How Much Debt Can You Afford?

This is a timely question considering the escalating mortgage delinquency rates reported almost daily. With the recent calamities in sub-prime lending at the forefront of the news, what should be obvious to most of us now bears repeating, don't borrow based upon what a lender alone informs you that you may qualify to borrow. Remember most lenders compensation is commission based and calculated as a percentage of the amount that is borrowed, thus the higher the loan amount, the higher the loan officer’s or loan agent's commission. This is an obvious conflict of interest but unfortunately it exists and not just on the loan side but it can exist on the real estate side at times as well. Real estate in general operates as a referral business so both a loan and a real estate agent likely want to do a good job for you so they will receive the highest compliment you can give them as a satisfied client, your personal referrals. However make no mistake about it these professionals are not always working as your fiduciary, that is to say they are not always duty bound to work in your best interest.

It seems that the process of underwriting loans with increased speed and technology, as well as advances in credit scoring, have not only brought faster loan decisions but riskier ones as well. No one should tell you how to run your personal finances but you. The seemingly old fashioned rules of lending used to reflect a housing ratio of only 28%, which meant that if more than 28% of a prospective borrower’s gross monthly income was being applied to their mortgage payment they would not qualify for the loan. However because today Uncle Sam has an even bigger hand in our collective pockets (this is why it takes two incomes to support a family where one used to do the job), this old formula of underwriting might need updating and should make today's lending ratios even more conservative as we all have less take home pay (or net income) than we had in the past. This concept is in sharp contrast to the now liberal lending practices that have been in place over recent years.

Moreover with the recent changes to the bankruptcy laws which occurred in 2005, a borrower cannot easily get off the credit hook. Once you find yourself in over your head and are left with damaged credit, bankruptcy is not the viable option it once was. Therefore it is more important than ever to make informed decisions in taking on both mortgage and consumer debt and not to assign this responsibility to a professional who may be benefiting financially based on the amount of debt they can persuade you to take on. Don't feel as though you've won the lottery when your lender tells you that you may qualify to borrow more money than you thought possible, they are not doing you any favors if you cannot comfortably repay the debt. Remember, borrow only the amount of money you yourself feel comfortable repaying as the lender who approves your loan is not the one obligated to repay it, you are.

In the end you yourself are the best judge of what you can repay and certainly not a commissioned professional or loan underwriter. Always do your personal finance homework on your own before seeking out any type of loan for no one knows or should know your finances better than you and no one can better predict what your earnings will be in six months to a year better than you can. The risk of borrowing excessively is disproportionately yours, not your lenders, so make this decision responsibly and make one that suits your lifestyle as well as the projected stability of your income.

U.S. Mortgage Rates Drop from Weakened Housing Market

Mortgage rates dropped in the week ending July 26, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

"Mortgage rates eased this week on market concerns that a further weakening of housing demand this spring will delay any recovery in the sector," said Frank Nothaft, Freddie Mac vice president and chief economist. "For example, building permits fell last month to the slowest pace in a decade, and more recent data on June sales of existing homes showed a fourth consecutive monthly decline."

This week's survey indicates 30-year fixed mortgage rates averaged 6.69 percent, a drop from last week's average of 6.73 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.72 percent.

Fixed mortgage rates for 15-year terms averaged 6.37 percent, a slight decrease from last week's average of 6.38. A year ago, the 15-year fixed-rate mortgage averaged 6.34 percent.

Averages for some adjustable-rate mortgages (ARMs) also posted minimal changes this week. Five-year ARMs averaged 6.30 percent this week, a drop from last week's average of 6.35 percent. At this time last year, the five-year ARM also averaged 6.35 percent.

One-year ARMs averaged 5.69 percent this week, down slightly from last week's average of 5.72 percent. Last year, the one-year ARM averaged 5.78 percent.
Freddie Mac said that to obtain these rates lenders charged an average 0.4-point fee for all mortgages except the one-year ARM, with a 0.5-point fee.

"Several factors contributed to the softening in housing markets this spring," said Nothaft. "In addition to the tightening of lending standards earlier this year, especially on subprime loans, the 40 basis point jump in rates on 30-year fixed-rate mortgages in June may have deterred potential buyers. For the year-to-date, sales of single-family homes were down about 9 percent from the first half of 2007."

Freddie Mac is a mortgage finance company established by Congress in 1970. The company buys mortgages and mortgage-related securities and packages them to sell to investors or to hold in its own portfolio. They release their summary of average mortgage rates weekly.

U.S. Mortgage Rates Make Small Movements

Rates stayed steady for mortgages in the week ending July 19, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

"In a week marked by stock indexes reaching new highs on Wall Street, mortgage rates lingered near the previous week's level as the latest economic indicators did not affect inflation expectations significantly," said Frank Nothaft, Freddie Mac vice president and chief economist. "June's core producer price index inched up higher than market expectations, pushing the year-over-year growth rate to 1.8 percent, while the core consumer price index held steady at a 2.2 percent annual growth rate.
This week’s survey indicates 30-year fixed mortgage rates averaged 6.73 percent, unchanged from last week’s average of 6.73 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.80 percent.

Fixed mortgage rates for 15-year terms averaged 6.38 percent, a slight drop from last week's average of 6.39. A year ago, the 15-year fixed-rate mortgage averaged 6.41 percent.

Averages for some adjustable-rate mortgages (ARMs) also posted minimal changes this week. Five-year ARMs averaged 6.35 percent this week, unchanged from last week's average of 6.35 percent. At this time last year, the five-year ARM averaged 6.36 percent.

One-year ARMs averaged 5.72 percent this week, up slightly from last week's average of 5.71 percent. Last year, the one-year ARM averaged 5.80 percent.

Freddie Mac said that to obtain these rates lenders charged an average 0.4-point fee for fixed-rate mortgages, and a 0.5-point fee for ARMs.

“The most recent statistics suggest that the housing market has yet to reach a trough,” said Nothaft. “Although June's housing starts unexpectedly rose to 1.47 million units, construction of one-unit houses still saw a decline of 0.2 percent: At 1.15 million units, it was the slowest pace since January. Building permits fell by 7.5 percent last month to the lowest level since June 1997."

Freddie Mac is a mortgage finance company established by Congress in 1970. The company buys mortgages and mortgage-related securities and packages them to sell to investors or to hold in its own portfolio. They release their summary of average mortgage rates weekly.

Government-Sponsored Enterprises: An Introduction to Fannie Mae and Freddie Mac

We've all heard of Fannie Mae and Freddie Mac, in various tones and across different topics. But are they? How do they operate in the world of mortgages, money, and home ownership? How are they different from other banks and lenders? In a series of articles, we examine the good, the bad, and the curious about government-sponsored enterprises, otherwise known as Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac are the two government-sponsored enterprises (GSE) in a specific area of mortgage lending. The goal of these private companies is to help expand home ownership across the country.

In a roundabout way, they've helped millions of people obtain homes and mortgages over their years of private existence. They also offer direct loans of various types, lead a number of public initiatives designed to expand home ownership, and offer mortgage education for consumers.

Seems simple enough. But confusion reigns when it comes to these two companies. Why? Two reasons – their work within the "secondary mortgage market," and their complex relationship with the government.

Secondary Mortgage Market
The primary market is where most of us live, and what most of us consider when it comes to lending and mortgages. These are transactions directly between homebuyers and mortgage lenders, like banks, credit unions, state and local housing finance agencies, and other institutions. When places like banks lend money to borrowers in the primary mortgage market, they are either using funds from their own deposits, or funds from what’s known as the secondary mortgage market.

Banks and other institutions will often sell the loans they make. GSEs purchase mortgage loans from banks, bundling them together into tradable securities. These are then sold to large investors, like fund managers, foreign central banks, commercial banks, pension funds, insurance companies, other financial institutions. The idea is that lenders get more funds from selling their mortgages to the secondary mortgage market, allowing them to originate more mortgage loans and enable more home purchases.

The secondary mortgage market offers liquidity of mortgage funds, meaning mortgages can be offered quicker, with a more standard value despite economic conditions. This standardization attracts investors, adding further strength tot he mortgage market. Finally, the secondary market aims to make funds available to lenders nationwide, correcting some imbalances that might occur by region.

Because of their role in the secondary mortgage market, Fannie Mae and Freddie Mac are the largest source of housing finance in the country, according to their oversight organization, the U.S. Department of Housing and Urban Development (HUD).

Government Charter
Fannie Mae was founded in 1938 as part of President Roosevelt's New Deal policies, the first organization to establish the secondary mortgage market and an important step in easing Depression woes. The Federal National Mortgage Association (FNMA, or Fannie Mae) operated for years as a government entity. In 1968, the company became a fully private organization working in the secondary mortgage market. Freddie Mac, on the other hand, was chartered by the government as a private company from the start, with a mandate to work within the secondary mortgage market.

Now – why are they "government-sponsored enterprises" if they are fully private corporations?

Each company has a congressional charter requiring them to achieve public purposes, those described above in the secondary mortgage market section. In exchange for carrying out these purposes, the companies get some special privileges. They are exempt from state and local taxes, and get conditional access to a line of credit from the U.S. Treasury worth several billions.

Most investors in the secondary mortgage market assume, because of the government charter and special privileges given to the GSEs, that the securities offered by Fannie Mae and Freddie Mac are guaranteed by the government. In fact this is the not the case, and is the biggest misconception about the companies.

Understanding the secondary mortage market and government charters is a major step towards comprehending the importance of Fannie Mae and Freddie Mac. In our continuing series, we'll examine other aspects of these GSEs, including their initiatives to increase home ownership, their surprising scandals, and more details on their role in the housing market today.

Mortgage Rates Week Ending July 12, 2007

U.S. Mortgage Rates Boosted by Employment and Credit Growth

Rates increased for most mortgages in the week ending July 12, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

"A favorable employment report for June and robust consumer credit growth for May pushed long-term mortgage rates higher in the past week, nearly eliminating the declines made in rates over the previous three weeks," said Frank Nothaft, Freddie Mac vice president and chief economist. "In addition, consumer credit jumped by $12.9 billion in May, almost double market expectations."

This week's survey indicates 30-year fixed mortgage rates averaged 6.73 percent, a jump from last week’s average of 6.63 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.74 percent.

Fixed mortgage rates for 15-year terms averaged 6.39 percent, an increase from last week's average of 6.30. A year ago, the 15-year fixed-rate mortgage averaged 6.37 percent.

Averages for some adjustable-rate mortgages (ARMs) also jumped up this week. Five-year ARMs averaged 6.35 percent this week, up from last week’s average of 6.29 percent. At this time last year, the five-year ARM averaged 6.33 percent.

One-year ARMs averaged 5.71 percent this week, unchanged from last week's average of 5.71 percent. Last year, the one-year ARM averaged 5.75 percent.

Freddie Mac said that to obtain these rates lenders charged an average 0.4-point fee for fixed-rate mortgages, and a 0.5-point fee for ARMs.

"Our July economic outlook forecasts 30-year fixed-rates to stay around their current level through the end of year," said Nothaft. "The refinance share of loan applications is expected to continue decreasing throughout the same time frame, averaging about 35 percent in 2007, the lowest level since 2000. Freddie Mac expects weakness in the housing market to persist in the second half of the year, with 2007 total home sales and housing starts hitting 5-year lows."

Freddie Mac is a mortgage finance company established by Congress in 1970. The company buys mortgages and mortgage-related securities and packages them to sell to investors or to hold in its own portfolio. They release their summary of average mortgage rates weekly.