Christina Dunham's Random Real Estate Musings

Credit card companies are great at marketing their latest features, but before you or your clients sign on the dotted line, read the fine-print carefully and look for some of the following fine-print pitfalls:

Cash Advances – The convenience of getting cash is very expensive when it comes to some credit cards. Many credit cards not only charge an upfront fee of up to 4% of the advance, they also carry higher interest rates than other charges on the same card, and have no grace period whatsoever. But here's the sneaky part: many credit card companies will require that balances for regular purchases be paid off before you begin paying off the balance of the cash-advance, which is often hit with a much higher interest rate.

Killer Fees – When it comes to fees, no one is more innovative than credit card companies. Here are just a few: account set-up fee, program participation fee, account maintenance fee, authorized user fee, credit limit increase fee, Internet participation fee. But, the trickiest credit card fee for consumers who are looking to improve their credit scores is the annual fee. Forced to keep the account open to demonstrate a history of good payments to the credit bureaus, consumers end up paying annually for that privilege.

Universal Default Clause – The universal default clause is an egregious provision that allows credit card companies to tack on an exorbitant "penalty" interest rate if a consumer is late on any of his or her bills, including items like utility bills. According to the advocacy group, Consumer Action, most default interest rates hover around 30%, but it's not uncommon to see a penalty rate of up to 35%. Some analysts have even reported rates in excess of 40%!

Binding Arbitration – Some credit companies have a binding arbitration clause. By signing this agreement, you have waived your right to a jury trial if a dispute arises between you and the company. Your case must be settled by an arbitrator. And the arbitrator is often chosen and hired by the credit card company.

Changing Terms – The terms and conditions of credit cards can be easily amended by the lender with a simple written notification. This notice usually accompanies the monthly statement. Some reports suggest that many consumers simply end up trashing the important notification, along with the usual pile of unwanted marketing material also enclosed in the envelopes, without ever reading it. Don't this happen to you.

Your credit is the most valuable financial tool you have at your disposal, and responsible credit card use boosts your likelihood of securing better interest rates and more favorable loan terms, especially for high ticket items like car and home loans. Pay attention to the fine print to make sure you are staying on top of any changes in your credit card terms. If you think of any other credit card features I should add to my list, please send me an email at contact@christinadunham.com.

Christina Dunham is a Mortgage Advisor with Dunham Group Mortgage. She has originated over $107 million in loans since 2003. She may be reached at contact@christinadunham.com. For a complimentary credit or mortgage loan consultation, contact Christina Dunham at 866.7.DUNHAM.

Mortgage Bonds are soaring higher on the recent announcement that Fannie Mae and Freddie Mac will come under control of the government. Over the last year, these companies lost a combined $14.9 billion as a result of the mortgage market meltdown, with both companies’ stocks sinking over 80% in the past 12 months. The bail-out announcement came as the government felt both these institutions will no longer be able to meet their mission to provide liquidity, stability and affordability in the housing markets.

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) initially formed by the federal government. “Fannie Mae,” created in 1938 and converted to a privately-held, shareholder-owned corporation in 1968, is the nickname for Federal National Mortgage Association (FNMA) based in Washington, D.C., and “Freddie Mac,” founded in 1970, refers to the Federal Home Loan Mortgage Corporate, based in McLean, VA.

There is essentially very little difference between Fannie Mae and Freddie Mac, as they both buy loans that conform to their guidelines from mortgage lenders nationwide. In the past, Fannie Mae and Freddie Mac would only purchased loans up to $417,000 -- the conforming limit for 1-unit properties (the limit is higher for 2, 3 and 4-unit properties). But in February of this year, President Bush signed a bill enabling these agencies to purchase loans up to $729,750 to provide relief to mortgage lenders holding loans they couldn’t sell to other investors in the secondary market. This conforming limit will be lowered to $625,550 beginning January 1, 2009.

When lenders originate home loans, they either utilize (a) their depositors’ funds, as in the case of savings banks and credit unions, or (b) funds from a line of credit from another institution, to finance the loan. In order to replenish the funds, lenders sell the home loans to the secondary market. Typically, pools of similar mortgages are packaged together as mortgage-backed securities. Fannie Mae and Freddie Mac are the largest buyers of these securities. At present, the two companies own or guarantee $5 Trillion (with a T) of mortgage debt, encompassing nearly half of all U.S. residential home loans.

In order to raise capital and replenish their own funds, Fannie Mae and Freddie Mac issue bonds to investors around the world. These debt securities have varying maturity dates, from a few months to over a year. In order to raise capital to pay maturing bonds, Fannie Mae and Freddie Mac issue new bonds. But with investors shying away from mortgage bonds, these companies may be less able to meet their debt obligations in the future. With a shrinking pool of funds, their ability to purchase mortgages from savings and loans, credit unions and mortgage bankers will be severely limited, throwing the already beleaguered housing market into a bigger tailspin.

That's why the Treasury has stepped in and said that they will back the payments on these bonds, giving investors more confidence to buy mortgage-backed securities. "We have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs - including the ability of the GSEs to weather a variety of market conditions going forward," said Treasury Secretary Henry Paulson "As a result of this work, we have determined that it is necessary to take action."

Typically, Fannie Mae and Freddie Mac only purchase cookie-cutter loans: full documentation, good credit, and good quality properties. But in 2006 and 2007, they purchased riskier mortgages, including loans made to borrowers who did not provide income documentation, referred to as “Stated Income” loans. These types of loans comprise half the companies’ credit losses in the second quarter of this year. By the end of 2008, these companies will stop purchasing stated income loans all together.

While the bail-out may make home loans more affordable with lower interest rates, the existing lending guidelines will continue to limit the number of qualified borrowers. With higher down payment, equity stake, cash reserves and credit score requirements, potential borrowers will have to work at becoming credit-worthy first. Especially disadvantaged are self-employed individuals, for whom stated income loans were originally designed. In addition, homeowners in high-cost neighborhoods in California where homes are priced well above the conforming limit, will have to settle for more expensive “jumbo” loan programs.

For questions about how the Fannie Mae and Freddie Mac bail-out may affect you, send me an email at contact@christinadunham.com.

Christina Dunham is a Mortgage Advisor with Dunham Group Mortgage. She has originated over $107 million in loans since 2003. She may be reached at contact@christinadunham.com. For a complimentary credit or mortgage loan consultation, contact Christina Dunham at 866.7.DUNHAM.

Beware the evils of the credit card fine print. It seems Fed Chief Ben Bernanke may have finally noticed. The Federal Reserve recently announced a plan to crack down on industry practices such as the Universal Default Clause and other "unfair" features of credit cards, a $2 trillion industry. The new regulations would limit the capacity of creditors to raise interest rates as well as allow consumers more time to pay their bills, offering more protection against late fees.

According to Bernanke, this plan is "intended to establish a new baseline for fairness in how credit card plans operate." He adds, “Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs.” In 2007, American consumers racked up $850 billion in credit card debt, according to the Consumer Federation of America.

Here are some highlights of his plan that is currently open for public comment, and what it could mean to you as a customer. The plan aims to eliminate the following:

• Universal default clause: One credit card company cannot raise interest rates on you simply because you are having trouble paying another credit card account.
• Diverting funds: Lenders can no longer allocate payments to lower balances while you rack up interest on higher balances. This is a common practice currently for cash advances, which often have higher rates than your normal APR.
• Unfair time constraints on payments: Under Bernanke's plan, you must be given a reasonable amount of time before a payment is deemed late, such as 21 days.
• Retroactive rate increases: Lenders can no longer increase rates on existing balances under this plan, unless a promotional rate expires or the borrower is more than a month late in making payments.
• Double-cycle billing: This feature has allowed lenders to calculate your interest based on the average daily balance of two months. Under this billing method, you essentially end up paying interest on a balance you already paid off. Under the proposed Fed plan, this will no longer be permitted.
• "Security deposits" and other fees: Lenders will no longer be allowed to tack on fees simply for issuing credit or increasing available credit.
• Deceptive credit offers: The language on this section is not clearly defined yet, but it's good to know that this area is being addressed – especially if you have college-aged children, who are a big target for misleading credit offers.

It's important to note that this plan, or any part of it, has yet to be implemented. Even if it gets approved as-is, without any changes, the Fed does not expect the regulations to be finalized until January 2009 or beyond. "Credit-card industry abuses have become more pronounced in this troubled economy as more families turn to their credit cards to help pay bills, buy groceries and make ends meet," said Rep. Carolyn Maloney, D-N.Y., the chair of the House financial institutions and consumer credit subcommittee, and added that the Fed’s move provides “tremendous momentum” to crack down on the credit-card industry’s abusive practices.

Although these changes may not take effect for some time, it's imperative to be an educated consumer of credit. During economic slowdowns, with increases in the costs of gas, food, healthcare, and education, it's more important than ever to stay on top of credit card use.

Another concern we have is that, if and when this plan is implemented, the credit card companies will try and spin the new rules in their favor, to make it seem as if this action was their creation to offer better, safer credit options that, again, lure you into utilizing expensive credit options that could bury you in credit card debt. Don't let this happen.