created a new rule, which took effect Monday. It changes mortgage fees based on a borrower’s credit score.
Here’s why you should care: If you are an American who has worked hard for good credit, you are likely to pay more on your home loan now than you would have before this revision.
By charging borrowers with good credit scores higher fees, those with non-stellar scores will pay less steep fees than they did previously. Think of it as mortgage socialism.
“It is absolutely intended to create a greater cross-subsidy,” Mark Calabria, a senior adviser at the Cato Institute and former FHFA director, told me. “So the kind of outrage you may be hearing in conservative circles about how this is penalizing people who have good credit to subsidize people with bad credit is 100% true.”
Hint: Biden and Democrats don’t think it’s parents
‘Equitable’ for whom?
Biden tried to do something similar with his $400 billion-plus student loan “forgiveness” plan by creating a situation that unfairly penalizes those who have paid the loans they took out – and the ones who never got loans in the first place – by making them pay for this leniency.
This housing rule change will have broad impact, as it affects most loans guaranteed by Fannie Mae or Freddie Mac, which are in turn backed by taxpayers. These loans comprise about 60% of the mortgage market.
Biden must compromise on debt ceiling:Otherwise, we’re all headed toward disaster
look at what happened in 2008 with the mortgage meltdown.
sent a letter last month to FHFA Director Sandra Thompson, a Biden nominee.
“This shortsighted and counterproductive policy demonstrates a profound misunderstanding of the necessity of accurately tailoring housing finance products to credit risk and establishes a perverse incentive that punishes hardworking Americans for their fiscal prudence,” the letter said.
Joe Biden wants you to think GOP is the biggest ‘threat’ to Social Security. He’s wrong.
In addition, state treasurers and finance officials from 27 states sent a letter on Monday urging the Biden administration to backtrack from the policy.
“It is already clear that this new policy will be a disaster,” they wrote. “It amounts to a middle-class tax hike that will unfairly cost American families millions upon millions of dollars.”
Even a former federal housing official under President Barack Obama slammed the Biden rule, saying it’s “unprecedented” and “not the way” to encourage more home ownership.
The cost of the fee change won’t be huge for most borrowers, but one estimate pegs the extra costs for higher-credit borrowers at $3,200. That’s not an insignificant charge, especially one caused by bureaucratic meddling.
Besides, it’s the principle that counts. And Biden’s wrong on this one.
Ingrid Jacques is a columnist at USA TODAY. Contact her at [email protected] or on Twitter: @Ingrid_Jacques
The Government National Mortgage Association – also known as Ginnie Mae – is a remarkable innovation and a proven success.
As the Ginnie Mae web site notes: “When the surge in home foreclosures further depressed housing values and the nation’s overall economy, Congress passed the National Housing Act of 1934 (Act), a key component of the New Deal. The Act created the Federal Housing Administration (FHA) to help resuscitate the U.S. housing market and protect lenders from mortgage default.”
The National Housing Act was amended in 1938 to charter Fannie Mae, and in 1968 Fannie was split in two, creating Ginnie Mae, which provides a secondary market for FHA, VA, and RHS loans to provide liquidity to mortgage lenders.
By accessing investors nationally and even worldwide, Ginnie Mae has helped us create an effective and resilient home mortgage finance system that is the envy of the world, facilitating long-term, fixed rate mortgages.
When interest rates doubled in 2022, homeowners in many other countries, like England, were hit hard as their variable mortgage rates skyrocketed. American homeowners holding fixed rate mortgages, on the other hand, were largely insulated because of the securitization role of Ginnie Mae (and Fannie Mae and Freddie Mac) in facilitating long-term, fixed-rate mortgages.
In contrast, the Silicon Valley Bank seizure showed the folly of banks funding long-term mortgages with short-term deposits. Without Ginnie Mae (and Fannie and Freddie), the damage to the United States would have been incalculably higher, had we instead relied on banks funding mortgages in portfolios rather than these broader secondary markets.
An important component of Ginnie Mae’s success is its strong and consistent record of profitability. As the Community Home Lenders of America (CHLA) documented in its 2022 Annual IMB Report, Ginnie Mae has consistently produced profits year after year, even in 2008 — and in 2023 and 2024 is expected to contribute an additional $3 billion to the federal coffers.
Ginnie Mae risk is low, because Ginnie Mae does not take any significant credit risk — but its impact is powerful due to securitizing federally guaranteed loans in order to facilitate access to long term MBS investors.
Another critical component of Ginnie Mae’s success is its broad base of approved “issuers.” Issuers are mortgage lenders and servicers approved to securitize Ginnie Mae Mortgage Backed Securities (MBS), consisting of FHA, VA, and RHS mortgages.
A broad base of Ginnie Mae issuers increases borrower choices and competition, and in turn reduces loan originators’ reliance on large aggregators. That is a significant benefit for mortgage borrowers.
We saw how important that is when COVID hit three years ago. When Congress granted borrowers a “forbearance” option to skip mortgage payments without penalty, many aggregators pulled back, temporarily abandoning the market or imposing less competitive rates and terms. But borrowers working with Ginnie Mae issuers were generally spared this adverse treatment because these lenders were able to directly securitize the loans.
Ginnie Mae serves dynamic real-world MBS markets and has proven its nimbleness in responding to changing circumstances and needs. For example, just in the last year, Ginnie Mae acted to shorten the required time frames for re-securitization of reperforming loans that went through loss mitigation to allow smaller MBS pool sizes.
The FHA is also to be commended for its recent announcement that it is developing an option to allows issuers to carry out loss mitigation for distressed borrowers without the costly impact of pulling lower interest loans out of Ginnie Mae pools. These changes will help borrowers and the lender/servicers that originate and service FHA loans for them.
But there is one more action that would make Ginnie Mae an even more effective program: a cash window.
Creating a cash window for loans that Ginnie Mae securitizes
The concept of a cash window is simple, and we know it works, because Fannie Mae and Freddie Mac already have a cash window. Under this cash window, approved lenders (“seller/servicers”) simply sell their loans directly to Fannie and Freddie. Fannie and Freddie then turn around and securitize the loans themselves in the secondary market, bringing in a master servicer to service the loans.
Some may argue there is no place for smaller servicers in the Ginnie Mae program. The CHLA disagrees. As noted, one of Ginnie Mae’s greatest strengths is its broad based of lenders and issuers.
An even broader base of Ginnie Mae participants would be good for borrowers. Creating a cash window for Ginnie Mae would help homebuyers and homeowners by creating more competition, which lowers mortgage rates and expands consumer choices.
Creating a cash window would help smaller lenders that are not interested or able to become a Ginnie Mae-approved issuer by enabling them to access Ginnie Mae MBS markets without having to go through third-party aggregators.
A cash window would also help existing Ginnie Mae-approved issuers by creating the option to pursue the best execution, through either a cash window or direct issuance.
Who would oppose this? Possibly the big aggregators, who understandably don’t want to lose some of their business. But Fannie and Freddie demonstrate there is plenty of business left for the aggregators, even with a cash window.
What would it take to make this a reality? Ginnie Mae already has the expertise and experience to pull this together. The main action that is needed is for Congress to authorize this by adopting legislation to authorize Ginnie Mae to purchase whole mortgage loans.
Congress should start debating this option and move expeditiously to make it a reality.
Scott Olson is the executive director of the Community Home Lenders of America (CHLA), whose members are small and mid-sized independent mortgage banks (IMBs).
Would retirement planning be easier if you had a pension?
It’s a silly question, I know. For most people, the answer is, “Yes, of course.”
Here’s a less-silly question: Did you know that you can buy a pension?
Most people I talk to don’t know that. But it’s true. If you want to, you can buy a pension from an insurance company. You can pay an insurance company a lump-sum of money, and the insurance company will promise to pay you a certain amount of money, which will adjust upward with inflation, every month for the rest of your life. (Or, if you prefer, they’ll promise to pay a smaller amount of money every month for the longer of your life or your spouse’s life.)
The technical name for such a product is a bit of a mouthful: single premium immediate inflation-adjusted lifetime annuity.
Yep, the dreaded A-word: annuity. It’s true that many types of annuities are a poor deal for investors. But I hope you’ll suspend your suspicion for a moment to see if this one particular type of annuity may be helpful for you.
They Let You Spend More Money
In addition to making retirement planning simpler (because of the predictable level of income they provide) this type of annuity has another major benefit: It can allow you to spend more per year than you can safely spend from a typical portfolio of stocks, bonds, and mutual funds.
If you’ve read much about retirement planning, you’ve probably come across the “4% rule.” That is, most retirement planning experts recommend withdrawing no more than 4% per year from your portfolio in the early stages of retirement.
Even in today’s low interest rate environment, a 65-year-old male can get a lifetime annuity paying 5.1%. And that payout will increase with inflation every year for the rest of his life. For a female of the same age, the available inflation-adjusted payout would be 4.5%. (The annual payout is lower for women because the insurance company knows that, on average, they’ll have to make payments for a longer period of time for female annuitants.)
Note: For anyone curious, these quotes came from Vanguard’s site. You can run your own numbers by going to this page and clicking the “Income Solutions” link, though you’ll need to have a Vanguard account first.
What’s the Catch?
So far, I’ve made these annuities sound like an investor’s dream come true. But that’s not exactly the case. Like anything else, they have their drawbacks.
First and most importantly: The money disappears when you die. If you retire, put your entire portfolio into a lifetime annuity, and promptly get hit by a bus, the money is gone. Your heirs do not get a dime of it. Rather, the money goes to fund the payouts on annuities for still-living annuitants. This is the reason that you cannot build your own lifetime annuity using bonds and other fixed-income investments. Lifetime annuities provide a higher payout per year than you can safely take from a typical investment portfolio because part of that income is coming from other annuitants–ones who have passed away.
The second drawback to such annuities is that they involve credit risk. Granted, insurance companies are subject to regulatory funding requirements that make it very uncommon for them to go belly-up, but that doesn’t mean it’s impossible.
Finally, lifetime annuities aren’t “liquid” in the way that stocks, bonds, and mutual funds are. If you find yourself crunched for cash, you cannot sell a piece of your annuity in the way that you could with other investments.
The Bottom Line
Because they allow for a high withdrawal rate, and because they provide predictable income, lifetime annuities can be a helpful tool for people who have under-saved and are now looking to safely draw the maximum amount of income from a portfolio. But this isn’t a retirement tip suitable for everyone.
For investors who have saved enough to be able to deal with the unpredictable returns that come with a stock/bond portfolio, lifetime annuities may not be a good fit. In addition, even if a lifetime annuity would be a good fit for you, it’s not a good idea to annuitize your entire portfolio.
TransUnion announced on Wednesday that it has entered into a commercial agreement with Truework, an income and employment (VOIE) services verification provider, in order to provide comprehensive income verification coverage.
Together, Transunion and Truework will offer verifiers an accurate and up-to-date view of consumers’ income and credit data, enabling better insights and more efficient decision-making, according to a press release.
“We expect this partnership to enable Truework to accelerate our distribution to TransUnion customers,” Pravesh Mistry, chief revenue officer of Truework, said. “We are excited to combine our expertise and resources to evolve the income verification process for lenders, while improving the experience for the end consumer.”
The partnership positions TransUnion to address the growing market demand for VOIE, offering customizable solutions across various industries. The initial focus will be on select industries, with plans to expand to others in the future.
Truework and TransUnion will also collaborate on developing the next generation of VOIE solutions.
“We see great synergies with Truework that will allow us to provide a more holistic view of each individual and look forward to continuing to grow this partnership,” Hilary Chidi, EVP of credit risk solutions and chief sustainability officer at TransUnion, said.
As part of the collaboration, Truework will leverage its one-stop platform for VOIE information to offer consumers greater control over their personal and financial data. The agreement follows TransUnion’s strategic minority investment in Truework earlier this year.
“We expect that our collaboration will allow customers to derive superior insights and make more informed decisions by providing a broader view of consumers,” Chidi said. “In turn, we expect that consumers will benefit from a clearer picture of themselves when they apply for loans, employment, and other opportunities.”
Headquartered in San Francisco, Truework offers a comprehensive platform that streamlines the verification process by integrating various methods. Through this approach, Truework covers 90% of U.S. employees. The company is also an authorized report supplier for Fannie Mae‘s Desktop Underwriter validation service, relied upon by 20 of the top 25 mortgage lenders in the U.S.
TransUnion is a global information and insights company that operates in more than 30 countries with over 12,000 associates. The company’s solutions extend beyond core credit, encompassing marketing, fraud, risk, and advanced analytics.
This content was generated using AI, and was edited and fact-checked by HousingWire’s editors.
I referenced in my last opinion piece in Housing Wire that the Urban Institute publishes a “monthly chart book” that is packed full of relevant data. This recent publication paints a clear picture as to why any Realtor or homebuilder should always include a nonbank lender in their referrals.
Before I open myself up to attacks here, I am using macro data from Urban Institute and there are certainly some banks who serve a broader swath of the market. But let’s start with the basics as to who really is expanding credit access in the market.
When looking at the nonbank share of all loans broken down by investor (Fannie, Freddie, and Ginnie Mae) the glaring data point that stands out is that nonbanks do well over 80% of all loans being made today. More importantly, when it comes to the Ginnie Mae programs, banks contribute only 7% of all the mortgages by the FHA, VA, and USDA. Seven percent is a glaring figure, especially when you look at the dynamics shaping the housing market.
The reason why this stands out is that the distribution of loans in the Ginnie Mae programs has the highest concentration of first-time homebuyers and the largest percentage of minorities. In the FHA program alone, 46.3% of all loans are to Hispanic and Black borrowers and with over 80% of all FHA’s purchase transactions going to first-time homebuyers, the fact that banks only do 7% of these loans is extraordinary.
Why does this all matter? Because the key regulators in Washington spend a lot of their time ingratiating themselves to the banking industry and lamenting about nonbanks. As Chris Whalen articulated in his recent op-ed, “Consumer Financial Protection Bureau head Rohit Chopra said in May that ‘a major disruption or failure of a large mortgage servicer really gives me a nightmare.’ He made these intemperate comments during CBA Live 2023, a conference hosted by the Consumer Bankers Association.”
The fact that regulators spend time “biting the hand that feeds them,” my reference to the fact that it is the nonbanks providing support for the constituency that this administration should care about and certainly not the audience at a CBA conference, is pretty alarming.
As Whalen goes on to highlight, “Chopra’s focus is political rather than on any real threat. But of course, progressive solutions require problems. Three large and mismanaged depositories failed in the first quarter of 2023, yet progressive partisans like Chopra, Treasury Secretary Janet Yellen, and Federal Housing Finance Agency head Sandra Thompson ignore the public record and continue to fret about nonexistent risk of contagion from mortgage servicers.”
I have taken a lot of negative feedback from many who are connected to the current administration about my criticism of things like LLPA fee changes. But in a similar context as Whalen, I am tiring of the politics of an administration and its regulators who focus their time on trying to reign in the independent mortgage banks (IMBs) — the very set of institutions that are responsible for ensuring that access to credit remains for American families who might otherwise be shut out of the market.
One might ask, why do IMBs do so much better here in advancing credit availability? I think it comes down to a core principal: IMBs only do mortgages. Unlike banks, they don’t do auto loans, credit cards, student loans, business lending, lines of credit and more. Banks don’t need to expand their mortgage lending businesses. In fact, the trend has been to retreat from mortgages, not embrace this segment further.
Just look at the data. When it comes to credit (FICO) scores, IMBs are significantly more aggressive. And since credit scores are lower for first-time homebuyers and trend lower in most minority segments, the IMBs naturally prevail as the best option for the homebuyer.
Or look at this data on DTI (debt to income ratio). The spread between median bank DTIs versus nonbanks in the Ginnie Mae program is significant and, frankly, will affect those on the margin of access to homeownership in a significant way.
The fact that banks are only 7% of all Ginnie Mae lending is not by accident. The reality is that they have systematically walked away from any element of mortgage lending that seems to be of greater risk. It’s frankly why companies like Wells Fargo today are a shadow of the mega-market dominators that they once were.
Whalen perhaps said it best stating, “More than any real-world problem posed by IMBs, it is the government in all of its manifestations that poses a significant risk to the world of mortgage finance and the housing sector more generally. Washington regulatory agencies seek to stifle the markets, limit liquidity and impose additional capital rules, strictures that must inevitably reduce economic growth and access to affordable housing.”
We have a labyrinth of federal regulators who failed to see how the significant rise in banks’ cost of funds, driven by the actions of the Federal Reserve, might push some banks into negative basis territory. This scenario, where they were paying depositors more than they were earning on their unhedged assets, put them out of business. And the regulators missed all of this. In all of their angst and speech-making about the risks of nonbanks, they simply overlooked three of the most expensive failures in banking history.
As I write this, I know that I too was once part of the arrogance of an administration that lectured and directed more than it listened at times. But today we face too many risks. Whalen clearly articulates how the GSEs are being directed down a path that will only decrease their relevance over time if left unchecked.
But perhaps the core message here is this: If I were a Realtor or homebuilder, I would make sure that my potential buyers, especially my first-time homebuyers, were in conversation with an IMB (or mortgage broker). If that simple step isn’t being done, then the access to credit challenges will likely only loom larger.
Remember, IMBs are not risk taking entities. They pass through the credit risk into government-backed lending institutions and they get paid a fee to service the loans for these government entities. We need regulators to stop speechmaking at banking conferences about risk here and instead applaud the critical role these companies perform.
More importantly, regulators should spend more time bolstering forms of liquidity to these entities. There are solutions that can help.
But really, the more time they spend politicizing the nonbank story, we risk more bank failures, which are truly the greater risk in the sector. Let’s applaud the IMBs for keeping the doors to homeownership open. And let’s demand that our regulators stop using political platforms to distort others’ views while not focusing on their primary responsibilities.
Accountability will only exist when stakeholders demand it.
David Stevens has held various positions in real estate finance, including serving as senior vice president of single family at Freddie Mac, executive vice president at Wells Fargo Home Mortgage, assistant secretary of Housing and FHA Commissioner, and CEO of the Mortgage Bankers Association.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story: Dave Stevens at [email protected]
To contact the editor responsible for this story: Sarah Wheeler at [email protected]
By Peter Anderson28 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited April 4, 2013.
Peer to peer lending has been a hot topic on personal finance blogs for the last year or so. Lots of people are promoting it as a good way to make decent returns on your money – even in a tough economy like we’re in (Some might argue that it’s because of the hard times we’re in that it’s becoming a better way to make good interest on your money).
I have stayed out of the social lending market because up until recently my wife and I were still building up 3-6 months of expenses in our emergency fund (actually we’re closer to 8 months, we’re a bit more conservative than some), and we didn’t really have a lot of extra money to put into things Lending Club or Prosper.
We’ve finally completed our 8 months of expenses, and since we now have a little bit extra discretionary income, I thought I would sign up to use one of the more popular person to person lending services, Lending Club.
The Idea Behind Peer-To-Peer Lending
For those of you who aren’t familiar with P-2-P lending, here is a quick primer of how it works. Sites like Lending Club bring together a large network of borrowers and investors. As an investor/lender you can choose to invest as little as $25 with one borrower, or if you want to invest a larger sum you can spread out your money between a larger number of loans. (You can lend a large amount to one borrower, but it isn’t suggested. Better to diversify your holdings. ) As a borrower you can get a loan for up to $25,000 and have that amount lent to you from many different sources. P-2-P lending may allow people who might otherwise not be able to get a traditional bank loan to still fund their business, consolidate debt, or fund a wedding – all while getting a lower interest rate than they might have at a bank or on their credit card.
Peer-to-peer lending isn’t without it’s downside – and as with many traditional loans there are going to be plenty of people that default on their loans, and don’t repay. So you need to take that into account when choosing the loans you want to fund, and looking at the higher interest rates on riskier loans. The higher the interest rate that you’ll receive, the more risk you’ll take on. Also, Lending Club and other P-2-P sites are not available in all states.
Signing Up For Lending Club
I chose to sign up for Lending Club as my first foray into P-2-P lending because it has a pretty good reputation in the blogosphere, and elsewhere. They also successfully registered with the SEC in 2008, which has given them even more credibility.
Signing up for the Lending Club was a simple process, although it will take you a few days from signing up until you can actually begin lending. Here are the steps to sign up.
Go to Lending Club web site
Click on Join Now link at the top right of the screen and complete the application to be a borrower or investor on the screen that comes up. If signing up as an investor don’t forget to use the referral code below for $50 free!
You should receive a confirmation email, in which you’ll need to click on a link to confirm your registration.
Go back to the Lending Club website and login with your new login info.
Click on the Invest button. Fill in your profile information in order to verify who you are, and to link your bank account to Lending Club. (Lending Club will make two small deposits into your account to verify that you have access to the account).
Once your bank account is verified, go to the My Account tab, and then choose Add Funds. You’ll need to transfer at least $25 to your Lending Club account in order to get started. This may take a few days.
From My Account tab, click on Invest to start lending money
Once you’ve finished to process above, you’ll be ready to start lending money. This is the fun part – lending money, and making a bit of money in return.
Lending Money With Lending Club
Lending money using Lending Club is actually kind of fun. You get to read about people’s situation, find out why they’re taking out a loan, and then see if they are in fact a good credit risk. I decided to look mainly at loans that were from borrowers with good credit scores, verified income, and what I considered good reasons for taking out a loan (I’m usually against taking on new debt of most kinds, so I didn’t want to fund loans unless they were for people bettering their debt situation, and trying to get out of debt). Since I’m just testing the waters, I decided to invest $100 for now. If I’m happy with the returns and borrower repayment I’ll consider investing more in the future.
Originally I was planning on investing my money with my friend Matt over at DebtFreeAdventure.com who is currently repaying a Lending Club loan to consolidate a couple of higher interest credit cards and an auto loan. Unfortunately (for me) his loan was completely funded before my deposit was credited to my LC account. So I had to find other loans to fund. To find borrowers to fund just do the following:
Click on the Invest tab at the top of the page.
Enter how much you would like to invest with each loan.
Hit the Run LendingMatch button to match your lending amount to borrowers.
If you would like you can increase the amount of risky loans you are willing to take on (and the interest you can make) using the slider on the page.
When you are done hit the Next button and it will bring back a list of matching loans for you to invest in, based upon your risk tolerance that you’ve selected.
If you prefer to select loans manually, you can also do that by selecting the Browse Notes link at the top of the page (this is what I chose to do).
Since I was investing with Lending Club for the first time I decided to manually select the notes that I would be investing in. I didn’t want to invest in anything that sounded overly risky, or to invest with anyone that sounded like they weren’t very responsible. Since I am only investing $100 to start, it didn’t take me very long to find 4 notes to invest $25 in, with people who had good credit scores, and who were either in the A or B credit rating.
Once you have your notes selected you just click on the Invest button, and then confirm your purchase order for those loans, and those amounts. Piece of cake.
Now, I just have to sit back and watch the interest pile up!
Sign Up For Lending Club
I’m going to be charting my experience with Lending Club here on the blog, so stay tuned. If you’ve been thinking about signing up for an account, now is the perfect time. If you register for a new investor account and click on our link, for a limited time you’ll get $25 in your lender account – for free!
OK. Ready to sign Up For Lending Club And Start Investing?
(yes, that is an affiliate link. thanks for signing up through me!)
More Social Lending Resources
Have you entered into the peer-to-peer lending arena as a borrower or investor? What has been your experience?
Credit matters when looking to buy a house, car or any other pricey asset. Unless a consumer is flush with cash, the path to home and vehicle ownership may go through a mortgage or a loan. Good credit can provide you with terms and privileges not available to a person with poor credit, including lower interest rates and increased borrowing capacity.
We delve into what constitutes a good credit score and the reasons why it is important to have a good credit score.
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What’s Considered Good Credit?
Consumers with standard credit scores of 661 or greater are considered to have good credit, because they rank as prime or super prime in terms of their risk assessment. A bad credit score falls on the lower end of the range and a good credit score falls on the higher end of the range.
Many credit scoring models, including the standard FICO® Scores and VantageScore 4.0, measure an individual’s credit risk on a three-digit scale ranging from 300 to 850. The highest risk group are consumers with deep subprime credit scores from 300 to 500, and the lowest risk group are consumers with super prime credit scores from 781 to 850, according to Experian.
Consumers may build and attain good credit by paying their bills on time, maintaining a mix of accounts and keeping their revolving balances under 30% of credit limits.
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Check your score with SoFi Insights
Track your credit score for free. Sign up and get $10.*
8 Benefits of Good Credit
Here are the eight core benefits of good credit, which highlight why it is important to have a good credit score:
Benefit #1: Easier Access to Credit
Good credit may provide you with easier access to additional credit. When a consumer applies for a credit card or personal loan, lenders may analyze the consumer’s credit report and credit score to make an informed decision on whether to approve or deny the application. A person with good credit is considered low-risk and therefore has an easier time getting approved for a personal loan compared to high-risk borrowers.
Benefit #2: Lower Interest Rates
Consumers with good credit may qualify for lower interest rates when borrowing money. For example, available financing data for new vehicle purchases in the first quarter of 2022 show consumers in the deep subprime category of bad credit have obtained auto loans with 14.76% interest on average. Meanwhile, consumers in the super prime category of excellent credit secured 2.40% interest rates on average. That amounts to an over 12 percentage point difference in interest rates.
Benefit #3: Lower Car Insurance Premiums
Many auto insurance companies use credit-based insurance scores to help categorize consumers by risk and determine what premiums they may pay. Under this practice, higher-risk consumers may pay higher auto insurance premiums than lower-risk consumers. In some states, having good credit or improving your credit score may lead to lower auto insurance premiums over time.
Benefit #4: Increased Borrowing Capacity
Consumers with good credit may obtain larger credit limits than those with poor credit. This could translate to greater spending power on a credit card and the ability to make larger purchases on credit. Having good credit also puts you in a better position to apply for and obtain new credit.
A bolstered borrowing capacity is not limited to credit cards either — credit unions and banks may offer personal loans to consumers with good credit. Such loans can help you consolidate debt, finance large purchases or obtain fast cash to weather an unforeseen emergency. Personal loans also may command lower interest rates than credit cards.
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Benefit #5: Easier to Buy a Home or Car
Good credit can help you buy a house with a good mortgage rate or a car with affordable financing. Borrowing money to own a home or vehicle comes at a price that includes principal and interest. Consumers with good credit may qualify for 0% annual percentage rate loans for a car, where no APR means no interest or finance charges. Establishing good credit may also improve your likelihood of obtaining a low-APR mortgage, which translates to lower debt repayment obligations.
Automotive consumers had an average credit score of 738 for new vehicle purchases and 678 for used vehicle purchases in the fourth quarter of 2022, according to Experian’s quarterly report. This shows the average automotive consumer boasted good credit within the prime category of low risk.
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Benefit #6: More Apartment Lease Options
Signing a lease to an apartment may require good credit. Landlords who conduct credit checks might deny lease applications if a prospective tenant has bad credit. Or, those with poor credit may have to provide a higher security deposit for rental housing compared with a prospective tenant who boasts good credit. Tenants with good credit also may have more leverage to negotiate for lower rent.
Jobseekers can benefit from good credit, as some employers may consider a person’s credit score when making hiring decisions. The U.S. Department of Housing and Urban Development says that a low credit score or credit invisibility is a burden that can “limit housing choice and employment opportunity,” whereas “a good credit score is part of the pathway to self-sufficiency and economic opportunity.” The term “credit invisible” refers to consumers who lack a credit score or credit history.
Benefit #8: Ability to Obtain Security Clearances
Law enforcement officers with good credit could gain privileged access to classified national security information and FBI facilities. Any state or local law enforcement officer seeking a security clearance has to first satisfy a comprehensive background check that includes a review of credit history. The FBI shares secret or top secret information with local law enforcement officers who have obtained security clearances.
Poor credit history would not necessarily disqualify an officer from obtaining a security clearance, but significant credit history issues “may prevent a clearance from being approved,” according to information posted on the FBI’s website.
The Takeaway
Good credit is important for anyone who wishes to borrow money to help finance key purchases. Many consumers rely upon mortgages and loans to buy houses and cars, while many cash-strapped individuals turn to credit cards to buy essential goods and services ranging from food and electricity to water and rent for housing.
The eight benefits of good credit highlighted above showcase why it is critical to pay your bills on time and practice good budgeting. SoFi Insights is a money tracker app that allows you to monitor and keep track of your credit score, among other perks that could assist with financial planning and managing your net worth.
Check out the features SoFi Insights offers to help bolster your financial success.
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There was a notable change in the difference between Fannie Mae and Freddie Mac’s credit-risk transfer activity in 2022, when volume inched up to a new high during the year.
Overall, single-family CRT issuance rose to just over $1.06 trillion last year compared to more than $1.05 trillion in 2021.
Fannie produced more new single-family CRTs than Freddie Mac annually for the first time since 2019 based on the unpaid principal balance of the reference pools of mortgages involved. The two agencies pay investors to share some of the risks associated with those loans.
Fannie’s total issuance for the year was $535 billion, which allowed the government-sponsored enterprise to gain a slight lead over the $528 billion that Freddie Mac issued. Last year, Fannie issued just $206 billion, compared to Freddie’s $846 billion.
A shift in the capital framework for the two government-sponsored enterprises led to the reversal of a two-year trend in which Freddie Mac had been the bigger player. Trump administration officials had added CRT deterrents but Biden White House officials removed them. Freddie had continued to issue CRT when the deterrents were in place, but had Fannie temporarily pulled back from the market in response.
While Fannie Mae pulled ahead for the year, Freddie remains the larger player based on cumulative reference pools since the program began in 2013 due to that pullback. Cumulative reference pools total more than $3.26 trillion for Freddie and over $2.98 trillion for Fannie for a total in excess of $6.24 trillion.
Reference-pool mortgages targeted for risk sharing are generally single-family loans with long-term fixed rates loan-to-value ratios above 60%.
Some commentators remain concerned about whether the capital framework should account for a higher level of risk designed to address concerns about CRT market disruptions like the one that occurred early in the pandemic.
The agencies use a variety of different CRT strategies, including structured, insurance-based and lender loss-sharing deals for this reason, and in its most recent report, their regulator and conservator indicated Fannie and Freddie will keep doing so.
“The enterprises continue to innovate and experiment with different structures and attempt to expand the scope of their CRT programs as part of their efforts to further reduce credit risk where economically sensible,” the Federal Housing Finance Agency said in its report.
Meanwhile, the FHFA has started a new review of the government-sponsored enterprise capital framework and its relationship to loan pricing, but proposals to date don’t appear to include any major changes that would constrain credit-risk transfer activity.
Rather, the FHFA is contemplating what appears to be a technical correction related to clean-up calls allowed when mortgage pools pay down to low balances as part of these reviews. If anything, the Mortgage Bankers Association expects this could encourage more CRT activity.
The Securities and Exchange Commission has proposed a conflict of interest rule that could potentially be applied to the process of selecting mortgages in reference pools for CRT and slow activity, but most commentators have been skeptical as to whether that will happen.
Language around the outlook for credit-risk transfer activity is cautiously optimistic in the FHFA’s latest report.
“The enterprises continue to innovate and experiment with different structures and attempt to expand the scope of their CRT programs as part of their efforts to further reduce credit risk where economically sensible,” the agency said.
A jumbo loan is something you’ll likely need if you’re looking to purchase a luxurious home, one whose features are more expensive than the average property in the area. What qualifies as a jumbo loan in your neck of the woods depends on the county in which you live.
Let’s explore the details around getting a jumbo loan.
What’s a Jumbo Mortgage Loan?
If you’re in the market for a new home and the asking price is higher than average, you might need to consider getting a jumbo loan.
Technically, a jumbo loan is a mortgage whose size surpasses the threshold set by government agencies Fannie Mae and Freddie Mac. These government-sponsored enterprises (GSE) are responsible for buying up the lion’s share of U.S. single-family mortgages, but not when it comes to oversized loans.
Due to their nature as non-GSE products, jumbo mortgages are considered non-conforming loans.
Considering that jumbo loans fall outside the parameters of the GSEs, they do not qualify for the government guarantees that their conforming loan counterparts receive. As a result, jumbo home loan requirements can be more stringent than secured loan products.
Jumbo vs. Conventional Loan
The GSEs were formed so that banks and credit unions would have enough cash on hand to perpetuate the lending process to other homebuyers.
A key feature of conforming loans is a cap placed on the amount, which protects the government from getting stuck holding too big a bag from borrowers who turn out to be a credit risk.
Jumbo loans are outsized mortgages for homes on the expensive side of the price spectrum. Often, a jumbo loan is appropriate if you are looking to buy a luxury home that stands out from the pack in the neighborhood, but that’s not always the case.
In a white-hot real estate market, you might find yourself needing to access a jumbo mortgage to outbid the competition.
Interest rates attached to jumbo loans are likely to exceed conventional loans because of the bigger risk to lenders. A similarity between jumbo and conventional loans is that both are repackaged and sold to investors in the secondary market.
However, due to their size, jumbo mortgages attract a different set of investors with a different risk profile.
Conforming Loan Limit Explained
The restrictions around conforming loans mainly involve the size of the mortgage. The Federal Housing Finance Agency, the department that oversees Fannie Mae and Freddie Mac, updates these parameters annually.
In 2021, conforming loan limits prices were $548,250 for single-family homes and increased to $647,200 in 2022.
The conforming loan limits are adjusted each year due to fluctuations in the average U.S. home price. Between Q3 2020 and Q3 2021, the average home price increased an average of 18.05%, which established the baseline from which the conforming loan limit was set.
Total Mortgage works with borrowers across the United States, making it easy to find a mortgage expert near you.
How Do Jumbo Loans Work?
When you’re getting a jumbo loan, it helps to know what to expect beforehand. We have streamlined the mechanics of jumbo mortgages so you’re not taken by surprise:
Higher Rates: Interest rates on jumbo loans tend to be higher than those on conforming loans to reflect the greater risk the lender is inheriting. According to Experian, you can expect a jumbo loan interest rate to be 1-2% higher vs. the going rates for more conventional loan products.
Second Opinion: You might need more than one appraisal. Considering the sheer size of a jumbo mortgage and potentially tough comps by which to compare the home’s market value, lenders may ask for two appraisals. They want to make sure that the value of the home measures up to the price.
Higher Expenses: Expect the closing costs to be higher than traditional loans. Lenders will generally charge a percentage of the home’s total purchase price that’s higher than usual because of the extra vetting that jumbo mortgages lend themselves to. According to Bankrate, as of Q1 2021, the average closing costs for a typical mortgage range between 2% and 5%, or $6,837 for a single-family property.
Requirements for a Jumbo Loan
Jumbo home loan requirements will vary from lender to lender, but everything is higher as a general rule of thumb. This is due to the bigger size of these mortgages, which places more risk on the lender’s shoulders.
Here’s a breakdown of the requirements for a jumbo loan:
Credit Score: You’ll need pristine credit to qualify for a jumbo loan. Lenders will be looking for a FICO credit score of at least 720, though they may be willing to go as low as 660. By comparison, borrowers could qualify for a conventional mortgage with a credit score of as low as 600.
Down Payment Amount: Expect to plunk down anywhere from 20-30% of the home’s purchase price as a down payment. A silver lining is that with a down payment of this size, as long as it doesn’t dip below the 20% threshold, you may not need to invest in private mortgage insurance (PMI).
Debt-to-Income (DTI) Ratio: Lenders want to see that your debt-to-income (DTI) ratio, which is the result of dividing your monthly expenses by your gross monthly income, does not exceed 36%. By comparison, lenders could be willing to overlook a DTI as high as 50% for a conventional mortgage.
Net Worth: Considering the risk that a lender is taking on, they might require borrowers to provide proof that they can liquidate other assets, if necessary. This is to cover the cost of the jumbo mortgage payments for 12 months.
Explore Total Mortgage’s Jumbo Loan Options
If your next home is one that is probably going to turn some heads, and you’ve got the credit profile and income required, you came to the right place. Consider jumbo loan options from Total Mortgage, whether a 10/1 ARM, 15-year, or 30-year mortgage, and apply online today.
The yield on the 2-year Treasury note continued to decline last week and finished the week at a lower yield than at the start of 2009. The fact the 2-year Treasury yield is now lower on a year-to-date basis is startling considering the robust performance of riskier investments such as Corporate Bonds, High-Yield Bonds, Commodities, and even stocks. On the surface, a new low for the year on the 2-year note would indicate a budding flight-to-safety rally. However, there are several rational reasons for the drop in 2-year Treasury yields, none of which are related to heightened risk aversion among investors about a renewed economic downturn.
T-Bill Supply Reduction
The most dominant factor has been a notable reduction in T-bill supply. In mid-September the Treasury announced it was not going to re-issue $185 billion in maturing T-bills originally issued as part of the Supplementary Financing Program (SFP). The SFP was launched during the fourth quarter of 2008 to assist bond market liquidity during the height of the financial crisis. With bond market liquidity vastly improved and the Treasury Department looking to extend the average maturity of outstanding debt, the Treasury decided to let all but $15 billion of SFP T-bills simply mature. The result was a 10% reduction of the T-bill market as the last SFP T-bill matured in late October.
The drop in supply comes at the wrong time as we approach year-end funding needs. As year-end approaches, banks and other institutions prepare to tidy up balance sheets by purchasing T-bills and other high quality short-term investments. To avoid illiquid trading conditions over the holidays, this process often begins before Thanksgiving. The commercial paper market, essentially the corporate version of a T-bill, is substantially reduced as a result of de-leveraging and disappearance of special purpose financing vehicles (SPVs), thereby leaving a greater-than-usual emphasis on T-bills as the vehicle of choice. Demand to fund over year-end is already reflected in zero yields on all T-bills that mature in January. Additionally, money market assets have decreased, but at $3.3 trillion they represent a hefty source of steady buying power.
The Fed is Your Friend
A friendly Federal Reserve has also been a key driver of the 2-year yield. The Fed continues to emphasize the “extended period” language when referring to the Fed funds rate. Last week, Fed Chairman Ben Bernanke, speaking before the NY Economic Club, once again reiterated that the Fed funds rate would remain low for an “extended period”. His remarks made absolutely no reference to the removal of monetary stimulus or taking steps to more proactively reduce cash in the financial system.
Most Fed speakers have reiterated Bernanke’s message with cautious remarks about removing stimulus too soon. Recently, St. Louis Fed President Bullard suggested the Fed may wish to keep the option open on bond purchase programs beyond March 2010 and when asked about timing for the first rate increase, Chicago Fed President Evans remarked “into at least the middle of 2010,” and the fi rst increase might not come until “late 2010, perhaps later in terms of 2011.” Fed fund futures pricing, one of the better gauges of Fed rate expectations, indicate the first rate increase will come at the September FOMC meeting. Previously Fed fund futures indicated the first rate increase would occur at the June FOMC meeting.
Where’s the Two Year Rate?
The decline of the 2-year note yield to 0.73% still keeps it in a range we roughly consider fair value. The 2-year maintains a tight relationship with the target Fed funds rate. Typically, when the Fed is on hold, the 2-year yield has traded 0.50% to 1.00% above the Fed funds rate. With target Fed funds currently 0.0% to 0.25%, the current 2-year yield is roughly in line with historical ranges. It is not uncommon for the 2-year yield to be lower than the Fed funds rate when the market expects a rate reduction. Although there is clearly no room for a lower Fed funds rate, the 2-year yield could drop further if the market truly believed that the economy was weakening again or that other monetary stimulus was forthcoming.
Domestic banks and foreign central banks have also played roles in a lower 2-year Treasury yield. Weak loan demand has left domestic banks with excess money reserves. With cash yielding next to nothing, banks are investing in longer-term securities such as the 2-year note. Short-term securities are much less sensitive to interest rate changes and when the Fed emphasizes it is on hold for longer, the risk in holding such a position is reduced.
Foreign central banks have purchased 2-year Treasuries as part of a renewed effort in currency intervention. The decline in the US dollar to its lowest point of the year has prompted concern from foreign governments whose economies are dependent on exports to the U.S. Foreign governments, via their central banks, have recently attempted to prop up the dollar via the purchase of short-term Treasuries.
The decline in the 2-year Treasury note yield to levels witnessed during the peak of the financial crisis has certainly caught the attention of investors. The drop in the 2-year yield has been particularly notable given the strong performance of riskier investments in 2009. However, several factors including a decline in T-bill supply, the Fed reiterating its “extended period” message, excess bank reserves, and foreign buying, have worked together to push the 2-year to its lowest levels of the past 12 months. These factors, and not a renewed flight-to-safety buying on renewed economic worries, have been responsible for the drop in 2-year Treasury yields.
IMPORTANT DISCLOSURES
This was prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you,
consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of funds shares is not guaranteed and will fluctuate.
The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.
High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors.
Mortgage-Backed Securities are subject to credit risk, default risk, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment
risk, and interest rate risk.
Municipal bonds are subject to availability, price and to market and interest rate risk is sold prior to maturity.
Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax.
Federally tax-free but other state and local taxed may apply.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
Stock investing involves risk including possible loss of principal.