Loan Delinquencies Reach Record Low

loan_delinquencyDelinquencies continued to decline in last year’s third quarter, falling in seven out of 11 categories as the economy improved and consumers responsibly managed their finances, according to results from the American Bankers Association’s Consumer Credit Delinquency Bulletin.

The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, fell 6 basis points to 1.51 percent of all accounts – a record low that is well under the 15-year average of 2.30 percent. The ABA report defines a delinquency as a late payment that is 30 days or more overdue.

“Strong economic growth has boosted job creation and supported income growth, which has made it easier for consumers to meet their financial obligations,” says James Chessen, ABA’s chief economist. “Lower gas prices helped free up resources for everything from new purchases to debt repayment.”

Bank card delinquencies ticked up slightly in the third quarter following two consecutive quarters of declines, rising eight basis points to 2.51 percent of all accounts. They remain well below their 15-year average of 3.77 percent.

“Bank card delinquencies have hovered near 15-year lows with only minor fluctuations over the past two years, and we expect that trend to continue,” says Chessen, who noted that bank card delinquencies have varied by only 14 basis points since the fourth quarter of 2012. “While people are clearly ready to spend again as economic activity picks up, the overwhelming majority of consumers continue to keep debt at manageable levels.”

Delinquencies in two of the three home-related categories – property improvement loans and home equity loans – continued their downward trend in the third quarter, falling to 0.82 percent and 3.24 percent, respectively. Delinquencies for home equity lines of credit edged up slightly, rising two basis points to 1.52 percent.

“As the housing market continues its slow and steady recovery, home-related delinquencies are following a parallel track,” says Chessen. “Increased home prices have eased pressure on consumers, but stresses can still occur, particularly as home equity lines reach the fully amortizing period and payment requirements rise. Banks continue to work with customers to ensure they can meet their obligations.”

Chessen is optimistic about the future as the economy continues its upward trend and consumer confidence improves.

“Consumers are on surer financial footing, which bodes well for future delinquency rates,” Chessen says. “Consumers are smiling every time they fill up their tanks. Every one-cent decline in pump prices puts about $1 billion back into consumers’ pockets, which means their paychecks are going much further. The signs are pointing in the right direction, but consumers hold all the cards when it comes to continuing to prudently manage their finances.”

The third quarter 2014 composite ratio is made up of the following eight closed-end loans. All figures are seasonally adjusted based upon the number of accounts.

For more information, visit www.aba.com.

FHA to Reduce Mortgage Insurance Fees

The Federal Housing Administration plans to lower its annual mortgage insurance fees by 0.5 of a percentage point—a move that it says will allow more buyers to jump into the real estate market.

“This action will make home-ownership more affordable for over 2 million Americans in the next three years,” says Julián Castro, secretary of the Department of Housing and Urban Development.

According to the White House, the change will save the average borrower about $900 a year. The lowered premiums will help more than 800,000 homeowners save on their monthly mortgage costs and create up to 250,000 new home buyers, the Obama administration says.

The FHA doesn’t make its own loans, but insures mortgages made by lenders. Borrowers pay for that insurance through yearly premiums, which have risen to 1.35 percent of the loan balance, to make up for losses suffered when mortgages went bad during the housing crash. The premiums now will be lowered to 0.85 percent. While that’s higher than the 0.55 percent charged before the crash, it is expected to ease the way for many low- and moderate-income buyers who choose FHA loans because they allow for down payments as low as 3.5 percent, plus lower credit scores.

It will make home-ownership possible for a slightly expanded group of home buyers.

The FHA probably was responding to pressure from the National Association of Realtors and other groups that promote home-ownership, as well as to an announcement last month by Fannie Mae and Freddie Mac that they will back certain mortgages requiring only a 3 percent down payment. The two mortgage finance companies require a 5 percent minimum down payment on most of the products they guarantee.

With the Fannie Mae and Freddie Mac offerings, FHA stands to lose part of its business. Lowering the annual insurance premiums is a way to better compete for that group of borrowers.

How Do Foreclosures Work?

Wondering how foreclosures work? Check out this helpful VIDEO put together by Elizabeth Weintraub for About.com.

Here is a transcript of what is talked about in the video.

“Hi, I’m Elizabeth Weintraub for About.com. Homebuyers think of pursuing foreclosures in a real estate market as a good deal. You may have an idea of a picture perfect house whose owner fell on hard times but your idea may be removed from reality quite far. So let me explain to you how foreclosures work.

Reasons for Foreclosure

The sellers may stop making payments for a variety of reasons. Most common are getting laid off from work, a divorce or excessive bill obligations. There are very few cases of people voluntarily going to foreclosures so keep that in mind if you choose to pursue one.

Buying a Foreclosed Home

There are three ways to buy a home in foreclosure. You can buy a home from seller before the foreclosure is final, at the county courthouse steps during the auction or you can buy the home after foreclosure, directly from the bank. Foreclosure procedures vary from state to state.

Potential Issues With Foreclosures

Also, realize that buying a foreclosed home brings about a host of emotional issue. You need to decide whether you are a type of person that will take advantage of a seller’s misfortune and/or put a family out on a street.

Damaged Property and Foreclosures

Moreover, you need to know that a bank-owned foreclosure home may be vandalized or stripped by the angry home owners so it will be ‘as is’. If something breaks or malfunctions, the current owners will not fix it. They previous owners sell appliances or try to destroy a home by flooding it. 

And finally, you may need to evict the tenant or owner of the premises when you receive the title. Buying a foreclosed home is not for the faint of heart. It is not recommended by the first home buyers. 

Thanks for watching. To learn more, visit us on the Web at homebuying.about.com”

Top 10 Myths About Buying a Foreclosure

Here are the Top 10 Myths about buying a foreclosure, and the facts to set the record straight:

  1. Foreclosures need a huge amount of work.  92 percent of consumers expressed that if they bought a foreclosure, they would be willing to make home improvements after they closed the deal, with 65 percent being willing to invest 20 percent or less of the purchase price.  Although stories of foreclosures missing plumbing and every electrical fixture are very memorable, many foreclosed homes need only the (relatively inexpensive) cosmetics that many new homeowners want to customize no matter what kind of home they’re buying: paint, carpet, etc.

 

  1. Foreclosures sell at massive discounts, compared to other homes.  Almost every member – 95 percent – of the surveyed group expected to pay less for a foreclosed home than for a similar, non-foreclosed home; 18 percent had realistic expectations of less than a 25 percent discount.  However, 36 percent expected to receive a bargain basement discount of 50 percent or more off the value of a similar non-foreclosure.  Reality check: while foreclosures might be discounted massively from what the former owner paid or owed, their discounts are much more modest when compared to their value on today’s market and the prices of similar homes.

 

  1. Buying a foreclosure is risky.  49% of respondents said they perceived buying a foreclosure as risky.  And yes – buying a foreclosure at the auction on the county courthouse steps can have risks, including the risk the new owner will take on the former’s owner’s liens and other loans.  But most buyers looking for foreclosures are looking at bank-owned properties, which are listed on the open market with other, ‘regular’ homes.  Buying these homes is really no more risky than buying a non-foreclosed home.

 

  1. You can’t get inspections on the property when you buy a foreclosed home.  County auction foreclosures don’t often offer the ability for buyers to have the homes inspected.  But virtually all bank-owned properties for sale on the open market not only allow, but encourage buyers to obtain every inspection they deem necessary. This is because almost every bank sells their foreclosed homes as-is, and they want to avoid later liability.  It’s in everyone’s best interests to make sure that the buyer has full information about the property’s condition before they close the deal.

 

  1. There are hidden costs to watch out for when buying a foreclosed home.  Sixty-eight percent of survey respondents who felt there is a negative stigma to buying a foreclosure expressed  the concern that buying a foreclosure poses the danger of hidden costs. At some foreclosure auctions, there are buyer’s premiums and other hefty fees that can really add up and take a chunk out of the effective savings the buyer stood to realize. However, when you buy a bank-owned property that is listed for sale with a real estate agent, the closing costs are the same as they would be if you bought a non-foreclosed home. Overdue property taxes, HOA dues and other bills left behind by the defaulting homeowner are cleared by the bank that owns a foreclosed home before it is sold on the market, though these items should be watched out for if you buy a home at the county foreclosure auction.

 

  1. Foreclosures are more likely to lose their value than “regular” homes. Thirty-five percent of U.S. adults who believed there are downsides to buying foreclosed properties believed this myth. In fact, because foreclosures often offer a discount from the home’s current market value, they may offer some degree of insulation from further depreciation.  Whether a home loses its value or not has to do with the dynamics of the local market, including the area’s supply of homes, demand for homes, interest rates and the health of the employment market – not with whether the home was or was not a foreclosure at the time it was purchased.

 

  1. Most foreclosures happen when homeowners just walk away.  Out of homeowners with a mortgage, only 1 percent said walking away from their home would be their first choice if they were unable to pay their mortgage. And a whopping 59 percent of mortgage-holders said they wouldn’t walk away from their home – no matter how upside down they were on their mortgage. Most foreclosures happen when the owners lose their jobs or their mortgage adjusts to the point where they absolutely cannot pay the mortgage, no matter how hard they try. Voluntary ‘walk-away’s are simply not as popular as many people think.

 

  1. When you buy a foreclosure, you should lowball the bank – they are desperate to get these homes off their books.  Stories about in the press abound about the large numbers of foreclosed homes the banks have on their books.  We’ve all heard the adage that banks have no interest in owning these properties.  But the real deal is that they’re simply not desperate enough to give these places away.  Also, the banks mostly service the defaulted loans – they don’t own them.  Various groups of investors do, and they hold the banks accountable to selling the bank-owned property at as high a price as possible, helping them cut their losses.  Many banks won’t even consider lowball offers, and many bank-owned properties actually sell for above the asking price.  Before a bank will take a lowball offer, they will almost always reduce the list price first, and see if that attracts a higher offer than the lowball one they have in hand.

 

  1. You need to be able to pay in cash in order to buy a foreclosure.  Again, if you buy a foreclosed home on the county courthouse steps, you might need to bring a cashier’s check and be ready to pay for the place on the spot. By contrast, bank-owned homes are bought through a more normal real estate transaction, which means buyers can obtain a mortgage to finance the home just like they would if the home weren’t a foreclosure. It is true, though, that in some markets, banks prefer offers from cash buyers, but this tends to be in situations where the property’s condition is pretty dire, and the bank knows this may make it hard for a buyer to obtain financing.

 

  1. It’s easier to buy a foreclosure with bad credit if you get a mortgage with the same bank that owns the property. Think about it: why would the bank want to end up with the same property as a foreclosure, again? Well, that’s what would happen if they allowed buyers with low credit scores to buy their foreclosures just to earn the interest on the mortgage. In reality, many banks do offer incentives like lower fees or closing cost credits for buyers who use their bank for their mortgage. But the buyers must meet the same credit, income and other qualification standards as anyone else would to seal the deal.