Credit Scores Confuse Consumers October, 2004 By Jim Woodard Your personal credit score is a key factor in determining the amount and terms of your next mortgage loan, whether you’re seeking to finance the purchase of a home or refinance an existing mortgage. Many people still know very little about credit scores, or their impact on their personal or family financial health, according to a recent survey by the Consumer Federation of American (CFA). An individual’s credit score can substantially determine the interest rate and other terms of a new mortgage. This, of course, affects how much those monthly mortgage payments will be. A very low score often prevents a person from qualifying for any mortgage loan. Credit scores are increasingly being used to determine a person’s ability to repay a loan or meet other financial requirements. They are extensively used by mortgage lenders, utilities, home insurers, landlords, employers and others. “The cost of not knowing what your credit score is, and what it means to you, could result not only in denial of credit but also difficulty in obtaining needed loans, services and even a job,” said Stephen Brobeck, CFA executive director. “Only about a third of persons surveyed in our study correctly understood that credit scores indicate the risk of not repaying a loan, not factors like financial resources to pay back loans or knowledge of consumer credit. This low percentage appears to reflect the misconception that credit scores evaluate factors like income, age, and marital status rather than one’s credit history. Only the record of past use of credit determines the credit scores of consumers.” In the survey, only 12 percent correctly identified the low 600s as the score level below which they would be denied credit or have to pay a higher, sub-prime rate. About a third thought this level was the low 500s. And only 13 percent correctly understood that scores above the low 700s usually qualify them for the lowest rates and best terms. About 72 percent of respondents incorrectly believed that they can obtain their credit score for free once per year. That right was recently established for free access to one’s credit report, but not for free access to the individual’s score (except when applying for a mortgage loan). * * * Mortgage Applications Increasing Today’s low interest rates are attracting an increasing number of borrowers. Applications for purchase mortgages are up by 18 percent over a year ago, and refinance mortgage applications are at their highest volume in the past five months, according to a report from the Mortgage Bankers Association. The MBA’s Weekly Mortgage Applications Survey for the week ending September 24, shows an increase of 4.9 percent in mortgage applications just during the preceding week. The refinance share of mortgage activity increased to 45.9 percent of all mortgage application – up from 44.5 percent a week earlier. The share of adjustable-rate mortgage activity decreased to 32.5 percent * * * Growing Market for Luxury Home Sales and Jumbo Mortgages There are indications that sales of high-end or luxury homes are reviving, after a couple of years of sluggish sales activity. Stock market losses was a key element in dragging the market down. Dramatic home price increases in some markets, like those in west and east coast areas, have pushed the median value of homes to levels considered “luxury home prices” a few years ago. With the increasing number of high-priced homes being sold, the Jumbo Mortgage is increasingly being used as a means of financing purchase transactions. Jumbo Mortgages are those where the sum borrowed is larger than $333,700 – the top limit this year for “conforming” mortgage loans. When a mortgage is over that dollar threshold amount, the fixed-rate mortgage cannot be purchased by the major buyers of existing mortgages, such as the federally chartered organizations of Fannie Mae and Freddie Mac. This puts these large mortgages into a different category for the lender. In many cases, he must seek out other mortgage buying investors, and they may require a little higher interest yield. Therefore, a Jumbo Mortgage often carries a slightly higher interest rate – up to 1 percent higher than conforming mortgages. There are a few special underwriting restrictions for Jumbos that should be noted by a prospective borrower. Your lender will explain this. In many cases, buyers of upper-end (luxury) homes feel one Jumbo Mortgage is better than other financing alternatives. Others opt for a combination of two piggy-back loans – a maximum first-lien conforming loan coupled with a second mortgage -- to keep the interest rate to a minimum. Coming up with the best possible plan that fits the needs and financial capabilities of the individual buyer is very important, and calls for help from seasoned professionals. “We are experiencing an increasing number of applications for Jumbo mortgages,” said Michael Levy, president-CEO of Home Savings Mortgage, a multi-office mortgage banking firm in California. “In many cases, the jumbo mortgage best serves the interests of borrowers.” * * * Home Buying and Financing Help for Military Personnel Financial Counselors of America has launched a fund that helps cover down payments and closing costs for active members of the armed forces, Reserves, and National Guard. The nonprofit organization, based in Memphis, Tenn., has formed the Military Housing Assistance Fund as a national program and is now accepting individual and corporate donations. Military men and women must qualify for a mortgage that accepts gift funds in order to take advantage of this program. And the home builder or seller must consent to pay a $600 administrative fee that covers the fund’s overhead and enables full transfer of donations received to beneficiaries. It’s projected that at least a thousand military families will benefit by this coming January. * * * Free Home Buying Education Offered A free Web-based course for consumers, helping them to understand the home buying and financing process, is now offered by the Mortgage Bankers Association. The course is called “Consumer Homebuyer Education” and is available through MBA’s consumer homebuyer Web site: www.homeloanlearningcenter.com . The online course guides the student through each stage of the home buying process, beginning with the benefits of buying a home and establishing credit to develop a budget. Successfully completing the course will enable the student to approach the process of buying and financing a home with greater confidence and have a positive purchasing experience, according to MBA. “Our research shows Americans have a real hunger for information on home buying,” said Jonathan Kempner, MBA president. “This free consumer homebuyer course is a quick and effective way of educating and informing consumers through the often stressful and confusing home buying and financing process.” * * * More Focus on Senior Housing A major and growing segment of today’s real estate market is on housing for seniors. There is an ever-growing number of seniors, thus the demand for their housing is booming. There are now about 32,185 units of housing for seniors at various stages of development at 219 major projects nationwide, according to a joint study by the American Seniors Housing Association and the National Investment Center for Seniors Housing & Care Industries. That activity reflects a 12 percent gain over last year. “The kind of building for senior housing you saw five or six years ago has gone away because access to capital for such developments is different in today’s market,” said John Fogarty, an executive with MAC Commercial Mortgage. Today, affordable housing projects for seniors are continuing to receive a major influx of funding from state and federal government initiatives, including $1.8 billion in mortgages from the U.S. Department of Housing and Urban Development (HUD) for senior-care facilities. Fannie Mae and Freddie Mac are also contributing special programs in this area. * * * A Growing Rental Market Another growing segment of real estate activity is the building of rental apartment buildings. With consumer demand for apartments on the upswing, multifamily developers and builders are becoming more optimistic and active in planning and constructing new projects. “After three years of rising vacancy rates, we’re seeing a turnaround in the apartment market,” said Bobby Raybum, president of the National Association of Home Builders. All classes of apartments have shown improvement in demand in recent months. This applies to “affordable” and luxury apartment units. Lower-rent units, a category that generally outpaces the other categories, continues to do so. The market for condos is also remaining very strong. These sales have grown substantially over the past year. “As interest rates slowly rise, both the for-sale and rental multifamily sectors will approach new points of stability,” said David Seiders, chief economist for the National Association of Realtors. “Activity in the condo sector will remain high, especially in and near large cities where land supplies are particularly tight. The rental demand will rise with higher mortgage interest rates and stronger rates of job formation.” * * * Emerging Problem: Underinsured Homes A recent study has determined that 64 percent of today’s homes are at least 27 percent underinsured. In some areas, homes are underinsured by more than 60 percent. Much of the problem has surfaced by West Coast wildfires and string of hurricanes in the Southeast, according to analysts at Marshall & Swift-Boeckh, a noted property insurance firm. Many policies have shifted from guaranteed-replacement coverage to extended-replacement policies. Rather than provide unlimited replacement coverage as required in a guaranteed-replacement policy, most insurers now tack on 20 percent to 25 percent onto a specific policy amount -- the property’s estimated value. This is designed to cover the company if the estimated value turns out to be too low. Of course, as the coverage amount increase, so too does the premium. The insurance industry blames the lack of coverage in many cases on homeowners, many of whom fail to account for rising materials costs and increased value tied to home improvements. However, California insurance commissioner John Garamendi believes that insurance agents do not include the full replacement value in their quotes because higher values mean higher premiums, and they don’t want to lose customers to their competitors. J. Robert Hunters, Consumer Federation of America insurance director, blames insurance agents without sufficient experience in valuations for the underinsurance crisis. Many homeowners who lost their homes to the fires insist that they requested full coverage when they purchased their policies and depended on the agent to determine the value and premium amount accordingly. * * * Commercial Real Estate Activity Increasing A segment of the real estate market that’s now experiencing a revival in activity is commercial properties. “The optimism by investors says more about the future of the commercial real estate sector than anything else,” said David Lereah, NAR’s chief economist. “The investment level shows they understand the value of portfolio diversification and the fundamental demand for commercial real estate that occur in a growing economy.” Nearly $100 billion in commercial sales took place in 57 tracked metro areas during the first eight months of this year – up from $54.6 billion during the same period last year. This includes a 66 percent increase in the purchase of office buildings and a 40 percent rise in multifamily property transactions. More than 45 percent of overall commercial spending this year has been on acquisition of investment office buildings. Private national and local investors accounted for 47 percent of transaction volume. Publicly traded REITs (Real Estate Investment Trusts) represented just over a quarter of the total, and institutions made up 11 percent. “Commercial market vacancy rates have been steadily declining due to the growing demand for space,” said Walt McDonald, NAR president. * * * Study Shows Minimal Impact from New Buildings When a large apartment building is planned for a community, there are nearly always people who object to the proposed project for one reason or another. A common complaint relates to the project’s impact on neighborhood schools, making them overcrowded and creating a burden on educational budgets. A new study has determined that the construction of multifamily residential buildings does not contribute to school crowding or overextending local budgets. The study was conducted by the National Association of Home Builders. “This new analysis shows that the idea that multifamily housing puts an undue burden on local schools is a myth,” said Bobby Rayburn, NAHB president. “Unfortunately, it’s a myth that has led to a lot of opposition to apartment and condominium development in communities across the country.” The study used the most recent American Housing Survey data from the U.S. Census Bureau. “Education is the biggest item in most local government budgets, so it’s reasonable for public officials to be concerned about whether new residential construction will result in a big influx of new students,” said David Seiders, NAHB’s chief economist. “But this study shows that new multifamily construction has a limited impact on school enrollment.” * * * REIT Investments Looking Good For persons who want to invest in real estate but want to avoid management responsibilities and serious risk, investing in REIT (Real Estate Investment Trust) stocks is looking better all the time. These investments have been looking increasingly strong for the past five years. This year, through September 15, they have yielded a return of 12.6 percent, according to a report from the National Association of REITs. The impressive performance of these investments shows that real estate had the best average ranking of any U.S. industry, the association noted. “Increasingly, investors are interested in building dividends and diversification into their portfolios through the inclusion of real estate investments,” said Steven Wechsler, NAREIT president. “Now they can do so in the knowledge that the industry’s as good as, if not better than, that of the rest of corporate America.” | 
