Credit market beginning to thaw

Watching the Dow over the last week or two has probably given folks a little motion sickness and whiplash. Mortgage rates over the last week have been similarly volatile. After jumping up a percentage point last week, they have improved dramatically in the last few days. Using the same 30 year fixed loan with a 20% down payment that I have used in previous posts, the rate is now back down to 6.0% after climbing to 6.875% a week ago. Lower rates indicate more willingness to loan, and could give a much needed spark to the real estate and mortgage industry.

There are other signs that the credit market is beginning to thaw. The overnight LIBOR rate has fallen to 1.28%, below the Federal Funds rate of 1.5%, suggesting that credit markets are stabilizing. "Libor is a daily average of what 16 different banks charge other banks to lend money in London and is used to calculate adjustable rate mortgages...Overnight Libor soared to a high of 6.88% earlier this month after the government's $700 billion bailout bill was signed into law."

Other signs of the credit market beginning to thaw:

• Larger companies that were having difficulty getting overnight loans a month ago, are now finding a market for their 30 and 60 day loan paper.

• Shoreline School District sold capital-improvement bonds valued at $25 million for a total interest rate of 4.94 percent, said Trevor Carlson...As recently as last week the interest rate — and the potential cost to the district's taxpayers — would have been substantially higher, he said.

• King County's sale of $48 million in short-term "bond anticipation notes" for jail improvements attracted eight bidders — more than expected, said Ken Guy, the county's finance director.

CNN Money
Seattle Times

While you're waiting, take the time to get prepared

If you are interested in buying a house, but not ready to act on it at this point, it would be wise to prepare yourself to be a strong buyer in the meantime. As 100% loans have all but disappeared, you should be setting aside some money for a down payment.

In addition, you should make sure your credit score is as high as possible. Lenders have become more restrictive and have raised credit score requirements. A higher score also means a lower rate on your loan, which translates to a lower house payment and/or a better house.

While the credit score is calculated on various formulas that aren't published, the following are the general portions that make up your score:

• 35% Your payment history Pay your bills on time. Automating payments online can help. Mortgage or rental lates are particularly damaging to your score.
  
• 30% How much you owe Keep balances on credit cards and other revolving accounts below 50% of your credit limit, preferably below 30% (lower is always better).
• 15% Length of your credit history Rather than let old cards go dormant, charge a latte a month (then pay it off). No activity lowers your score.
• 10% Your new credit Don't open unnecessary new accounts. And if you're rate shopping for a mortgage or an auto loan, do it within two weeks; multiple requests could ding your score.
• 10% Your mix of loans You can't do much to change this (except get a credit card if you don't have one). "No payment for 90 day" type loans are also a ding against your score.
  

You can also get a copy of your credit report at annualcreditreport.com. Check to make sure there are no errors on your report. Correct any errors as soon as possible.

Also, if you have any collections on your report, depending on how old they are, it may be wise to leave them alone. By paying them off, you make them a more recent factor in your score than they were before. If they are sufficiently old, it may make sense to pay them at the same time your mortgage loan closes.

Other helpful information can be found here on my website seanday.net.

Bernanke speaks

Federal Reserve Chairman Ben Bernanke released a statement predicting that the global economy will be down well into 2009 and hinted at a possible future rate cut. The next scheduled meeting is October 28-29, but there is a possibility of an emergency meeting.

CNN story

I don't believe another rate cut is warranted at this point as it is not rates holding people back from borrowing money, but the banks refusal to make the loans in this uncertain climate. There are also less funds to loan with the collapse of the secondary mortgage market, further restricting banks ability to approve loans. Hopefully the Fed's plan to buy up short-term debt (as well as troubled mortgage backed securities) will help unfreeze the credit market.

Rates are still historically low, at least in the mortgage lending market.

More Federal Relief

On the heels of the passing of the $700 billion bailout plan, the Federal Reserve has expanded it's economic rescue plan and is planning on buying massive amounts of short term debt to try to unclog the credit markets.

Commercial paper is a way of borrowing money for short periods, typically ranging from overnight to less than a week.

In more normal times, about $100 billion of these short-term IOUs were outstanding at any given time, sold by companies to buyers that included money market mutual funds, pension funds and other investors. But this market has virtually dried up as investors have become too jittery to buy paper for longer than overnight or a couple of days.

The unstable situation has left many companies vulnerable. The notion under the plan is for the government to provide a "backstop" that would give companies a new place to get cash, the Fed said. The action makes the Fed a crucial source of credit for nonfinancial businesses in addition to commercial banks and investment firms.

Full Seattle Times Story

Comic relief

Click to enlarge.

Will a rate decrease boost the real estate market?

Lowering the federal funds rate might not have the immediate intended effect of making it easier for people to buy a house. There are many other hurdles to buyers trying to obtain financing. As the secondary market for mortgage-backed securities has dried up, many lenders large and small have disappeared. According to the Mortgage Lending Implode-o-meter, 130 lenders have gone out of business or have been bought out. Greenpoint Mortgage owned by Capital One was shut down just yesterday.

There are very few lenders issuing subprime or Alt-A loans. These are loans that many people turned to in the last few years as home prices increased dramatically. These lenders had expanded guidelines that allowed self-employed and lower credit borrowers to obtain financing. They are also where many borrowers found 100% financing. Even prime lenders have tightened their guidelines significantly in the past months in response to investor fears of mortgage defaults. Many have increased credit score and down payment requirements. They have also required borrowers to have more money in reserves as well.

Unfortunately with fewer places to find a mortgage, and with much tighter guidelines at the remaining lenders, many buyers are now out of the market. A rate drop may help the people who already qualify to afford a larger home, but it won’t necessarily bring more buyers into the market.

As it has become more difficult to obtain financing, it has become even more important to have an Integrated Agent in your corner. When anyone could get a loan, deals didn’t fall apart on financing as often as they had historically. Now that borrowing has become more difficult, our track record of closing 98% of our purchases will stand above the rest. Find out more about Integrated Agency and myself at www.seanday.net.

Capital One will now report limits

Capital One now says it will begin reporting their cardholders’ credit limits to the three credit bureaus. It has been a long-standing practice of theirs to only report the cardholder’s current debt, but not their limit. This practice has very likely harmed the cardholder’s credit score. Approximately 30% of your credit score is based on your utilization of credit. If you are near your credit limit, your score goes down, while low balances benefit your score. Ideally your balance would be below 30% of your limit on each card.

The problem with Capital One’s practice is that with no limit reported, the bureaus were forced to either ignore utilization on the account or use your highest balance as your limit. Let’s use an example of a card with a $10,000 limit, and you typically carry a balance of around $900. If the most you’ve ever charged was $1,000, your utilization would show as 90% rather than the real utilization of 9%. Your score would go down even though in reality you are managing your debt well. Lower scores translate into higher mortgage rates, which then translates into higher monthly payments. Once Capital One begins reporting credit limits, cardholders will hopefully see their credit scores go up in the few months.