Rate Update and Credit Scores

Economic data and a stock market milestone were overshadowed last week when the Security and Exchange Commission filed a lawsuit against Goldman Sachs.  On Friday, the SEC claimed that Goldman Sachs marketed packages of mortgages put together by a hedge fund that would profit if the mortgages fell in value. Goldman Sachs is accused of misstating and omitting key facts about these financial products tied to sub-prime mortgages as the US housing market was starting to falter. The hedge fund ultimately turned a $1 billion profit when the bulk of the mortgages defaulted, and the investors lost a similar amount. This will likely be the first of many law suits as the SEC examines other investment banker’s roles in the mortgage meltdown. Some names that have surfaced already include Credit Suisse, Deutsche Bank and Bank of America. Earlier in the week, the Federal Reserve Beige Book report revealed that overall economic conditions improved in nearly all parts of the country, with many regions reporting increased activity in residential housing markets. The March Core Consumer Price Index rose at a 1.1% annual rate, indicating a very low level of inflation. March Housing Starts also exceeded expectations, rising 2% from February and 20% from one year ago, to the highest level since November 2008. This data suggesting a gradually improving economy was highlighted by the Dow Jones Industrial Average reaching an 18-month high on Thursday. Currently, the 30-Year Fixed sits at 4.750% (4.898% APR) and the 15-Year Fixed is at 4.125% (4.379% APR). We will undoubtedly learn more about the mishaps at Goldman Sachs and other Wall Street firms this week. Additionally, we will see New and Existing Home Sales and the Producer Price Index.

The tightening credit markets have led to higher qualification standards for mortgage loans, especially with respect to borrower credit scores. A few short years ago, borrowers could obtain multi-million dollar loans with poor credit history or even no credit history. Today, a prospective borrower would be lucky to find a lender that will entertain a loan to someone with a credit score below 620, and will receive far superior interest rates for scores exceeding 720. Credit scores can range from 300-850 and are a statistical calculation based on payment history (35%), credit utilization (30%), length of history (15%), credit type (10%), and recent credit checks (10%). Items stick around for seven years and bankruptcy will remain for ten years. Maxing out a credit card, a 30-day late payment, debt settlement, foreclosure (150 points) or bankruptcy (150-200 points) all negatively impact credit scores. The impact of a short-sale on credit scores may be less severe than a foreclosure depending on whether the borrower stays current on their payments and how the lender reports the sale. Some tips to consider if you are looking to improve your scores are to make sure any derogatory items being reported are accurate. Oftentimes erroneous reporting can be easily fixed with a simple letter or phone call to the creditors, and the scores will jump dramatically. Another easy way to improve your scores is to limit your credit card utilization to 50% of the maximum available balances. It is better to carry small balances on many cards than to carry a large balance on a single card. Also, most banks offer some sort of online bill payment program that will aid consumers in making on-time payments to creditors.