New Conforming Limits Announced

Every year about this time, FHLMC (Freddie Mac) and
FNMA (Fannie Mae) adjust the limits on loans that
they will purchase from lenders.

These are called conforming loans because the loans
that are created for purchase by FHLMC and FNMA are
underwritten to a standard that conforms to their
guidelines. Mostly, these loans are for 30-year
and 15-year fixed rate loans.

The new limits for 2009 for San Diego County are:

1-family home $546,250
2-family home $699,300
3-family home $845,300
4-family home $1,050,500

The limit that was set for 2008 was $417,000 for a
1-family home. These new limits reflect a recognition
that San Diego needed a higher limit so that our market
could be better served.

You may recall that the Stimulus Act that was passed
earlier this year allowed for a temporary increase in
the loan limits that is scheduled to expire December 31,
2008. In San Diego, the temporary limit was $697,500.

There was some speculation that Congress may have
extended this temporary limit past the end of the year,
but the announcement of the new limits seems to put
this speculation to rest.

The lenders, for the most part, have already begun to
accept loan requests using the new loan limits.

What this means for you is that larger loan amounts
can now be eligible for the lower interest rates and
fees that conforming loans offer.

Loans above the conforming loan limits are known as
jumbo loans, and instead of these loans being sold
to FHLMC and FNMA (they are not eligible because of
the loan size) they are sold to investors.

These investors usually purchase these loans through
Wall Street when the jumbo loans are packaged into
bundles known as Mortgage-Backed Securities (MBS).

Recently, there has not been any investor appetite
for purchasing jumbo loans. This is because investors
purchased MBS in the past that included many loans
that were rated as good risks that turned out be much
higher risks.

The investors lost money in these MBS because the
quality was not what it was advertised and promoted to
be.

Until the investors are satisfied that the quality of
the loans that are bundled into these MBS are rated
fairly and the interest rates are commensurate with
the risks, they will not provide funds that flow
through the lenders to make jumbo loans.

So, at the present time the enhancements in the
conforming loan limits allow us to serve a larger
segment of the market at the most affordable terms
that are offered.

Keep in mind that there are 30-year jumbo loans that
are available where the interest rates are fixed for
the first 3, 5, 7, and 10 years. These have been
effective mortgage solutions and have been worthy of
consideration.

When 30-year and 15-year fixed rate jumbo loans are
offered at reasonable and competitive rates again,
we can then have a fuller menu of resources to serve
the entire market.

Please get in touch with me so that we can see how
these tools can be of benefit to you.

Update On The Agency-Jumbo Loans

When the Stimulus Bill was passed earlier this year,
it included a provision for FNMA (Fannie Mae) and
FHLMC (Freddie Mac) to purchase loans above the
conforming limit of $417,000.

This provision allowed for loan amounts up to
$697,500 in San Diego County (up to $729,750 in some
counties). It has an ending date of December 31, 2008.

Some of our lenders have stipulated that they want
these loans closed as early as December 1 to December
15, so that they have time to finalize the sales of
these loans to FNMA and FHLMC.

There is still time to process loan requests and meet
some of these deadlines for this loan program. It will
take everyone pulling in the same direction to handle
it as efficiently as possible.

But, there is always the chance (and many of think of
it as likely) that Congress will extend the date and
establish a new conforming limit.

Now that the elections are over, we can hope that
Congress can get back to doing the work for the people
and facilitate an extension. A new loan limit that
has been floated is $625,000, but we will have to wait
and see if Congress acts and to what degree.

If Congress does extend the expiration date, it will
remove some of the urgency that we are facing on the
mid-December deadline.

When the Agency-Jumbo loans were first announced, we
had high expectations that they would allow borrowers
to obtain jumbo loans at conforming interest rates.

As the shake-out occurred, conforming rates behaved in
a normal fashion, but jumbo rates skyrocketed. This
was because investors were no longer willing to buy
financial instruments that were backed by high-balance
loans. The investors that were willing to engage
demanded higher rates of return in exchange for the
higher perceived risk.

What developed was conforming rates that went up and
down in relation to market forces. Jumbo rates were
very high. And the Agency-Jumbo loan program had
rates that stayed in the middle. Currently, the
Agency-Jumbo rates are marginally above the conforming
rates.

The adjustment that FNMA and FHLMC have made, instead
of having interest rates reflect the increased risk, is
to be very stringent on the qualification process.

The good news is that the guidelines are pretty well
defined, so that we have a good opportunity to know
the likelihood of your request being approved.

If you have an interest in this loan program, give me
a call so that we can strategize about what it takes
to get things done for you.

I Work For You

As a mortgage broker, I have access to lenders and
programs that you as a borrower are unable to find
on your own.

For the most part, many of the big lenders that have
a local presence allow us to represent their loan
products as well.

When you apply to the local lender, you are putting
your eggs in that basket. If that lender is unable
to approve your loan request, you will need to
re-apply with another lender. This will probably
result in duplicate fees for appraisal of the
home and for credit reports.

Additionally, when you apply with the one lender,
your request will need to fit into that lender's
available loan programs and underwriting pattern.
The representative there will be working for the
lender and asking you to adapt to their policies.

Because I have the availability of many lenders and
many loan programs, I serve as an advocate for you
with the lenders.

When you complete an application with me, I am
going to package your loan request and select as
many potential lending prospects as possible.

If your qualifications are strong and many lenders
will be willing to approve your loan, I can select
among the lowest in price - that is interest rate
and loan fee - to get you the best terms possible.

The big advantage of this approach is that one
loan application with me makes available to you
the market of available loan products that I
represent.

If Lender A expresses an unwillingness to consider
some aspect of your loan request, I can roll your
loan application to Lender B, and so on.

You would not need to obtain a new credit report or
appraisal to gain access to the additional lenders.

If you have a borrower profile that limits my
choices, it will probably be necessary to have your
loan file submitted to any number of lenders who
provide loan products that fill a particular niche.

Once your loan application is in process, we have
the ability to get electronic loan approval through
our lenders. We submit the data from your file,
the automated underwriting system renders its
decision, and we receive a list of conditions that
must be satisfied to finalize the approval.

The list of conditions will include the lender's
review of the physical file so that they can
validate the data that we submitted.

The approval will typically notify us of the
maximum interest rate up to which the approval is
valid.

Because underwriting guidelines have tightened
recently, it is in your best interest to complete a
loan application early in your time frame for wanting
to purchase or refinance. This early action on your
part will allow us to get the preliminary loan
approval, and to have a list of conditions from the
lender that we can satisfy.

When the time becomes right - either the right home
you want to purchase presents itself, or when loan
pricing is where you want it to be - we can then
be in a position to move quickly on your request.
And, we will already know just what the lenders are
looking for to avoid surprises.

Give yourself every advantage to have your financing
of your home go smoothly. Give yourself lots of
choices, lots of flexibility, and be pro-active
in the process.

Start your loan application with me, and let me work for you!

Is There Any Mortgage Money Available Right Now?

Over the last few weeks, we have seen wild fluctuations
in the financial markets.

Congress couldn't agree on a "rescue plan", and then a
week later, finally put together legislation that was
signed immediately by President Bush.

A big rationale for the "rescue plan" was due to the
fact that credit markets had become very illiquid as
lenders and investors were forced to hold mortgage
loan assets. A larger-than-normal percentage of these
assets were not being repaid in a timely manner which
leads to foreclosure. There were no buyers for these
loans, or for other loans that are currently being paid
well, because investors have no confidence in the
quality of the loans.

So, the "rescue plan" was designed to have the govern-
ment buy these troubled assets to free up liquidity for
the financial institutions and allow them to start
lending more freely again.

But, throughout this process mortgage lending has
continued.

Despite the financial troubles they have been going
through, Freddie Mac (FHLMC) and Fannie Mae (FNMA)
have been purchasing loans up to their conforming
limit of $417,000 with regularity. They have also
been authorized to purchase loans up to $729,750
(depending on which county the property is in) through
the end of this year and loans have been created in
this categoy as well.

The jumbo loan category, those loans above $417,000
(and temporarily those above $729,750), has been
severely restricted. Institutional investors and
those buying mortgage-backed securities through Wall
Street have no appetite for buying these products
right now. Consequently, interest rates are high
for these loans, and availability is extremely limited.

Now, please understand that the qualifying standards
are not as liberal as they were in the past. For the
most part, loans that accept low credit scores, that
accept stated income from the borrower, and that are
above 90% of the value of the property are not readily
available.

So, the key to the kingdom is that your qualifications
include the following:

* Strong credit scores

* Provable, stable income that meets the lender's
current qualifying criteria.

* A strong equity position in your home, or a sizable
down payment on the home purchase.


Mortgage lending has not stopped. Qualifying is more
strict.

If you have an interest in buying a property while
prices are substantially lower than they have been,
or want to see about renegotiating your existing
home loan, just give me a call.

We can work together to see what is possible in this
lending environment, and do our best to help you reach
your goals.

Credit Scoring: Behind the Curtain

Credit scores have a huge impact on our lives. If you are
going to borrow money for a car or a home, the scores on
your credit report will help determine the loan amount
granted, and more importantly, the cost of your loan in
the form of interest rates and fees.

A while back, I went to a seminar where some of the
behind-the-scenes information was discussed.

First, some basics.

Credit scores range from 300-850 (some models may go to
900).

On the credit report, the top 4 reasons are listed as
to why the score is not perfect.

Originally, Fair, Isaac was asked to produce a model
that would predict the likelihood of a borrower having
a 90-day late in the next 24 months.

It is a dynamic modeling system, representing a moment in
time. The score can be different in the morning and afternoon
of the same day.

The model is weighted by the following factors:


35% of your score is based on history.

If there are lates, the model looks at recency, frequency,
and severity.

Recency:

There is a heavy impact if the late is within the last 6 months.

There is moderate impact if the late is within the 7-24 month
range.

There is little impact if the late is over 24 months ago.

Frequency:

Obviously the more often accounts are late, the more impact
on scores.

Severity:

The longer the late, the more impact on scores. For example
a 30-day late is less costly than a 60-day late which is less
costly than a 90-day late, etc.

Late payments and inquiries after a bankruptcy can be
costly to the score.


30% of your score is based on level of debt.

Higher credit card balances are an indicator of higher
likelihood of default.

Limited use of lots of available credit is favorable.

Don't close credit cards. This tends to skew your report
toward more recent credit and you lose the benefit of the
history of the old cards that will be closing.

Using cards to their maximum credit limit is less favorable.

Pay them down, spread the balances to existing cards,
or ask for increases to the credit limits.

Use 2-5 cards actively, meaning at least every 3-6 months.

HELOCs are scored as installment debt if the balance is
more than $30,000. This is more favorable in the credit
model. They are scored as revolving debt if less than $30,000,
and this is less favorable in the credit model.


15% of your score is based on length of credit history.

The model looks for a 30 year history.

Rotating revolving debt to new credit card at a high
balance-to-limit ratio works against the score. And,
as we said, closing the old card makes the credit history
look shorter, and does not score as well.


10% of your credit score is based on credit mix (open and
closed accounts).

Revolving debt has the most negative impact.

Finance company references hit the score the hardest.

Deferred payment accounts can be a problem. If you ever
make a payment on one before you have to, continue to
make even a small payment because the reporting system
is now activated to show it as a paying account, not a
deferred account. If you don't continue making even a
small payment, you will probably be reported with lates.

These deferred payment accounts also will report a high
balance on the report based on the add-on interest, and
will also show the inquiry. These are not invisible to the
credit report!


10% of your score is based on inquiries.

Inquiries stay on your report 2 years, they count in the
scoring for 1 year, and they actually show on your report
for 90 days.An inquiry can count for 2-15 points against
your score.

Companies can no longer run your credit without a signed
authorization.

Inquiries from auto companies within a 7-day period are
grouped as 1 inquiry.Inquiries from mortgage companies
within a 30-day period are grouped as 1 inquiry. Rolling
14-day inquries are considered as 1 inquiry. (Theoretically,
you could run the credit every 14 days for a mortgage and
have it only count as 1 inquiry).

Credit union inquiries can't always be determined: they
may be revolving (credit card), installment (auto), or mortgage.

Some statistics:

Median score is 720.

11% had a score >800 and had a default rate of 1%
29% had a score of 750-799 and had a default rate of 2%
20% had a score of 700-749 and had a default rate of 5%
16% had a score of 650-699 and had a default rate of 15%
11% had a score of 600-649 and had a default rate of 31%
7% had a score of 550-599 and had a default rate of 51%
5% had a score of 500-549 and had a default rate of 71%
1% had a score of <499 and had a default rate of 87%

As we take a look at the mortgage meltdown through the
prism of credit scoring we can see that even if there
were not a decline in property values, that the lenders
were putting themselves in a very vulnerable position.

Many programs allowed for scores of 640 or less, and they
allowed financing up to 100% without documenting income.
Statistically, they had a 40% to 87% chance of default
before accepting the additional risks of high loans in
relation to the value of the home, and accepting the
borrowers' representation of their incomes!

Use these guidelines as you make decsions about your
credit activity. Remember that the credit bureaus have
created these "black box" modeling systems and that the
process is not transparent.

Be sure to do adequate research so that if you decide to
apply for credit, pay off some credit items, or close
accounts that you feel comfortable with the potential
consequences to your credit score.

Keeping Your Existing Home When Buying A New Home

There are times when a borrower wants to buy their new
home, but want to or need to hold onto their existing
home and use it as a rental property.

In the current market, there are many homeowners who
owe more on their homes than they are now worth. Also,
they see that they could buy a comparable home to the
one that they own for a much lower purchase price.

What has developed recently is that some homeowners
found a solution to their problem that the lending community
didn't anticipate.

Before they developed credit problems on their existing
home loans, they would purchase a new home. As part of
the qualifying for the new home, they would represent
that they would rent out their existing home and move
into the new one.

The underwriting guidelines that were in place allowed
a portion of the rental income to offset the expenses
on the soon-to-be-rental property. Specifically, 75%
of the rental income was allowed to be used. The guide-
lines recognized that there would be vacancies and
maintenance costs which is why they did not allow the
full rental income.

These homeowners were able to buy their new home at a
signicantly reduced price compared to what they paid
for their existing home. After closing, and recognizing
that there was no advantage to them keeping and main-
taining the home they just departed, let that home
revert back to the lender through default and fore-
closure.

At that point, their credit becamed impacted, but because
they had already purchased their new home that they were
planning on living in for quite some time, the bad credit
that developed didn't keep them from reaching their goal.

Because this became a significant trend, there are now
new underwriting guidelines for retaining the existing
home and purchasing a new home.

1. If the current primary residence is pending sale but
will not be closed prior to the closing date of the new
primary residence, the borrower will have to qualify for
both the current and new mortgage principal, interest,
taxes and insurance amounts (PITI). No potential
rental income offset will be allowed.

2. If the current primary residence will become a second
home and there is at least 30% documented equity in the
current home, the borrower will have to qualify for both
the current and new mortgage principal, interest, taxes
and insurance amounts. This requires that there are at
least two months of PITI for both properties.

3. If the current primary residence will become a second
home and there is not at least 30% documented equity in the
current home, the borrower will have to qualify for both the
current and new mortgage principal, interest, taxes and
insurance amounts. This requires that there are at
least six months of PITI for both properties.

4. If the current primary residence will become a rental
property and there is at least 30% documented equity
in the current home, they will allow the 75% of rental income
to offset the expenses on the existing home. No longer
can the borrower merely represent the proposed rental
income, though. They would require a fully executed lease
agreement and proof that a security deposit was received
from the tenant and deposited into the borrower's account.

5. If the current primary residence will become a rental
property and there is not at least 30% documented equity
in the current home, the borrower will have to qualify for
both the current and new mortgage principal, interest, taxes
and insurance amounts. This requires that there are at
least six months of PITI for both properties.

To document the existence of the the 30% equity position,
the borrower would have to provide a full appraisal of the
existing home.

The lenders are hopeful that by instituting these changes
that they will prevent or slow down the number of borrowers
who buy the new home and then send the keys back on the
old home.

If a borrower has little equity in the home, but have the
financial capacity to qualify for the expenses on both
homes, the lenders are thinking that they will not be as
tempted to damage their credit for the future.

If a borrower has a lot of equity in the home, they are
more willing to allow the rental income offset, because
it is much less likely that the owner will sacrifice 30%
or more of the equity of the home by defaulting. They
would probably sell the home in the open market before
letting the lender take it back.

This is further evidence that the underwriting guidelines
are attacking every element of the process that they
can identify as having contributed to losses or fraud.

I always say it, but it bears repeating: You have to plan
ahead and start the conversation about what you are trying
to accomplish before you get involved in that new trans-
action.

Underwriting guidelines are more restrictive than at
anytime in recent memory, and they are changing
constantly.

Do not rely on old information or anecdotal stories from
your friends and co-workers.

Call me so that we can deal with your specific facts and
your unique qualifications.

Underwriting Tightened to Avoid Recurring Problems

As the mortgage crisis has unfolded, a recurring theme
has been: "How did it get this bad? Why didn't someone
take a closer look at what they were doing?"

Over the past several years prior to the mortgage
market's upheaval, there is no doubt that the process
had gotten very lax. It may be fair to say that all
the parties to the process thought that someone else
was making sure that everything was done properly.

The reality was that each step was done well enough
to advance it to the next level, but that no one took
ultimate responsibility for making sure that it was
all done correctly.

That has changed now.

Underwriters are now taking a very close look - a very
close look - at all elements of your application package.

Let's take a look at some of the areas that there is
more scrutiny, based on some recent experiences.


Employment:

Underwriting guidelines have always focused on job
stability over the previous two years. This does
not mean that you cannot change jobs, but the lender
is looking for continuity in a career field, and
lateral or upward moves to the new job.

For a person who receives hourly pay or a salary,
copies of W-2 forms for the last two years, a current
year-to-date paystub, and a verification of employment
(VOE) form that is completed by the employer would be
necessary.

The underwriters are now very diligent about cross-
checking all of these documents for any inconsistencies
and requiring clarification and letters of explanantion
for them. No matter how insignificant the discrepancy
may be, the underwriter wants it explained and they want
to make an assessment on all the facts.

What this means to you is that when we meet, we need to
discuss your situation and make sure that we have a
tight timeline and that all the numbers fit together
well. We want the presentation to the lender to be
very clean.


Self-Employment:

The two-year time requirement is also the guideline
for a person in business for themselves, or who derive
their income from commissions.

In this case, the lender wants two years of federal
tax returns, and possibly a current year profit-and-
loss statement.

If the income has increased from year-to-year, the
lender will average the income. If the income has
decreased, they will tend to use the lower figure
for what they define as stable income. They have
no way to assess whether income that is moving
downward is an aberration or truly a trend.

What this means to you is that you may need to think
ahead if you are planning to purchase or refinance
in the near future. Recognizing that the lender is
going to use the same information for income that you
are using to minimize your tax obligation may allow
you to make different choices when you put your tax
information together.


Asset Verification:

Verification of your bank accounts, investment accounts,
and retirement funds are important for the lender's review.

The guideline is to show current balances, as well as
the average balance for the last 60-90 days. The
lender is interested in seeing that the funds are
stable and seasoned in your name. If there have been
recent large deposits, the current balance and the
average balance will reveal the disparity.

The lender will want to know the source of the funds
that have recently arrived in your accounts. They will
need to come from a reasonable and acceptable source.

Deposits from bonuses, gifts from family members, or sale
proceeds from assets would typically be acceptable.

Deposits from personal loans, credit card advances, or
from unexplainable sources may not be acceptable.

What this means to you is that you need to pull together
your money well in advance of your loan application, or
be able to explain all the "new money" that arrives in
your accounts.

There is no substitute for strategic planning in advance.


Credit History:

Credit scores have become the big thing in mortgage
lending.

If you don't know your credit scores, and what is on
your credit report before you start the application
process, you could be unpleasantly surprised when you
are trying to obtain your home loan.

Increasingly, the lenders are offering their best
loan terms for borrowers with higher credit scores.
At one time, scores of 680 or more put borrowers in the
best position. Now, it is not uncommon for lenders to
want scores above 740 to offer preferential terms.

If you order your credit report in advance, you can
have the opportunity to make sure that all the items
are reported properly. And, if they are not, you can
get them corrected, processed through TransUnion,
Equifax, and Experian, and get your report re-scored
so that you can present the best possible picture to
the lender.

The underwriters will use the middle of the three
scores for the basis of the loan request, or if only
two scores are available, they use the lesser of the
two.

You are probably finding a recurring theme here.

Plan ahead. Take the time to sit down with me, fill
out some paperwork, run your credit report and let
me have the opportunity to assess your credit quali-
fications in light of current underwriting guidelines.

With all of the changes that have occurred in the
mortgage lending business, and how conservative
underwriting has become, it is the best way to help
you understand what to expect.