1.5% Buyer Penalty to Help the Economy

What kind of incentive are Fannie and Freddie offering to help build buyer confidence and stimulate the economy? How about a 3/4% penalty charge for buyers with good credit that don't have 25% down payments! If your credit is under 700 try a 1.5% penalty. While I realize they are trying to cover their tail from future property value tailspins, it seems to me there needs a solution which will not prevent buyers from buying especially good credit candidates. The risk could be underwritten with perhaps a lesser penalty charged to these buyers. Some lenders are fighting this ridiculous amended clause, but unless more people are aware of this there will not be any change.

This article was posted on the NAHB e-letter I receive and I wanted to share the absurdity with my bloggers.

There are alternatives such as FHA but those come with great limitations. It is getting a little crazy out there and you need to be aware.

As of April 1, Fannie Mae and Freddie Mac are increasing the delivery fees they charge lenders based on FICO scores, downpayment amounts and other loan characteristics. Most major lenders already are pricing in these higher fees, effectively raising costs to borrowers immediately. Lenders can pass these fees on to the consumer in the form of higher interest rates rather than as an upfront charge. Under the new guidelines, even applicants who assumed that their FICO credit scores would get them favorable rates will be charged more unless they can come up with downpayments of 30% or more.

For example, a buyer with a 699 FICO score who brings a sizable downpayment of about 25% to the table will be hit with a 1.5% delivery fee at closing under the new guidelines. A buyer with a FICO score between 700 and 720 will pay an extra three-quarters of a point. Even someone with a 739 FICO — once considered a platinum guarantee of the best rates available — will get dinged with a quarter-point add-on. Condominium buyers who cannot come up with a 25% downpayment will be hit with a three-quarter point add-on penalty, no matter how high their credit score — simply because they are not purchasing a traditional detached, stand-alone house. Without congressional intervention or new marching orders from the companies’ regulator, the add-on fees are here to stay. But there’s an alternative available for just about anyone who wants to avoid the fees: Federal Housing Administration mortgages, where downpayments go as low as 3.5% and credit scores are not an issue for most applicants. (www.washingtonpost.com)
Washington Post (2/14/09); Kenneth R. Harney

When is a Buyers Market a Buyers Market?

The news stories these days are scary. If you start to separate out the fact from the fiction or fear, you can begin to make an educated decision about what makes economic sense buyers you when making their next home purchase.

Keep your eye on those interest rates NOT the property prices. They will have more long term impact on your home buying power.

"The thing that will make home prices stop falling is the very same thing that will push mortgage rates higher," says Jim Svinth, chief economist at mortgage firm Lending Tree. "So anything you gain by a further drop in prices might be offset by rising financing costs."

Rather than being concerned about the what-ifs, I'd suggest focusing more on the what-wills: The interest rates will continue to climb (which is an inevitable outcome from an economy such as ours) to head off inflationary pressures which is a reason Bernanke will not likely cut the Fed Rate again - in order to keep inflation in check.

Since January 24th, mortgage rates have climbed 0.6% which is the fastest increase in two decades and rates should continue to rise. That increase in mortgage rates is the same effect as a property losing 5% of its value! That means if you were able to afford a $600,000 home, now you would be limited to $570,000. Look at the numbers on the enclosed sheet and let's talk about why they call it a buyers market. Because rates are still historically low (but rising) and that is what will have the most impact on getting the best deal on a home.

Experts who specialize in macroeconomics know that rates will raise and so will the cost to own the longer you wait.