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Fitch Ratings and Moody's Investors Service both affirmed their top-notch ratings of the U.S. during the week, although Moody's assigned a negative outlook to its "Aaa" rating. The S&P news was pretty much anticipated by the market. The downgrade by S&P generated anxiety in the global equity financial markets, but others point to the fact that investors don’t really have anywhere else to put their money, even with the yield on our 10-yr T-note down to 2.34%! Now only four major countries have the AAA rating: Canada, Germany, France, and the United Kingdom. Is US debt now the best of the worst?
Some investors may be forced to sell Treasury securities as they are required to hold only AAA-rated assets. But what, exactly, does a rating agency’s opinion matter? They’d like investors to believe that the source of their power is the accuracy of their opinions, but what seems to matter to a greater degree is the extent to which their ratings have been embedded in various rules and regulations across the financial world. In 1975 the SEC began to use such ratings to calculate how much capital broker-dealers should be required to hold, and designated a few firms as "nationally recognized statistical rating organizations," or NRSROs. Now NRSRO ratings are embedded in thousands of regulations and private contracts, if not more, determining what securities money-market funds would be permitted to own, how much collateral counterparties would have to put up in trades, among countless other matters.
Rating agencies have been viewed by many in the mortgage banking world as miss-rating hundreds and thousands of mortgage-backed securities, therefore contributing to the credit crisis in which we find ourselves. The “whip” has come down on brokers, lenders, servicers, banks, and to some extent investment banks, but rating agency’s business models have not changed much. And given how often their ratings appear in rules and regulations of banks, federal agencies, money managers, etc., it may not be feasible or practical to eliminate ratings. But there is an inherent conflict of interest when a security issuer pays the rating agency to rate one of its securities.
The detrimental role of credit rating agencies Moody’s, S&P, and Fitch was noted in the U.S. Financial Crisis Inquiry Commission’s report said “the three credit rating agencies were key enablers of the financial meltdown." A European Parliament report highlighted three key problems in the industry: lack of competition, over-reliance on external ratings in the regulatory framework, and no liability for ratings by the agencies. Further, ratings changes are lagging indicators: downgrades or upgrades mostly reflect information already analyzed and digested by financial markets. In response, regulators and legislators on both sides of the Atlantic drafted new rules to reduce the intrusion of rating agencies in the regulatory framework. New entries into the business such as Kroll or Rapid Ratings, are trying to address that issue.
If the changed rating leads to hundreds of billions of additional borrowing costs, it will become a self-fulfilling prophecy for the US government (instead of spending on improving our economy, it will spend more on interest payments to debt-holders) and the consumer (who will pay more in taxes to cover the increased expense – some believe that the government merely takes money from one group and gives it to another, and the average consumer will bear the brunt).
At this point, S&P’s reasoning about the inability of politicians to address the real issue of fiscal sustainability is generally viewed as correct, and most traders think that the short-term effect on Treasury yields of S&P’s decision will be small. But is it really the role of the rating agencies to influence or determine political strategy? Perhaps - there is no inducement for politicians to be fiscally responsible, and it seems that fiscal responsibility is not a path to reelection.
excerpted from Rob Chrisman's blog
My history of allergies goes back about 25 years – longer if you count possible genetic disposition (both my Dad and Brother have asthma). After my tree pollen allergy symptoms became enough of a nuisance to require it, I sought out the best Anchorage had to offer in both AMA and Natural medicine specialists. There was the 1.5 years of immune-therapy plus prescriptions for every eye-drop, nasal mist and pill that they had to offer. None of these were very effective. A few years ago I discovered the Chinese herb concoction called Xanthium-12 and it worked OK the first year about half as good the next and not at all the third. A daily dose of local honey has also been tried which I like but had no allergy benefits for me.
Across this time I tried various air cleaners, especially in the bedroom at night and of course I’ve used a neti pot. This year I’ve taken the “clean room” concept to a new level where the sleeping room is closed to outside air at night, the air cleaner is running and I’ve showered off the accumulation of stuff on my body before retiring. This has been the most helpful of anything I’ve tried. I retire with stuffy nose, itchy eyes, etc. and awaken with those symptoms pretty much gone. If this success continues over the next year or so I will declare a victory of sorts.
Brokers are independent originators who compete by shopping across many financing sources for consumers - they do not approve loans, they do not create loan programs, or have any more influence than originators at a bank. Brokers get paid because banks and lenders do not have to recruit, train, house, or pay benefits to additional staff, or spend any money on direct marketing for new loans. This allows banks and lenders to increase production with minimal expense, simply by soliciting brokers. This competition benefits consumers and keeps retail banks honest. The public chooses brokers because they consistently deliver better service plus lower rates and costs than the big retail lenders. Since brokers or originators in general, did not cause the housing boom or bust, why must we endure the upcoming April 2011 implementation of legislation fostered by conditions that occurred in 2005. It is simply wrong. Imagine the national debate we'd be seeing if we tried to create legislation to regulate commissions for the second largest purchase financed by consumers - cars.
For the second time in less than a year FHA has modified the mortgage insurance fees for the home loans they insure. Here’s a payment comparison for a $200,000 purchase under old and planned FHA mortgage insurance rules for a 30-year fixed rate loan at 4.75% with minimum required down payment. As you can see, effective this April there is another ±$40 increase in the monthly obligation. This difference is not massive by itself but when combined with the October 2010 increase, the FHA borrower is faced with over $80 more in monthly payments for the same mortgage.
Pre-October 4th 2010 case numbers
2.25% up-front MIP = $4342.50
Financed amt = $197,342.50
PI payment = $1029.43
0.55% Monthly MIP = $90.45
TOTAL PI+MIP payment = $1119.88
Post-October 4th 2010 case numbers
1.0% up-front MIP = $1930
Financed amt = $194,930
PI payment = $1016.85 – slightly smaller due to lower financed amount
0.9% Monthly MIP = $146.20 – larger
TOTAL PI+MIP payment = $1163.05
Post-April 17th 2011 case numbers
1.0% up-front MIP = $1930
Financed amt = $194,930
PI payment = $1016.85
1.15% Monthly MIP = $186.81 – larger again
TOTAL PI+MIP payment = $1203.66
Washington – The federal bank, thrift and credit union regulatory agencies, along with the Farm Credit Administration, announce that the Nationwide Mortgage Licensing System and Registry will begin accepting federal registrations today.
Under the Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act) and the agencies' final rules, residential mortgage loan originators employed by banks, savings associations, credit unions, or Farm Credit System institutions must register with the registry, obtain a unique identifier from the registry, and maintain their registrations.
Following expiration of the 180-day initial registration period on July 29, 2011, any employee of an agency-regulated institution who is subject to the registration requirements will be prohibited from originating residential mortgage loans without first meeting these requirements. The rules include an exception for mortgage loan originators that originated five or fewer mortgage loans during the previous 12 months and who have never been registered; they would not be required to complete the federal registration process.
The registry announcement is being made by the Board of Governors of the Federal Reserve System, Farm Credit Administration, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Office of Thrift Supervision. Further information regarding the registry and the registration process is available at the registry's website: http://mortgage.nationwidelicensingsystem.org/fedreg/Pages/default.aspx.
A notice about the initial registration period will be published soon in the Federal Register. The Federal Register notice is attached.
Since January 1, 2010 the compensation a mortgage broker derives from getting a loan for a borrower is disclosed in a manner to HELP the borrower decide which mortgage offer is best. Although well intentioned, this legislation has clouded and confused the very decision process it was intended to help. The compensation I make is is NOT a meaningful way for someone to determine their best offer. Only the borrower's rate, monthly payment and closing costs matter in making this determination. This disclosure process was supposed to improve 'transparency', a word no doubt selected to cast suspicion. The benefit to broker's clients is to find the least expensive source of funds for their loan/financial scenario. If brokers improve value to the consumer while getting paid for the effort they spend in creating the added value, they both win. When was the last time you were told the amount of gross income you paid for a can of peas, a gallon of gas, or a new car, and you were still able to determine the best price? The consumer does not need this and in fact without it, the process would be much less confusing and make it easier for the consumer to determine the best offer.
FICO, founded in 1956 as Fair Isaac by engineer Bill Fair and mathematician Earl Isaac, provides consulting services and enterprise decision management systems. They developed the FICO scores, a measure of credit risk, which are the most used credit scores in the world. FICO scores are available in the United States from Equifax; Experian; TransUnion; and PRBC. FICO, like Band-Aid or Kleenex, has become a generic symbol of credit worthiness. Home loan scores can range from 300-850 and are a statistical calculation based upon payment history (35%), credit utilization (30%), length of history (15%), credit type (10%), and recent credit checks (10%). Items stick around for seven years; bankruptcy for ten. The score is intended to predict the liklihood the borrower will have a 90-day late in the next 2 years. Maxing out a card, a 30-day late payment, debt settlement, foreclosure (150 point ding) or bankruptcy (150-200 point hit) all negatively impact FICO. Sometimes folks wonder about whether or not a short sale hurts your credit score as much as a foreclosure (see other articles in this blog), it depends on whether the borrower stays current on their payments and how the lender reports the sale (try for "debt repaid in full"). My thanks to Rob Chrisman and Wikopedia for much of this content.