OK, so I was wrong.

Everything in the first quarter of the year pointed to a slow rise in mortgage rates. If you didn’t take advantage of the refinance craze in the spring of 2009, when rates for a 30-year fixed rate mortgage touched 4.75 percent, then forget it.

The Federal Reserve’s program of buying mortgage-backed securities was coming to an end in March and the economic outlook was showing some signs of a heartbeat. Talk had already begun on just when the Fed would start targeting a rise in rates.

But then came Greece and its economic problems. Then came worries about the foundering Euro. Worries about a housing bubble in China.

In June, the jobless report showed that only 11,000 private sector jobs were created in May. Not so good.

Now the hangover from the expiration of the federal housing tax credits. In May, new home sales plunged 33 percent — the largest monthly drop on record.

Oh yes, there was the daily coverage of oil liberally gushing into the Gulf of Mexico, spoiling the Gulf Coast region, depressing the livelihoods  of the people of that area.

Take all of that into consideration over the last 60 days and what you get is a Consumer Confidence index that came in at 52.9 in June, a falling from 62.7 in May, according to a survey released this past Tuesday by the Conference Board, a private research group. It was the biggest drop since February.

Digest all this woeful news and what would you expect. The stock market swoons and looks for the safest place to put money. The international community, fearful of the European economies, looks for a flight to safety. And where is that: good old U.S. Treasuries.

So much money came into the Treasuries that the yield for the 10-year bond – an indicator for how mortgage rates typically will behave – dropped to its lowest point earlier this week (2.94 percent) since April 2009.

And where did mortgage rates go – they dropped like a rock.

The Mortgage Bankers Association reported this week that applications for new mortgages rose 9 percent over last week and within that number 77 percent were for refinancing as homeowners who may have missed out a year ago were able to get a second chance and even those who did refinance were able to modify their rates downward again.

Rates for just about every kind of mortgage were hitting their historic lows.

You could get a 30-year conventional fixed rate below 4.5 percent.

If your situation was more short term, you could jump into a 5-year adjustable rate mortgage for a point less at around 3.5 percent.

With this kind of cheap money available, anyone who was thinking of using cash to purchase a home should think again – especially since this money comes with the benefit of interest deduction.

So does it make sense to re-examine your mortgage even if you just refinanced 12 to 18 months ago? To determine, use two simple criteria: do the numbers make sense and what do you want the mortgage to do for you.

The best strategy for a borrower who has recently refinanced and wants to take advantage of these low rates (for however long they last) , is to work with a mortgage professional who can lower your rate and monthly payment, while attempting to keep your new loan amount near its current level.

That is typically achieved by a loan officer not using the lowest rate possible, but finding a happy medium between a lower rate than what the borrower currently has and then combining that with a lender credit that will absorb the mortgage company, appraisal and hopefully most of the title company costs.

It’s almost like using points in reverse.

When borrowers seek a lower rate they can buy it down by paying points.

In this instance, the lender is doing the opposite. Using a higher rate will generate what is called premium pricing, which then can be passed on to the borrower as a credit to cover the costs of the transaction.

Let’s say a person has a $400,000 mortgage. Their current rate is 5.125% with a principal and interest payment of $2,177. Now let’s say he gets an offer to move his rate to 4.75% — maybe not the lowest it can be, but it would come with a lender credit of .75 percent of the loan amount — $3,000.

The new principal and interest payment would drop to $2,056, a savings of $121 a month and the $3,000 should cover the majority of the mortgage and title company costs.

The borrower would still have to re-establish their escrow account for taxes and insurance, meaning that they would most likely have to come to the settlement table with those monies. But it can be thought of in the following way. When refinancing, a borrower usually does not make a payment on the first of the month following the refinance. Now, think of it as instead of skipping that month, you will just be making what would have been your regular mortgage payment at the settlement table. And remember, that borrower will get rebated back whatever is remaining in their current escrow account.

The bottom line here is that your mortgage is a financial tool – for better or worse. There is an opportunity right now with rates this low to see if you can lower your monthly payment or move from a 30-year mortgage to a 20-year or even a 15-year term, without tremendously affecting your family budget.

And again, if it makes sense – do it. If not, and if in doubt, then don’t.

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The tax credit closing deadline and the NFIP reauthorization were extended to September 30. NAR worked closely with congressional leaders on both sides of the aisle to enact these important pieces of legislation. Extending the tax credit closing and flood insurance deadlines will help provide additional stability to real estate markets across the nation, NAR said.

“What a great way to begin celebrating our nation’s most patriotic holiday by opening the door to the American dream of homeownership to thousands of home buyers who would have been shut out of the homes of their dreams through no fault of their own,” said NAR President Vicki Cox Golder, owner of Vicki L. Cox Real Estate in Tucson, Ariz.

“We know that up to 180,000 home buyers eligible for the tax credit are rejoicing this morning. And we all thank both houses of Congress for their work to ensure passage of both bills,” Golder said. She singled out Senate Majority Leader Harry Reid (D-Nev.), Senate Minority Leader Mitch McConnell (R-Ky.), Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), Senator Johnny Isakson (R-Ga.), House Majority Leader Steny Hoyer (D-Md.), Congresswoman Shelley Berkley (D-Nev.) and Congressman Joe Courtney (D-Conn.) for their efforts to extend the tax credit closing deadline.

The passage of H.R. 5623, the Homebuyer Assistance and Improvement Act, applies the homebuyer tax credit closing deadline extension only to homebuyers who have ratified contracts in place as of April 30, 2010, but could not close before June 30. The legislation is designed to create a seamless extension of the new closing deadline for eligible transactions to September 30. There will be no gap between June 30 and the date the president signs the bill into law.

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If you really want to see how the mortgage landscape has changed in the last four years, all one has to do is take a look at those companies that were big time players in the “Alt-A” business in 2006 and see where they are now.

Alt-A mortgage paper basically refers to those reduced documentation programs – stated income, No Ratio and No Doc — that were running on steroids just a few short years ago. Just a retro glance at those companies shows how much money in loan originations was fueling a fire that eventually would incinerate most of those firms.

According to a list compiled by Mortgage Daily.com of the top 20 companies doing Alt-A business, leading the way was Countrywide, which originated $88.5 billion in Alt-A, subprime and home equity lines in 2006. In the first quarter alone in 2006, it originated $20.2 billion. Then you have such other players as IndyMac Bank, Option One, New Century, Novastar, Washington Mutual, Wachovia, National City – all doing billions of dollars of business in the Alt-A field.

Fast forward four years and all of those companies have vanished or have been absorbed into other firms. Now take a look at who the leaders are in the Alt-A, home equity, subprime list and it’s a little sparse.

In the first quarter 2010, only two banks – Bank of America and JP Morgan Chase – reported their originations, which were primarily home equity lines. Bank of America originated $2 billion and JP Morgan Chase did $300 million. The others on the list, but who had not yet reported, were Residential Capital, U.S. Bank Home Mortgage and Wells Fargo. And that’s the list.

But just think — $2 billion from Bank of America. This is from a bank whose footprint is practically nationwide and who not only absorbed Countrywide and its servicing portfolio, but also took in Merrill Lynch brokerage as well.

This just reconfirms how tight lending remains, and how it has narrowed the swatch of buyers who four years ago could consider buying a home, but who today are renters.

Updates to FHA financing

Last week the House Financial Services Committee approved raising the annual FHA mortgage premium that borrowers using the government-insured loans pay. This action was expected since FHA announced late last year that it was raising its upfront mortgage insurance premium from 1.75 percent of the amount borrowed to 2.25 percent.

The annual premium currently is .55 percent of the loan amount and is collected proportionately every month. With the approved raising of the annual premium – which has yet to be determined, but is expected to rise to 1.50 percent – FHA will scale back the amount it charges on the upfront premium.

Bottom line: the overall loan amount will decrease with the lower upfront premium that is tacked onto the base loan amount, but an FHA borrower’s monthly payment will rise.

The committee, however, did defeat a proposal made by New Jersey Rep. Scott Garrett, which would have increased the minimum down payment for FHA guaranteed loans from 3.5 percent to 5 percent.  It also would have prohibited sellers from giving closing cost help, which for the meantime can be as much as 6 percent of the sales price. FHA already plans to scale back the maximum seller concession to 3 percent sometime this summer.

Tighter underwriting ahead

Fannie Mae continues to tighten up its guidelines, this time it takes aim at borrowers who have just started new jobs, but who will go to settlement before they get their first paycheck.

Previously, Fannie Mae would allow a borrower to go to settlement as long as they had 30 days on the job before the first mortgage payment would be due. That meant if you started May 1 on your new job and submitted all the proper documentation from your employer about your salary, you could close on your loan May 30 because you would have 30 days of employment under your belt by the time the first payment – July 1 – would take place.

No so any more.

Now Fannie Mae will require a full 30 days on the job with paystubs to be submitted before a borrower can go to settlement. So for that attorney transferring to Baltimore from New York who finds his dream home and wants to buy now, the Realtor in charge better make sure that the settlement date will come after that person is in place on the new job for at least 30 days prior to closing.

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With just days to go for first-time buyers and move-up buyers to take advantage of the federal tax credit programs, it’s apparent the initiative is doing exactly what it was meant to do – ignite home sales.

Here’s a prediction: In May, the National Association of Realtors will announce that sales of existing homes in April were the highest in the last three years.

Here’s another prediction: In June, the National Association of Realtors will announce that sales of existing homes in May dropped drastically from the previous month.

Just as the “Cash for Clunkers” program gave a quick high to the auto industry, the April 30 deadline to have a ratified contract to take advantage of tax credits is creating a bit of a buying frenzy that has not been seen since the go-go days of the late 1990s and early 2000s. Yes, contracts are being put in, countered within hours and agreed upon with a sense of urgency.

To review what the government has put in place: a first-time homebuyer (someone who has not owned a principal residence in Maryland for the last three years) can get up to $8,000 back on their taxes. A move-up buyer, who has lived in their home for three of the last five years, is eligible to get $6,500 back. It’s not a deduction on one’s taxes; it is cash back and a tremendous incentive. As one Realtor said in my office: “After April 30, the house you are looking at just cost you $8,000 more.”

So is it possible that the there will be an 11^th hour extension of this program? So far there has been no serious chatter about extending the program through the spring selling season. And if the NAR is not banging the drum, then my guess is that there is “bailout” fatigue in Washington. The only exception is for members of the military who are out of the country while serving our country. For them, there is a one-year extension.

Already title companies and prepping for a hectic closing week at the end of June when settlements for all of those contracts signed by April 30 must be concluded or the buyer will be ineligible to get the tax credit.

Therefore here are some tips for buyers who are going to go through the process.

• First, do not schedule your closing date on June 30, unless you enjoy stress. Be smart and schedule the closing at least a week before, because if there are issues at the last minute, there will be sufficient time to resolve them.
• If you are floating your interest rate, lock in sooner than later. New disclosure rules put in place by HUD now require 3 to 6 days for a buyer to review documents when there is a status change to the loan. If you lock 48 hours before settlement, I can almost guarantee you, you will not settle.
• Get all documents, disclosures and financials asked by your lender to them as soon as possible. That means within 48 hours. More times than not, the reason why loans get bogged down in the system is because the borrower drips in the required documents. The sooner a file goes through underwriting for a loan commitment and final conditions are known, the better for everyone in the process.

There is no question that lenders are seeing their pipelines fill up and that will put more pressure on the operation side of the industry to move files through in a timely manner. Therefore, it also would not surprise me if there are some interest rate hikes coming for no other reason to slow down the mounting volume.

So as the final days wind down, remember that the easy part may have been finding the home by April 30, the tough part will be getting to the table with no stress by June 30.

Know your condo association financials

I recently had a purchase loan that was unable to go to closing, not because the borrower was inadequate, but because there were issues with the financials within the condominium associations.

Here was the situation:

The borrower was putting down 10 percent, meaning that private mortgage insurance would be required. With less than 20 percent down, many lenders, to protect and document on behalf of the mortgage insurance companies, will do a full review of the condominium and its budget as well. This is called a “condo questionnaire” within the industry and typically the management company that works with the association fills out the details.

In this instance, the yearly operating budget for the association was $65,000. The yearly reserves being set aside for unexpected repairs were only around $2,800.

Fannie Mae guidelines, which most if not all lenders underwrite to, require that a minimum of 10 percent of the yearly operating budge be set aside. Furthermore, MI companies carry the same requirement and will not budge off of that mark. And even though there were substantial reserves already in the bank, the yearly contribution was inadequate.

Bottom line: The collateral did not meet quidelines, therefore it was not a saleable loan and the deal fell apart. It was unfortunate for my buyer but it put the seller in a worse position because now he has a home where getting buyer financing is certainly more difficult.

So the advice to sellers, as well as agents listing condos, is to get the association’s budget beforehand to see if there are any issues that might make it impossible for a potential buyer to get financing.

Robert Nusgart is a loan officer with Prospect Mortgage, LLC., a division of The Strata Group in Baltimore. He can be reached at 443-632-0858 or by email at Robert.Nusgart@prospectmtg.com. Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.

 He can also be heard periodically on The Real Estate Hour at Sunday noon with Brandon Gaines of Yerman, Witman, Gaines and Conklin Realty on WBAL 1090-AM.

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      For anyone who thinks that the nation’s housing mess that is getting better, think again.
     Yes, sales in the area are moving in a positive direction and the decline in home values – although still a significant problem — is not as steep recently in as many areas. Still, it’s apparent that homeowners, who might normally be looking to move up or scale down to another home, are frozen mainly because the combined value of their first and second mortgage or home equity line exceeds the value of their home.
     There’s been the notion that there is a wide river of hard-working homeowners who are current on their primary mortgage and equity line, but who are handcuffed because the equity line that they took out five years ago has now helped to put them underwater.
     Second liens are noose around the homeowner’s neck right now and until the government and the banks come to the realization that this has to be seriously addressed, the housing market will not come back with any form of gusto.
     Before the meltdown most lenders offered 80-20 combo loans for 100 percent financing. Banks, in addition, spent millions on marketing and advertising, offering home equity lines to current homeowners who could then take out up to 100 percent value of the residence. And remember the ease of the qualifying process on how banks created these lines? They’d get the required information about job, income and assets and then ask you what you thought the value of your home was. You gave them a favorable number and within hours you would get a call back, telling you that you were approved for that line because if your assessment came close to their automated valuation model (AVM), no problem.
     Certainly homeowners have a responsibility for their actions. But the banks do as well. They were the pushers and the homeowners were the junkies. And everything was based on the assumption that home values would continue to rise.
     Well, now we know that is not the case, and here we sit almost three years after the meltdown. Those homeowners with variable equity lines – most of which are tied to the prime rate — have been fortunate that the Federal Reserve, because of the banking crisis, has kept that interest rate about as low as it can go.
     But as the economy continues to recover it is silly to assume that the prime rate will continue to be kept so artificially low. That rate is currently at 3.25 percent. Typically the minimum payment required is an interest-only payment. So if a homeowner has an outstanding equity line of $100,000 at prime with no add-on margin, the monthly payment is $270 a month. But as quick as the Fed took down rates, it can raise them just as fast. So let’s say in the next 18 months the prime rate moves to 5.25 percent. That payment now becomes $437.50.
     The consequences? The homeowner has a bigger bill (and a bill that may still climb if rates climb) and less cash to spend on goods and services. That doesn’t help the economy. They can’t refinance back into a single mortgage because their combined loan to value is higher than the value of their home. They may want to sell, but can’t because they don’t have money to bring to the table or they are scared that a short sale will – and it will – adversely affect their credit.
     The interactions between lenders, servicers, investors and trustees of those mortgage-backed securities are so intertwined, intricate and convoluted, that it makes it almost impossible for anything to get done.
But something – short of a kids’ call for a “do-over” – has to be done.
     In early March, House Financial Services Chairman Barney Frank sent a letter to the four biggest banks – Bank of America, Wells Fargo, Citigroup and JP Morgan Chase – asking them to write down second-lien mortgages in an effort to facilitate modifications and prevent foreclosures. In a foreclosure banks know that a second lien is basically worthless. But in a modification, the second lien holder still has some say. And many times, the holder of the second mortgage is a roadblock to a modification.
     What can the government do to force the banks with second liens to consider more write downs of principal? Certainly not that much as most banks are in the process of ending their TARP involvement. But that does not mean the government is powerless.
     Last week, the Treasury Department updated its Home Affordable Modification Program (HAMP) to start addressing the second lien problem. It calls for incentive payments from the government to loan servicers who write down balances for those who qualify under the HEMP program and for those who are at 115 percent loan to value on their home or more.
     The problem is that these programs being dangled in front of the banks to do more modifications and principal reductions are voluntary. So if it is voluntary and there is no real threat of government enforcement, why should banks accelerate modifications and think hard about helping homeowners with principal reductions. It seems the only way banks will do more is if they get more incentive from the government. How much more incentive? Who knows?
     Nevertheless, if the government and the housing industry want to really assist homeowners they need to start thinking first about how to solve the second mortgage mess.
        Robert Nusgart is a loan officer with Prospect Mortgage, LLC., a division of The Strata Group in Baltimore. He can be reached at 443-632-0858 or by email at Robert.Nusgart@prospectmtg.com. Visit his website at www.RobertNusgart.com for the latest mortgage and financial news.
He can also be heard periodically on The Real Estate Hour at Sunday noon with Brandon Gaines of Yerman, Witman, Gaines and Conklin Realty on WBAL 1090-AM.

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Earlier this week, the Federal Reserve left short term rates alone and indicated that it won’t be raising rates any time soon, or for at least the next several months. However, it also stated that it still plans to wind down its purchasing of mortgage-backed securities, a move that began in late 2008 and has since kept rates well below 6 percent.

Now that the $1.25 trillion program is scheduled to come to an end March 31, it is likely that rates will start to rise as the private sector moves back in to take over where the federal government has left off. And it is doubtful that those investors will be purchasing at the same price as the government.

 The chatter is that rates could rise anywhere from 50 to 100 basis points, moving into the summer, meaning that a 30-year fixed rate will start bouncing around the 6 percent mark. I’m sure the Fed will keep a close watch, but it knows it can’t continue to artificially keep rates down forever. And I have the impression that the weaning away from this program will allow the Fed to step back and see how the market and the economy from Wall Street to Main Street reacts.

The one aspect that might blunt the expected rise is the simple law of supply and demand. Lenders are smart enough to realize that if rates rise it would have the effect slowing down the demand for mortgages. So, in an attempt to keep their pipelines running at a brisk pace, it is entirely possible that banks and lenders will try to keep rates low and when the pipeline becomes bloated, raise rates to ease the stress on the operations end.

The bottom line, though, is that if you are looking to purchase or refinance and believe that things will be better in six months, you may want to adjust that thinking. And if you only qualify for an FHA government-insured loan, then certain the time to do it is now.

Last week FHA announced sweeping changes to how it is doing business. For the last three years, FHA has become the dumping ground for lenders to refinance sub-prime borrowers it had on its books and has been the only place where new borrowers, who may be credit challenged or can’t afford a large down payment, to find refuge. More than 30 percent of all loans now are FHA and that’s why its capital reserves are under stress.

Coming sometime this spring, FHA will increase its upfront mortgage insurance requirement from 1.75 percent of the base loan amount to 2.25 percent. It also is seeking Congressional approval to raise the annual FHA mortgage insurance premium. And if that is granted, FHA said it would shift some of the upfront cost to the annual premium – which is collected on a monthly basis by the lender.

But that’s not all.

If a borrower has a credit score below 580, instead of the required 3.5 percent down payment, the down payment will go to 10 percent. However, that may not have as vast of an impact since many lenders have their own underwriting overlays where the minimum credit score to qualify for an FHA loan is either at 620 or 640.

What may cause the most concern for the Realtor community, however, is the announcement that FHA is scaling back its seller concession provision from 6 percent to 3 percent, putting it in line with non-government insured conventional loans.

That decision is a direct strike at one of the best selling points for an FHA loan. An FHA borrower always has to have at least 3.5 percent into the transaction. And if a sale could be negotiated to the point where the seller was willing to help the buyer by giving back 6 percent of the sales price as a concession toward paying closing costs and pre-paid items (days of interest and tax and insurance escrows), then many times all the borrower would need would be just his 3.5 percent.

Now with that being cut back to 3 percent – which is supposed to take effect sometime this summer – more pressure will be placed on the borrower.

FHA did this by stating it wanted to do away with any possibility of inflated home prices. But because of the firewall now in place between lenders and appraisers, the ability to influence appraisals has been greatly diminished and appraisers are in no mood to be swayed when scrutiny has never been higher on appraisals.

Nevertheless, these changes are coming. And it wouldn’t be surprising to see FHA move later in the year from its 3.5 percent requirement to a 5 percent requirement.

So as 2010 unfolds, the wise move for borrowers seemingly is not to procrastinate because the indicators are pointing to a more costly environment.

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Sure looks a little different than what borrowers have been seeing for a number of years under the Real Estate Settlement Procedures Act.

Previously, lenders and mortgage brokers could design their own version of a good faith estimate and when borrowers were trying to shop for a mortgage, it truly was confusing to compare and contrast various good faiths from one company to another because visually they could be very different and when numbers are show up in different places, then naturally confusion will exist.

HUD decided to make the new good faith estimate uniform from one lender to another and the main thrust seemed to be making a document that more user friendly with the ability to allow consumers to more easily do side-by-side comparisons.

Well, it was a nice try. HUD took what was basically a one-page document that — more times than not — would specifically detail the estimated charges a borrower could expect to see when settlement time comes and turned it into a three-page document that fails to display some of the first questions that a borrower wants to know. These include:

• What is my total monthly payment, including taxes and insurance?
• How much money do I need to come to closing with?
• Or, if I am refinancing and getting cash back, how much should I expect to get back?

Yes, that’s true. Now a borrower will not have an official document, required by HUD that will give them the answers to three of the most important questions that a borrower seeks. And nowhere in the new good faith estimate does it break down the specific dollar charges for getting the loan. It clumps them all together in a single origination charge.

True, some lenders are taking it upon themselves to embellish the new good faith with more details as way to protect them in the name of disclosure. But in reality all that does is generate more paperwork for the borrower to sift through and attempt to understand. A three-page document may now grow to six pages.

The new good faith estimate seems to be clearly focused on making sure the borrower understands what interest rate they have, how long that rate is good for, how it or the monthly payment can rise or fall or not all, if there is a pre-payment penalty and what charges at closing can increase, not increase or increase by no more than 10 percent.

Making lenders and loan officers more accurate in their estimates should be applauded. A seasoned loan officer should pride themselves on issuing a good faith that will be extremely close to what the final numbers will be at closing. A good loan officer, if unsure, will check with a title company to get exact fees for taxes, title insurance and such. Of course there are times when some charges that the loan officer could not anticipate for the good faith will show up on the settlement sheet – such as a homeowner’s insurance policy annual renewal being required to be collected.

Nevertheless, the idea of creating a uniform document that all lenders can use is a first-class thought and a step in the right direction.

The U.S. Department of Housing and Urban Development, which pushed hard for the new RESPA regulations, has said that it will “exercise restraint in enforcing new regulatory requirements” under RESPA until May 1. But let’s hope by then, some revisions will have been made so that there is a place within the new good faith where borrower will easily be able to see what their effective monthly mortgage payment will be, how much they should expect to bring to closing or how much they should expect back if refinancing.

Sometimes, the simplest things are the hardest to do.

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Let me state my case for bringing back the stated-income loan.

OK, I hear the incredulous screams of: “You’ve got to be kidding me. That why we’re in the mess in the first place.”

To a certain extent, that’s true. The misuse and loosened guidelines for stated-income loans prior to August 2007 was widespread throughout the industry. What became known as “Liar Loans,” because income was just stated and never validated, has virtually vanished from the lending community. But the question is: “Has the pendulum swung too far in the other direction?” I think it has.

First, let’s get to the core of why stated-income loans were introduced. The primary use for stated-income loans was to allow those borrowers who were self-employed and did not receive a weekly or bi-weekly paycheck to state their income.

I used to tell self-employed borrowers that they probably had a wonderful accountant or CPA whose main job was to shield their income as much as possible from the IRS. Their job was to show the federal government that my borrower had very little taxable income. And when they showed their tax returns, that was the case.

I, on the other hand, am in the business of showing my underwriters that my borrower makes a significant income that qualifies him for a loan. Basically, the accountant and I are on opposite sides of the spectrum. These were borrowers whose income fluctuated from month to month or season to season.

For example, take a landscaper, whose makes most of his money during the spring and summer and sees his income tail off in the fall and winter. During part of the year, this borrower may be cash rich, but how do you document his or her income. In reality, the individual’s income could support the loan for the home the borrower would want to purchase, but it was nearly impossible to document the real income. The individual got paid in cash and personal checks. The adjusted gross income on that person’s tax returns would show he or she was dirt poor — even though that may not be the case because the individual had very healthy bank accounts. Therefore, if the borrower had the proper credit scores and assets, this would be the perfect stated-income borrower.

Since there was more risk involved with originating this particular kind of loan, the borrower would pay a slightly higher interest rate than the fully documented borrower.

Those kinds of loans seemed to be working out, so now investors and Wall Street got the bright idea that stated-income loans should be opened up to salaried workers as well. Why? If you have an engineer making a weekly paycheck, why do you need stated income? It was just a way to expand the pool of borrowers, and now we see that was a critical mistake.

So when the mortgage meltdown happened and stories came out about ill-qualified borrowers getting homes that they never could afford by virtue of a stated-income loan, that was that. No more stated-income loans for anyone. It was like being in that junior high classroom where a few of the kids were caught goofing off and all of a sudden the entire class gets detention.

The outlawing of these loans has made it almost impossible for many self-employed or “1099 employees” to qualify for mortgages even though in reality they generate a substantial income. In fact, Maryland has basically made it illegal to originate a stated-income loan.

So what to do? How do you resuscitate them? First, these loans must only be used for the kind of borrower that they were originally intended for — self-employed workers and business owners. Next, ensure that the self-employed borrower also has exceptional credit, with a credit score of at least 720. Finally, increase the number of months of bank reserves (money left over after settlement to pay the monthly mortgage) a stated-income loan borrower must show. At least six months would be good.

These people are the victims of unintended consequences. Yes, stated-income loans were abused, and that abuse caused much harm in the industry and to neighborhoods, but at some point common sense must return to the marketplace. It’s time for the pendulum to start swinging back — at least a little bit.

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Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Credit scores range from the 300s to the 800s, for the most creditworthy borrowers. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.

Credit scores analyze a borrower’s credit history considering numerous factors such as:

• Late payments
• The amount of time credit has been established
• The amount of credit used versus the amount of credit available
• Length of time at present residence
• Employment history
• Negative credit information such as bankruptcies, charge-offs, collections, etc.

There are really three FICO scores computed by data provided by each of the three bureaus––Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score

Frequently Asked Questions (FAQs)

How can I increase my score? While it is difficult to increase your score over the short run, here are some tips to increase your score over a period of time.

• Pay your bills on time. Late payments and collections can have a serious impact on your score.
• Do not apply for credit frequently. Having a large number of inquiries on your credit report can worsen your score.
• Reduce your credit-card balances. If you are “maxed” out on your credit cards, this will affect your credit score negatively. If possible, try to keep balances under 50 percent of your high limit.
• If you have limited credit, obtain additional credit. Not having sufficient credit can negatively impact your score.

What if there is an error on my credit report? If you see an error on your report, report it to the credit bureau. The three major bureaus in the U.S., Equifax (1-800-685-1111), Trans Union (1-800-916-8800) and Experian (1-888-397-3742) all have procedures for correcting information promptly. Alternatively, we may help you work with the bureaus to problems as well.

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