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When the Federal Reserve lowers rates I tend to get many phone calls thinking that mortgage rates are going down as well. Historically, many times the opposite is true. It is my firm belief that an educated consumer is a smart consumer and therefore spend a lot of my day discussing just this question with my clients.

First of all the Federal Reserve has absolutely no direct impact on mortgage interest rates. The Federal Reserve controls the Short-Term Overnight Lending Rate, the Fed Funds Rate and the Discount Rate, which have a very close relationship to the Prime Rate.

On November 6, 2001, the Federal Reserve decreased interest rates by 50 basis points, now this was the tenth time in the calendar year the Federal Reserve had lowered rates. Starting on November 7, 2001, and all the way through the end of the year, rates went up on mortgages by as much as one full percent.

This left a lot of people scratching their heads. A lot of people chose not to lock in their mortgage interest rate on their home mortgage refinance or purchase loans, because they thought rates were coming down. All they saw was the media reporting that the Fed was lowering rates again. As a matter of fact, the Fed lowered rates in December for the 11th time that year. But by late 2001, mortgage interest rates were higher than they have been at any time in 2001. That is right, higher than they were before the Fed stated their first decrease in January 2001, higher than after 11 decreases.

The reason for this is simply a matter of cash movement. The stock market has as much of an impact, if not a greater impact, on mortgage interest rates as the Federal Reserve. Mortgage interest rates move in accordance with the trading of what is called the mortgage-backed securities. This is a secured instrument similar to that of a bond, and when people are putting money into equities (that being the stock market), the money going into stocks is typically coming out of bonds and mortgage-backed securities to fund the purchase of these stocks.

When the stock market is selling off, money is coming out of stocks and the money needs to have a place to be parked, in many cases a safe haven, to generate a secured guaranteed yield. That is when the money goes into bonds or mortgage-backed securities. When the money goes into bonds or mortgage-backed securities, rates on mortgages come down. When mortgage-backed securities are sold to generate cash flow to investment stocks, rates go up. So, you see, the much more accurate and dynamic relationship is that between stocks and mortgage-backed securities, not the Federal Reserve.

If you refer back to our example of November 6, 2001, the Fed lowered rates by 50 basis points and the stock market rallied. The reason is because the stock market predicts going forward that we are going to have much better corporate earnings because interest rates are low, and companies can borrow money at a cheap rate of interest. We are going to have greater corporate profits as a byproduct of this come Spring, 2002.

In summary, the Fed lowers rates, stocks rally, mortgage-backed securities sell off and mortgage rates go up. That is the dynamic and the occurrence that we need to be very careful to watch.

Now, I have seen the exact opposite happen on many occasions where the Fed raises interest rates. The stock market does not like high interest rates because it cuts into corporate profits. The Fed raises rates, stocks sell off and mortgage rates actually improve. So, don't be confused just because the Fed is meeting and you have heard that they are lowering the rate. Just because the Fed is expected to lower interest rates, this does not have a direct impact of any positive result on your home mortgage.

I hope this information has been helpful. Please feel free to call me if you have any questions. 802-885-1212.

Beyond the Hype:
The Credit Crisis and
What it Means to You
By Ray Morvan, Sr. Loan Officer

Barry Bonds may have broken the all-time home-run record recently, but you wouldn't know it by looking at the headlines. The only "Bonds" the media seems interested in are mortgage bonds – specifically mortgage-backed securities.

To date, subprime mortgages have been credited for bankrupting well over 110 lenders and seriously damaging operations at many major mortgage firms. They've reportedly wiped out 5 hedge funds, tens of thousands of jobs, and have led to millions of foreclosures with millions more on the way. And, as if that weren't enough, subprime mortgages are also blamed for massive volatility in the stock, bond, credit, futures, and real estate markets here in the US. And it's this volatility that is now spreading like a virus into other major financial sectors around the globe. Some say losses in the mortgage securities market alone could reach hundreds of billions of dollars this year.

This means that, for any American looking to buy, sell, or refinance their home, they are confronting a very different market from the one that existed just 6-12 months ago. The US Federal Reserve has already begun pumping billions of dollars into the US banking system in order to address what is clearly a credit crisis that will change how we borrow money for years to come!

How did this happen?

The recent real estate boom was fueled by a period of record home appreciation and historically low interest rates.

Banks, in order to compete, loosened guidelines and began offering more funding to more borrowers through riskier, non-conforming or "exotic" mortgages.

These ideal lending conditions persisted for several years, supported by high demand, historical real estate data, home prices, and massive trading volume/profits on mortgage-backed securities and other financial instruments on Wall Street.

Then, in 2006, a slowdown in real estate led to a deterioration of home values, an increase in inventories, and ultimately to today's tightening of credit guidelines, leaving many investors unable to sell or refinance out of their existing positions. Many Americans who had tapped into their equity were suddenly tapped-out and overextended as home values fell. Foreclosures followed in record numbers and a re-valuation of mortgage bonds and other financial instruments created the credit/liquidity domino effect we're now experiencing.

Unfortunately, it's going to get a lot worse before it gets better. According to the latest estimates, over 2 million sub prime and Alt-A adjustable rate mortgage (ARM) holders will face payment increases of up to 30%-100% when their loans reset in the next 2 to 18 months. These loans make up less than

40% of the total mortgage market, but the negative effects, as we have seen, of increased foreclosure activity can have a ripple effect throughout the industry and around the globe.

What does this mean to you and your mortgage?

Sellers: If you're planning on selling your home, be prepared for an even smaller pool of qualified buyers. While some experts predict a settling of this credit crisis over the coming year, tightened credit guidelines and diminishing mortgage products could knock out as many as 15%-30% of potential qualified buyers. Now is not the time to sit and wait for the best possible price. Have a serious talk with your Real Estate Agent. Having experienced buying/selling transactions in your area, he or she can help you price your home accordingly. He or she can also help ensure that your buyers are pre-approved and stay pre-approved throughout the entire transaction.

Buyers: Get pre-approved by your mortgage lender, not just pre-qualified by a mortgage broker. To understand the difference between pre-approval and pre-qualification or a mortgage lender vs. a mortgage broker please visit my website at www.vermontmortgagemoney.com While there are a lot of great deals out there, getting credit is becoming tougher and tougher, and it's taking longer and longer to complete a transaction. Remember, what you qualify for today could change tomorrow in a volatile market. For those looking to refinance, keep this in mind. There is no time to delay! Communicate with your lender. Don't do anything that could negatively affect your credit, and make sure you get all your documentation in on time.

ARMs Borrowers: If your ARM is scheduled to reset in the next 2-18 months, you need to schedule an appointment with a mortgage professional right away. Whether your ARM is sub prime, Alt-A, or even if you have a pre-payment penalty, don't let a default or foreclosure situation sneak up on you. Did you know that your monthly payments can increase anywhere from 30% to 100% once your loan resets? At the very least, give yourself the peace of mind of knowing what your adjusted payment will be. A good loan officer can help calculate the numbers.

Borrowers with less-than-perfect credit: Each week it seems lenders are shedding more and more mortgage products. Many lenders have stopped offering No-Doc loans and are reducing all forms of Stated-Income loans. While it might be challenging, borrowers with credit issues need to see a loan expert. Often they have credit repair resources and other strategies to help you reach your financial goals.

Finally, don't let the headlines get to you. While all looks bleak and scary now, there's an important concept to embrace: all markets, while cyclical in nature, are self-correcting, be it credit, real estate, stocks, or bonds. For the last 6 or 7 years, real estate was booming and riding high. The correction we're experiencing now – while it seems harsh and could get much worse – is, in a sense, "natural" and directly related to the extremely loose guidelines and perhaps overzealous lending and leveraging during the boom cycle.

If you or someone you know would like to learn more about the credit crisis and how it could affect your financial goals, please call us at (802)885-1212 to set up an appointment. We would be happy to speak with you about it! ¦

There is a great debate within the inner-mortgage circles these days. Should we, as loan professionals, encourage clients to borrow as much money as possible? Or would consumers benefit more if we helped them to understand the advantages of 15-year amortization schedules and pre-paying principal? Let's examine the pros and cons of both strategies.

Leveraging Your Property. In order to understand why you'd want to borrow as much as possible for your home purchase, you must first grasp the concept that equity has a zero rate of return. Here's an example:

If Consumer "A" buys a home for $300,000, and puts 20% down, then they have $60,000 in equity. Over the next 5 years, the property appreciates $100,000 in value. Consumer "A" now has $160,000 in equity.

Consumer "B" buys a home for $300,000, and puts no money down. At the end of 5 years, that same home is now worth $400,000. Consumer "B" has $100,000 in equity, which is the same appreciation as Consumer "A", a net $100,000.

As you can see, your down payment has nothing to do with your rate of return. What becomes important is how you choose to manage the $60,000 you didn't use as a down payment. If you use it for frivolous activities, such as buying toys or going to Las Vegas, it would be more prudent for you to use that money as a down payment. Especially since this will enable you to obtain a lower interest rate.

However, if you were to invest the $60,000 in a vehicle that can out-earn the cost of that debt, then this could be a formula for success. This is why some lending professionals suggest putting as little down as you possibly can, maximizing your tax write-off, and investing the rest. This principle has been applied for many years in the life insurance game. The old saying goes, "Buy term and invest the rest." The key component is taking the money you would have used as a down payment and creating an asset accumulation account. This account should earn a significant enough rate of return to enable you to pay your mortgage off entirely and achieve the ultimate goal of being debt-free.

Paying Your Home Down Rapidly. There are very few times over the course of my career that I have seen a client with zero debt and no financial difficulties. Choosing to pay off all of your debt can reduce stress and help you to gain freedom of cash flow for investment opportunities. A 15-year mortgage or a bi-weekly payment strategy provides structure. It can also put you on track to have your mortgage paid off within a set timeframe. Simply put, it contains built-in discipline.

It's important, however, to understand that regardless of how rapidly you pay your home off, you're not getting any greater rate of return on your investment than if you paid it off slowly.

Conclusion. So how does one determine which scenario is best? The choice depends entirely upon the individual. Savvy consumers who are disciplined, and are comfortable taking chances from an investment perspective, would do well with the first scenario. Over the course of time, it's been proven that your rate of return over the long-haul will be far greater than the rate you'd pay for a mortgage in today's rate environment. It's important to seek the advice of a skilled investment advisor to ensure success with this strategy.

The second scenario is best for those who have a difficult time managing their money or who'll sleep easier at night knowing they have a plan in place to pay their loan off more rapidly. Be sure that your budget can handle accelerated payments. When consumers "bite off more than they can chew" with a 15-year mortgage, they frequently end up having to refinance back into a 30-year schedule.

If you find this subject intriguing and would like to know more, I recommend that you read a book titled, Missed Fortune 101, by Douglas Andrew. It's an outstanding read that is very simplistic and goes into far greater detail than I can cover in this column. Douglas is a financial planner who advises safe-structured investments such as whole life policies and tax-free fixed income instruments.

I’ve worked in the mortgage industry for years and I’ve seen this market hit many highs and survive some tough lows. While the national media outlets are reporting the facts, they often miss the underlying story. Here are some of the questions I know many people are considering, and I would like to share my response:

1. What’s really happening with major lenders – have we seen the last of the 100% financing options?

•      “100% financing is likely to be available only to those borrowers with the most pristine credit, which will impact affordability in our area as potential borrowers diminish. That means credit remediation is more important than ever for those who want to become borrowers. But in my experience consumers don’t really understand what impacts their credit scores. They don’t know there are some straightforward ways that their mortgage advisor can help to increase those all-important credit scores.”

2. What is considered a risky loan by today’s lending standards?

•      “Borrowers with credit scores below 620 have proven to bring more risk to the table than those with higher scores. That doesn’t mean they can’t get a loan – but the days of the easy subprime loan are over. Here’s what consumers with less than perfect credit in our area may want to consider: Expanded approval loans. Backed by Fannie Mae, these loans reward borrowers by lowering the interest rate after 24 consecutive months of timely payments. Tougher documentation standards. Borrowers will be asked to at least state their income and in many cases they will also be required to provide the documentation to support it.”

3.  Are home values going to be affected by rising defaults?

•     “Depending on the severity of the rate of loan defaults, it may have a significant impact on our local housing valuations. Consider this: Banks don’t want to hold on to properties – they want to get them off their books. That means they will sell at a discount. We saw this in the early 1990s when there was a rise in foreclosures and a subsequent decline in property values.”

Divorce raises a whole host of complex issues that can be emotionally devastating to everyone involved. During this time of great upheaval, the last thing you want to deal with is a change in the credit status you've worked so hard to achieve.

Unfortunately, for many, change is the least of their new financial problems. The sudden discovery of maxed-out credit cards or a spouse's refusal to pay certain bills can lead to a total breakdown in communication and the annihilation of at least one spouse's credit. And, depending upon how finances are structured, this can sometimes have a negative impact on both parties.

The good news is it doesn't have to be this way. By taking a proactive approach and creating a specific plan to maintain one's credit status, anyone can ensure that "starting over" doesn't have to mean rebuilding credit from scratch.

The first step for anyone going through a divorce is to obtain copies of your credit report from the 3 major agencies: Equifax, Experian®, and TransUnion®. It's impossible to formulate a plan without having a complete understanding of the situation. (Once a year, you may obtain a free credit report by visiting www.AnnualCreditReport.com.)

After you've gathered the facts, you can begin to address what's most important. Create a spreadsheet, and list all of the accounts that are currently open.

For each entry, fill in columns with the following information: creditor name, contact number, the account number, type of account (e.g. credit card, car loan, etc.), account status (e.g. current, past due), account balance, minimum monthly payment amount, and who is vested in the account (joint/individual/authorized signer).

Now that you have this information at your fingertips, it's time to make a plan.

There are two types of credit accounts, and each is handled differently during a divorce. The first type is a secured account, meaning it's attached to an asset. The most common secured accounts are car loans and home mortgages. The second type is an unsecured account. These accounts are typically credit cards and charge cards, and they have no assets attached.

When it comes to a secured account, your best option is to sell the asset. This way the loan is paid off and your name is no longer attached. The next best option is to refinance the loan. In other words, one spouse buys out the other. This only works, however, if the purchasing spouse can qualify for a loan by themselves and can assume payments on their own.

Your last option is to keep your name on the loan. This is the most risky option because if you're not the one making the payment, your credit is truly vulnerable.

If you decide to keep your name on the loan, make sure your name is also kept on the title. The worst case scenario is being stuck paying for something that you do not legally own.

In the case of a mortgage, enlisting the aid of a qualified mortgage professional is extremely important. This individual will review your existing home loan, along with the equity you've built up, and help you determine the best course of action.

When it comes to unsecured accounts, you will need to act quickly. It's important to know which spouse, if not both, is vested. If you are merely a signer on the account, have your name removed immediately. If you are the vested party and your spouse is a signer, have their name removed. Any joint accounts (both parties vested) that do not carry a balance should be closed immediately.

If there are jointly-vested accounts which carry a balance, your best option is to have them frozen. This will ensure that no future charges can be made to the accounts. When an account is frozen, however, it is frozen for both parties.

If you do not have any credit cards in your name, it is recommended you obtain one before freezing all of your jointly-vested accounts. By having a card in your own name, you now have the option of transferring any joint balances into your account, guaranteeing they'll get paid.

Ensuring payment on a debt which carries your name is paramount when it comes to preserving credit. Keep in mind that one 30-day late payment can drop your credit score as much as 75 points.

It is also important to know that a divorce decree does not override any agreement you have with a creditor. So, regardless of which spouse is ordered to pay by the judge, not doing so will affect the credit score of both parties. The message here is to not only eliminate all joint accounts, but to do it quickly.

Divorce can be difficult for everyone involved. However, by taking these steps, you can ensure that your credit remains intact.