Brokered CDs Are Insured, Taking Away Credit Risks

Sometimes I forget that we now live in a world of tooth fairy credit. Only hours after my March 9 column appeared, which advised an aspirant first-time homebuyer, my e-mailbox was filled with contrary messages from lenders. I had done the reader a disservice and discouraged him as a homebuyer, they said, because a 5 percent down payment was no longer necessary. In fact, I knew that. I have always felt that I should write about traditional financing, the kind that requires 5 percent to 20 percent down payments, because off-path financings can be problematic. There has, however, been a fundamental change the FHA has a new program that will allow first-time home purchases with virtually no down payment or credit. Listen to what mortgage broker Jane Stathas at Allied Mortgage in Dallas wrote about the program. “I am a loan officer and do not agree at all with your response to ‘S.M.,’ the 27-year-old who makes $25,000 and would like to purchase a home. “First of all, this person is a perfect candidate for an FHA loan through Loan Prospector. This new computerized underwriting system takes ratios as high as 54/54, unpaid collections, open judgments, late pays, not much re-established credit. “What you might have wanted to advise this person was to call a lender (such as myself), who specializes in FHA and first-time buyers and credit challenges, and let that lender get a credit report pulled and qualify that person. Without seeing the credit report, reserves, etc., this person might actually qualify for as high as $1,000 per month with the extended ratio guidelines.” It is possible, today, to buy a house with virtually no down payment. In some cases you can borrow more than the house is actually worth. Sadly, this is not good news for you and me as consumers. Our new problem is that lenders are sloppy about credit risk. They are entirely willing to take risks that may not be in our best interest because we will suffer more, for a longer time, if anything goes wrong. Don’t get me wrong. Becoming a homeowner is a good thing. But that doesn’t mean we should be as eager and dull-witted about borrowing as some of our lenders are being about lending. Bankers push credit cards on people who can’t possibly pay back what they will borrow. The profitability of the entire credit card industry is predicated on having a large population of people who have enough misfortunes that they can’t pay off credit card debt costing 18 percent or more. Today, according to Ram Research, more than 42 percent of all credit card holders are smart enough to pay off their balances on a monthly basis, up from 31 percent in 1990. This change is causing a profitability crisis in the credit card industry. Mortgage brokers will show you how to borrow 80 percent on a mortgage and then 10 percent on a second mortgage and maybe another 10 percent for your down payment. You can find someone who will allow you to commit 40 percent or even 50 percent of your income to fixed monthly obligations. It is not mentioned that your new creditor doesn’t care what or whether you eat. Just make the monthly payment. Borrowers need to remember that. Our competitive free market makes abundant credit possible. Abundant credit, however, is not a good thing for building personal net worth and financial security. It is a good thing for lenders in a strong economy. It is a disaster for lenders when the economy heads south. Only a decade ago, taxpayers paid for a megabillion-dollar bailout of our entire banking system. In the home lending area, part of the bailout could be traced to interest rate buy-downs on mortgages and low down payments. They made it virtually inevitable that thousands of homeowners would “walk” from their loans (and homes) when the economy turned down. And they did. Most of the bankers who made those loans don’t have jobs (or banks) anymore. Q.: I am trying to affirm a decision I have already embarked upon. I have a little more than $550,000 in a variety of investment vehicles that range from mutual funds to excellent stocks. My stocks are Merck, Bristol-Myers Squibb, Harley-Davidson and MCI WorldCom. About $125,000 of the money in mutual funds is in defined-contribution plans that I do not want to touch until age 59 & #733;. My wife and I are 53 and have been in very high-stress careers. We are leaving these careers behind sometime this year. Between us we will receive annual pensions of $35,000 for the rest of our lives. We have purchased life insurance and long-term health insurance, and we have health plans that we can take with us when we retire. The only debt we have is a $400-a-month car payment. We sold our house and live temporarily in an apartment, and we owe absolutely nothing on credit cards. Our plan is to move to a golfing community in New Mexico and live on $5,000 a month with factored-in CPI raises. We will either purchase a house or condo after we have been there about a year. My question: Are we there? My calculations say yes, but I need affirmation. M.M., by e-mail A.: The answer is, get packing, with one caveat: Make this move with the idea that you can do something other than play golf if the need arises. What you need to do is make certain that you are not spending or using the same investment dollar twice. You can get this in perspective by considering your long-term income sources: – The fixed $35,000 lifetime pensions you will be receiving. – The income from your $550,000 nest egg. At a withdrawal rate less than 3 percent, it will fund the gap between your anticipated spending and lifetime pensions. – Social Security income you and your wife can start to receive at age 62. If you haven’t already contacted Social Security, ask for an estimate of your future benefits as soon as possible. My bet is that two sets of benefits will be at least $15,000 a year, turning your investment nest egg into deep reserves at 62. That’s the big picture. The largest single unknown here is how much of your nest egg will you commit to buying a house or condo? If you commit too much, you will impair the ability of your remaining nest egg to produce income that is sustainable. On the other hand, renting for at least a year will help get you out of upscale urban notions of what is “necessary” and into New Mexico notions of what is “necessary.” Since $50,000 a year is a very handsome income in New Mexico, you may be able to lower your expenses significantly. Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; or by fax: (214) 977-8776; or by e-mail: [email protected].