you have missed payments in the last 12 months- even once- you can be downgraded to a B. If you have had significant problems, but aren't a deadbeat (a layoff for example- and their have been a lot of those), you might have fallen to a C. But lenders will still make loans to these people since they recognize the lack of payments may have been beyond their control. There is flexibility in the underwriting- more so than the standard FHA loan, but look to getting a smaller loan overall and paying potentially higher fees. Make sure you shop around.

MORTGAGE INSURANCE: (SF Chronicle 12/94) The more you put as a down payment, the less the mortgage insurance (MI). In the 90% to 95% range, the MI will be approximately 1.3% of the loan amount. In the 85% to 90% range, the MI premium is about .55% for the first year. For 80% to 85% loans, it's about .43%. The cost of MI premiums decrease in subsequent years to about .40% to .55% of the loan amount. Lenders usually require the first years premium in advance at closing. You can avoid MI by getting the seller to carry back a second TD. Many lenders don't require MI if you put down more than 20%. You can get the MI built into the interest rate for the loan and it's therefore tax deductible. But then there is no opportunity to cancel the MI in the future. And you usually would like to drop this as soon as possible. Most lenders will allow you to cancel the MI if you have been paying for two to five years. Others have no time requirements but simply require that there is at least 80% equity at the time of cancellation.

Mortgage ratios: Actually these are the so called standard debt to income limits established by FHA in order to get a residential loan. The 29 refers to your monthly housing expense as a percentage of your monthly income. The 41 refers to your housing costs plus other recurring consumer debt- auto loans, etc.- expressed as a percentage of monthly income. In the past, loan officers were rarely able to grant a loan if a borrowers percentages did not meet these strict guidelines. However, under a major overall of FHA, these guidelines are now flexible and should allow much more leeway for people who are reasonable credit risks.

MORTGAGE INTEREST DEDUCTION : 44% of this benefit goes to the top 5% of owners. Scrapping the deduction altogether would terminate a $51 billion dollar subsidy and would probably reduce interest rates overall since homeowners would refuse to accept the current rates. They are very obstinate since it is one of the last tax deductions available.

Gross Income % of Households % of subsidy

Under $9,999 18.4 -----

10,000- 19,999 19.1 -----

20,000- 29,999 15.8 1.5

30,000- 39,999 12.2 3.8

40,000- 49,999 9.1 6.3

50,000- 74,999 13.7 22.0

75,000- 99,999 5.7 21.9

100,000- 199,999 4.1 27.6

200,000+ 1.1 16.5

Some say that the loss of deduction would hurt the home market and fewer people would own homes. Perhaps, but take a look at international home owner figures.

% of Home ownership with Deduction

U.K. 68%

U.S. 64%

France 54%

Netherlands 47%

% of Home ownership withOUT Deduction

Australia 72%

Canada 63%

Japan 62%

Germany 39%

BIG MORTGAGES: (1996) So you own a home and want to take out a second. Well, you figure that the bank won't loan more than the standard 80% to 95% maximum loan to appraised value. But how would you like a loan that is 125% to 150% of appraised value? Impossible? Apparently not. If you have other assets- stocks, mutual funds etc. The lender ends up making a real estate AND a personal loan. The rate is above normal and there might also be a 2% fee. Closing is apparently very fast- two weeks. A caveat applies with interest deduction. Since the loan consists of real estate AND a personal loan, the IRS might contest part of the deduction as personal interest.

Other interesting loans are 100% financing for custom home buyers who want to buy their lot and build a special home. One program requires they deposit $5,000 or $10,000 into escrow- then the bank funds the entire loan. The rate on the short term loan is bank prime plus 1%. After construction is complete, a permanent loan at prevailing rates pays off the construction loan plus covers the entire property.

Lastly, here is a unique loan for a business owner who does not want to divulge his entire life and financial history to the bank- absolutely necessary in almost all cases. With this loan- from $203,000 to $1,000,000, the business owner provides essentially nothing. The hitch is that the maximum loan to value is only 60% and the property has to be appraised twice. Also, the buyer pays as much a 3/4% higher interest rate.

FREDDIE MAC: (SF Chronicle) On July 12th 1995 , Freddie Mac (they buy billions of mortgages each year from institutions) changed how it views your finances in regards to getting a home mortgage. In essence, it is telling all the sellers that they should utilize the credit scores developed by the services of FICO or MDS. Using sophisticated formulas, the programs reduce all your personal data and credit history into a numerical score. You probably need a 660 on FICO in order to qualify for a loan- but a 700 or 800 is all the better (scores range from about 400 to 900). (On the MDS scorecard of 1 to 1,300, you want the lowest score.) If you score above 660 on FICO. the lender only needs to do basic underwriting. Between 620 and 660, Freddie Mac will required more extensive work ups on all aspects of a borrower's history. Under 620, probably forget it- buy a tent.

FHA: The Federal Housing Administration loans may be a little more complicated in obtaining than conventional mortgages, but will allow a lower down payment and an ability to carry more debt. With conventional mortgages, you're percentage of income allowable to be spent on housing is 28%; with FHA, it's 29%. Under conventional mortgages, the percentage of income that can be spent on total debt is 36%; with FHA, it's 41%. That's a BIG difference. Additionally, FHA will allow the down payment, as small as 3%, to be totally gifted by a family member or friend. FHA no longer requires a purchaser to include child care costs in the calculation of monthly debt; it now includes overtime, bonuses and part time employment and in April, 1994, it reduced the premium for one time mortgage insurance premium form 3% to 2.25% of the loan amount. If you finance the insurance premium, it is 0.5% of the loan amount.

REAL ESTATE MORTGAGES: (1997) Identified previously, borrowers are divided by alphabet- A, B, C- and reflect their credit rating for the purchase of a home. A is the top of the line; B for those who have been as late as 60 days in the last 12 months on a credit card or who have an overall debt to household over 40%. They are often charged 1% more on a mortgage than an A borrower. C borrowers may have been late 30 days two or three times on their home loan and 60 days late on a credit card several times. They may be charged 2.5% more. D category pay top rates- assuming they can get one at all. Freddie Mac and Fannie Mae's usually wanted just the best creditors- the A category. But Freddie Mac is now going to buy up to $2.5 billion of the less credit worthy loans. That will shave a little off the rates for the B's and C's. Their acceptance of these loans is due to the risk evaluation tools that were developed over the last few years. They can better spot the B's and C's and work to forestall further problems.

GETTING A REAL ESTATE LOAN: (1999) Pay attention to your FICO scores. FICO scores vary from the low 300's to a high of 850. A FICO score of 680 is considered good enough to not require any further review by an underwriter. An "A paper" loan may still be made with a 630 FICO score if reviewed by an underwriter. Some lenders offer premium pricing for borrowers with 700 or 740 scores.

"Why do mortgage lenders pay so much attention to these scores? (LePre) Real simple: there is a 1 in 8 chance that a borrower with a FICO score below 600 will be either severely delinquent or in default of their loan. There is a 1 in 1,300 chance that a borrower with a score above 800 will have similar problems."

Deducting points on a loan (WSJ 2002)  The general rule of thumb is you may deduct all the points you paid in the year you paid them, as long as you meet several qualifications, such as if your loan is secured by your main home and if you use your loan to buy or build your main home. For the rest of the fine print, see IRS Publication 936, which has a handy summary on page six.

But you aren't always required to follow this rule. In some cases, even if you qualify to deduct your points in the year you paid them, it may be better to spread out your deductions over the life of the loan, says Martin Nissenbaum, national director of personal income-tax planning at Ernst & Young.

Suppose a couple paid 1.25 points late one year on a mortgage to buy a home. But like most taxpayers, they discovered they were better off taking the standard deduction for that year, instead of itemizing. (The standard deduction is a flat amount based on your filing status.) Thus, the couple would prefer to take the standard deduction for that year and spread the points over the life of the loan. That's okay, the IRS said in a private-letter r

That's an important choice to keep in mind since about seven out of every 10 federal income-tax returns claim the standard deduction, instead of itemizing. Remember that if you take the standard deduction, you can't deduct your interest costs for that year.

Here is an example from Ernst & Young: Suppose you took out a 15-year loan on Jan. 1 of this year and you paid $2,700 in points. Also let's assume that it's better to take the standard deduction this year than to itemize. In 2003, if you itemize, you could deduct $180 of those points ($2,700 divided by 15) as mortgage interest, he says. And you could continue to deduct $180 each year for the rest of the loan's term. "When you pay off or refinance the loan, you can deduct the points remaining, if any, in that year," he adds.

What about a home-improvement loan? The IRS says you may fully deduct those points in the year you paid them as long as you pass various other tests listed in Publication 936.

The rules are different with points you pay on a loan secured by your second home. In that case, you generally must deduct the points over the life of the loan.

That same general rule applies with refinancings: Generally, those points aren't deductible in full in the year you paid them. Spread them over the life of the loan.

But there can be exceptions. If you use part of the refinancing proceeds to improve your main home and if you meet all the other criteria listed in IRS Publication 936, then you can fully deduct the part of the points related to the home-improvement work in the year you paid it. As for the rest of the points, deduct them over the life of the loan.

For example, if half of the loan is attributable to home-improvement costs, then half of the points would be currently deductible, says Mr. Nissenbaum of Ernst & Young.

Accountants tell me some people make a costly mistake when they refinance several times. Suppose you are refinancing for a second, third or even fourth time. In that case, be sure to deduct any points from the earlier refinancing that you haven't yet deducted. The same idea applies when you sell your home and pay off the mortgage; in that case, any points you haven't yet deducted would be deductible for that year.

Here's an additional wrinkle: Real-estate agents say sellers sometimes pay points for the buyer in order to facilitate the deal. In such cases, the buyer reduces the basis of the home by the amount of the seller-paid points -- and then the buyer gets to treat the points as if he or she paid them. The seller can't deduct those points as interest, but they are "a selling expense that reduces the amount realized by the seller," the IRS says.

Credit: (2002) creditworthiness is scored on an 850-point scale, with average being about 640. Fair Isaac uses a number of factors to determine your score, including your record of timely payments on other loans (35%); the amount and type of your outstanding debt (30%); the length of your credit history (15%); number and types of accounts opened recently (10%); and your mix of accounts, such as department store, credit card companies and bank loans (10%)

Foreclosures: (NY FED 2003) "Examining the Rising Foreclosure Rate," by Richard Deitz and Ramon Garcia (in pdf) Although homeownership nationwide has reached a record level, so has the foreclosure rate. This article examines the foreclosure rate in the U.S. economy and outlines factors that may be contributing to its rise. It also investigates the behavior of foreclosure rates in New York State and in six of its major metropolitan areas.

Mortgages: (NY Times 2003) Until 2000, the United States Treasury market was the world's largest and most liquid. Now the government bond market is overshadowed by the mortgage-backed securities market. Treasuries and corporate bonds each account for about 22 percent of the Lehman Brothers United States Aggregate Index, a measure of the whole fixed-income market; mortgage-backed securities make up almost 35 percent. Holders of mortgages hedge by selling short Treasury securities with maturities roughly equal to the average life of the mortgages in their portfolio.

Mortgage-backed securities respond violently to moves in interest rates. When rates fall and homeowners refinance, some of the mortgages in large portfolios held by banks, hedge funds and mortgage originators are cashed in. That requires the managers of these portfolios to rebalance their hedges by buying Treasuries. Such buying helped push interest rates down to ridiculous levels earlier this year.

When rates rise, refinancings drop, and the average life of a mortgage grows. That forces traders to rebalance portfolios by selling Treasuries. Selling begets selling; interest rates spike.

"Back in 1996, the mortgage market was roughly half the size of the Treasury market. "Now it is 125 percent of the Treasury market."

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