According to the National Association of Realtors home prices in the first quarter were 11.3 percent higher than a year ago. Among the top 150 major metro areas, home values increased in 133, but fell in 17.

So why are such numbers important for the VA loan program?

The VA is like any mortgage insurance program. It faces claims and losses, especially when home values decline.

The Veterans Administration does not actually put up the cash necessary to make mortgages. Instead, it’s an insurance program. With backing from the VA vets and military households are able to borrow mortgage money with nothing down because lenders know that the strong guarantees from the VA substantially limit their risk.

The catch is that the VA is like any mortgage insurance program. It faces claims and losses, especially when home values decline. For this reason rising home values tend to reduce the size of the claims faced by the VA, meaning that with growing home values the program is unlikely to require higher fees and charges – or that the VA mortgage program needs to be revised in a way that would make it more restrictive.

Rising home values increase real estate equity, the value of a home after subtracting mortgage debt.

“A strong rise in home values is contributing to housing wealth recovery, which has risen by $1.4 trillion in the past year and looks to top that increase this year,” said NAR’s chief economist Lawrence Yun. “The extra consumer spending arising from growth in housing wealth is expected to be $70 billion to $110 billion this year.”

Rising home values are important for millions of Americans because the real estate marketplace has not yet returned to the peak prices seen in April 2007. The result is that a large number of homes remained financially underwater – but this number declines as home values generally rise.

It can be argued that steeper home values reduce affordability thus making it more difficult for first-time buyers to enter the marketplace. However, at least at this time we have a combination of prices and mortgage interest rates which have led to a very high level of affordability. According to the National Association of Home Builders, “73.7 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $64,400.”

Not to be overlooked is that the thought that prices also do something else: They make the market more attractive for homebuyers in the sense that rising prices suggest increasing demand.

We don’t know what will happen in the future or in any particular market, but the view here, for what it’s worth, is that it would be surprising if home prices continued to rise at the torrid pace seen during the past year. A more-likely scenario would be slower growth as the housing sector continues to shed distressed properties which have accumulated during the past few years. Of course, for the VA loan program, rising prices are always good news.

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In fact, loans rates can touch zero and sometimes there can even be negative interest. The idea of “negative interest” seems to defy logic. Why would a lender make a loan when there is no return? In fact, how can there be a loan where the lender expects to get back less principal?

Loans rates can touch zero, and sometimes there can even be negative interest.

One way to knock down rates is to have a lot of cash chasing very few investment opportunities. It’s the old supply-and-demand game, and it really can happen. According to Forbes magazine, “T-bills got so popular that for brief periods between 1938 and 1941 they carried negative interest rates.” (See: “A Brief History of Stock Fads,” September 14, 1992)

More recently, the US Treasury sold securities in January worth $15 billion with an interest rate of -.63 percent.

The real return to Treasury investors was actually less in terms of buying power. That’s because the money they get back will have reduced buying power as a result of inflation. As of March, annual inflation in the US was running at 1.5 percent.

It’s actually a good thing that the Treasury can float loans and not pay interest. If the Treasury did pay interest, then one result would be an increased federal deficit.

I bring up the subject of negative interest because it actually has something to do with VA mortgages.

To have a mortgage — to borrow cash — there must first be someone or something that has money available to lend. When rates are as low as we have seen in recent months it means the marketplace is flooded with capital. There is plenty of cash available for people to borrow, if that were not the case then interest levels would be higher.

Huge volumes of cash come to the US marketplace because investors worldwide want their money in a safe place. Those Treasury securities with negative interest might seem awfully strange, but a small loss in the US marketplace is actually a much better option for some investors than keeping money in a number of markets worldwide, places where capital is less safe and where risk is far greater.

No one knows where mortgage rates are headed, but for the moment at least we can say that  interest rates today are in a trough. That’s happy news for borrowers, a good time to look at financing and refinancing.

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It’s not uncommon in many vet and military households to have one spouse or partner who is the major breadwinner and a second spouse or partner with a smaller income or no income. As far as the world is concerned this is a perfectly-acceptable financial arrangement as long as the bills are being paid – except when it comes to credit cards.

Government rules which have long made it difficult for many military spouses to get credit cards are now changing under new guidelines just announced by the Consumer Financial Protection Bureau.

As federal credit card regulations have been written it’s been enormously difficult for an individual with limited income or no income outside the home to obtain a credit card, even though it’s the couple’s intention to fully repay the debt. The problem is buried in federal rules which say issuers cannot provide credit cards to individuals in their own name unless they have an “independent ability” to pay the debt.

You can see where this is a problem: An estimated 16 million households have joint checking and savings accounts and yet there is not equal access to credit because one person works outside the home and the other doesn’t.

Good Credit

The best way to establish a good credit score is to actually use credit in a responsible manner. This is difficult to do if you can’t get a credit card in the first place.

What happens with many people is that they build credit over time by first applying for credit cards with small limits, such as cards for gasoline and department stores. As such cards are used over time limits rise and it becomes possible to get other forms of credit.

Credit is Key to Homeownership

All of this becomes especially important when it comes time to finance a big item such as a house or car. Lenders want to know the credit standing of both parties and if one has been unable to get credit that impacts credit scores and thus the ability of the entire household to acquire a VA loan or new-car financing. Worse, should something happen to the main breadwinner the other person may have insufficient credit to maintain household finances.

The new rule “allows credit card issuers to consider income that a stay-at-home applicant, who is 21 or older, shares with a spouse or partner when evaluating the applicant for a new account or increased credit limit.”

Changes to the credit card regulations are expected to go into effect later this year — a precise date has not been established. However, the implications for VA mortgage borrowers are clear: More equitable access to credit can help vet and military households establish stronger credit reports and thus easier access to VA mortgages.

Photo courtesy Anne Rossley

While this is a general rule there are exceptions, including the rates seen last week. According to Freddie Mac, home loan rates looked like this:

• 30-year fixed-rate mortgage (FRM) averaged 3.40 percent with an average 0.8 points.
• 15-year FRM this week averaged 2.61 percent with an average 0.7 points.
• 15-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.58 percent this week with an average 0.5 points.
• 1-year Treasury-indexed ARM averaged 2.62 percent this week with an average 0.3 points.

If you look at these general national rates, rates that can vary somewhat across the country, you can see two interesting numbers.

Fixed Rates Beating ARMs

First, each loan option is shown with a percentage mortgage rate as well as a figure for points. “Points” represent money paid up front to the lender. One point is equal to 1% of the amount borrowed. If you borrow $100,000 a point would be equal to $1,000. If the cost of a point is 0.5 then the lender would collect $500 at closing.

A look at the figures above show that various combinations of rates and points are available, depending on the preference of the borrower.

Second, if we look just at the rates then there is a curious situation: the interest rate for a 15-year mortgage is less than start rate for a one-year ARM. In fact, the Freddie Mac figures show that the cost of a 15-year mortgage is just 0.3 percent lower than a five-year ARM.

This is not something you see very often. Here we have a situation where a fixed rate for the life of the loan is lower then the start rate for an ARM, a rate which may rise or fall in the future.

Why are the rates for 15-year financing so low?

Consider Your Options

One reason must be that lenders see very little risk in the coming decade or so. Because 15-year mortgages are paid down so fast, the risk to the lender quickly declines, meaning there is less to worry about and that the loan can be justified even with lower rates.

However, while the rates for 15-year financing might be lower than for the one-year ARM, its actual monthly cost is higher.

Let’s say that the VA loan amount is $150,000. The one-year ARM at 2.61 percent will have a monthly cost for principal and interest of $601.30. The 15-year fixed-rate loan at 2.58 percent will cost $1,005.84.

If the rate for the 15-year loan is lower than the ARM, why is the monthly cost so much higher?

The answer concerns the length of the loan. The monthly cost for the ARM is calculated on the basis of a 30-year loan term while the fixed-rate mortgage must be paid off in half that time. There are fewer months to repay the fixed-rate loan product so the monthly costs must be higher.

Always consider your options. Sometimes a loan product with a lower rate can have a higher monthly cost, sometimes much higher. In this case the 15-year loan has a steeper monthly expense, however, after 15 years the cost for principal and interest will drop to zero while the borrower with 30-year mortgage will keep on paying. Which option is “better” depends on your finances and personal preferences.

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A credit score is not a measure that can be quickly changed: if you want good credit in the future the time to take a new approach to money is now. Here are three ways that are sure to increase your credit standing and not cost a dollar extra: Scheduling, consolidation and tax planning.

Will your credit score be good enough to get you through the home application process?

Scheduling

Everybody has bills. Whether your bills arise from student loans, car payments, credit card debt or whatever one thing they share in common is that a missed or late payment can damage your credit. The solution to is to adopt a pay-now payment plan. It works like this:

Pay each bill the day it’s received. Not a week later or just before the due date. The logic of this approach is that bills have to be paid. By waiting to the end of the payment period  bills are more likely to be late, and that’s something we want to avoid.

At first it can be difficult to schedule payments with delivery-date precision. To make this work you have to get a calendar and plan out bills and payments. Then start by paying one or two regular monthly bills when they come in. Next month add another debt to the project, and so on.

What’s the benefit of this approach? No late fees, no credit dings and — in time — a higher credit score.

Consolidation

Many of us have multiple accounts. There are savings accounts, checking accounts, mutual fund accounts, holiday savings accounts, and accounts scattered across different institutions in different places.

However, Promothesh Chatterjee at the University of Kansas School of Business says lots of little accounts can keep you from the promised land of timely payments.

“For years, the conventional wisdom has been that spreading your money across various accounts encourages you to save,” Chatterjee said. “Nowadays, the average American has multiple liquid accounts, typically a combination of checking and savings accounts. But our research finds this is the wrong strategy to encourage saving. We find that individuals are more likely to save if they have only one primary account, rather than many accounts.”

For vet and military family who may have moved several times and set up multiple accounts as a result, Chatterjee said if you can’t centralize accounts than the alternative approach is to central accounting.

“If you’re really opposed to consolidating, you can at least try to reduce the vagueness of having money across multiple accounts by utilizing software and services that provide a consolidated view of all of your accounts in one place,” Chatterjee said. “This type of aggregate reporting could help reduce vagueness and enhance savings.

“But the take-home message remains: Consolidating multiple accounts into one account will help encourage you to save your hard-earned money.”

A good way to follow Chatterjee’s advice is to have both a checking account and a savings account with the same institution. The checking account should have overdraft protection, a form of account insurance that might cost $25 a year.

Have all payments and deposits made into the checking account. Use checks and a debit card to make payments from the checking account. At the end of each month take excess money from the checking account and drop it into the savings account.

Tax Planning 

It’s possible to use the tax system to build up savings by reducing the number of dependents you claim. The result will be that either you have paid additional money into the system and owe less, or you will have paid too much and are owed a solid refund — cash you can stick in a savings account.

Traditionally, some have objected to claiming fewer dependents on the grounds that over-payments are really an interest-free loan to the government. Given today’s low interest rates taxpayers are not losing much by over-paying and in return they’re getting a type of forced savings.

The IRS reports that the typical refund for 2012 was $2,803. However, those who filed electronically got better results — the average direct deposit refund was $2,985.

In either case, a nice chunk of change — and perhaps a chunk that could be larger with fewer claims for dependents.

For details and specifics speak with a tax professional.

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The latest settlement between the mortgage industry and the government is a $9.3 billion deal between major servicers, the Federal Reserve and the OCC, the Office of the Comptroller of the Currency, a part of the Treasury.

Most of the settlement is in the form of $5.7 billion in “other assistance” to borrowers, however there is also $3.6 billion in cash, with checks going out to some borrowers as early as this month.

More than 1,000 VA and military households will receive at least $125,000 each under still-another mortgage settlement.

The Settlement

The settlement is designed to compensate borrowers who received foreclosure notices in 2009 and 2010. Initially the government wanted mortgage servicers — the folks who collect monthly payments and initiate foreclosures — to individually review borrower files to see who, if anyone, should be paid, but the review process turned into a massive fiasco: $2 billion was spent reviewing files without a single dollar being paid to any wronged borrower.

I know what you’re thinking: Wouldn’t $2 billion pay for a lot of VA benefits, lots of preschool classes or at least a couple of better bridges?

But I digress. The independent foreclosure reviews were dumped in favor a system which sorts borrowers into various categories. Depending on the category, payments range from $300 to as much as $125,000.

So how was it determined who should get what? OCC spokesman Bryan Hubbard told us that “borrowers were placed into categories based on objective loan attributes.”

Categories

For vets and military families, there are several important categories.

First, we have 116 VA and military borrowers who faced foreclosure but were protected under the Servicemembers Civil Relief Act (SCRA). Because foreclosure actions against these borrowers were withdrawn they will receive $15,000 each.

Second, there were 1,082 VA and military borrowers who were foreclosed despite coverage by SCRA. Each borrower will receive $125,000.

Third, SCRA limits the interest that can be charged to qualified individuals. Under the settlement 424 vets and military households will receive $300 “or the amount overcharged and paid by the borrower, whichever is greater.”

The End of Disputes?

Is this the end of the servicer disputes? Not likely.

“Receiving a payment as a result of the Independent Foreclosure Review settlement will not prevent you from taking any action you may wish to pursue related to your foreclosure,” says the OCC. “Borrowers will not be required to execute a waiver of any legal claims they may have against their servicer as a condition for receiving payment.”

Several additional servicer settlements will likely emerge in the next few weeks, again with specific compensation for vet and military households. Watch this site for more information.

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While the payroll tax provision has ended and paychecks are now smaller, that “little” .1 percent g-fee increase continues and — by the way — it’s not so little: It’s expected to raise $35.7 billion for Uncle Sam over ten years.

There might be some justification for a higher g-fee if the money went to make mortgages cheaper, reduced foreclosure levels or helped Fannie Mae and Freddie Mac, but that’s not the case. Instead, the money is simply a tax which takes money from loan borrowers — including VA borrowers — and sends it directly to the US Treasury.

How did this happen?

How do Fannie and Freddie impact mortgage rates?

In 2008 the federal government took over Fannie Mae and Freddie Mac on the grounds that they might go bankrupt.

This is a big deal for VA loan borrowers because mortgages of all types are bought, sold, insured and guaranteed by Fannie Mae and Freddie Mac. In effect, they operate much of what is known as the “secondary” market, the electronic platform where investment capital from all over the world is used to buy US mortgages, including VA loans. Such a market holds down mortgage costs and assures that loans are available nationwide. Any interruption in the secondary system would cause mortgage rates to soar.

So far the government has spent $187 billion propping up the two companies. That’s a huge amount of money but it doesn’t quite tell the whole story: Fannie Mae and Freddie Mac have already repaid some $50 billion to Uncle Sam and more is on the way.

Meanwhile, the new and higher g-fee –a fee paid by all lenders who use Fannie Mae and Freddie Mac, including VA lenders — sends money directly to Uncle Sam. Because lenders pass on such costs, borrowers pay extra money for their mortgages and the cash is used to off-set general government spending. In other words, the higher g-fee is simply a back-door tax paid by some taxpayers but not others. The extra money raised by the higher-fee does not even count as a reduction of the $187 billion advanced to Fannie Mae and Freddie Mac.

Now there’s a bi-partisan effort on Capitol Hill to end the raids on new mortgage borrowing. Senators Bob Corker (R-TN), Mark Warner (D-VA), David Vitter (R-LA), and Elizabeth Warren, (D-MA) have introduced the Jumpstart GSE Reform Act.”

“The legislation,” said the group, “would prohibit any increase in the guarantee fee — which is required to be charged by government-sponsored enterprises Fannie Mae and Freddie Mac — from offsetting other government spending.”

Under the bi-partisan proposal the guarantee fee could go up — but only if the money is used to improve the mortgage system. For instance, higher g-fees could be used to speed the repayment of the cash loaned to Fannie Mae and Freddie Mac, knock down mortgage costs or expand foreclosure-prevention programs.

All in all, the bipartisan group is on to a good idea.

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Every borrower wants the best possible rate at the time of application, but mortgage levels are a moving target. It’s easy to get some idea of where rates are generally, but because they are constantly in motion, it’s tough to know the exact moment of mortgage rate perfection, assuming there is such a thing.

How can VA loan borrowers grab the rates we see today?

If you like where rates are at this moment and are concerned that they may increase, then you want to “lock in” your rate at the time of application.

Floating Rates

The alternative to locking-in a mortgage rate is to instead allow the rate to “float.” By letting the rate float it means that by the time of closing the interest cost could be higher or lower. If rates are moving slowly within a given range, and if one has some tolerance for risk, then floating can be okay strategy.

For borrowers who agree that the mortgage marketplace is generally heading higher then the better option is to lock-in at the time of application. Another reason to prefer lock-ins is simplicity: The mortgage hunt is over and done with a lock-in.

Questions to Ask

Borrowers should ask several questions if they want to lock-in the rate for a VA mortgage:

First, how long does the lock-in last? A lock-in commonly stays in place for 30 days but there can be a lock-in for 15 days or even for 45 or 60 days. The length of the lock-in is very important because if the loan application process is delayed as a result of a paperwork snafu or for another reason it’s possible the loan will not settle within the lock-in period, thus causing the borrower to lose the lock-in. For this reason borrowers should work closely with the lender to assure that the loan application is completed as quickly as possible.

Second, is there any fee or charge associated with the lock-in? Some lenders charge for a lock-in, some don’t and some have a policy which has a fee for a lock-in past a certain time period, say 30 days.

Third, get everything in writing and be sure the VA loan lock in arrangement is both clear and certain.

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Relying on “people with direct knowledge of the findings” the paper reports that “the nation’s biggest banks wrongfully foreclosed on more than 700 military members during the housing crisis and seized homes from roughly two dozen other borrowers who were current on their mortgage payments, findings that eclipse earlier estimates of the improper evictions.” (See: Banks Find More Wrongful Foreclosures Among Military Members, March 3, 2013)

Allegations against two lenders claiming that they had unfairly foreclosed 175 servicemembers were resolved with a $22 million settlement in 2011. In 2012 the $25 billion robo-signing settlement between major servicers, the Justice Department and most states set aside as much as $116,785 plus lost equity and interest for each servicemember who had been improperly foreclosed.

A large number of veterans may have been wrongly foreclosed upon.

To now suggest, as the Times claims, that the number of wrongful foreclosures involves some 700 military households raises several important questions.

First, how many of the alleged 700 wrongful foreclosures have been included in past settlements? Without specifics there’s no way to know if some cases among the 700 mentioned have been already resolved.

Second, when will more data be released? The paper reports that “in January, regulators ordered the banks to identify military members and other borrowers who were evicted in violation of federal law.”

January was two months ago.

Here’s the concern: Last year several federal regulators ordered major loan servicers to conduct foreclosure reviews and determine if any homeowners had been improperly foreclosed in 2009 and 2010.

This sounds good but why limit reviews to 2009 and 2010? What about 2007, 2008 and 2009?

No less important, how good was the review process?

As the Office of the Comptroller of the Currency stated in February, although mortgage servicers “had expended nearly $2 billion on the consultants’ review through November 2012, we were still not ready to compensate the first borrower.”

In other words, after spending $2 billion on reviews no money was paid to borrowers.

The review process has now been replaced with a $9.3 billion compensation agreement, however this agreement may not be final given that it too has set off huge questions regarding how the settlement figure was selected and who benefits.

The bottom line is this: VA loans are only available to those with qualifying service. Active duty military personnel are generally protected under the terms of the Servicemembers Civil Relief Act (SCRA) and cannot be foreclosed without a court order. To this point it remains unclear how many additional VA mortgage terminations could result in compensation, meaning those who were foreclosed during the past few years should watch this issue with care.

Photo courtesy Anne Rossley

What you’re seeing is not the marketplace at work, if by “marketplace,” we mean loan rates which are the result of freely-moving supply and demand. Instead, rates are low today in some part because of the Federal Reserve’s intervention.

We know this intervention is important because last week the Fed released notes from its January meeting and the stock market instantly took a tumble. The reason: The notes suggested that the Fed would not be active in the mortgage marketplace forever.

Rates are low today in some part because of the Federal Reserve’s intervention.

Here’s what’s going on:

In September the Fed announced that it could begin buying mortgage-backed securities worth $40 billion per month. By bringing more cash into the marketplace (supply) the Fed is effectively forcing down rates. Indeed, according to Federal Reserve Governor Jeremy C. Stein, loan rates fell 0.2 percent merely on the basis of the Fed announcement.

Buying mortgage-backed securities has an important impact on home lending rates because of the way the lending system works: A lender originates a mortgage and then turns around and usually sells the mortgage into the secondary market, an electronic fishbowl for mortgages are bought and sold. A loan packager cobbles together 5,000 or 10,000 mortgages and creates a mortgage-backed security or MBS. Interests in the MBS are sold to investors, the cash from investors is used to create new mortgages and the cycle repeats itself continuously.

By purchasing mortgage-backed securities worth $40 billion a month the Fed is flooding the mortgage marketplace with capital and that flood is keeping rates steady if not pushing them lower. The catch, of course, is that the Fed cannot do this eternally, at some point it has to stop and when it does the artificial prod which has been holding down rates will be removed.

For vets and military households the mechanics of lower rates are less important than the reality that low rates continue to be available for VA mortgages. How much longer such low rates will be out there is unknown.

Right now, new VA financing is available nationwide as are Streamline refinances. Perhaps most interesting refinancing options right now is the VA Interest Rate Reduction Refinance Loan (IRRRL)

The point of an IRRRL is to knock down the interest rate and thus monthly costs. Also, you can use the program to switch from an adjustable-rate mortgage to a fixed-rate loan. There’s no required appraisal and refinancing costs can be included in the new loan amount or with an interest-rate bum.

You cannot get cash from your home using an IRRRL, but you may be able to cut monthly expenses considerably, especially if your current mortgage carries a relatively higher rate. Speak with your VA lender for details.

Photo courtesy Danielle Walquist Lynch