Archive for July, 2009
Fraud and Greed of Trusted Rating Agencies Helped Spread the Credit Crisis
Money Morning
By, Shah Gilani
Contributing Editor
Money Morning
Underlying the credit crisis gripping the U.S. and world economies is a crisis of confidence. Blame has been laid at the feet of the U.S. Federal Reserve, and an investment bankers’ brew of toxic financial products. Ultimately, however, it was the supposedly trustworthy rating agencies that got everyone to drink the poisoned Kool-Aid.
The sheer fraud and greed of rating agency analysts and executives is staggering. That no one has gone to jail, and none of the agencies have been shut down is a travesty of justice on an infinitely larger scale than Bernie Madoff’s Ponzi scheme. Until depositors, bankers and investors regain confidence in the quality of ratings we rely upon to measure financial stability and creditworthiness, the tremors that underlie the credit crisis will drag on indefinitely.
Letter and number ratings – such as AAA, Aa1, BBB and Caa1 – are financial shorthand for the due diligence supposedly done by rating agencies after they’ve examined an issuer or a security’s financial structure, and evaluated the likelihood of its being able to pay interest and principal at maturity. Investors rely on the objectivity and fiduciary responsibility of the rating agencies to publish fair, accurate and uncompromised assessments.
By law, certain investors must rely on the ratings of a handful of Securities and Exchange Commission designated “Nationally Recognized Statistical Rating Organizations” (NRSROs). For example, most state insurance regulators require that only assets rated in the top four ratings categories by NRSROs are eligible investments. Similarly, money market funds can only invest in securities with the highest NRSRO ratings. In fact, innumerable institutions – public and private, and domestic and international – mandate asset quality levels predicated on the major rating agencies’ due diligence.
Standard & Poor’s Ratings Services, Moody’s Investors Service (MCO) and Fitch Ratings Inc. are all SEC-designated NRSROs. They are the largest, best-known and most-profitable ratings firms in the tiny, $5 billion-a-year universe of ratings firms. S&P is a part of The McGraw-Hill Cos. Inc. (MHP), while Fitch is a subsidiary of France’s Fimalac SA.
Moody’s was spun out of financial publisher Dun & Bradstreet Corp. (DNB) as a public company in 2000. Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B), apparently having spotted a diamond in the rough, bought into D&B before the divestiture, and ended up with a hefty 19% stake in Moody’s after the spin-off was completed.
The problem with the business of rating the issuers of securities, and rating the securities they issue – such as mortgage-backed securities and collateralized mortgage-backed obligations – is that the rating agencies are paid by the issuers to rate them. Objectivity aside, ratings firms are in business not to rate but to make money for themselves by rating issuers and their securities. It’s like all the contestants in the Miss World pageant paying the judges with country funds … who’s not going to be judged beautiful?
What was even more problematic in the scheme of the ratings business model was that analysts didn’t understand how to analyze and rate the very complex cash flow structures of these new collateralized mortgage-backed securities. Not wanting to lose business to their competitors, who were all in the same boat, they used the same rating model structures that they used to rate corporate bonds, though the two different securities had nothing in common.
It was like asking your local car mechanic to certify your Citation V jet – just before you take off for a transatlantic flight to London. God help you if there’s a problem.
And there were problems. Lots of them. According to a Feb. 15 “Review & Outlook” piece in The Wall Street Journal, Joseph Mason, professor of finance at Drexel University, studied collateralized debt obligations rated “Baa” by Moody’s and determined that they were 10 times more likely to default than equivalently rated corporate bonds. The article went on to say that an S&P spokesperson, when asked if they actually examined the underlying mortgages in the pools, answered: “We are not auditors; we are not accounting firms.”
While S&P – and to a lesser degree, Fitch – were just playing the game, Moody’s actually ran away with the ball. An eye-popping and brilliant April 11 Journal article by Aaron Lucchetti exposed the unseemly underbelly of Moody’s greed. What stood out the most in the article was Moody’s willingness – under the direction of Brian Clarkson, who joined the firm in 1991 and became president and chief operating officer – to bend over backwards to accommodate issuers of mortgage-backed and structured finance paper. Clarkson was willing to switch analysts if clients complained, which several did, including Credit Suisse Group AG (ADR: CS), UBS AG (UBS), and Goldman Sachs Group Inc. (GS).
Under Clarkson, Moody’s expanded and grabbed a huge piece of the deal-ratings-market pie. By 2006, the company was rating $9 out of every $10 raised in mortgage securities. For all of that year, the firm’s structured finance group generated more than $881 million in revenue, about 43% of Moody’s revenue. And in 2007 it was estimated that the firm rated 94% of the approximately $190 billion in mortgage and structured-finance CDOs floated during the year.
But there was some concern, including some from insiders. Former Moody’s analyst Mark Froeba told The Journal that “there was never an explicit directive to subordinate rating quality to market share. There was, rather, a palpable erosion of institutional support for rating analysis that threatened market share.” In the same article, former Moody’s executive Paul Stevenson was quoted as saying that “the most recent problem is that the rating process became a negotiation.”
Clarkson, the Moody’s president and COO, didn’t do too badly negotiating his compensation, either. In 2006 he made $3.8 million, while the firm’s chief executive officer, Raymond McDaniel, made $8.2 million. Clarkson “retired” under pressure this past May and McDaniel, the CEO, added the title of president to his mantle.
Eventually, the always-late-to-the-dance SEC awoke to the realization that it was supposed to be watching the watchers – the ratings agencies. While hundreds of billions of dollars around the world was invested in Wall Street’s pay-to-play version of Illinois gubernatorial politics, many heartbroken and flat-out-broke investors discovered that what the rating agencies had determined to be “AAA” rated securities were not the princely investment-grade securities those three letters said they were, but were toxic Amazon frogs instead. Of course, that calls for an investigation. And so it was.
A 10-month “examination” by the SEC, concluded in July, uncovered, believe it or not, “poor disclosure practices and procedures guiding the analysis of mortgage-related debt and insufficient attention paid to managing conflicts of interest.” Brilliant!
According to the report, which included as exhibits several e-mail exchanges between analysts at unnamed ratings firms, there was an obvious degree of knowledge and complicity in playing the ratings game. In one exchange, an analyst said that their ratings model didn’t capture “half” of the deal’s risk but that “it could be structured by cows and we would rate it.” And in another even more famous exchange dated Dec. 15, 2006, a manager wrote that the firms continued to create an “even bigger monster – the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”
Have any heads rolled? No. Have any fines been levied or any firms closed down? No. The SEC apparently went back to sleep, having since been intermittently aroused by the failure of The Bear Stearns Cos., the bankruptcy of Lehman Brothers Holdings Inc. (OTC: LEHMQ), the nationalization of American International Group Inc.(AIG), and a few other minor nap-interrupting events, including the bailout of Citigroup Inc. (C). I’m only sorry that the Commission’s disjointed hibernation should once again be interrupted by the petty crime of a simple Ponzi scheme artist. Well, maybe now they can finally get some rest. For the sake of our future, someone please disband this band of sleeping fools.
Shortly after the July examination was made public, in an acknowledgement that it might be under unwarranted attack, S&P announced that it was considering ways to take volatility and stability into account in its ratings. But, in a simultaneous burst of clarity, S&P suggested that it feared that a more disciplined and functional ratings model would make it harder for issuers to raise capital. Only days later, in fact, S&P went on the offensive, calling SEC proposals to boost disclosure and mitigate internal conflicts of interest too costly for the ratings businesses. Among the proposals that were pushed back was one to require a separate ratings structure and ranking system for structured products.
Fast-forward to Dec. 3, and the unveiling of the SEC’s latest proposed rules changes. While the toothless wonder folded up like a pup tent once again on all substantive changes that would have created a more transparent and honest playing field, it did manage to sneak in some suggestions, including those that said:
The rating agencies can’t rate debt they help structure.
Analysts can’t participate in fee negotiations.
Analysts can’t be given gifts worth more than $25.
Analysts must disclose a random 10% sampling of their ratings within six months.
The ratings agencies must maintain a history of complaints against analysts.
And that the agencies must record when an analyst’s rating for structured debt differs from a quantitative model.
Calling these proposed rules changes baby steps is like calling the Grand Canyon a ditch.
Because Wall Street didn’t like the idea, what got dropped from the proposed changes were rules to create different structures for rating different products. And the most egregious of the dropped rules was a proposal that ratings firms make public all underlying information they use in making their ratings. Which is exactly the transparency needed.
There is an overwhelming heaviness to the credit crisis that bears on our economic future. It is the inordinate weight of established, self-serving power brokers driving dump trucks full of ill-gotten gains over any clarion call for transparency. The underlying currency of capital markets must be clearly and objectively rated instruments, whose value is determined by free markets. Until confidence is restored in the producers, products and the purveyors of financial services, thirsty investors are unlikely to partake of any new punch.
[Editor’s Note: Uncertainty will continue to be the watchword for at least the first part of the New Year. Little wonder, as the global financial crisis continues to whipsaw the U.S. financial markets in a manner that hasn’t been seen since the Great Depression. It’s almost enough to make you surrender. But what if you knew, ahead of time, what marketplace changes to expect? Then you’d be in the driver’s seat – right? You’d know what to anticipate, could craft a profit strategy to follow, and could then just sit back, watching and waiting – and finally profiting from – the very marketplace events you anticipated.
R. Shah Gilani – a retired hedge fund manager and a nationally known expert on the U.S. credit crisis – has predicted five key financial crisis “aftershocks” that he says will create substantial profit opportunities for investors who know just what these aftershocks are, and how to play them. In the Trigger Event Strategist, trigger events,” as gateways to massive profits. To find out all about these five financial-crisis aftershocks, and about the trigger-event profit strategy they feed into, check out our latest report.]
To read more Click here
Investment news
By, Shah Gilani
Contributing Editor
Money Morning
Underlying the credit crisis gripping the U.S. and world economies is a crisis of confidence. Blame has been laid at the feet of the U.S. Federal Reserve, and an investment bankers’ brew of toxic financial products. Ultimately, however, it was the supposedly trustworthy rating agencies that got everyone to drink the poisoned Kool-Aid.
The sheer fraud and greed of rating agency analysts and executives is staggering. That no one has gone to jail, and none of the agencies have been shut down is a travesty of justice on an infinitely larger scale than Bernie Madoff’s Ponzi scheme. Until depositors, bankers and investors regain confidence in the quality of ratings we rely upon to measure financial stability and creditworthiness, the tremors that underlie the credit crisis will drag on indefinitely.
Letter and number ratings – such as AAA, Aa1, BBB and Caa1 – are financial shorthand for the due diligence supposedly done by rating agencies after they’ve examined an issuer or a security’s financial structure, and evaluated the likelihood of its being able to pay interest and principal at maturity. Investors rely on the objectivity and fiduciary responsibility of the rating agencies to publish fair, accurate and uncompromised assessments.
By law, certain investors must rely on the ratings of a handful of Securities and Exchange Commission designated “Nationally Recognized Statistical Rating Organizations” (NRSROs). For example, most state insurance regulators require that only assets rated in the top four ratings categories by NRSROs are eligible investments. Similarly, money market funds can only invest in securities with the highest NRSRO ratings. In fact, innumerable institutions – public and private, and domestic and international – mandate asset quality levels predicated on the major rating agencies’ due diligence.
Standard & Poor’s Ratings Services, Moody’s Investors Service (MCO) and Fitch Ratings Inc. are all SEC-designated NRSROs. They are the largest, best-known and most-profitable ratings firms in the tiny, $5 billion-a-year universe of ratings firms. S&P is a part of The McGraw-Hill Cos. Inc. (MHP), while Fitch is a subsidiary of France’s Fimalac SA.
Moody’s was spun out of financial publisher Dun & Bradstreet Corp. (DNB) as a public company in 2000. Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B), apparently having spotted a diamond in the rough, bought into D&B before the divestiture, and ended up with a hefty 19% stake in Moody’s after the spin-off was completed.
The problem with the business of rating the issuers of securities, and rating the securities they issue – such as mortgage-backed securities and collateralized mortgage-backed obligations – is that the rating agencies are paid by the issuers to rate them. Objectivity aside, ratings firms are in business not to rate but to make money for themselves by rating issuers and their securities. It’s like all the contestants in the Miss World pageant paying the judges with country funds … who’s not going to be judged beautiful?
What was even more problematic in the scheme of the ratings business model was that analysts didn’t understand how to analyze and rate the very complex cash flow structures of these new collateralized mortgage-backed securities. Not wanting to lose business to their competitors, who were all in the same boat, they used the same rating model structures that they used to rate corporate bonds, though the two different securities had nothing in common.
It was like asking your local car mechanic to certify your Citation V jet – just before you take off for a transatlantic flight to London. God help you if there’s a problem.
And there were problems. Lots of them. According to a Feb. 15 “Review & Outlook” piece in The Wall Street Journal, Joseph Mason, professor of finance at Drexel University, studied collateralized debt obligations rated “Baa” by Moody’s and determined that they were 10 times more likely to default than equivalently rated corporate bonds. The article went on to say that an S&P spokesperson, when asked if they actually examined the underlying mortgages in the pools, answered: “We are not auditors; we are not accounting firms.”
While S&P – and to a lesser degree, Fitch – were just playing the game, Moody’s actually ran away with the ball. An eye-popping and brilliant April 11 Journal article by Aaron Lucchetti exposed the unseemly underbelly of Moody’s greed. What stood out the most in the article was Moody’s willingness – under the direction of Brian Clarkson, who joined the firm in 1991 and became president and chief operating officer – to bend over backwards to accommodate issuers of mortgage-backed and structured finance paper. Clarkson was willing to switch analysts if clients complained, which several did, including Credit Suisse Group AG (ADR: CS), UBS AG (UBS), and Goldman Sachs Group Inc. (GS).
Under Clarkson, Moody’s expanded and grabbed a huge piece of the deal-ratings-market pie. By 2006, the company was rating $9 out of every $10 raised in mortgage securities. For all of that year, the firm’s structured finance group generated more than $881 million in revenue, about 43% of Moody’s revenue. And in 2007 it was estimated that the firm rated 94% of the approximately $190 billion in mortgage and structured-finance CDOs floated during the year.
But there was some concern, including some from insiders. Former Moody’s analyst Mark Froeba told The Journal that “there was never an explicit directive to subordinate rating quality to market share. There was, rather, a palpable erosion of institutional support for rating analysis that threatened market share.” In the same article, former Moody’s executive Paul Stevenson was quoted as saying that “the most recent problem is that the rating process became a negotiation.”
Clarkson, the Moody’s president and COO, didn’t do too badly negotiating his compensation, either. In 2006 he made $3.8 million, while the firm’s chief executive officer, Raymond McDaniel, made $8.2 million. Clarkson “retired” under pressure this past May and McDaniel, the CEO, added the title of president to his mantle.
Eventually, the always-late-to-the-dance SEC awoke to the realization that it was supposed to be watching the watchers – the ratings agencies. While hundreds of billions of dollars around the world was invested in Wall Street’s pay-to-play version of Illinois gubernatorial politics, many heartbroken and flat-out-broke investors discovered that what the rating agencies had determined to be “AAA” rated securities were not the princely investment-grade securities those three letters said they were, but were toxic Amazon frogs instead. Of course, that calls for an investigation. And so it was.
A 10-month “examination” by the SEC, concluded in July, uncovered, believe it or not, “poor disclosure practices and procedures guiding the analysis of mortgage-related debt and insufficient attention paid to managing conflicts of interest.” Brilliant!
According to the report, which included as exhibits several e-mail exchanges between analysts at unnamed ratings firms, there was an obvious degree of knowledge and complicity in playing the ratings game. In one exchange, an analyst said that their ratings model didn’t capture “half” of the deal’s risk but that “it could be structured by cows and we would rate it.” And in another even more famous exchange dated Dec. 15, 2006, a manager wrote that the firms continued to create an “even bigger monster – the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”
Have any heads rolled? No. Have any fines been levied or any firms closed down? No. The SEC apparently went back to sleep, having since been intermittently aroused by the failure of The Bear Stearns Cos., the bankruptcy of Lehman Brothers Holdings Inc. (OTC: LEHMQ), the nationalization of American International Group Inc.(AIG), and a few other minor nap-interrupting events, including the bailout of Citigroup Inc. (C). I’m only sorry that the Commission’s disjointed hibernation should once again be interrupted by the petty crime of a simple Ponzi scheme artist. Well, maybe now they can finally get some rest. For the sake of our future, someone please disband this band of sleeping fools.
Shortly after the July examination was made public, in an acknowledgement that it might be under unwarranted attack, S&P announced that it was considering ways to take volatility and stability into account in its ratings. But, in a simultaneous burst of clarity, S&P suggested that it feared that a more disciplined and functional ratings model would make it harder for issuers to raise capital. Only days later, in fact, S&P went on the offensive, calling SEC proposals to boost disclosure and mitigate internal conflicts of interest too costly for the ratings businesses. Among the proposals that were pushed back was one to require a separate ratings structure and ranking system for structured products.
Fast-forward to Dec. 3, and the unveiling of the SEC’s latest proposed rules changes. While the toothless wonder folded up like a pup tent once again on all substantive changes that would have created a more transparent and honest playing field, it did manage to sneak in some suggestions, including those that said:
The rating agencies can’t rate debt they help structure.
Analysts can’t participate in fee negotiations.
Analysts can’t be given gifts worth more than $25.
Analysts must disclose a random 10% sampling of their ratings within six months.
The ratings agencies must maintain a history of complaints against analysts.
And that the agencies must record when an analyst’s rating for structured debt differs from a quantitative model.
Calling these proposed rules changes baby steps is like calling the Grand Canyon a ditch.
Because Wall Street didn’t like the idea, what got dropped from the proposed changes were rules to create different structures for rating different products. And the most egregious of the dropped rules was a proposal that ratings firms make public all underlying information they use in making their ratings. Which is exactly the transparency needed.
There is an overwhelming heaviness to the credit crisis that bears on our economic future. It is the inordinate weight of established, self-serving power brokers driving dump trucks full of ill-gotten gains over any clarion call for transparency. The underlying currency of capital markets must be clearly and objectively rated instruments, whose value is determined by free markets. Until confidence is restored in the producers, products and the purveyors of financial services, thirsty investors are unlikely to partake of any new punch.
[Editor’s Note: Uncertainty will continue to be the watchword for at least the first part of the New Year. Little wonder, as the global financial crisis continues to whipsaw the U.S. financial markets in a manner that hasn’t been seen since the Great Depression. It’s almost enough to make you surrender. But what if you knew, ahead of time, what marketplace changes to expect? Then you’d be in the driver’s seat – right? You’d know what to anticipate, could craft a profit strategy to follow, and could then just sit back, watching and waiting – and finally profiting from – the very marketplace events you anticipated.
R. Shah Gilani – a retired hedge fund manager and a nationally known expert on the U.S. credit crisis – has predicted five key financial crisis “aftershocks” that he says will create substantial profit opportunities for investors who know just what these aftershocks are, and how to play them. In the Trigger Event Strategist, trigger events,” as gateways to massive profits. To find out all about these five financial-crisis aftershocks, and about the trigger-event profit strategy they feed into, check out our latest report.]
To read more Click here
Investment news
California Home Loan Mortgage Rates
Ken Charnly
The California Home Loan Mortgage Rates are low at this point of time. The California Home Loan Mortgage Rates are connected to the national interest rate and controlled by national housing market interest index. The national interest rate is controlled by secondary markets which are
closely monitored by the Government since the whole economy depends on them. The economy at this time coupled with the housing market situation has brought about this change in California Home Loan Mortgage Rates.
Home Loan Mortgage Rates in California do not rally appeal to a prospective buyer especially if he is from a different state. These rates can inject more frustration than excitement into his life since the cost of living in California is high in comparison to other states. It really
takes a lot of intellect and skill to play around with different options to reduce interest rates and payments in order to make California Home Loan Mortgage Rates affordable.
The California Home Loan Mortgage Rates fluctuate daily. In order to get the feel of it, it is advisable to wait and watch and see the trend before making a decision. These mortgage rates come in with a variety of different options. There are interest only rates, standard fixed rates,
adjustable rates and variable rates. All these rates have to be taken into account while making a decision in order to get the best rates possible.
Interest only California home loan mortgage rates are the lowest since the buyer or borrower is paying only the interest component. This apparent low level of payment options makes it interesting and attractive to borrowers. A standard fixed mortgage rate gives the maximum security to the home buyer in freezing the interest rates, i.e. the interest rates will neither raise nor fall. They will have a consistent, preplanned repayment schedule throughout the loan term. The term comes in different sizes viz. 15, 20, 25, 30, or 40 years. A fixed California home loan mortgage rate follows the national housing interest index faithfully.
Mortgage rates that variable or adjustable carry a lower interest tag; normally 2%-3% lower than the fixed rates. They begin as fixed for a short period which is predetermined, usually 2, 3, 5, or 7 years, after which they start fluctuating in accordance with the current market California home loan mortgage rates.
The borrower has certain options here; he can refinance for a new loan, sell the home, or start repayment of the new variable or adjustable rates. Buyers planning to invest in property for a short period often choose the variable or adjustable mortgage rate because of the lower payments they offer during the starting years of the loan.
Lower California home loan mortgage rates are always attractive to borrowers because they are mostly on the higher side due to higher cost of living. The best way to ensure a low California home loan mortgage rate is to possess a good to excellent credit score.
The California Home Loan Mortgage Rates are low at this point of time. The California Home Loan Mortgage Rates are connected to the national interest rate and controlled by national housing market interest index. The national interest rate is controlled by secondary markets which are
closely monitored by the Government since the whole economy depends on them. The economy at this time coupled with the housing market situation has brought about this change in California Home Loan Mortgage Rates.
Home Loan Mortgage Rates in California do not rally appeal to a prospective buyer especially if he is from a different state. These rates can inject more frustration than excitement into his life since the cost of living in California is high in comparison to other states. It really
takes a lot of intellect and skill to play around with different options to reduce interest rates and payments in order to make California Home Loan Mortgage Rates affordable.
The California Home Loan Mortgage Rates fluctuate daily. In order to get the feel of it, it is advisable to wait and watch and see the trend before making a decision. These mortgage rates come in with a variety of different options. There are interest only rates, standard fixed rates,
adjustable rates and variable rates. All these rates have to be taken into account while making a decision in order to get the best rates possible.
Interest only California home loan mortgage rates are the lowest since the buyer or borrower is paying only the interest component. This apparent low level of payment options makes it interesting and attractive to borrowers. A standard fixed mortgage rate gives the maximum security to the home buyer in freezing the interest rates, i.e. the interest rates will neither raise nor fall. They will have a consistent, preplanned repayment schedule throughout the loan term. The term comes in different sizes viz. 15, 20, 25, 30, or 40 years. A fixed California home loan mortgage rate follows the national housing interest index faithfully.
Mortgage rates that variable or adjustable carry a lower interest tag; normally 2%-3% lower than the fixed rates. They begin as fixed for a short period which is predetermined, usually 2, 3, 5, or 7 years, after which they start fluctuating in accordance with the current market California home loan mortgage rates.
The borrower has certain options here; he can refinance for a new loan, sell the home, or start repayment of the new variable or adjustable rates. Buyers planning to invest in property for a short period often choose the variable or adjustable mortgage rate because of the lower payments they offer during the starting years of the loan.
Lower California home loan mortgage rates are always attractive to borrowers because they are mostly on the higher side due to higher cost of living. The best way to ensure a low California home loan mortgage rate is to possess a good to excellent credit score.
Home Loan Finders – Assisting You To Find The Perfect Home Loan Online
Seo Manager
Looking for Home Loans, Credit Impaired Loans, Debt Consolidation, Refinancing options, non conforming loans? Home Loan Finders is your best bet online.
Home Loan Finders are experts in finding you that perfect Home Loan you have been looking for. With So many lenders, so many options, so many products, so many brokers, not choosing the right home loan can be disastrous. Don’t fall into that trap! Get it right the first time!
Home Loan Finders have hundreds of brokers and lenders competing for your business, once you submit your enquiry the broker with the lowest rate will get you home loan best designed for you and will contact you directly.
Let the experts do the hard work and find the perfect home loan for you. Home Loan Finders specialise in hard to do Home Loans, Credit Impaired Loans, Debt Consolidation, Refinancing and all non conforming loans and pride ourselves in the ability to arrange home loans without any fuss or hassle at the lowest possible cost to you.
Save Thousands In Repayments. Consolidate credit card debt, personal loans & Car loan into one low easy home loan repayment!!
Apply online now at homeloanfinders.com.au to get started. All applications are accepted and we will respond to you in 15 minutes! Unlike other brokers, we have NO UP FRONT SERVICE COSTS. Credit Impaired & Hard to Do Home Loans are our speciality, even if you have been refused before, we can help.
Apply online now at homeloanfinders.com.au for the easiest way to find that perfect homeloan.
Looking for Home Loans, Credit Impaired Loans, Debt Consolidation, Refinancing options, non conforming loans? Home Loan Finders is your best bet online.
Home Loan Finders are experts in finding you that perfect Home Loan you have been looking for. With So many lenders, so many options, so many products, so many brokers, not choosing the right home loan can be disastrous. Don’t fall into that trap! Get it right the first time!
Home Loan Finders have hundreds of brokers and lenders competing for your business, once you submit your enquiry the broker with the lowest rate will get you home loan best designed for you and will contact you directly.
Let the experts do the hard work and find the perfect home loan for you. Home Loan Finders specialise in hard to do Home Loans, Credit Impaired Loans, Debt Consolidation, Refinancing and all non conforming loans and pride ourselves in the ability to arrange home loans without any fuss or hassle at the lowest possible cost to you.
Save Thousands In Repayments. Consolidate credit card debt, personal loans & Car loan into one low easy home loan repayment!!
Apply online now at homeloanfinders.com.au to get started. All applications are accepted and we will respond to you in 15 minutes! Unlike other brokers, we have NO UP FRONT SERVICE COSTS. Credit Impaired & Hard to Do Home Loans are our speciality, even if you have been refused before, we can help.
Apply online now at homeloanfinders.com.au for the easiest way to find that perfect homeloan.
The Truth About Mortgage Rates
Andres Navarro
The best rumors have the longest staying power, and the untruths about the connection between Bank of Canada interest rate cuts and mortgage rates is a prime example. Why? Well, though Bank of Canada interest rate cuts do affect the financial industry, they do not affect every segment of the financial sector; some segments are directly affected, others are only indirectly effected, and then there are segments that are directly or indirectly effected depending on the financial product. The mortgage industry falls into that third category.
Shocked? Well, you’re probably not alone. The idea that Bank of Canada discount rate changes cause mortgage rates to change is a common misconception that’s been perpetuated for years. So, let’s set the record straight!
TRUTH: When the Bank of Canada adjusts interest rates, it does affect interest rates of financial products. However, only interest rates for short-term financial products—things like car loans, credit cards, etc.—are directly affected by Bank of Canada interest rate cuts or hikes. Meanwhile, 10, 15, 30, and 40-year fixed mortgage loans are considered long-term financial products. As such, the Bank of Canada’s decisions do not directly influence fixed mortgage rates.
TRUTH: Though Bank of Canada rate cuts have no direct influence on fixed mortgage rates, the Bank of Canada’s decisions do directly sway one type of mortgage loan: Adjustable rate mortgages (ARM), which are also sometimes referred to as variable rate mortgages, IF the ARM is specifically stipulated as being tied to the prime rate.
TRUTH: Fixed mortgage rates are based on mortgage bonds (sometimes called mortgage securities), NOT the 10-year T-bill. Therefore, what actually has a direct effect on a mortgage rate increase or decrease is the buying and selling of mortgage bonds.
TRUTH: Though Bank of Canada rate changes do not have directly influence fixed mortgage rates, they can have a Domino Effect on fixed mortgage rates. How so? Well, the purpose of the Bank of Canada’s rate adjustments is often to increase or decrease consumer spending. For instance, when interest rates are cut, the goal is to increase consumer spending. As a result, investors speculating that the Bank of Canada’s tactic will work pull their money out of the bond markets (which are less volatile, low return investments) and put their money into stocks because they believe they can make greater profits from their investment. When this happens, that can cause mortgage rates to fluctuate. Remember: Mortgage bonds / mortgage securities affect mortgage rates. If money is cashed out from mortgage bonds, rates will increase. Conversely, if the monies are withdrawn from other types of bonds, mortgage rates may dip or they may remain unchanged.
So, what does all of that mean if you’re looking to modify or refinance your mortgage, or if you’re waiting for mortgage rates to change before you apply for a mortgage loan? First, it means that you should keep an ear out for what the Bank of Canada is doing regarding interest rate cuts and spikes ONLY if you’re interested in a variable rate mortgage—which would not be ideal for most consumers in the current economy. However, if you prefer a fixed rate mortgage, it means you can (and should) stop wasting your time tracking the 10-year T-bill and keeping tabs on the Bank of Canada. Instead, keep watch on what’s happening with mortgage bonds so you’ll know when mortgage rates are where you want them!
The best rumors have the longest staying power, and the untruths about the connection between Bank of Canada interest rate cuts and mortgage rates is a prime example. Why? Well, though Bank of Canada interest rate cuts do affect the financial industry, they do not affect every segment of the financial sector; some segments are directly affected, others are only indirectly effected, and then there are segments that are directly or indirectly effected depending on the financial product. The mortgage industry falls into that third category.
Shocked? Well, you’re probably not alone. The idea that Bank of Canada discount rate changes cause mortgage rates to change is a common misconception that’s been perpetuated for years. So, let’s set the record straight!
TRUTH: When the Bank of Canada adjusts interest rates, it does affect interest rates of financial products. However, only interest rates for short-term financial products—things like car loans, credit cards, etc.—are directly affected by Bank of Canada interest rate cuts or hikes. Meanwhile, 10, 15, 30, and 40-year fixed mortgage loans are considered long-term financial products. As such, the Bank of Canada’s decisions do not directly influence fixed mortgage rates.
TRUTH: Though Bank of Canada rate cuts have no direct influence on fixed mortgage rates, the Bank of Canada’s decisions do directly sway one type of mortgage loan: Adjustable rate mortgages (ARM), which are also sometimes referred to as variable rate mortgages, IF the ARM is specifically stipulated as being tied to the prime rate.
TRUTH: Fixed mortgage rates are based on mortgage bonds (sometimes called mortgage securities), NOT the 10-year T-bill. Therefore, what actually has a direct effect on a mortgage rate increase or decrease is the buying and selling of mortgage bonds.
TRUTH: Though Bank of Canada rate changes do not have directly influence fixed mortgage rates, they can have a Domino Effect on fixed mortgage rates. How so? Well, the purpose of the Bank of Canada’s rate adjustments is often to increase or decrease consumer spending. For instance, when interest rates are cut, the goal is to increase consumer spending. As a result, investors speculating that the Bank of Canada’s tactic will work pull their money out of the bond markets (which are less volatile, low return investments) and put their money into stocks because they believe they can make greater profits from their investment. When this happens, that can cause mortgage rates to fluctuate. Remember: Mortgage bonds / mortgage securities affect mortgage rates. If money is cashed out from mortgage bonds, rates will increase. Conversely, if the monies are withdrawn from other types of bonds, mortgage rates may dip or they may remain unchanged.
So, what does all of that mean if you’re looking to modify or refinance your mortgage, or if you’re waiting for mortgage rates to change before you apply for a mortgage loan? First, it means that you should keep an ear out for what the Bank of Canada is doing regarding interest rate cuts and spikes ONLY if you’re interested in a variable rate mortgage—which would not be ideal for most consumers in the current economy. However, if you prefer a fixed rate mortgage, it means you can (and should) stop wasting your time tracking the 10-year T-bill and keeping tabs on the Bank of Canada. Instead, keep watch on what’s happening with mortgage bonds so you’ll know when mortgage rates are where you want them!
Veteran Administration (va) Loans – Thank You for Your Service
Kristin Abouelata – Home Loans
In 1930, Congress and the President established the “GI Bill” which allowed the Veteran Administration (VA) to coordinate benefits for its service people. One of these programs, known as the Home Loan Guaranty Program, was created to help returning veterans and their families assimilate back into civilian life after sacrificing so much personally for their country.
Who qualifies for VA loans? If you served in the military, naval or air service and are active duty or released from duty for reasons other than a dishonorable discharge, you may qualify. You had to serve for 90 days active duty or 181 days consecutively in peacetime. If you served less than the minimum requirement because of discharge or service connected disability, you may also qualify. In addition, if you are the surviving un-remarried wife or husband of an eligible service member who died for his/her country, you may too be eligible. This program was designed to reward you and your loved ones for your service.
“The VA program, in general, is an exceptional program. Many veterans don’t know it can even benefit them if he/she is overseas. We’ve been helping active duty service people by putting their families in homes, and giving them peace of mind that their loved ones and their immediate needs are being taken care of while they’re away”, reflects Jamie Utton, Director of Product Development at Mortgage Investors Group.
These loans are available only for a primary home you intend to occupy. You can’t go and buy a beach house for weekend use with it. However, you can also use your eligibility to refinance your primary residence and pay off debt (except for Texans, for some reason, they don’t allow it in that state). Or, if you had a VA loan prior, and the interest rates have dropped dramatically, you can do a “streamline” refinance – no worries about paying for a new appraisal or the hassle of verifying your income. You’re all set to go.
So what makes the VA loan stand out above other types of financing? It allows for 100% financing for loans up to $417,000 with no reserves (checking and savings money to burn) required. The loan amounts allowed go up to $1.5 million, but you’d have to put some type of down payment into the transaction if you want to borrow that much money, plus show you have enough money to pay your mortgage for two months sitting in the bank if you need it. And if you’re buying a home, the program allows for the seller to pay up to 4% of the closing costs, based upon the purchase price. Basically, you can get into a home for very little or no money at a more than affordable market rate.
And the best part? No extra money is added to your payment for mortgage insurance if you put a less than 20% down payment on the home. That’s a pretty unique feature that makes this loan more affordable than others. Most of the time, the veteran will be required to pay a VA Funding Fee, but it is financed into the loan amount. So, the funding fee is not an out of pocket expense for closing. A veteran can be exempt from paying the funding fee for different reasons, including service connected disability, or if he/she is a surviving spouse of a veteran who died in service or from a service related disability. And regarding credit scores, the VA loan program has more flexibility than some other programs offer.
If you think you may qualify for this loan, let me first of all say, “Thank you.” I really appreciate the sacrifices you’ve made for this country. And if you’re looking to purchase or refinance your home, call a lender today who specializes in VA loans, and take advantage of this great benefit.
In 1930, Congress and the President established the “GI Bill” which allowed the Veteran Administration (VA) to coordinate benefits for its service people. One of these programs, known as the Home Loan Guaranty Program, was created to help returning veterans and their families assimilate back into civilian life after sacrificing so much personally for their country.
Who qualifies for VA loans? If you served in the military, naval or air service and are active duty or released from duty for reasons other than a dishonorable discharge, you may qualify. You had to serve for 90 days active duty or 181 days consecutively in peacetime. If you served less than the minimum requirement because of discharge or service connected disability, you may also qualify. In addition, if you are the surviving un-remarried wife or husband of an eligible service member who died for his/her country, you may too be eligible. This program was designed to reward you and your loved ones for your service.
“The VA program, in general, is an exceptional program. Many veterans don’t know it can even benefit them if he/she is overseas. We’ve been helping active duty service people by putting their families in homes, and giving them peace of mind that their loved ones and their immediate needs are being taken care of while they’re away”, reflects Jamie Utton, Director of Product Development at Mortgage Investors Group.
These loans are available only for a primary home you intend to occupy. You can’t go and buy a beach house for weekend use with it. However, you can also use your eligibility to refinance your primary residence and pay off debt (except for Texans, for some reason, they don’t allow it in that state). Or, if you had a VA loan prior, and the interest rates have dropped dramatically, you can do a “streamline” refinance – no worries about paying for a new appraisal or the hassle of verifying your income. You’re all set to go.
So what makes the VA loan stand out above other types of financing? It allows for 100% financing for loans up to $417,000 with no reserves (checking and savings money to burn) required. The loan amounts allowed go up to $1.5 million, but you’d have to put some type of down payment into the transaction if you want to borrow that much money, plus show you have enough money to pay your mortgage for two months sitting in the bank if you need it. And if you’re buying a home, the program allows for the seller to pay up to 4% of the closing costs, based upon the purchase price. Basically, you can get into a home for very little or no money at a more than affordable market rate.
And the best part? No extra money is added to your payment for mortgage insurance if you put a less than 20% down payment on the home. That’s a pretty unique feature that makes this loan more affordable than others. Most of the time, the veteran will be required to pay a VA Funding Fee, but it is financed into the loan amount. So, the funding fee is not an out of pocket expense for closing. A veteran can be exempt from paying the funding fee for different reasons, including service connected disability, or if he/she is a surviving spouse of a veteran who died in service or from a service related disability. And regarding credit scores, the VA loan program has more flexibility than some other programs offer.
If you think you may qualify for this loan, let me first of all say, “Thank you.” I really appreciate the sacrifices you’ve made for this country. And if you’re looking to purchase or refinance your home, call a lender today who specializes in VA loans, and take advantage of this great benefit.
What You Should Know About Adjustable Rate Mortgages
Terry
Adjustable-rate mortgages, or ARMs, differ from fixed-rate mortgages in that the interest rate and monthly payment move up and down as market interest rates fluctuate. Most have an initial fixed-rate period during which the borrower’s rate doesn’t change, followed by a much longer period during which the rate changes at preset intervals.
Adjustable rates start low
Rates charged during the initial periods are generally lower than those on comparable fixed-rate mortgages. After all, lenders have to offer something to make it worth their while to assume the risk of higher rates in the future.
The initial fixed-rate period can be as short as a month or as long as 10 years. One-year ARMs, which had their first adjustment after one year, used to be the most popular adjustable, and were the benchmark. Recently the standard has become the 5/1 ARM, which has an initial fixed-rate period that lasts five years; the rate is adjusted annually thereafter. That type of mortgage, which mixes a lengthy fixed period with an even lengthier adjustable period, is known as a hybrid. Other popular hybrid ARMs are the 3/1, the 7/1 and the 10/1.
These hybrid ARMs — sometimes referred to as 3/1, 5/1, 7/1 or 10/1 loans — have fixed rates for the first three, five, seven or 10 years, followed by rates that adjust annually thereafter.
After the fixed-rate honeymoon, an ARM’s rate fluctuates at the same rate as an index spelled out in closing documents. The lender finds out what the index value is, adds a margin to that figure and recalculates the borrower’s new rate and payment. The process repeats each time an adjustment date rolls around.
Most ARM rates are tied to the performance of one of three major indexes:
· The weekly constant maturity yield on the one-year Treasury Bill:
The yield debt securities issued by the U.S. Treasury are paying, as tracked by the Federal Reserve Board.
· The 11th District Cost of Funds Index (COFI):
The interest financial institutions in the western U.S. are paying on deposits they hold.
· The London Interbank Offered Rate (LIBOR)
The rate most international banks are charging each other on large loans.
Sky’s not the limit
Borrowers have some protection from extreme changes because ARMs come with caps. These caps limit the amount by which ARM rates and payments can adjust. Caps come in a couple of different forms. The most common are:
· Periodic rate cap:
Limits how much the rate can change at any one time. These are usually annual caps, or caps that prevent the rate from rising more than a certain number of percentage points in any given year.
· Lifetime cap:
Limits how much the interest rate can rise over the life of the loan.
· Payment cap:
Offered on some ARMs. It limits the amount the monthly payment can rise over the life of the loan in dollars, rather than how much the rate can change in percentage points.
Interest-only ARMs
Around the turn of the 21st century, lenders began to market interest-only mortgages to middle-class borrowers. Formerly the preserve of what lenders called “affluent clients,” interest only mortgages are usually adjustables. The borrower is required to pay only the interest for a specified period, often 10 years. After that, it adjusts to the going interest rate, as tracked by a specified index. After that, the loan amortizes at an accelerated rate. During the interest-only period, the borrower can choose to pay some principal, too. By providing flexibility in the size of monthly payments, interest-only mortgages often are a good match for people with fluctuating monthly incomes: salespeople who are paid by commission, for example.
Variety of flavors
Some ARMs come with a conversion feature that allows borrowers to convert their loans to fixed-rate mortgages for a fee. Others allow borrowers to make interest-only payments for a portion of their loan terms to keep their payments low. But no matter the exact terms, most ARMs are more difficult to understand than fixed-rate loans.
To keep your financial options open, make sure to ask the mortgage lender if the ARM is convertible to a fixed-rate mortgage. Also, ask if the ARM is assumable, which means when you sell your home the buyer may qualify to assume your existing mortgage. That could be desirable if mortgage interest rates are high.
Deciding between an ARM and a fixed-rate mortgage
Which is the better mortgage option for you: fixed or adjustable?
The low initial cost of adjustable-rate mortgages (ARMs) can be very tempting to home buyers, yet they carry a degree of uncertainty. Fixed-rate mortgages offer rate and payment security, but they can be more expensive.
ARM advantages
· Feature lower rates and payments early on in the loan term. Because lenders can use the lower payment when qualifying borrowers, people can buy larger homes than they otherwise could buy.
· Allow borrowers to take advantage of falling rates without refinancing. Instead of having to pay a whole new set of closing costs and fees, ARM borrowers just sit back and watch the rates — and their monthly payments — fall.
· Help borrowers save and invest more money. Someone who has a payment that’s $100 less with an ARM can save that money and earn more off it in a higher-yielding investment.
· Offer a cheap way for borrowers who don’t plan on living in one place for very long to buy a house.
ARM disadvantages
· Rates and payments can rise significantly over the life of the loan. A 6 percent ARM can end up at 11 percent in just three years if rates rise sharply.
· A borrower’s initial low rate will adjust to a level higher than the going fixed-rate level in almost every case even if rates in the economy as a whole don’t change. That’s because ARMs have initial fixed rates that are set artificially low.
· The first adjustment can be a doozy because some annual caps don’t apply to the initial change. Someone with an annual cap of 2 percent and a lifetime cap of 6 percent could theoretically see the rate shoot from 6 percent to 12 percent 12 months after closing if rates in the overall economy skyrocket.
· ARMs are difficult to understand. Lenders have much more flexibility when determining margins, caps, adjustment indexes and other things, so unsophisticated borrowers can easily get confused or trapped by shady mortgage companies.
· On certain ARMs, called negative amortization loans, borrowers can end up owing more money than they did at closing. That’s because the payments on these loans are set so low (to make the loans even more affordable) they only cover part of the interest due. Any additional amount due gets rolled into the principal balance.
Adjustable-rate mortgages, or ARMs, differ from fixed-rate mortgages in that the interest rate and monthly payment move up and down as market interest rates fluctuate. Most have an initial fixed-rate period during which the borrower’s rate doesn’t change, followed by a much longer period during which the rate changes at preset intervals.
Adjustable rates start low
Rates charged during the initial periods are generally lower than those on comparable fixed-rate mortgages. After all, lenders have to offer something to make it worth their while to assume the risk of higher rates in the future.
The initial fixed-rate period can be as short as a month or as long as 10 years. One-year ARMs, which had their first adjustment after one year, used to be the most popular adjustable, and were the benchmark. Recently the standard has become the 5/1 ARM, which has an initial fixed-rate period that lasts five years; the rate is adjusted annually thereafter. That type of mortgage, which mixes a lengthy fixed period with an even lengthier adjustable period, is known as a hybrid. Other popular hybrid ARMs are the 3/1, the 7/1 and the 10/1.
These hybrid ARMs — sometimes referred to as 3/1, 5/1, 7/1 or 10/1 loans — have fixed rates for the first three, five, seven or 10 years, followed by rates that adjust annually thereafter.
After the fixed-rate honeymoon, an ARM’s rate fluctuates at the same rate as an index spelled out in closing documents. The lender finds out what the index value is, adds a margin to that figure and recalculates the borrower’s new rate and payment. The process repeats each time an adjustment date rolls around.
Most ARM rates are tied to the performance of one of three major indexes:
· The weekly constant maturity yield on the one-year Treasury Bill:
The yield debt securities issued by the U.S. Treasury are paying, as tracked by the Federal Reserve Board.
· The 11th District Cost of Funds Index (COFI):
The interest financial institutions in the western U.S. are paying on deposits they hold.
· The London Interbank Offered Rate (LIBOR)
The rate most international banks are charging each other on large loans.
Sky’s not the limit
Borrowers have some protection from extreme changes because ARMs come with caps. These caps limit the amount by which ARM rates and payments can adjust. Caps come in a couple of different forms. The most common are:
· Periodic rate cap:
Limits how much the rate can change at any one time. These are usually annual caps, or caps that prevent the rate from rising more than a certain number of percentage points in any given year.
· Lifetime cap:
Limits how much the interest rate can rise over the life of the loan.
· Payment cap:
Offered on some ARMs. It limits the amount the monthly payment can rise over the life of the loan in dollars, rather than how much the rate can change in percentage points.
Interest-only ARMs
Around the turn of the 21st century, lenders began to market interest-only mortgages to middle-class borrowers. Formerly the preserve of what lenders called “affluent clients,” interest only mortgages are usually adjustables. The borrower is required to pay only the interest for a specified period, often 10 years. After that, it adjusts to the going interest rate, as tracked by a specified index. After that, the loan amortizes at an accelerated rate. During the interest-only period, the borrower can choose to pay some principal, too. By providing flexibility in the size of monthly payments, interest-only mortgages often are a good match for people with fluctuating monthly incomes: salespeople who are paid by commission, for example.
Variety of flavors
Some ARMs come with a conversion feature that allows borrowers to convert their loans to fixed-rate mortgages for a fee. Others allow borrowers to make interest-only payments for a portion of their loan terms to keep their payments low. But no matter the exact terms, most ARMs are more difficult to understand than fixed-rate loans.
To keep your financial options open, make sure to ask the mortgage lender if the ARM is convertible to a fixed-rate mortgage. Also, ask if the ARM is assumable, which means when you sell your home the buyer may qualify to assume your existing mortgage. That could be desirable if mortgage interest rates are high.
Deciding between an ARM and a fixed-rate mortgage
Which is the better mortgage option for you: fixed or adjustable?
The low initial cost of adjustable-rate mortgages (ARMs) can be very tempting to home buyers, yet they carry a degree of uncertainty. Fixed-rate mortgages offer rate and payment security, but they can be more expensive.
ARM advantages
· Feature lower rates and payments early on in the loan term. Because lenders can use the lower payment when qualifying borrowers, people can buy larger homes than they otherwise could buy.
· Allow borrowers to take advantage of falling rates without refinancing. Instead of having to pay a whole new set of closing costs and fees, ARM borrowers just sit back and watch the rates — and their monthly payments — fall.
· Help borrowers save and invest more money. Someone who has a payment that’s $100 less with an ARM can save that money and earn more off it in a higher-yielding investment.
· Offer a cheap way for borrowers who don’t plan on living in one place for very long to buy a house.
ARM disadvantages
· Rates and payments can rise significantly over the life of the loan. A 6 percent ARM can end up at 11 percent in just three years if rates rise sharply.
· A borrower’s initial low rate will adjust to a level higher than the going fixed-rate level in almost every case even if rates in the economy as a whole don’t change. That’s because ARMs have initial fixed rates that are set artificially low.
· The first adjustment can be a doozy because some annual caps don’t apply to the initial change. Someone with an annual cap of 2 percent and a lifetime cap of 6 percent could theoretically see the rate shoot from 6 percent to 12 percent 12 months after closing if rates in the overall economy skyrocket.
· ARMs are difficult to understand. Lenders have much more flexibility when determining margins, caps, adjustment indexes and other things, so unsophisticated borrowers can easily get confused or trapped by shady mortgage companies.
· On certain ARMs, called negative amortization loans, borrowers can end up owing more money than they did at closing. That’s because the payments on these loans are set so low (to make the loans even more affordable) they only cover part of the interest due. Any additional amount due gets rolled into the principal balance.