I have heard a lot of politicians and news media talk about how mortgage brokers created the problems that are plaguing the mortgage industry. That is a bunch of baloney! I am a mortgage broker and lender and here is my side of the story.

Mortgage brokers can only work within the framework of guidelines set up by the investors (banks) who buy loans from them. The bank sets down rules for minimum credit score, max loan to value, documentation requirements, etc. Mortgage brokers do not approve loans. They fit customers into programs that investor banks offer.

If a client comes in with a 600 credit score, no documentable income and no money for a down payment the mortgage brokers job is to look around the universe of wholesale mortgage programs and see if there is a program the client can fit into. If there is, then the broker puts the loan together per the program guidelines and submits the loan to the bank for approval. The bank underwrites and approves the deal if it meets their requirements. If this loan goes into foreclosure who's fault is it? The mortgage broker? I don't think so. As long as no fraud was committed on behalf of the broker then it's the bank's fault for creating a loan program that is ridiculous. Zero down, no income documentation for someone with weak credit? You're kidding right? No - these types of loans were being made routinely up until the end of last year.

Are there loans out there that went bad because of a mortgage broker? Absolutely. These are the loans where the mortgage broker did something fraudulent to make it appear the borrower met the banks guidelines and duped the bank into approving the loan. That is the fault of the mortgage broker and, like every business, there are bad people in this industry. This is a small percentage of the loans that have gone bad but there are certainly those out there.

Big banks and Wall Street greed are the true causes of the current mortgage crisis. Between 2000 and 2006 there was a huge amount of money made on sub-prime mortgage lending and some giant players entered the arena, like Morgan Stanley. They have all been bitten badly though as the reality of these subprime borrowers showed itself in the form of large numbers of non-performing loans. Now the collapse of subprime lending has bled over to the prime credit markets and to the U.S. housing market in general. Many homeowners who have lost the equity in their homes due to declining values are choosing to walk away from their homes. I have heard the words "I'm going to give it back to the bank" too many times in the past year. There is an irresponsible attitude out there right now that is adding to the problem as some people who could make their house payment choose not to because their home has lost value. If they hang in there they may yet get it back. Right now the single biggest cause of foreclosures is declining values.

The bottom line is that the mortgage industry and it's various players created the problems we are facing by relaxing credit standards to a ridiculous degree and lending money to nearly anyone that had a pulse. The good news? Over the next year or so we should see the bulk of these loans move through the system and be sold and both the real estate market and the lending industry should start to heal.

My last post was all about how credit scores are calculated and what scores are good or bad.  In Part 2 we're going to talk about what to do to maximize your credit score or to improve on your score if you'd like it to be higher.

I hear the craziest things that people have been told to do in order to rescue or improve their credit score.   Have you ever gotten a copy of your credit report and then gone through it and closed all of the accounts you were not actively using?   http://mioaklandcounty.com/blog/2007/02/07/how-to-get-credit-score-part-two/

The credit score - as mysterious as a gypsy palm reading? Kind of, yea. Sometimes I'm surprised that some credit scores are better than it appears they should be and others are worse. Why? I have no idea. This system is not perfect and nobody knows exactly how it works (strange but true). I have a lot of information on this topic for you, so I'm going to split it up into two articles. The first will address how credit scores are derived, what affects them and the range of scores from good to bad. The second article will cover steps to take to improve a poor credit score or to maintain a good score..

There are some key factors that are used in determining your basic score; 1) Your payment histories - recent late payments hurt a lot. The older a late payment is the less impact on your score. 2) Number of accounts that have balances. If you have a dozen charge cards with balances consolidate them down to 3 or 4. There is no reason to have Macy's, Nordstrom, GAP, Sears, Kohl's, Liz Taylor, Mervyns, etc and owe $89 to each of them! Use your Visa card - they all take it! 3) Proportion of balances to credit limit. This means don't max out your credit cards. When your credit cards are at there limit it is a big red flag. It's best to never use more than half of the available balance on a charge card. 4) Length of time accounts have been opened. Old accounts with long payment histories are really great for a credit score. This is the reason why you should NOT close charge accounts that you are not using. Just shred the card and stop using it. This way the account remains active and continues to have a positive impact on your score. 5) Credit inquiries. An inquiry shows up when someone checks your credit report. Lot's of inquiries indicate you may be trying to open a lot of new credit which is a red flag. If you get a new credit card every six months to get the low intro rate your credit score will suffer because of constant inquiries and the number of accounts which have been opened in the recent past. 6) Collection Accounts and Public Records. If you owe a creditor and you're not paying they will send the account to a collection agency. This shows up on your credit report - bad. When you get a bill from the doctor's office that your insurance did not cover do yourself a favor and pay it. Then you can try to get the insurance to reimburse you if they were wrong. Otherwise the doctor's office will waste no time going to collection. Medical collection accounts are so common it's ridiculous. Public records include Judgments, Tax Liens, Bankruptcy's, Etc, all bad and should be avoided at all costs to keep your credit score in the positive range.

What is the positive range? Well, credit scores run from 300 (worst) to 850 (best). Generally speaking, anything under 500 is horrible. From 500 to 575 is very bad and 575 to 620 is bad. Then from 620 to 680 is OK and 680 to 720 is good. If you are over 720 you have excellent credit and you'll get better rates on everything from credit cards to home loans and even insurance! Your credit score influences the cost of many important things in your life and should be taken very seriously. Next time we'll talk about how to keep your score high or to get it higher.

Ken Mascia
Oxford Financial Corporation
Birmingham, Michigan
248-644-1200
www.oxfordfinancial.com

Check this out; you may be having the same experience right now; many of the buyers I am talking to are looking for a "foreclosure", because they want to "get a really great deal."   Well, I can understand the logic behind this thinking.   All of the recent talk about high foreclosure rates combined with a slow real estate market would lead you to believe that there are some great deals out there on foreclosed homes.  What's the scoop?

The bottom line is this - aggressive mortgage lending has really taken the wind out of the sails of foreclosure buyers.  Nearly every home that goes into foreclosure is mortgaged to the hilt and may in fact have loans that total more than the value of the property.  Let's face it folks, nobody that has a lot of equity in their home gets foreclosed on anymore.  If you have equity, then there's a lender somewhere that will loan you more money to get you out of trouble. 

So, when the bank gets a house back after a foreclosure it has already incurred thousands of dollars in legal fees and probably has to spend some money to make the house presentable for marketing.   There is not a lot of wiggle room on the sales price.  Yea, says this foreclosure buyer, but they have to get rid of that thing, so I can get a deal on it, right?  Not necessarily, you have to remember that the owner of the home is a gigantic bank with about a billion dollars in home loans on the books and they build in a reserve amount for expected losses on foreclosures.  The bank's balance sheet is so huge that the foreclosures are like a fly on their shoulder that goes unnoticed.  They are not generally willing to lose a significant amount of money on these things.  So if the equity in the property is zero or negative, then you may get lucky and be able to buy the house for a 5 - 15% discount to current market.  That's probably about as good as it gets and that's not a great deal!

There are really better opportunities that go overlooked.  One of these is estate sales.  When a person dies, the surviving heirs are generally very motivated to sell the house and put the estate to rest.  I have seen some of my clients get unbelievable deals from estate sales of homes. 

Another possibility is auctions.  Recently there have been a couple of well know builders that have been forced to auction off a block of new homes to avoid a financial disaster.  One of my own clients bought a home at auction in December for $195,000 that had been listed for sale in the mid 200's and we appraised the house for $245,000 with a very conservative appraisal.  This was also a builder model and he got all of the furnishings!!  We didn't even include that fact in the appraisal and the house probably had at least $25,000 in furnishings.  This was a great deal!

Finally, a homeowner who has owned their home for a long time, bought it cheap, has a ton of equity and is motivated to sell is going to be way more flexible on price than a bank trying to get their loan money back on a foreclosure.  Think about it - if you bought a house in 1985 for $125,000 and you only owe $75,000 on it now, and you sell it for $250,000 (even though you thought it was worth $300,000) you still doubled your money on this property.  The buyer got it for $50,000 less than it will sell for when the market picks back up again.   Look for sellers that have owned for a long time and have a lot of equity!  If they are motivated you may get that great deal!

The bottom line is, in today's world foreclosed homes don't necessarily make for bargains.  There are a number of other ways to find great deals out there if you put your thinking cap on, are patient, and know what to look for.  Happy Hunting!

Ken Mascia
Oxford Financial Corporation
Birmingham, Michigan
248-644-1200
www.oxfordfinancial.com

No way!  A home inspection blew up your sale?  That only happens to some other poor sucker in tales told at Peabody's bar on Friday afternoon, right?  Not so much.   Recently one of my first time homebuyer clients has made three separate offers on three different properties and the home inspection resulted in the death of all three deals!  The same home inspector each time and at a cost of $450 per inspection.  The buyer has paid enough to the inspector to have made many of the repairs that the inspector noted.  It seems odd that every house this guy goes into has potential drainage issues, or black mold under the deck (under the deck??), or the siding is totally wrong, the roof will blow off in the next storm or the addition is a fire hazard!

Are home inspections bad?  No way.  Home inspections have become crucial tools in making a sound decision when buying a home.  This inspector, however, is an ALARMIST and presents his findings in a way that makes the buyers only choice to duck out of the deal.  A good home inspection will point out the faults of the property in an objective way and allows room for people to make their own decisions about whether an issue is a deal breaker, no big thing or a renegotiation.   Making every problem into a major defect is not in the job description.  Can't we all just get along?

Really, one of the things that seem to have gotten lost over the last few years is that buying an existing home is buying a home USED.  OK, when you buy something second hand it is not brand new.  Do we understand each other?  Plus, part of being a homeowner is the cost of maintaining a home.  Statistics show that the average cost of maintaining a home over time is 1 to 2% of the homes value per year.  This is for things like roof, furnace, painting, water heaters, etc.  So, if the inspection reveals that the house will need a new roof in 5 years that's OK.  If the house was built in the 50's then it probably has 50's electrical and plumbing.  What else would you expect?  I mean this is not rocket science.  The bottom line is that a buyer should expect that the house is going to need routine maintenance on an annual basis and some general updating over time.

It seems like the thing to do is have a chat with your buyer prior to the inspection and give them an idea of what kind of things they may hear from the inspector.  Some advance warning and a little knowledge can turn things around and keep the sale on course.

This is just a little follow up of the piece I wrote earlier this month “I Owe More Than My House is Worth!”    There have been a number of questions about Short Sales and I have a few answers.

The definition of a Short Sale is when you owe more on a property than it can be sold for and your lender agrees to accept less money than they are owed in an effort to keep the home from going into foreclosure.  No lender wants to foreclose on anyone.  It’s a lot of work and nobody wins.

What Steps Do I Need to Take for a Short Sale?  Well, the first thing is to verify the value of the property.  In order for a lender to consider a short sale they will first want to appraise the home.  They will have to justify why they took less than they were owed on the loan.

Next, you want to add up all of the costs of selling the property.  These will include Real Estate commissions, transfer taxes, closing costs and title fees.

Then get the balances of all loans owed on the home.  Don’t forget, the principal balance is not the payoff.   The payoff will include accrued interest and any unpaid late fees, etc.

Add all of these things up and the total is the amount needed to walk away from the home even money.  If these costs total more than the value of the property the difference is the “Short Sale” amount.  This is the amount the lender stands to lose if it accepts the sale.

How Does the Short Sale Affect the Owners Credit Rating?   This is somewhat of a gray area.  It doesn’t have to have any negative impact on the owners credit score as long as the owner continues to make the mortgage payments on time.  If you miss payments at anytime during the loan term these will show up on your credit report and can lower your credit score dramatically.  Of course, one of the main factors in evaluating a loan application is the borrowers past history with making payments on time.  So, keep those payments on schedule!   The short sale, if handled correctly, should not result in a major black mark on your credit.

Ken Mascia, Loan Officer 248-644-1200

Oxford Financial Corporation

Birmingham, Michigan

That’s a tough spot to be in pal.  With today’s real estate market and some very aggressive mortgage lending tactics, this has become all too common.  Many lenders encourage people to borrow all of their equity and in many cases, on an interest only loan!   This is truly a recipe for self destruction.  When you owe money, the general idea is to try to pay it back.  At least that’s what Mom always said.  Anyway, if you’re in this situation, for whatever reason, what are your options?

One option that should not even be considered is stopping making payments on the house and giving it back to the bank!  Otherwise known as foreclosure.  The bank can still go after you for the shortfall after the house is sold.  Plus, your credit will be destroyed.  Not cool.

Another possibility is renting the home to someone else so you can go out and buy a new house.  This will work great as long as you can get enough rent to cover most, or all, of the house payment.

If you really have to get out of the house, then you may have to sell at a loss.  In some extreme circumstances, it may make sense to bring money to closing to get out of the situation and move on with your life.

Maybe your lender will allow a “short sale”?  This is when the sales price does not cover the mortgage payoff and your bank agrees to eat the difference.  Doesn’t happen often, but it may worth at least a phone call to see if they would consider it.  This would probably only be allowed if your having some extreme financial trouble and the bank feels it’s the best way out for them.

As a last resort, you may be able to voluntarily give the property back to the lender.  This is known as “Deed in-lieu of Foreclosure” and is generally only done if you are behind on your payments and the bank agrees to take the house back.  This is not nearly as damaging to your credit as a foreclosure.  A call to your lender can determine if this is a possibility. 

Finally, watch out for scammers!  Someone may offer to buy you out of the house and take over your house payments.  Never give someone else the responsibility to pay for your loan.  If they don’t make the payments, you are the one who gets foreclosed on and your credit is ruined – not theirs.   If someone offers to do something to get you out of this mess that sounds too good to be true – it is!!

Ken Mascia, Loan Officer

248-644-1200

Oxford Financial Corporation

WOODWARD DREAM CRUISE 2006

In Oakland County Michigan, the Woodward Dream Cruise is the event for car nuts.  Who isn't a car nut in Metro Detroit?  People either love this event or they hate it!   The haters are all people who live right near Woodward Avenue but don't want to participate in the event.  But, it's really hard to not partake when there are 1,000,000 people lining the avenue, walking the streets, taking photos and driving around in their cars!  Plus, instead of a one day deal this thing has turned into a full week of cruising and partying!

 I for one started the Dream Cruise on Wednesday night at a friends Party and continued Thursday night, Friday Night and all day Saturday!  Thank God it was raining until early afternoon on Saturday because I really needed some rest.

 We started out at the SKBK Sotheby's International Realty bash in Birmingham, MI.  The Elvis and Pinky Tuscadero (is that who that is?) get ups were a big hit and everybody got a big laugh out of it!  Great party with excellent hot dogs and a couple of giant coolers loaded with Labatt Blue, not to mention the excellent company.

 If you live near Southeastern Michigan and have not been to the Dream Cruise come on up and check it out next year.  The 3rd weekend in August has never been more fun.  You'll see the biggest collection of classic cars ever assembled anywhere.  I guarantee you'll love it!

Ken Mascia