The foreclosure phenomenon has changed the lending landscape for some time to come. With Countrywide almost going under before being bailed out by BOF, IndyMac going under, Freddie MAC and Fannie Mae being taken over by the government, Lehman Brothers going bankrupt and Washington Mutual being bought by Citigroup along with all the other continuing financial bad news, the confidence level in U.S. lending institutions is at an all-time low. The San Diego Union-Tribune reports that due to the fear of losing more money on faulty investments, banks have stopped lending to each other and have stopped the flow of so-called commercial paper (essentially corporate IOUs that fund short-term expenses).
The economic stimulus package didn’t have the desired effect, and it’s about to expire in December. Foreclosures are still on the rise, and housing prices are still dropping. The credit crunch hasn’t eased. Instead, it continues to dry up. A first time home buyer who lacks a 20% down payment pretty much can’t get a conventional home loan, especially if they have a credit score of less than 700. FHA remains the best choice for first time home buyers and for those with credit scores of less than 700. That’s not likely to change anytime before the end of next year. It could take longer if Congress continues to disagree on the bailout. Home loan modifications have increased significantly, as more and more lenders are accepting requests to modify the mortgage note.
While the bailout is not a popular choice, watching the market fall by more than 700 points is a clear indicator of what happens when no action is taken. Also seeing the market rebound on the news that the bailout is being worked on and stands a better chance of passing this time around indicates that action is needed now. It’s time for politicians to stop playing the blame game and get the bailout fixed and passed. Today, there are reports that the bailout has more tax breaks for businesses and alternative energy along with higher government insurance for bank deposits. Democratic opponents of the bill said they would be willing to back an increase of bank deposits of $250,000. Currently, bank deposits of up to $100,000 are insured by the Federal Deposit Insurance Corporation (FDIC). Few details on the revised bailout plan are available, but hopefully the revisions are enough to get it passed.
“The credit markets are in shambles,” says Mark Goldman, finance professor at San Diego State University. “Now we’re seeing it in homes, autos and other big-ticket items. Soon I think we’ll be seeing it in retail, as credit cards dry up. How bad will it get? I don’t think anybody realizes the true depth of the problem.” Marty Gold, the managing mortgage broker who recently worked with FHA Home Loan Services recently said, “Credit scores are like liquidity to homeowners.” The higher credit scores homeowners have the more opportunities they will have in the future to refinance.
People with credit scores of 620 used to be able to get a car loan without any trouble. Now, scores need to be at least 650, and some places want FICO scores of at least 700. For a home purchase loan conventional home lenders now expect a credit score of at least 680 for someone with a 20% down payment and at least 700 for those with less than 20% startup equity. FHA mortgages still provide lenient credit standards. At this point, lenders require a score of typically around 580. You can still buy a home with a 3% down payment, although that will be increasing to 3.5% in January. If you’re a cash-strapped first time homebuyer or someone with a credit score of less than 700, FHA is your best bet until things ease up.
Where did you get your blog layout from? I’d like to get one like it for my blog.
Comment by Tony Orlando — October 1, 2008 @ 10:45 am
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