Mary Steinmeyer’s Blog

The Federal Reserve cut short-term interest rates for the seventh time within seven months on Wednesday, May 1, 2008. The .25% reduction brings the federal funds rate (the rate banks charge each other for overnight loans) down to 2%.

Stocks responded positively in the short run. Shortly after the rate cut was announced, the Dow Jones Industrial Average briefly topped the 13,000 mark for the first time since January.  But it was short lived.  The Dow dropped significantly later in the day over worries about what the Fed would do next. The index closed at 12,820.13, down 11.81 points from Tuesday’s close.

Now the big question is, is Bernanke done?  Will the Fed sit tight or are more adjustments in our future.

TheWall Street Journal had a very disturbing story on Wednesday about the “Fast and Easy” loan program of Countrywide Financial Corporation, many of whose mortgages were bought up by Fannie Mae.

 

Some of the problems are surfacing in a mortgage program called “Fast and Easy,” in which borrowers were asked to provide little or no documentation of their finances, according to people with knowledge of a Federal probe and to former Countrywide employees.  Fast and Easy borrowers aren’t required to produce pay stubs or tax forms to substantiate their claimed earnings. In many cases, Countrywide didn’t even require loan officers to verify employment, according to an October 2006 presentation by Countrywide’s consumer-lending division. That left the program vulnerable to abuse by Countrywide loan officers and outside mortgage brokers seeking loans for customers who might have been turned away if their finances had been more closely scrutinized, according to three current and former Countrywide senior executives and to several mortgage brokers who arranged loans through the program.

 

Both Countrywide and Fannie Mae, the government-sponsored company that bought many of the loans, classify the loans as “prime,” meaning low-risk.  A Fannie spokesman agreed that the verification of employment wasn’t required on all loans, but added that Countrywide was expected to verify employment details on a “sampling” of loans. The Countrywide spokesman said his company fulfilled that obligation.

 

In a related article from Bloomberg.com, its interesting to note that Bank of America Corporation. the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corporation’s debt after taking over the mortgage lender, increasing the likelihood of a default.“There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the bank said in an April 30 regulatory filing, adding that no decision has been reached. Investors had grown more optimistic the bank would back Countrywide debt, and Standard & Poor’s said this week it may raise Countrywide’s rating to match Bank of America’s.

While this might be a great market for first-time home buyers in terms of inventory and interest rates, it can also be a very challenging market with issues regarding value and availability of loan programs.  Many consumers who can qualify lack the cash for a down payment or closing costs.

 

There are awesome grant programs available through various city and county programs.  So when in doubt, give me a call.  Let’s see what we can put together.

If you’re not familiar with reverse mortgages, the name is appropriate.  The reverse mortgage basically works backwards to a traditional mortgage.  Instead of paying the lender every month, the lender pays the borrower either monthly or in one lump sum (or in a combination of these choice), ostensibly so senior homeowners can live out their golden years in comfort. 

 

The amount of money available is based on current interest rates, lending limits, the equity available in the home, age of the borrower, and life expectancy.  No payments are due while the reverse mortgage is still outstanding.  It is repaid when the borrower (or in the case of couples, the sole remaining spouse) dies.  The borrower can never owe more than the house is worth, no matter when it is given up and regardless of market conditions.  If the house does sell for more than the balance owed on the reverse mortgage, the excess after all closing expenses are paid, goes to the borrower.

 

But the reverse mortgage, much like the Option ARM discussed in a previous issue, is not a “one size fits all” solution for all consumers.  And there is definitely an air of “buyer beware” when it comes to reverse mortgage products and the professionalism of the mortgage lender offering the product.  A few scam artists have found this product and are hawking it to unsuspecting homeowners.

 

With some 40 million Americans already 62 or older and another 79 million Baby Boomers heading into their senior years, the potential for reverse mortgages is bright.  Tomorrow’s reverse mortgage products will probably include products for various life stages, not just aging because borrower’s requirements change as they age.  The most important thing anyone considering a reverse mortgage can do to protect themselves is engage in face-to-face counseling from an independent, government approved third party counseling agency, such as AARP (800-209-8085).

While most people will look at a recession with fear and uneasiness, it’s important to also realize that this is an opportunity to get some deals and improve your personal finances.