Prime Rate Credit

Although banks have historically had a set of criteria to go by when lending money to an individual or couple for the purpose of purchasing a home with it (in other words, a mortgage loan), many admittedly let some of the criteria either slip by or be minimally qualifying in years past, which analysts say is part of why we are facing one of the largest mortgage and subprime meltdowns ever which is just now coming to light now.

However, if it’s been a lesson to anyone, it’s been a lesson to major lenders that they need to tighten the noose on their lending practices, meaning they had to better screen candidates for mortgage loans so that they could keep both themselves out of hot water by avoiding bad loans, and the consumer, by not letting them get in “over their heads” so to speak, by taking on too big a mortgage for their salary and other forms of compensation to cover over the duration of the loan, typically 30 years.

A survey taken in April of major lending banks found that over 2/3 of the banks reported they had adopted tighter lending restrictions and new criteria and guidelines, including proof required of income, before they let a consumer sign on the dotted line and purchase a home with money borrowed from their institution.

Not only that, but banks are also severely tightening (compared to years ago), their restrictions on lending for credit cards and other common loans as well, extending their caution into other fields of concern, since consumers have generally overextended themselves in these areas, which many analysts say has also led to the current economic conditions and “credit crunch”, as it has been termed.

Banks have grown more concerned as well because with the erosion of current credit including mortgages, loans and credit card delinquencies, they are forecasting that even more loans are going to go bad in the near future, only further pulling back on their profits and putting them in the red, so to speak. There are of course some banks that have avoided this crisis as greatly as they can, but most are in some form of trouble because of one thing or another, and many think it will be years before they and consumers recover from this debacle.

We bought a home roughly one year ago, and we are just now starting to notice we are getting offers from both our original lenders (we got two mortgages, one to cover the balance after the downpayment and one to cover the downpayment), and also from other lenders who would like nothing more than to lure us away with promises of a lower mortgage interest rate and better payment options. We however, happen to be perfectly happy with both of our mortgage lenders, who happen to be Citimortgage and Chase mortgage.

A woman who I work with at my job actually happens to be a part time real estate agent as well, and she let me in on something that most people don’t know, or when they get the news in the mail they are perplexed. Most of the time, your mortgage lenders will repackage your loan and sell it to another mortgage lender.

I still have not gotten one of these yet. She said that oftentimes, you will get a letter in the mail that says you are now making your payments to a different lender, and it’s all perfectly legit, because the original lender sold the “rights”, and risk along with it, of your mortgage to another lender for whatever reason.

I guess it’s kind of like when you have a checking account with a certain bank, and that bank gets bought out by another bank, you really have no say in who’s name appears on your checks or who you keep your money with unless you choose, voluntarily, to take your business elsewhere. I had a hard time understanding this though, especially on loans like ours which are good risks, where the mortgage company will make out in the end from gathering thousands upon thousands of dollars in interest from you on the front end especially.

Why sell it then? If anyone who has any knowledge in this field has a comment, please do explain for the rest of us.

In recent news, if you haven’t already heard, supposedly home foreclosures have hit a 23 year record high, which means people are still having a hard time paying their mortgages, and the subprime mess may still have some long lasting effects on the banking industry, and more importantly, on the economy as a whole.

They are talking about the closing final quarter of 2007, since these statistics take time to gather, but as you know, news like that always affects the economy as it is today, because it may be a sign of things to come. The rate is pretty high too, that about almost one full percent of all homeowners are defaulting on their mortgage loans.

Even a higher and more alarming percentage in housing is that almost a whopping 6 percent of homeowners fell behind on their mortgage payments. It’s really crazy right now, because you see a lot of mortgage lenders adding a relief option to their websites, meaning they have basically been forced to offer some sort of settlement option to homeowners who are struggling to pay their mortgage payments on time, or at all. It’s truly a sign of the times, and mortgage companies are being forced to offer mortgages and determine eligibility criteria a bit more stringently now so that this crisis does not repeat itself.

I’m not sure if I am one who thinks this is going to correct itself any time soon. I like to be an optimist, but at the same time I can’t say confidently that I believe the whole housing market will bail out of trouble in the year 2008. We may be waiting a while folks, it seems a series of factors have not been on the people’s side for quite some time on this one.

With the new Federal Reserve prime rate cut to 3.5% down from 4.25 percent, which is pretty significant although it may seem small at first glance, what will that mean for consumers? Well, it’s a plan that the Federal Reserve, headed by Ben Bernanke, who was Alan Greenspan’s successor, came up with, at congress’ and consumer’s urging pretty much, to help stimulate the economy and encourage home buying and mortgage applications and prevent a recession all at once. Tall order, huh?

Well, with the new federal rate cut, what can that mean for you? If you’re looking to borrow money for a mortgage on a home, it can mean almost a whole point lower on your mortgage interest rate, which doesn’t sound like much, but adds up to thousands and thousands of dollars on some homes over the course of a typical 30 year mortgage loan. If you calculate that mortgage interest, it is quite a savings and if you figure you can save or invest that savings, you’re looking at thousands of dollars over time!

It’s actually quite exciting if you think about it, and are in the market for a new home. Heck, maybe even some home flipper prospectors will get in on the game and that will stimulate the economy even more. Many people believe the new stimuls package in addition to the decrease in the prime interest rate is not enough to stimulate and fix the economy long term, but rather is a bad idea, that we’re just borrowing money from our children and how are we going to pay it back. What do you think?

There may be a market for some good stock buying in the mortgage and banking industry right now. Not only that, but with the Fed most likely cutting interest rates again, there may also be some good mortgage rates that are ripe for the picking coming up if you are in the market or are shortly going to be in the market to buy a home soon.

What do I mean when I say that mortgage and banking stocks may be a good buy right now, when the economy is in the toilet and many banks have publicly acknowledged that the subprime mortgage fiasco as well as issues with worsening recession fears and consumers fearing bad credit and lack of credit availability widening in attack, there may be some excellent opportunities to buy premium stocks at reduced prices. And that means they could go down further before they go back up, so keep that in mind too.

When you invest in anything, you should be sure to do your research on the solidness of the company’s financials, and base it on the fact that they have a solid marketing strategy, good liquidity and money on the books and many other things before pulling the trigger, even if the stock appears to be deeply discounted. I myself have forrayed in to investing in banks as of late, but it’s not without calculated risk, and as long as you calculate your risk, you may do well in the end when this mortgage crisis is over and forgotten .

Problem is, we don’t know exactly when that will be and many naysayers say it will still be a while, and we don’t even know the full impact of it at this point. As long as you can weather the storm, there could be potentially great gains in many of the bigger bank stocks that are supposed to be able to weather these types of financial times, like Well Fargo and Bank of America, who just made a major aquisition in it’s troubled competitor who was majorly hit by the subprime fiasco, Countrywide.

As far as mortgage deals go, whip out the mortgage calculator, and start calculating what type of mortgage interest rate you’d need to be able to purchase a home comfortably. Be careful to factor in all your other month to month expenses though. This is where many people make the biggest mistake, in that they forget to really factor in these other big what-if’s. I mean, are you still going to be able to afford an emergency fund, savings and retirement and so on and so forth?

Well, it was just recently announced that two big mergers happened in the world of mortgage financing, and one mortgage giant bought out another one the most recently, meaning Bank of America bought out it’s former rival Countrywide Financial for a whopping 4 billion dollars in stock. Another good candidate for a buyout right now according to analysts who know more about this stuff than I’d ever care to, are Washington Mutual, which has been battered by subprime mortgage loans, and also Bear Stearns who says right now they are not looking to merge with anyone.

Two other mortgage lenders and bankers that are being speculated on as possible merge partners are National City and Key Corp (where I actually do my banking, and I actually had a car loan with National City for a long time). There has been lots of talk of these mergers because it’s kind of an effort to make the banking industry a bit more solid and united and “unbreakable” by large aquisitions since now more and more cities are also expected to go after bank litigation since their cities have been battered by the subprime crisis.

Take for example Wells Fargo, who is being sued now by Baltimore, who says that they have evidence that according to maps and other demographics, their subprime division specifically went after minorities (predatory lending) and also tacked on numerous fees and high interest. The company says that they have done no wrong, and that those terms apply for any subprime mortgage lender.

The amount of foreclosures has been outrageous in many major cities, including Cleveland, which is by where I live. I know people who have personally been touched by a foreclosure, and it really takes a toll on their credit and on their spirit, so I can understand why people are upset about these practices, however, I’d have to see more proof that company blatantly took advantage of certain poor areas before I could say much!

Due to the recent credit crunch and mortgage foreclosure crisis, the Federal Reserve is proposing rules for all lenders, including brokers and banks. Proposals offered for regulations should be instated by next year.

One of the regulations proposed by the Federal Reserve is to make certain that lenders know, in advance of completing a loan, that the borrowers have enough money set aside for taxes and insurance. The Federal Reserve also plans to restrict loans in which there is no proof of a borrower’s income.

One other proposed regulation is to ensure lenders have examined a borrower’s ability to repay on a loan. Clarity will be enforced by improving financial disclosure so that the borrowers understand fully the terms and conditions of their mortgage and also may have used helpful items like a mortgage calculator that calculates a darn near close monthly payment before they jump into the contract.

Another area considered for enforcement is prevention of lenders penalizing the borrower when they pay their loan off early. Abuses in mortgage advertising will be another area the Federal Reserve will address.

The Federal Reserve will need to balance their proposed regulations so they won’t suppress legitimate and responsible lending and so they still allow refinancing opportunities for those subprime borrowers.

Home values have declined and homeowners are often left with a mortgage balance that exceeds the amount they can sell their home for. Therefore, the homeowners in financial trouble often don’t have the option of selling their home to alleviate their financial woes.

With the foreclosure crisis and the current credit crunch, we are at increased risk of recession, so the time is right for the Federal Reserve to take action.

News this morning is that the Federal Reserve, or “The Fed” as it is affectionately termed by those in the financial industries and those of us who just read this stuff, maybe be lowering interest rates soon in an effort to ease credit worries and the currently worsening economy due to the mortgage crisis.

The US government already authorized a forced freeze on certain types of mortgage loans in an effort to ease the stress of increasing interest rates of mortgages on those with certain types of mortgage loans on their homes. However, reportedly this freeze did not give all who own a home and have a mortgage a break, only a specific sector was influenced by this decision.

The Federal Reserve, under Bernanke’s leadership, has already cut the interest rates twice this year to relieve some of the mortgage and housing crisis, but it is said that more cuts may be needed to provide any real type of relief. See the mortgage calculator and loan comparison calculator for examples of what types of loans and mortgages are available out there for consumer now, and you can get more of an idea what I’m talking about. All this stuff is so confusing sometimes!

Bernanke has said that it is the Fed’s responsibility to keep the economy moving, and further rate cuts may be necessary to keep that going, and to keep the stock market active, since before this housing crisis, the stock market was much more busy with foreign investment, and now many foreign investors are reluctant to “invest in the US” since the fears about housing and the mortgage credit crunch.

You’d think that the government intervening to save people from increased ARM mortgage loan interest rates and bailing scores from impending foreclosure would be welcome. To those that is bails out, it most certainly is, but to those of us that pay the taxes to help bail those out of trouble that may not have exactly done their homeword when signing up for loans they inevitably couldn’t afford, it’s really not so great.

We all know that the government may step in to subsidize certain things, like crops of fruits and veggies from America’s farmers, but when they stepped in recently to help bail out subprime mortgagees who couldn’t handle their payments and were either going to need lower payments and less interest, or an iminent foreclosure, some people got downright mad.

You see, it is your tax dollars, and you could get angry about that, but also you may want to look at it more in a “cup half full” way as well. First of all, you are keeping homes occupied in neighborhoods, and hopefully driving up property values in that area, and second of all, on a purely altruistic level, you are charitable and willing to help your fellow man in crisis for making a not so sound financial decision.

Third, from a purely practical point of view, you are helping (hoping) to educate people and financial institutions that borrowing money is serious business and when it is borrowed irresponsibly, or loaned out irresponsibly, it can have dire consequences. What side of the fence do you think you’re on? I’m on the fence a little on this one. I feel like people should be made accountable, but also believe in the greater good. Use a mortgage calculator to make sure you know what you’re getting into.

We’ve been hearing so much about the “Fed” possibly cutting those rates lately on and off, and you were probably wondering what that really meant for regular folks like you and me. At least I know I was.

That is, I was wondering if it really meant anything to me personally or your personally if you were to say, apply for a mortgage loan and pursue the American dream of owning your own home, or maybe selling your home, or upgrading to a newer, better home. After all, when the Fed cuts rates, it is mostly the mortgage lending market that is impacted. Right?

Well, yes, it is largely impactful to the mortgage lending market when there is a rate cut, and since much of the focus on our failing economy is on the miserable mortgage crisis, that is what we will focus on.

Well, the answer kind of surprised me, and if I understand it correctly, when the Fed cuts rates, even at the smallest or seemingly largest percentage - well, make that a fraction of a percentage point, it really does not affect what you personally are going to pay or what you are able to be offered by banks competing for your business.

In other words, it is really the prime rate that is set and considered the bar by which all banks adhere to, which is more or less decided on by what is called the bond market. Since banks use this a benchmark for offering competitive rates to their customers (prospective loanees), because they know this percentage is publicized, and the educated consumer will use this percentage as a measuring stick by which to shop for a new general loan, mortgage loan, and even some credit card.