No loans for Sellers with Undocumented Income

The exact reason No Income Verification loans were created in the first place is the exact challenge now facing numerous potential homeowners who no longer can get a loan - unless you know a R E A L L Y good mortgage broker who has a personal and private relationship with some good banks. Oh, and by the way - this is also the same reason Chris Daly's rental assistance law is diabolical. There's no way to account for undocumented income...

With more than $300,000 in combined annual income, tens of thousands of dollars in the bank and credit scores that top 800, Jennifer France and her partner would seem like ideal candidates for a mortgage refinance. But when they applied to swap an interest-only loan on their nearly $1 million San Carlos home for a 30-year fixed that locked in today's low rates, they were summarily denied. The reason: effectively, because both operate their own businesses.
"I was really surprised, I had been preparing to refinance for years," said France, a landscaper and gardener. "It's hard for the self-employed; that puts us in a bind."

While the amount they make is easily enough to qualify for the new loan, tax deductions for self-employed workers dropped their official income below the threshold that banks wanted to see. A few years ago, theirs would have been the ideal scenario for a stated-income or no-documentation loan, which allowed individuals with ample but unconventional sources of income to secure home loans. But after untold numbers of borrowers lied about their financial wherewithal to buy homes they couldn't afford, often with a wink and nod from mortgage brokers, nearly all lenders stopped offering what became known derisively as "liar loans." Now even the well-qualified borrowers for whom the products were first intended can't get them. [more]

Undocumented income makes it hard to get a loan [SFGate]
The Giant Pool of Money - Hands-down best description of the Credit Crisis [SFHomeBlog]
Daly's Draconian Renter's Relief Package Passes [SFHomeBlog]

Credit Cards and FICO Scores

This one has always bugged me. And the FICO folks don't seem to see the irony in it (meaning, they have no plans to change it)...

NPR's Planet Money blogged about this today, and I think it's worth posting, as I imagine that many are not aware of the ramifications of doing something that would seem like the 'right thing to do'.

Basically, if you close a credit card account, it hits you negatively in multiple ways. First, it stays on your credit record, even though it's listed as closed. Second, you reduce your 'available credit' (which is obviously the whole point of closing the account), but this negatively affects your ratio of credit to available credit. If you have a second mortgage on your home for $50,000 (remember when you could still get those?), you are using 100% of your available credit on that line. It is looked at as a revolving line of credit, just like a credit card, and really hurts your credit score to have 100% (or even 90% if you've paid some of that down) of that line used.

Apparently, you want to have a 30% ratio of credit used to credit available. I currently don't have any second loans, and am carrying a bit on my credit cards. But since I no longer have any second mortgages, my credit score has shot up. Doesn't make sense to me, but FICO thinks otherwise. I still have flawless credit, never missed a payment on anything, etc, but from time to time have carried MUCH more debt (both secured and unsecured). Strangely, with less secured debt right now and more unsecured debt, I'm apparently a more viable borrower. Go figure.

And third, it results in putting an end date on the 'longevity' of that account, regardless of why you closed the account. You 'could' have kept the account open, but you didn't, so you get dinged for not having greater longevity with that card.

From the Planet Money blog today...

Gail Cunningham of the National Foundation for Credit Counseling has an answer. FICO scores, which banks and other lenders use to consider how risky a borrower you are, weigh five major categories, Cunningham says.

1) Paying your bills on time -- 35 percent of your FICO score.
2) Ratio of credit available to credit used -- 30 percent.
3) Longevity of credit accounts -- 15 percent.
4) Applications for new credit -- 10 percent.
5) Using a range of credit, from fixed payments like a house note to open-ended payments like credit cards -- 10 percent.

Canceling a credit card would nick your points in the second and third categories. If you close an account, you obviously affect its longevity -- bad for that portion.

If you close an account worth $5,000, Cunningham says, that means you have less overall credit available, which would affect the ratio of credit available to credit used.

So yes, closing accounts and applying for new ones threaten your FICO score.

What's the optimum ratio of credit available to credit used? "I don't want to see anyone use more than 30 percent of their available credit," Cunningham says. "That makes you look as though you don't have any cash and you're desperate for credit."

And a note to people like me who have cards but almost never use them: Take those cards out and buy a little something, Cunningham says. Pay them off at the end of the month, but do use them. "New credit is hard to come by these days," she says. "You want to keep all of your existing lines of credit. All in the world you represent to a credit card company with your unused card is risk -- because you could go out tonight and spend it all."

So, even though it seems incredibly counter-intuitive right now to keep unused credit card accounts open, that might be your best bet (if you're looking to buy a home, refinance your home, or do anything that involves your FICO score). Unless you have little or no will power when it comes to buying that new flat-screen TV, and then can't pay your cards off every month... Then that credit score ding might be worth it.


A Credit Card Dilemma [Planet Money - NPR]
Some good info on how your credit cards relate to your credit score [SFHomeBlog]

Voluntary Refinance Best Bet for Bay Area Mortgage Relief

As reported on CBS news, and most recently in the SF Chronicle, the Housing Rescue Plan is expected to widely bypass most Bay Area homeowners. What's the primary reason?

"Only a small percentage of Bay Area mortgage holders meet the criteria for the low-cost refinances being offered to help stabilize the housing market. To qualify, loans must have been for less than $417,000 if issued more than a year ago, and homes cannot be underwater by more than 5 percent...But that initiative is only available to people who took out so-called conforming loans of less than $417,000 and whose homes are not more than 5 percent underwater - meaning what they owe is not more than 5 percent greater than their home's value. For instance, someone with a home now worth $300,000 who owes $315,000 could qualify for the refinance - but would be barred if the home's value dropped further." Read the full story here.

It's not all bad news. The new Housing Rescue plan is reportedly dedicating $75 billion to help encourage lenders to cooperate with voluntary refinancing of existing loans that are not eligible for traditional refinancing. The most common reason I'm seeing for that is appraisals that are not penciling out for a new lender. Additionally, a reported $200 billion is dedicated towards helping Fannie Mae and Freddie Mac keep new loans flowing and mortgage rates low.

Bottom line - if you are looking to take advantage of the current interest rates and cannot refinance traditionally - be prepared to spend some time on the phone. There are companies that have sprung up all over the state offering to negotiate with your bank on your behalf, for a fee, but there are just as many people who are falling victim to fraud by such companies. I personally cannot recommend trying that route.

My best advice is to be patient, stay persistent, and if you get a jerk on the line, stay calm and call back to talk to someone else who is either better at their job, or just a more helpful person. I never cease to be amazed how well that works...

The Giant Pool of Money - The Hands-Down Best Explanation of the Credit Crisis

I've read more articles and descriptions of the Sub-Prime Mortgage Mess and current 'credit crisis' than I care to admit.

It wasn't that I was looking for answers myself, per se. And I always felt I had a fairly good handle on what went down from having witnessed it, more or less, from my front row seats.

Really, I kept looking because I was searching for someone, intelligent - neutral and capable of telling the story in its entirety in order to better explain the situation to my clients. Mostly because they were getting a lot of sound bites with very little substantive answers.

There was a Money magazine editor who tried - and he did a pretty good job. A NY Times article came out last year that was also really good, a bit technical, but fair I thought. Almost all the blog postings I came across that attempted it ended up with extreme views on either side, 'greedy mortgage broker' this and 'evil stock broker' that, fueled by the 'always deceptive real estate agents'...

...(Cue the angel music)- then along came Ira Glass. My hero!

All joking aside - this week's free download of This American Life narrated by Ira Glass, entitled 'The Giant Pool of Money', single-handedly explains, in layman's terms, what happened, why it happened, and how it affects everyone - not just those who are homeowners or those who are facing foreclosure. I have to say, there wasn't any description or story included that I disagreed with, and more to the point I learned several things that I previously did not know.

I highly recommend taking the time to download and listen - you can also subscribe to the podcast for free at the iTunes Store where they post a new podcast every Monday. It is well worth the time regardless of whether you are a past, present, future or never-to-be homeowner.

And ultimately, the current credit crisis has ended up impacting everyone. More so than I even realized before listening to this podcast myself.

Read more about the episode here.

Download the MP3 of the podcast here.