Housing Foreclosure Prevention Act of 2008 (HR 3221)

The 600+ bill is aimed at helping distressed homeowners. I am sure we all don’t have time to read the full document (housing act), so here is a great summary of what the bill is going to do provided by Votesmart.Org:

-Establishes the Refinance Program Oversight Board, which is responsible for coordinating a program that insures “homeownership retention mortgages,” which are refinance loans designed for borrowers who are at risk of foreclosure (Sec. 112).

-Specifies that the aggregate original principal mortgages insured under the “homeownership retention mortgage” program may not exceed $300 billion (Sec. 112).

-Expands eligibility for FHA mortgage insurance to include borrowers who have been deemed “high risk” due to having a credit score equivalent to a Fair Isaac Corporation (FICO) score of less than 560 (Sec. 206).

-Provides incentives for “high risk” borrowers who have consistently paid their premiums on time that would reduce the amount of annual premium payments to payment levels equal to that of individuals who are not deemed “high risk” borrowers (Sec. 208).

-Mandates the establishment of underwriting standards which allow the FHA to insure mortgage loans for qualified borrowers who have existing mortgages with adverse terms or rates, qualified borrowers who do not have access to mortgages “at reasonable rates and terms for such refinancings due to adverse market conditions”, and qualified borrowers who are in default or at imminent risk of being in default (Sec. 210).

-Outlines the following eligibility requirements for receiving insurance for a “homeownership retention mortgage”:

-The insured residence shall be the sole residence in which the mortgagor has a full ownership interest,

-The mortgagor shall be verifiably unable to pay the existing mortgage(s) and, as of March 1, 2008, the mortgagor shall have had a mortgage debt-to-income ratio of greater than 35 percent,

-The new loans shall not exceed 90 percent of the property’s value,

-Prepayment, default, and delinquency penalties on existing mortgages shall be waived,

-Indebtedness under the existing senior mortgage shall have been reduced by such percentage as the Refinance Program Oversight Board may require, and holders of liens on property securing a mortgage to be insured under the program shall agree to accept the proceeds of the insured loan as payment in full for all indebtedness under all existing mortgages,

-The Secretary of Housing and Urban Development shall hold and retain a lien on the residence which will be subordinate to the mortgage insured under the program but will be senior to all other mortgages,

-The mortgage insured under the program shall bear a single rate which will be fixed for the entire mortgage term,

-The mortgagor shall undergo a criminal history check to ensure that he or she has not been convicted of mortgage fraud in the past seven years (Sec. 112).

-Requires the implementation of the following underwriting standards for the “homeownership retention mortgage” program: the mortgagor insured under the program shall have “a reasonable expectation” of repaying the mortgage, there shall be no denial of insurance based on credit scores, based on previous delinquency or default, or based on bankruptcy, and a total debt-to-income ratio of up to 50 percent shall be allowed (Sec. 112).

-Terminates “homeownership retention mortgages” two years after the enactment of this amendment, in the absence of any approved extensions (Sec. 112).

-Increases the allowed levels of principal obligations for mortgages insured by the FHA (Sec. 203).

-Extends the term of mortgages insured by the FHA from thirty-five to forty years (Sec. 204).

-Establishes the Federal Housing Finance Agency, which shall supervise and regulate Fannie Mae, Freddie Mac, and Federal Home Loan Banks (Sec. 311).

-Raises limits on loans that Fannie Mae and Freddie Mac can purchase from $93,750 to $417,000 for a single-family residence, from $120,000 to $533,850 for a two-family residence, from $145,000 to $645,300 for a three-family residence, and from $180,000 to $801,950 for a four-family residence (Sec. 333).

As it stands today, the bill as passed the Senate 84-12.
Bill Sponsor: Nancy Pelosi 

Key attention should be noted that this bill will reduce loan balances for troubled homeowners and transition the debt carried by the banks to the Federal Government (taxpayers).

One should also pay attention that this bill has roots to the banking industry. While the stated goal is to help troubled homeowners, it is a bank bailout. You can read an internal document from Bank of America posted by the bigpicture and help but not see how similar the bill is to the ideal plan outlined by BofA.

My favorite quote in the document “we believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market”

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Who is really at fault?  The housing pull-back (or as others refer to it “crash”) has had a substantial impact on the financial health of this country.  Most news and TV correspondence have painted this as the end of the world.  I agree it is a bad situation, but not one that is a surprise or the end of the world.

While I don’t like seeing a decrease in the housing sector, it is necessary for a healthy market to have pull backs.  This pull back is larger than others only because housing was artificially inflated by high demand as a result of low interest rates and easy to obtain loans.  How can one complain that the market is in a dive bomb when it was substantially over inflated in the first place based largely on demand from individuals that could not afford the house they bought?  Really is this a surprise?  A simple calculation can tell you that a family making under 70K per year can not afford a 500K house no matter how good their credit is with little down, but with the loan products out there they were able to buy one.  Or how about the real-estate investor who bought 3-5 units that were break even on a 5 year or less ARM.  I hope these people had reserves to account for the change in payment after the initial period.  Even to this day, I hear advertisements for investment properties that “cash flow $500 per month for the first year with only 10% down!”.  Yeah right.  What happens after year one?  Negative cash flow of $1,000?  These are crap loans designed to lure people into an investment that don’t understand all the details.  If you buy investment property on a variable loan, you are just asking for a bad situation.

I read several articles that blamed mortgage brokers.  I don’t really understand this argument.  Yes there are many unscrupulous ones, but in most cases, as a consumer you can compare rates from any bank, online service, or other mortgage broker to make sure you are not getting a bad deal.  You also have the ability to read the papers you are signing.  For this reason, I can not lay blame on the mortgage brokers, even if they did practice bad lending policies.

I believe that a majority of the problems start at the banks themselves.  Lowering lending standards, allowing no documentation loans, and allowing ARMs to families that could barely afford the lower introductory rates.  There was almost no checks and balances.  It did not matter how bad your debt to income looked as long as your income could support the low fixed interest only payment (in some cases income did not even matter).

However, they should not bear all the responsibility.  The buyer should take responsibility as well.  If you do not understand the loan, if you have not shopped around, if you have not read all the terms, and if you have not taken the time to figure out what happens at every point in your loan’s life, you should not have signed the papers.  To many buyers were under the illusion that housing prices would stay level or increase in value every year which would always allow them to refinance their loan after the fixed period ended.  This is absurd.  It may continue for a long time, but what if?  The problem today is that we have reached that what if and buyers can not refi a house that is upside down in value.  I hate to say it, but unfortunately this frenzy made a lot of people money that probably did not need it and bankrupted a lot of honest people trying to provide a decent life for their family.

This mess is causing a lot of pain right now, but on the positive side, it is bringing housing back in line with where it should be.  Double digit gains year over year are not sustainable and are unhealthy in any market.  While there may not be an easy or immediate solution, housing over the long term will come back.  Buying a house may or may not be a good idea now, but with low interest rates and a 20% haircut off most markets it may not be a bad idea to begin a new strategy.

If you are looking for a new loan, here are a few tips to take into consideration:

1.    Always read everything!  I don’t care if it takes two entire days, read it, understand it, and if you don’t ask questions.  The terms are not always set in stone and can often be modified if you find something that is unreasonable.

2.    Pick the right loan for the right reason!  Don’t pick the interest only because that is what you can afford.  If that is the case, then the house is to expensive for you.  Picking a lower interest ARM is really only good for one thing, lowering your principle loan balance faster than a traditional loan can.  However, it is a gamble because you do not know what interest rates are going to do.  If you take this strategy take the time to model out how the reduction in principle offsets the increase in interest.  With some reasonable assumptions, you should be able to figure out a good break even point depending on what you anticipate interest to be.  If you don’t know how to model out a payment schedule, find someone that knows how or look at some of my previous posts.

3.  Shop around!  There are a wealth of sites and places you can go to apply for loans.  If you are using a broker, call a different one and see if they can meet or beat the current loan offer you have.  The more bids you get out, the easier time you will have finding out what a fair loan is based on your situation.

4.  Be smart and check BBB and consumer reports!  If using a broker, take the time to research for any negative comments.  Odds are, you will find some and see what the complaints were.  Depending on what you find, you can ask how the broker how they resolved the issue or not do business at all with them.

5.  Know your facts!  That is, know you credit score, know what you can afford, know your back up plan if things get tough, and most importantly know your habits.  If you can not stick to a budget don’t get a house that requires a loan that will put you in a situation that requires tight money management.  A nice big house is great, but if you don’t have any flexibility for travel, entertainment, or living, what is the point of having the nice house?

These are just a few tips, but I hope that you find them useful on your next home purchase.

What are your thoughts on the current housing problems?  Who is at fault?  What is a good solution?  Should the tax payers bail people out?  Should the CEOs with big bonuses pay? 

With so many good financing offers out there, thought I would throw a quick reference guide together that you could print out and take to the dealer. Here goes:

1. (MF) money factor to approximate percentage rate: Multiply lease factor by 6,400.

2. Low APR financing monthly payment per $1,000 financed:

72-months 0% APR - $13.89 per $1,000 financed.
60-months 0% APR - $16.67 per $1,000 financed.
48-months 0% APR - $20.83 per $1,000 financed.
36-months 0% APR - $27.78 per $1,000 financed.

72-months 1.9% APR - $14.71 per $1,000 financed.
60-months 1.9% APR - $17.48 per $1,000 financed.
48-months 1.9% APR - $21.65 per $1,000 financed.
36-months 1.9% APR - $28.60 per $1,000 financed.

72-months 2.9% APR - $15.15 per $1,000 financed.
60-months 2.9% APR - $17.92 per $1,000 financed.
48-months 2.9% APR - $22.09 per $1,000 financed.
36-months 2.9% APR - $29.04 per $1,000 financed.

72-months 3.9% APR - $15.60 per $1,000 financed.
60-months 3.9% APR - $18.37 per $1,000 financed.
48-months 3.9% APR - $22.53 per $1,000 financed.
36-months 3.9% APR - $29.48 per $1,000 financed.

3. Here is one the car dealers don’t ever advertise: Total interest paid per $1,000 borrowed:

72-months 3.9% APR - $123.18 per $1,000 financed.
60-months 3.9% APR - $102.29 per $1,000 financed.
48-months 3.9% APR - $81.65 per $1,000 financed.
36-months 3.9% APR - $61.26 per $1,000 financed.

72-months 2.9% APR - $90.73 per $1,000 financed.
60-months 2.9% APR - $75.46 per $1,000 financed.
48-months 2.9% APR - $60.33 per $1,000 financed.
36-months 2.9% APR - $45.34 per $1,000 financed.

72-months 1.9% APR - $58.87 per $1,000 financed.
60-months 1.9% APR - $49.04 per $1,000 financed.
48-months 1.9% APR - $39.27 per $1,000 financed.
36-months 1.9% APR - $29.56 per $1,000 financed.

If your car costs $20,000 and you received 3.9% APR for 72-months you will have paid $2,463.60 in interest ($123.18 * 20).

Quick note on leases. Now that you know the total interest paid on the special financing terms, if you decided to lease on the spot with out doing your homework at least do this quick check before you sign any papers.

Multiply your total payments.
Add your down payment. (Should be zero or very small)
Add your trade in allowance.
Add any rebates and incentives.
Add in the residual value of the car. (Should be as high as possible)

This is you total price of the car. Does it make sense? Is it high compared to traditional financing? If you are doing a 36-month lease, look at what your total cost of the car would be using traditional financing using the charts above. For a car that costs $20,000 financed at 3.9% for 36 months you will pay a total of $21,225.26. If you do your calculation above for your lease and it turns out to be $25,550, you know you have a terrible deal.

Word of warning here. Just because the numbers match the good financing does not mean you have a good deal. If you are at the dealer and reading this and you don’t know why, then take the information down and tell the dealer you will call him with your acceptance within 24 hours. Go home and walk through the calculations on this site and determine if your lease meets the proper factors for being a good deal.

If you are arithmetic challenged, post the information in the discussion board or on any other car buying discussion board and wait for responses.

Never rush a lease unless you are already familiar with each factor before you go into the dealer.

Good luck!

In my opinion you get burned less playing with fire, but before you go out and strike a match, here are some very quick tips to control the flame at the dealer:

1. First and foremost know your total car cost! Even if you don’t understand a single thing about a lease, do yourself a quick check and multiply the payments by the term, add any incentives or rebates, add any down payment, and add the cost of the car at the end of the lease (residual value).

Payments *(term) + Incentives + Rebates + Down payment + Amount due at end of lease (Residual value) = Total cost of car.

Why is this important? Simple, you can compare this to doing traditional financing. In most cases, the lease of the car should cost close to financing the car. Lease factors and interest rates vary slightly, but it is still a good gauge. If they feed you lines that lease rates are not good because banks are only offering special interest rates, then maybe you should not lease. This is almost always not true, if the banks are running good interest rates they probably have good lease rates.

2. Come prepared with traditional financing costs! This is important for step 1. Calculate the cost of the car using interest rates from 1-6% and 36-60 months. If you don’t know how to do this search our site for loan amortization or download our free loan tool for MS excel. Simply calculate the payment for 1%,2%,3%,4%,5%,and 6% and in any incentives and rebates, and down payment.

Now you have something to compare. If the total cost of the lease in step 1 is close to the total cost of the car is step two at 5%, then you know your car if purchased at the end of the lease would be similar to buying the car at 5% interest. If the buy financing offered by the dealer is 0% for this loan period then you know you have work to do as the lease is a lot more expensive.

3. OK, so you compared total cost and they equal the appropriate interest rate, am I getting a good deal? This is where leases become confusing for the average consumer. The answer is probably not if you plan on turning in the car at the end of the period. Why? Leasing in other words is financing the depreciation of the car. We have all heard the expression “the car loses value the minute you drive it off the lot”. This is true, usually in the neighborhood of 20%, this loss in value is what you are paying for in a lease. So, if you pay more than the expected loss of the car of the term you choose you are not getting a good deal.

4. Don’t put a lot of money down! This is the single easiest way to set your wallet on fire. Remember in tip #3 that you are financing the estimated depreciation. If you put money down, the dealer can put the money towards the residual value of the car and give you a low payment. If you trade you car in at the end of the lease you just lost your down payment.

5. Ok what is the proper amount to put down? In my opinion nothing. It is a lease, however, we can’t always qualify for that so do a simple check. Calculate the following: payments*term + down payment + rebates and incentives. Look at that number and then ask yourself is this how much the car is going to loss value in over the term I am looking at? For example, if you do this math on a 30K car that you want to lease for 36 months and the value equals 20K, then something is wrong. Either you payment is to high, you down payment is to high, or they did not give you the rebates. Warning, when doing this compare keep in mind that you pay interest in the lease based on the lease factor so your numbers may be off a little depending on the lease factor they gave you. If you did step one and two, then you know you approximate equivalent interest rate and you should be able to determine a reasonable amount to factor in.

6. Leasing is financing the depreciation of the car! I know this has been said before, but it is so important to understand this. There is no need to have a residual value at the end of the lease that is below what you think the value of the car is going to be at the end of the term. Your payment should be the lowest you can get while keeping the residual value high or above the estimated value of the car at the end of the lease. This seems the opposite of what you would thing, right? Well, if your residual value is higher than the car is worth at the end of the lease, then you are in effect renting the car for less while you are driving it which is the object of a lease (very important: remember all you checks in step 1 and 2, it is you check that they have applied all amounts).

7. In most cars, 36-month leases are optimal. Why? It has to do with depreciation. Any longer and your paying for a steeper rate of decline and it does not make sense to do that.

8. Never do off - term loans (i.e. 39-months, 52-months, etc)! These are designed to build in better profit margins while looking better to the consumer. I have never seen one in that is better then a traditional term loan. They might be out there, but if you go down that path be sure you know how to fully calculate everything on the loan because if you don’t you are probably better off pulling all your cash out of your wallet, handing it to the dealer, and then leaving.

Before you lease always know at least how to do the tips above and please do more homework. Leases are very easy for dealers to make incentives and down payments disappear. I firmly believe, that with out leasing the car dealers would be in far worse condition profit wise today.

Be wise, do you homework and happy leasing! Send questions out to the public in the comments!

Much more to come on this topic, please subscribe. Thanks!

0% financing is back and so are generous cash back offers. Knowing which one to take can save you money in the long run! Here is how to do it!

Some key questions to ask yourself:

1. How much can you afford each month or how much do you want to spend?

2. What is your credit score?

3. How long do you typically drive your cars?

Ok, with those out the way and saved for later lets do some comparing. Take a look at the Chevy Silverado which currently has $3,000 cash back, 0% apr for 60 months, or 1.9% apr for 72 months. Three great offers (offers found via edmunds.com). We will base the compare on the truck costing $25,000.

First calculate your payments and total cost of the car. If you don’t know how to calculate loan payments you can download our free loan tool for excel found in the left margin or use this quick and easy tool at Bankrate.com.

APR     Amount     Payment

0%         $25,000         $416.67 (not including tax and fees) (60-months)

1.9%     $25,000         $367.66 (not including tax and fees) (72-months)

Total Cost of car using 0% APR loan: $25,000 +tax and fees

Total Cost of car using 1.9% APR loan: $26,471.52 +tax and fees

Now for the hard part:

If you want to take the cash offer you will not get the special financing and be subjected to normal car loan rates. This also implies that your special car financing comes at a cost of $3,000. Your rate will be dependent on the bank offers and your credit score. The best advice here is to do research to see what banks are giving to average car loans from sites like Bankrate , Lending Tree, or Eloans. With great credit you should do better than the average and with poor credit you will do worse than the average.

Now, calculate your cost of the car based on a few interest rates and compare.

APR     Amount (less rebate)     Payment     Total Cost of Car

5%         $22,000                         $413.            $24,806.67 (not including tax and fees)

6%         $22,000                         $423.21         $25,392.34 (not including tax and fees)

In this example, for a 60-month loan with no down payment, you should take the rebate if you your interest rate is below 5%.

Alternative method is to calculate what the $3,000 equates to as an interest rate on a 60-month loan for $22,000. If you do your math correct you should get 5.3%. If your loan is better than 5.3% take it, otherwise go with the 0% apr.

Caution

Factors such as putting money down or adding accessories impact the results. If you put money down, you are going to pay less interest. For example, if you put $5,000 down on the 6% loan your total cost of the car is now $24,621 making it a better deal. However, you sacrifice $5,000 of cash which is a whole other topic.

Fees and other accessories also add to the price of the car, make sure to add them in when doing your compare.

Remember the questions up top? They now come into play. One method may be better, but if you can’t afford the payment then you will need to go with a different option. If you have done your homework, you will know how much the option costs you.

The other important question above is your credit score. Many of the good APR offers don’t apply with poor credit, so taking the cash rebate is a better deal.

For the last question, how long do you normally own a car? The longer you stretch out your loan the more likely it will become upside down (same holds for interest, the more you pay the less principle you apply on a monthly basis). If you know you flip cars every three years, consider taking a shorter loan or at least an option that puts your principle after three years close to the estimated value of the car (hint you will need an amortization schedule to figure that one out).

Happy car shopping! Finding you better deals!