There has been a lot of excitement in the past week about the new “conforming” loan limits for Fannie and Freddie loans. The new limits were announced as part of the American Recovery and Reinvestment Act of 2009 which the President signed into law on February 17, 2009. Realtors and potential home buyers and owners are happy that the new conforming loan limits was raised to $729,500 from $417,000. If you live where I live, in the San Francisco Bay area, and a few other high cost areas, there is good reason to be happy. But for most of the country this provision doesn’t change a things. It’s a good provision to be sure, but there is a lot of misinformation among the general public so we should put things in perspective.

The new loan limits up to which Fannie and Freddie are allowed to underwrite home mortgages are established by county. These limits are equal to the greater of 125% of the 2008 local area median home price or $417,000 for Fannie and Freddie, with an overall maximum cap of $729,750. Here are some fun facts:

• There are 3,142 counties in the U.S. (excluding protected territories such as Puerto Rico and the American Virgin Islands.)
• Only 275 counties, or 8.8%, will see loan limits raised above the previous $417,000.
• Only 73 counties, or 2.3%, will have loan limits of $729,750.
• The new average agency loan limit nationwide is just $430,322, a 3.2% increase.
• The 275 jumbo counties are spread across 29 states, but just 5 of those states (VA, MD, CA, AK and NJ) encompass almost 60% of these counties.

You can check your counties new loan limits on the OFHEO page.

UPDATE: As of the first week in May banks have begun rolling out the new “Super High Balance” Conforming loan programs. Pricing is only slightly higher than regular conforming but underwriting guidelines remain very tight. (I.e., you better have a good job and excellent credit scores.)

Managing your credit in these challenging economic times.

Not long ago managing your credit was a hot topic. Everyone wanted access to the easy money floating around and there was plenty of advice on how to build and maintain a good credit rating. Suddenly those voices have gone silent, but now more than ever it’s critical to keep an eye on your credit ratings.

These days it seems most lending institutions have gone out of the lending business, making credit pretty hard to find even for the most credit worthy. This will eventually change and the credit markets will return – don’t ask me when – but they will. But when the worst is past and the banks are lending again the requirements will be much stricter than they’ve been for most of the past decade, and your good credit score will be key. While the math behind the credit score is complex and mysterious (my statistican wife claimed it’s a State Secret,) in general there are five key factors to be aware of:

How Fair Isaac Corp. weights the various parts of your credit management to determine your credit score.

1. Payment History

It may seem obvious but paying your bills on time is the most important thing you can do. If you’re behind on a credit account make it your financial priority to get current and stay current. While this is important on all your accounts certain types of credit will impact your score more. Always try to pay your mortgage first and then your credit cards.

2. Watch your utilization rate.

Your utilization rate is the total amount you owe divided by your credit available. So if you have a credit card with a $5,000 credit limit and a $2,500 balance, your utilization rate is 50%. Credit bureaus generally like to see utilization rates in the 30%-35% range. This is less an issue of what you owe than how you manage it. For example, do not close an established credit account as a short term strategy to improve your score. Here’s why…

Suppose you have 4 credit cards with $30,000 of total credit available, and on average you carry a total balance of $9,000. Your utilization rate is 30% and everybody is happy. Now you decide to cancel a card you never use, with $0 balance and $10,000 of credit available. All of a sudden your utilization rate is 50% and your score could take a big hit.

I know the schemers among you are thinking “I’ll just run out and apply for a bunch of new credit to drive down my utilization rate.” Unfortunatley they’re on to you because…

3. Length of Credit History.

Longer credit histories are more heaviliy weighted than new ones. So if you’re going to cancel a card try to cancel a newer one. New credit accounts will reduce your average account age, and that can result in a lower score.

4. Type of Credit.

Mortgages and HELOCs tend to have the strongest impact on your credit score, followed by credit cards. If you’re going to close down a credit account close your department store cards first. (In fact, better would be not to get sucked into those one-time 10% discounts to open new revolving credit account.) Then consider your newer bank cards such as Visa or Mastercard. But try to avoid the shell game of moving balances around. If you really want to stop using a card, pay it off first then shred the card.

5. New Credit

If you’re looking for new credit – maybe a mortgage or a new card – be focused and do your inquiries over a short period of time. The scoring systems will track the length of time over which new credit is sought and distinguish between the search for a new line of credit from trying to open a bunch of new credit accounts. Many commercial inquiries into your credit score over time can really pull down your score. But remember, checking your own credit report will never affect your score, and this is something you should do regularly.

6. Expanded Use of Credit Scoring

If everything we’ve said so far seem old news to you, this last one may be a bit of a surprise; more and more institutions are using, or contemplating using, your credit score to evaluate you as a customer. Insurance is a big one. It’s controversial still but be prepared, it’s coming. If you have a bad credit score you very likely will not only pay more for your mortgage but you’ll pay more for insurance as well (if you can get either.) There is talk about credit scores being used in evaluating job applicants as well. For now the major reporting agencies claim they do not make credit scores available for employment evaluations, but a growing population of employers claim they do look at a person’s credit history. Whatever the truth, a well managed credit history is becoming ever more important in our modern world.

Learning from the lessons of Lincoln.

President Obama feels a close kinship with Abraham Lincoln. To be sure there are many similarities. Both were born outside Illinois (Obama in Hawaii and Lincoln in Kentucky.) Both men became lawyers and served in the Illinois State Legislature.

US National Debt continues to skyrocket with new budget.

Each served only a single term in Congress before ascending to the Presidency. And both men were (are) powerful orators who catapulted onto the national political scene and became commander-in-chief with no previous military experience.

President Obama often looks our 16th president as a model and source of inspiration, and as inspirational models go he makes a good choice. I would encourage number 44 to look to Mr. Lincoln even further however, for inspiration in substance as well as form. President Lincoln also governed during very turbulant times in our history. And as he so eloquently put it:

This quote is as relevant today as it was 140 years ago. Most people agree that our current crisis was brought about in great part by horribly irresponsible abuse of debt – by our banks and other financial institutions, by our government, and by the American people (as we argued in Save the World.)

So what are we doing? We are discouraging thrift, taxing the wage payer and spending WAY more than we earn. We, the American people, shoulder a hefty chunk of responsibility for our current mess, but we also seem to know when the party is over and how to make the necessary choices. The household savings rate hit 5% in January according the Department of Commerce, the highest level in almost 14 years. Meanwhile our government is ramping up its deficit spending to the tune of $1,750,000,000,000. Our government “for the people” needs to take a cue “from the people” – they owe it to us.

When people are doing well they travel more, go out to nice dinners, buy new cars. When times are tough we eat in, enjoy “staycations,” and just do the regular maintenance to keep our cars running well a few more years. We seem to understand that discretionary spending is a luxury of strong economic times. Shouldn’t we expect the same of our government?

Savings and Long-Term Investment is the Path to Sustainable Recovery

There is no shortage of opinions on how we ended up in this global economic meltdown: greedy Wall Street executives, lack of government regulation, capitalism was doomed to consume itself. Who always seems to get off scot-free is the American consumer. Ok, maybe not scot-free since the average American is certainly suffering, but the free-spending, debt-addicted consumer shoulders a hefty portion of responsibility for our current troubles (As we stated in “It Wasn’t My Fault.”) Post Depression through about 1980 the savings rate averaged around 8%. All through this period America thrived and the standard of living rose considerably. New financial products were created allowing people to take advantage of the American Dream, and still we saved.

From 1980 through 2005 we kind of lost our rational compass. The saving rate dropped below 1% and even went negative at time. (Meaning as a nation we were spending more than we were making.) This fueled tremendous economic growth but even a 5th grader could see that it’s not sustainable. (And we’re all smarter than a 5th grader, right?) All through this period the pundits howled about the low American savings rate and how much more the rest of the world saved. We were becoming a nation of debtors.

Suddenly the party ended and in December 2008 the savings rate climbed back to 3.6%, and is forecast to go much higher throughout 2009. This is a good thing, right? Personal savings is a primary domestic source of financing for capital investments – those investments that drive long-term economic growth.

But wait! Apparently the government now thinks we’re not spending enough. “Please Mr. and Mrs. Consumer, don’t pay down your existing debt, spend more money to save short-term jobs.” (I think it’s the politicians jobs their most worried about.) I get it. Americans think in very short time horizons. We want next month to be better than this month, and 5 years from now is too far off to worry about. But think about it; if overspending got us in to this mess in the first place, who in their right mind thinks it will get us out? (I’ll bet not your 5th grader.)

There is no short-term cure for a long-term problem. American’s need to save, and we need to invest. What we don’t need to do is spend more. Be more thoughtful about daily expenses. Invest in your retirement! (It’s coming sooner than you think.) Borrow money wisely and for good purposes. Buy or improve your real estate, start or run your company, get your kids, or yourself, an education, but stop paying 28% interest to buy a pair of jeans when you already have 10 pair in the closet. And if your 3 year old car is running fine, drive it for a few more years.

Let’s save the economy and our country’s future by saving ourselves and saving our money. We saved, grew and prospered for 35 years after WWII. We can have balance again and, more importantly, sustainable economic growth and prosperity.

Author’s Note: The irony of being in the private mortgage lending business and pushing people to save is not lost on me. I am a big proponet of the wise use of debt, and lower leveraged real estate investments can create tremendous long-term wealth for genertions to come. (That new bass boat however…)

“CMBS Market Begins to Show Fissures”

The following is an excerpt from the Wall Street Journal – WSJ (11-19-08):

The market for debt used to finance hotels, offices and shopping malls tumbled Tuesday on worries that the long-feared rise in defaults for commercial mortgage-backed securities had begun, possibly ushering in the next phase of the financial crisis.

According to a Citigroup Inc. report, the overall number of commercial mortgages packaged into securities that are 30 days or more past due rose to 0.64% in October from 0.39% at the end of last year, with most of the increase coming in October. The latest figure, though low by historic standards, marked the highest delinquency rate in two years.

The jump in soured commercial loans was mainly due to the financing drought and a lack of buyers. Property owners have been unable to refinance mortgages as they have become due, forcing defaults if existing lenders have been unwilling to extend loans under the same terms.
(You can read the full WSJ article here: CMBS Market Begins to Show Fissures – WSJ.com.)

Despite the dire headlines I can tell you that nobody in the industry is surprised by this.  The commercial mortgage market has lagged the devastation of the residential market but a downturn was inevitable.  Most commercial mortgages come due in 5 to 7 years, so all the commercial mortgages originated during the meteoric rise in real estate prices are starting to come due just as economic pressures come to bear and available financing disappears like the dinosaurs.

What the article just glosses over though is that delinquency rates are still at all time historic lows. Over-leveraged property owners with little equity are more likely to default, but those that have something to lose are not so willing to hand the keys back to the bank.  Solution?

Enter the Commercial Private Mortgage Lender.  Private lenders are not subject to the whims of the public debt markets and do not make their money by selling the paper to someone else. (The key implication of that last point is that we do not make stupid loans on the basis that we can offload the risk onto some other unsuspecting investors.)  A quick assessment of the property’s potential and it’s protective equity can be just the lifeline troubled property owners need.  The money is expensive; much more expensive than a conventional bank loan, but it’s far less than an equity partner. Private money is not the solution for everybody but it can save your property, and your financial life – and fortune. Risk is appropriately accounted for and everybody wins: borrower gets a low friction loan and the trust deed investors get a great return on their money.