Home mortgages didn’t used to have such a high down payment. Back in the late 2000′s we say the heyday of the 0% down loan. It was not uncommon for people to just put down 2-5%.

But, then all of a sudden things changed. And if you’ve been around in the last 5 years, it’s easy to see why. Does the term Mortgage meltdown ring any bells?

Well, since the subprime loan debacle, and all of the bad loans out there, lending standards have gotten tighter… should I go as far as say waaaay tighter.

I’ve heard of 40% downpayment with a minimum 750 credit score to get the best interest rates.

For the average, however… I’m seeing a 20% downpayment needed.

The Effects of a 20% down payment Requirement from Potential Homebuyers

Future homebuyers may be required to put a 20% down payment according to the newly proposed rules. The purpose of this is to prevent another possible financial breakdown.

The rules that are being proposed are ways to put into effect the Dodd-Frank Wall Street Reform and Consumer Protection Act launched in the U.S Congress in the past year. One of the many rules are to ask for a 20% down payment in order to ensure that the home loans being sold by the banks in the secondary market are safe, said Robert Fletcher, the Ohio Association of Realtor’s executive officer.

Fletcher said that implementing the rule on the 20% down payment will disqualify 60% of potential homebuyers. Since the housing market plays a main role in the economy, removing buyers considered as low risk from the housing market will be a big hindrance to the recovery of the economy, added Fletcher.

In Greater Cincinnati, the average price of houses is at $151,080. With the proposed rules, this will require about $30,216 down payment excluding closing costs. This amount is more than the average price of most brand new cars that consumers can afford.

The purpose of the risk retention requirements like the 20% down payment is to address the challenges in the residential, commercial and loan markets. It seeks to provide a solution to their problems by asking the organizations that are selling securities to maintain an economic interest in the credit risks of their combined and sold assets, according to the rules proposed by the regulating agencies.

Aside from shooing away potential buyers to the housing market, another effect of a 20% down payment requirement on home purchases is that more and more people could not afford to buy a home. It may also cause banks to become less willing to let the consumers take a loan for a more affordable cost. Overall, it will reduce the housing demand, cut house prices and eventually hurt the industry of home building.

On top of the down payment requirement, the proposed rule may also ask the homebuyer to provide a credit history, a proof of income and a documentation showing that the down payment source is valid.

Based on this, you can expect that lending standards are going to remain high for quite some time. If you are looking to buy a house, then you are going to need to make sure you have money to put down, and you will need the credit score to support your purchase.

Could you afford to pay a 10-20% down payment on your home? from CRA NC on Vimeo.

Lenders Reluctance in Refinancing Underwater Mortgages

Apparently, it looks like it may be almost impossible to get any kind of refinance for mortgage if the amount you owe is greater than what the property is appraised for.

Elizabeth Duke of the Federal Reserve says that mortgage lenders’ concerns of being stuck in the bad loans of someone else are main hindrances to the refinancing of underwater mortgages.

This is one of the main reasons why the Home Affordable Mortgage Program (HARP) of the government has had difficulties in assisting homeowners with very little or below zero equity, added Duke.

The challenge according to Duke is that lenders are worried that if they decide to refinance underwater mortgage via HARP, they might need to purchase back the loan from Freddie Mae or Freddie Mac, the holder and guarantor of the loans, in case it shows that the original underwriting of the loan has problems.

Because of this, they are hesitant to refinance mortgages originally made by another lender even if the current owners of the loans are Fannie Mae and Freddie Mac. Through what is called the putback process, Fannie Mae and Freddie Mac may ask the lenders to purchase back the mortgages that were not underwritten properly. Thus, if the loan is later on refinanced by another lender, it is responsible for it.

This is only one of the four major concerns causing an obstacle to the mortgage refinances of HARP, said Duke. Other problems include pricing on loans that are risk-based that leading to more refinancing cost; hesitance of second lien holders in putting their loans under a refinance mortgage; and rejection of mortgage insurers to new loan’s re-underwriting even if this will lower the default risk.

Duke said that what occurred was the application of mortgage lenders and insurers of the same criteria as that of the new loans in the refinancing of low equity and underwater mortgages.

She added that removing these obstacles to refinancing will help lower the general credit risk of lenders, keep homeowners secured and provide overall support to the economy.

Bank of America’s Inaccurate Reporting of its Residential Mortgage Loan

Henry Blodget’s worries regarding the quality of Bank of America’s mortgage loans show several interesting details. However, he seems to be looking in an incorrect place.

According to a Blodget’s statement in “The Bomb That Might Blow A Hole In Bank Of America,” a Business Insider piece, the biggest bank of the country only accounted $19 billion worth of residential mortgage loans that are deemed to be nonperforming. This totals to only 5% of the entire residential mortgages on its balance sheet and a $21 billion worth of loss reserves in loans.

To begin with, the detail in the story of the $21 billion used to pay for expected losses from potentially bad loans is inaccurate. As of June 30, the bank reported a total of $37.3 billion for loan allowances and rent losses. This can be seen on page 129 of Bank of America’s 10-Q reporting with the Securities and Exchange Commission.

In terms of the chances that there was under-reporting of problem mortgages, the story given was a real mistake because the reported 5% also accounted for Bank of America’s mortgage loans that were obtained from Countrywide. Jerry Dubrowski, spokesman of Bank of America, established that they previously lowered the loans of Countrywide to an acceptable value.

Excluding the loans of Countrywide, residential mortgages that are fully-insured and loans that have already been lowered to a fair value, the Banks total mortgage loan amounts to $169.869 billion. This accounts to one out of four of the mortgage loans included in its main portfolio as of the 30th of June. $16.726 billion of this amount or 9.84% are categorized as nonperforming loans.

Bank of America divides the Countywide loans to show the past write-downs on loans considered as “purchased credit impaired.” This was also done in order to better represent the credit risk in the loan portfolio of the residential mortgage.

Blodget also says that about 35% of the bank’s residential real-estate loans amounting to $413 billion might be in trouble in the future. This is according to an unnamed analyst’s scrutiny of the securitized mortgage delinquencies in the entire industry.

However, according to Rochdale Securities’ Richard Bove, the idea that the bank’s credit quality in its self-originated core portfolio is weak as the loan portfolio from the wholesale lending operations of Countrywide is already beyond the imagination.

Related articles

• US Bank Sues Bank of America for $1.75 Billion Over Countrywide Loans (johnmurphyreports.com)
• Barclays, Bank of America Are Sued by FHFA Over Mortgage-Backed Securities – Bloomberg (news.google.com)

Credit Score Requirements are Now Stricter for Homebuyers

Recent data shows that getting the best terms for a mortgage loan needs more than just excellent credit. Today, only individuals and families with exemplary credit standing can benefit from the historically low interest rates of 30 year mortgages.

The Mortgage Bankers Association reports in the Mortgage News Daily that about half of the newly written mortgage loans during the first quarter of the current year were given to consumers with credit scores that are higher than 750.

On the contrary, only up to one-third of the new loans in 2008’s third quarter, the period before the credit crisis started, were given to consumers with greater than 750 credit scores. FICO scores, the term referring to credit cards, is the basis of most lenders in the mortgage terms that they issue to the consumers. Scores usually range from 300 to 850. In the past, having a score of at least 720 is enough to obtain the best terms for mortgage loans.

At present, consumers who are at the lower end of the credit score range have a tougher time in getting a mortgage approval, according to the Mortgage Bankers Association’s recent data. The scores that used to easily qualify for mortgage loans are now making majority of the lenders contemplate. Actually, less than one out of ten loans, about 9%, were given to aspiring homeowners with below than 650 points credit standing, reported the Mortgage News Daily.
Experts say that the changes in the requirements of the FICO score is part of the consequences caused by the credit crisis that started in 2008 and the resulting decline of the economy.

Michael Rubin, the author of Beyond Paycheck to Paycheck: A Conversation about Income, Wealth and the Steps in Between, says that there has been a significant shift in mindset which is why banks are not very willing to take the risk anymore. He further added that most banks were not very careful until the second half of the year 2008. During that time, they were very much focused on lending.

Today, banks have changed strategies by being careful with their borrowers. They are now very keen in screening their consumers because they want to make sure that they will be repaid.

It’s great that you are looking for the best way to repay a student loan. That means that you are a responsible person and want to do the right thing! Let’s take a look at loan repayments when it comes to student loans.

Two Ways to Repay a Student Loan
Majority of Americans have been struggling to settle different types of loans and debts such as mortgage, home-equity, credit card and vehicle in the last few years. But, these are not the only loans that Americans are having problems with. According to the Federal Reserve Bank of New York, student loans are also significantly increasing. Moody’s Analytics support this information by saying that there is no improvement in the rates of delinquency of student loans and the future outlook for borrowers are troublesome. If you are one of the many individuals who are experiencing challenges in settling your student loan, do not be tempted to ignore them. Take note that not paying your loan will have a huge negative impact on your future paycheck, tax refund and credit rating. Here are two ways to repay your student loan.

Serve an organization that can help you settle your debt.
There are many organizations that you can work for to obtain loan forgiveness. These include the United States Military, AmeriCorps and Teach America. Also, full-time public sector workers such as police officers, public school teachers and public defenders are qualified to have their debt balances cancelled after making 120 payments on or beyond October 1, 2007.

Seek a leniency application
If you took a Federal Stafford loan, you are allowed to defer your repayment up to a maximum of three years under the condition that you are unemployed, you are going through difficult economic challenges or you pursued grad school. You can also request forbearance from your lender.
Aside from suspending your payment up to three years, you can also make small payments for your federal loans in the first couple of years of your payment period. Moreover, you can also ask for an extension of your repayment term. Another option is to qualify for a repayment plan that is based on your income. This plan lets you link your income and your payment.

Related articles

• Student Loan Options in a Tight Credit Market (education.com)
• A Quick Guide to Student Loans (askthemoneycoach.com)
• 7 surprising ways to minimize student debt (msnbc.msn.com)