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Mortgages: Changes in Refinancing

June 12, 2011 by Leave a Comment

Two-thirds of mortgages being written these days are refi’s, according to the Mortgage Bankers Association. Assuming your credit scores are strong, deciding whether to jump in as well may be a matter of numbers; there are plenty of Web calculators to test the what-ifs, like the ones at HSH.com. Interest rates are teasing new lows, at 4.49 percent, on average, as of Thursday for a 30-year fixed-rate loan, according to Freddie Mac.

If you grabbed a record-low rate late last year, or almost-as-low rates in mid-2009, you may decide to sit this one out. Otherwise, the average outstanding home loan still carries an interest rate of about 6 percent, according to Frank Nothaft, the chief economist at Freddie Mac. “It continues to be an attractive time for people to refinance if they haven’t taken advantage of it already,” he said.

Market changes are especially striking for those borrowers with loans taken out before the 2008 financial crisis. “They’re shocked at how much less the house is worth; they’re shocked at how much documentation we have to get; and they’re shocked at how much they have to sign,” said Matt Hackett, the underwriting manager at Equity Now.

First, don’t assume you’re going to take cash out. In the first three months of 2011, just a quarter of refi borrowers did so, according to Freddie Mac. On average, 62 percent of refi’s over the last 25 years involved getting cash out.

About half of borrowers now keep their loan balance about the same, and 21 percent cut that balance. Some want to cut debt, but others are putting in cash because the dwindling value of their home means they don’t have 20 percent equity, and the extra cash increases equity, the way a bigger down payment does.

Others want to get their loan below $417,000 to take advantage of the lowest rates, according to Philip Merola, an executive vice president of Mountain Mortgage Corporation, a lender in Union, N.J.

People still do take cash out for things like college tuition, Mr. Merola said. But the equity has to be there — don’t expect a loan for more than 80 percent of the current appraised value.

And if you don’t have equity? If your loan is insured by the Federal Housing Administration, consider an F.H.A. Streamlined Refinance, which may not require a new appraisal. There’s also the government-backed Home Affordable Refinance Program, designed for loans that have little or negative equity.

Also bear in mind that you’ll need more documentation. Expect to document all income, assets and debts. In fact, you can expect the lender to go beyond the application, said Michael Moskowitz, the president of Equity Now. Borrowers sign an Internal Revenue Service Form 4506, which allows a lender to get tax returns.

In the past, lenders used returns for quality control after closing, if they looked at them at all, Mr. Moskowitz said. But now his company reviews all tax returns. For instance, he said, a money-losing side business will show up, thus reducing the borrower’s income.

Finally, remember that disclosure forms have changed. As of last year, lenders were required to provide a revised Good Faith Estimate form aimed at making terms more transparent. One key update: In the past, some closing-cost estimates were fairy tales. The new form specifies fees that can’t change between estimate and closing, fees with changes capped at 10 percent, and others that can grow more.

Mr. Hackett warned that some lenders, when they haven’t technically accepted a loan application, fudge on estimates with informal “initial fees worksheets” they provide. Some people think they have a good-faith estimate in such cases, he said. But fees aren’t capped.

One thing that hasn’t changed, said Mr. Nothaft: “It will still come across as a thick wad of paper with a lot of forms to sign.”

Article source: http://feeds.nytimes.com/click.phdo?i=f9daedf0b662807727c826844efbdb5c

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In Consumer Behavior, Signs of Gas Price Pinch

May 18, 2011 by Leave a Comment

At $4 a gallon, gas is too expensive to justify the 50-mile round-trip commute.

“The option was either to sell my truck and get something smaller, or to try to get closer to work,” said Ms. Greene. She chose to move. The new house is just eight miles from the office.

Economists say steady job growth over the last three months, as well as this year’s federal payroll tax cut, have offset the downward pull of rising energy costs on the economy as a whole. But like a lot of economic news these days, what looks good on paper does not feel good for Americans still digging their way out of the recent recession.

At a True Value hardware store in Wilmington, Del., customers stressed by the cost of filling their tanks are buying more replacement parts for wheelbarrows and lawn mowers instead of buying new equipment.

In the San Francisco Bay area, the daily number of cars driving across the Golden Gate Bridge has dropped while passengers on the buses and ferries have risen.

“If all your customers are paying $50 for a tank of gas that they used to pay $25 for, somebody is not getting that $25,” said William Dunkelberg, chief economist for the National Federation of Independent Business.

According to a recent survey, one in four small businesses cited weak sales as their No. 1 problem.

Although gas prices have eased slightly in recent weeks, they are, on average, up about 30 percent over a year earlier. High oil prices have also driven up prices of food, airfares and even taxi rides in some regions, diverting consumers from other purchases.

The nation’s largest retailer, Wal-Mart, which reported earnings on Tuesday, said high gas prices had restrained its shoppers, and its business. Sales at stores open at least a year fell by 1.1 percent in the first quarter, as visits to stores in the United States declined.

“Our customers are consolidating trips due to higher gas prices,” said Bill Simon, who oversees the United States business. It was the eighth consecutive decline in same-store sales at Wal-Mart.

Lowe’s, the home improvement chain, which reported a 5.7 percent slide in quarterly profits on Monday, said its traffic was down 3.4 percent in the quarter as customers made fewer trips.

“Rising gas and energy prices are cited by homeowners as the top factor affecting future spending plans, followed by the state of the overall economy and inflation in general,” said Lowe’s chief executive, Robert A. Niblock, explaining earnings that missed analysts’ expectations in a conference call with investors.

MasterCard Advisors’ SpendingPulse, which researches consumer spending, reported on Tuesday that the gallons of gas pumped nationwide in the last month fell by 1 percent from the period a year ago.

Conserving miles has become a new business priority at Topical BioMedics, where Ms. Greene works in Rhinebeck, N.Y. Her boss, Lou Paradise, recently invested in cloud computing so employees could access documents and programs and work from home more. He hands out gas cards as bonuses and birthday gifts, and holds seminars on how to make a car more energy-efficient. And when employees have to drive somewhere on business, he urges them to use the company cars — a Volkswagen TDI, a clean-diesel car and a Ford Transit Connect van, which is relatively fuel-efficient.

Other companies are also trying to help workers cope with high gas prices. Robert Trow, who runs a small distribution company in Mashpee, Mass., recently gave his employees a raise — on top of the one he gave in December — to help them deal with pump prices.

At the hair products business Paul Mitchell, which is based in the Los Angeles area, the company gives employees 20 cents a mile when they carpool, and covers bus fare in full. More employees are taking the company up on the offers now. Even the chief financial officer, Rick Battaglini, has begun carpooling to work.

Over all, the economy, though still slowly mending, has largely been able to shrug off the effects of high gas prices. Since the beginning of the year, employers have added more than 750,000 jobs, which puts more money into the economy in the form of additional paychecks.

And while the rise in gas prices since the beginning of the year roughly translates into a loss of $75 billion to $100 billion in spending power if sustained for the entire year, the payroll tax cuts adds back about $112 billion, according to an analysis by Credit Suisse.

“It looks like those two things have fought each other to a standstill,” said Neal Soss, chief economist at Credit Suisse.

Article source: http://feeds.nytimes.com/click.phdo?i=c413d5cc826a20991797b74fc5080eeb

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Economix: Small Banks and Debit-Card Reform

May 13, 2011 by Leave a Comment

Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

It’s not hard to understand why large banks oppose any attempt to overhaul the financial arrangements currently surrounding credit cards and debit cards. In the duopoly run through Visa and MasterCard, big banks earn fees that far exceed their costs.

The excess profit for debit cards would be substantially reduced by a proposed Federal Reserve regulation now on the table that would implement the Durbin Amendment from the Dodd-Frank 2010 financial reform act. That amendment, sponsored by Senator Dick Durbin, a Democrat from Illinois, required the Fed to place a cap on the fees that banks may charge on debit-card transactions.

Senator Jon Tester, a Democrat from Montana, has proposed legislation that would delay and effectively derail implementation of the Durbin Amendment, and the big banks are very much in his camp.

Senator Dick Durban, Democrat of Illionois, has proposed that the Federal Reserve require banks to lower debit-card fees to a level closer to the actual cost of transactions. Philip Scott Andrews/The New York TimesSenator Dick Durban, a Democrat from Illinois, has proposed that the Federal Reserve require banks to lower debit-card fees to a level closer to the actual cost of transactions. 

It’s much harder to understand why Independent Community Bankers of America, the trade group for small banks, is pushing so hard for the Tester bill (and effectively shielding big banks from political pressure), because community banks are explicitly exempted from having to lower their fees, and individual executives from at least some small banks publicly support the Durbin Amendment (see, for example, Senator Durbin’s letter to the I.C.B.A. last year).

The most plausible explanation is that I.C.B.A. is one of the country’s largest issuers of credit cards and debit cards — so the representatives from small banks actually have, in this regard, the incentives of a big bank. Although all of its members may be exempt from the debit-card fee provision, the association perhaps is not. To an outsider, this looks like a serious conflict of interest that is undermining the interests of community bankers and distorting the political process.

The I.C.B.A. needs to provide the details of this potential conflict in a transparent manner, including how much money the organization makes from its card business. It also needs to publish the full details of a “survey” that it uses to claim that most community bankers are against the Durbin Amendment. And it probably should also step back from its involvement in the Durbin-Tester debate.

The open secret of the American financial system is that while you and your friends might like to rail against banks over dinner, when the time comes to pay (at the grocery store or in the restaurant), you are likely to offer the merchant some form of plastic card.

While this transaction may seem free to you, the merchant is charged a fee by the bank that issued the card — administered through a card network run by Visa or MasterCard (or American Express or Discover). Specifically, the merchant’s bank (known as the “acquirer”) has to pay “interchange fees” to the card-issuing bank.

For debit cards, which draw directly from your checking account, these fees averaged 44 cents for each transaction in 2009 (which was 1.14 percent of the relevant average retail transaction, according to the Fed, adding up to $15.7 billion economy-wide).

The actual cost of these operations varies, mostly depending on economies of scale in the bank’s processing operation (which is why the Durbin exemption for small banks makes sense). But over our current systems, the cost is very low; on average it is 4 cents for a transaction, according to the Fed. (For the most detailed publicly available study on the effect of lower interchange fees, look at this report on what happened in the Australian debit-card payment system.)

The Durbin Amendment charged the Federal Reserve with lowering the debit-card fees to a reasonable level that will cover costs, and the Fed is proposing to set this rate at not more than 12 cents for a transaction. But this rate would apply only to larger banks. By design, the Durbin Amendment does not apply to banks with less than $10 billion in total assets, and the Fed has confirmed that this exemption can be implemented (see this statement by Ben S. Bernanke, the chairman of the Fed).

Global megabanks are now regarded as “too big to fail” by policy makers, and these companies benefit from huge implicit government guarantees. When you talk with community bankers, they understand and are seriously upset by this arrangement.

But the lobbyists for these community bankers have been unwilling or unable to take on the big banks in any part of the political arena. The Durbin Amendment is a determined attempt to give the small banks an advantage. But the I.C.B.A. is not interested.

It argues that the “carve out” for small banks will not work — through moves by merchants and the card networks, these banks will be squeezed out of the payments system. This is not the view of the Federal Reserve staff, which has studied this closely.

And Senator Durbin is firm on this:

My amendment does not allow discrimination by merchants against issuers of debit cards. As is the case today, under my amendment a merchant who accepts Visa debit cards from large banks would be required to accept Visa debit cards from small banks and credit unions as well. They would also be prohibited from offering discounts for large bank cards and not providing the same discount for small bank cards from the same network.

Perhaps there are legitimate reasons for the I.C.B.A.’s views, but it is also the case that the I.C.B.A. Bancard is a significant player. This is ironic, because the card’s stated purpose is admirable — to help small banks compete:

Today, I.C.B.A. Bancard also serves as an advocate for independent community banks in national policy discussions about payment systems. Part of our mission is to educate community banks about the need to actively offer payment services in order to retain their best customers, earn profitable returns, and be respected as full-fledged participants in the marketplace.

By some rankings, the I.C.B.A. Bancard is among the top 25 debit cards and credit cards in the country.

The I.C.B.A’s main justification for its position is a “survey” of independent community bankers that shows they are opposed to the Durbin Amendment — that is, lowering the debit fees of banks with which they compete. This result is odd, particularly given that a simple online poll by American Banker showed that 60 percent of its readers thought that small banks would gain from the amendment — and this result came after the I.C.B.A. tweeted that it wanted votes against the Durbin plan.

The I.C.B.A.’s Web site does not disclose details of who was surveyed or by whom, or what questions were asked. Its staff members were friendly but confirmed to me that they would not disclose these details. (My impression is that the survey asked banks how they would respond if their debit interchange fees were greatly reduced — not whether the Durbin Amendment would actually reduce these fees).

It’s time for the I.C.B.A. to disclose those details. Is this a real survey or another instance of lobbying posing as research? The I.C.B.A. should share this information both with its membership and with the public.

Article source: http://feeds.nytimes.com/click.phdo?i=967d23c1fedfc7ac949ac377f7ba1863

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Bucks: How Lowering the Cap for U.S.-Backed Mortgages Will Affect Home Buyers

May 12, 2011 by Leave a Comment

Loans for homes in upscale areas like Monterey, Calif., may be affected by a new limit on federally guaranteed loans.Peter DaSilva for The New York TimesLoans for homes in upscale areas like Monterey, Calif., may be affected by a new limit on federally guaranteed loans.

The approaching end of federal guarantees for very expensive mortgages is worrying potential home buyers — and sellers — in high-cost markets. Will they be able to get financing? How much more will they have to pay for that financing?

The limits on mortgages that can be backed by the federal government were raised in 2008 to ease the pain of the housing debacle in areas with high home prices. (Without government backing, many lenders would have refused to finance such loans when the housing bubble burst.) But the current higher limits are due to expire Sept. 30 unless Congress acts to extend them.

Groups like the National Association of Realtors are lobbying to extend the higher caps, arguing that removing them might cause further declines in home values, given the still-fragile housing market. But, as The Times reported Wednesday, that idea is meeting resistance from both Democrats and Republicans, who think it’s time for the private market, not taxpayers, to bear the risk of very big mortgages.

The impact of the coming change is expected to be felt well before Oct. 1, since most loans take more than a month to close. That means borrowers may confront the new criteria as early as this summer. To help put the change in perspective, Bucks asked Cameron Findlay, chief economist at Lendingtree, to outline a hypothetical example of a borrower who could be affected by the lower limits.

First, some background. Before the housing crisis mushroomed in 2008, the limit for a government-insured loan was $417,000 nationally. Loans above that amount were considered “nonconforming” or “jumbo” loans, in mortgage lingo, and carried a higher interest rate to reflect their higher risk. That loan limit still applies in most of the country, and borrowers seeking loans below that amount shouldn’t be directly affected by the coming change. But for the last three years, the formula used raised the limit to as much as $729,750 in areas with high median home prices. The move created a new tier of loans that were eligible for government backing but, in practice, still subject to slightly higher interest rates.

Now, a change in the formula that takes effect Oct. 1 will lower the maximum to $625,500. The change is expected to be felt especially hard in high-priced markets on the coasts, including California, New York, New Jersey and Washington. (For a detailed explanation of the formula and a rundown of its impact on various counties, see this report from the Federal Housing Finance Administration.)

Now, let’s consider the impact on Mr. Findlay’s borrower. Say “Joe Homebuyer” seeks a $700,000 loan today for a house in an upscale neighborhood. The loan amount falls between the “baseline” limit of $417,000 and the current maximum of $729,750. That makes it a “conforming jumbo” loan, in the latest lender parlance. Such loans carry a premium of about 0.10 percentage point over the going interest rate of 4.75 percent. So Joe’s rate today would be 4.85 percent, which translates into $42 more a month.

Here’s what happens after Oct. 1. Joe’s loan is still $700,000, but it’s over the new $625,500 maximum. It’s now a “true jumbo” — ineligible for federal backing — and subject to a higher premium of 0.60 percentage point, making the interest rate 5.35 percent. That’s a stiff $257 more each month over the going rate.

So in the end, Joe ends end up paying $215 more ($257 minus $42) per month under the new rules.

Mr. Findlay noted that all sorts of factors could affect an actual borrower’s interest rate, including his credit score and debt-to-income ratio. And the premium for jumbo loans, for example, could rise higher than 60 basis points, depending on the mortgage market. In the midst of the housing crisis, it was more than double that. “It can be substantial when the market is in turmoil,” he said.

Do you think the higher loan limits should be extended? Are you concerned about selling your home, or getting a mortgage to buy one, if the limits are not extended?

Article source: http://feeds.nytimes.com/click.phdo?i=e4dd843b4b1bbda6066d3e4e49d6797f

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Government Shutdown Would Have Wide Ripples

April 8, 2011 by Leave a Comment

Among the people anxiously waiting to hear if Congress can reach a budget deal are front desk clerks at the Ahwahnee Hotel in Yosemite National Park, manufacturing executives whose companies supply goods to federal agencies, bank loan officers who make mortgages guaranteed by the Federal Housing Administration and Wall Street analysts who depend on a steady flow of government data.

The federal government is, after all, a very big business, and temporarily pulling the plug would disrupt many other businesses.

President Obama has warned that the looming shutdown could stall the already fragile economic recovery by choking off much-needed paychecks to workers and introducing another level of uncertainty in an already uncertain world.

Economists are divided as to how much the shutdown would rattle the economy. Of course, some of it depends on how long any stoppage lasts. If Congress agrees to a budget quickly, it might be just a few national park visitors who are disappointed over the weekend. But if the hiatus stretches to a week — or to nearly three weeks as it did in 1995 — then the ripples could quickly fan out.

When the government shut down for 20 days in late 1995, the nation’s economic growth was slowed by as much as a full percentage point in that quarter, according to James F. O’Sullivan, chief economist at MF Global. The effect was temporary, he said, with the economy adding about that much in the following quarter.

Mr. O’Sullivan said that over the three months that included the shutdown, federal spending fell 14.2 percent from the previous quarter, before rebounding 8.6 percent in the following quarter.

David Greenlaw, United States economist at Morgan Stanley, said other factors might have held back growth in late 1995, including a 10-week strike at Boeing. This time around, the economic expansion faces a number of challenges, including turmoil in the Middle East, concerns about supplies coming from Japan after its earthquake, tsunami and nuclear crisis, and millions of unemployed Americans looking for work.

The federal government is such a large customer that many companies, like Booz Allen or Verizon, could be forced to cut back on workers’ hours, though these two companies and many others declined to comment on their plans on Thursday.

At the national parks, many of the hotels and restaurants are operated by private concerns that will most likely suspend some workers if the parks are closed. Without their weekly paychecks, those employees could tighten their belts, causing further fallout for grocery stores or other retailers who may see sales slow.

In Yosemite, for example, Delaware North Companies Parks and Resorts operates four hotels with 972 rooms and 13 restaurants. A company spokeswoman, Lisa Cesaro, said that if the shutdown continued beyond the weekend, all lodging and food operations would close, and workers would be forced to take vacation time or unpaid leave, right as peak season was starting.

Government contractors are worried not only about payments, but also about what to do with inventories they would normally ship to agencies that may be closed. Imagine a parts supplier for the federal government with a scheduled delivery coming up, said Rae Ann S. Johnson, a lawyer and council director for the Manufacturers Alliance/Mapi, a trade group. “If the government is shut down, there is no one to deliver it to. If they have to store it longer than anticipated, then there are extra costs.”

The shutdown could also make it harder for lower-income families to get mortgage loans because the Federal Housing Administration would suspend its guarantee program. The F.H.A. guaranteed about 21 percent of new mortgage loans in 2010, federal data shows.

Shaun Donovan, the housing secretary, said on Thursday that he feared some lenders would stop making new F.H.A. loans, or prevent closings by reneging on loan approvals. “This is the worst time that we could introduce that uncertainty into this fragile housing market,” Mr. Donovan told a Senate subcommittee.

Lenders do not need to obtain guarantees at the time a loan is made. Wells Fargo and Bank of America, by far the biggest F.H.A. lenders, said that they would continue to make the loans and simply wait to obtain guarantees — at least as long as the shutdown remained fairly brief. But JPMorgan Chase said that it would not make new F.H.A. loans during a shutdown, although it emphasized that loans already approved would not be affected.

Economists as well as Wall Street analysts and investors fret that the spigot of data churned out by the government could stop if the shutdown extends into next week. Reports scheduled for next week include retail sales and inflation data.

A spokesman for the Bureau of Labor Statistics, which calculates the unemployment rate, said that during a shutdown, the agency would not collect data, issue reports or respond to public inquiries, adding that the Web site might not be operational and would not be updated.

Binyamin Appelbaum contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=2624879a39a8e63d29cf11c5b3acd469

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