Merchant Funding

The former Countrywide Financial Corp. gave preferential loans to more than three dozen employees of Fannie Mae while the two giant housing enterprises were locked in an expanding, multi-billion dollar business relationship in subprime mortgages, documents show.

Discounted mortgages written by Countrywide, once the nation’s largest subprime lender, were granted to a far wider group of Fannie employees than the four top executives executives whose preferential loans were previously disclosed, according to Countrywide documents provided to Congress under a subpoena.

Countrywide’s VIP section, established to handle preferential mortgages for favored customers, serviced a variety of Fannie employees who handled Fannie’s business of buying mortgages and selling mortgage-backed bonds. Recipients included an account manager, a lobbyist, underwriters, lawyers, a home loan manager, a sales executive and a credit risk manager.

The documents reveal that when Countrywide was depending on government-sponsored firms to finance billions of dollars worth of subprime loans that touched off the housing meltdown, it was giving employees at the largest of those companies — Fannie Mae — sweetheart deals on their own home loans.

Countrywide was acquired by Bank of America in mid-2008. The documents were turned over to the House Oversight and Government Reform Committee by Bank of America. The government seized control of Fannie Mae and its smaller government-sponsored competitor, Freddie Mac, in September 2008. So far, the takeover has cost taxpayers $145 billion and is likely to be the most expensive of all the financial bailouts.

Rep. Darrell Issa of California , the House committee’s senior Republican, said Countrywide’s preferential VIP mortgages for Fannie employees spiked in 1998, when Countrywide was negotiating volume discounts on the subprime mortgages it was selling, and again from 2001 to 2003, at the edge of a housing and mortgage boom.

In a letter to the Federal Housing Finance Agency — the government agency that regulates Fannie Mae and a smaller competitor, Freddie Mac — Issa said Countrywide’s 153 loans to 37 Fannie employees were part of a attempt to vastly expand business with Fannie to the detriment of Freddie. Though government-chartered institutions, both Fannie and Freddie were owned by private stockholders.

“In 1999, Countrywide reached an exclusive agreement to sell Fannie Mae billions of dollars in mortgages at a discounted rate,” Issa said in the letter.

Records compiled by a trade publication, Inside Mortgage Finance, show Fannie rapidly expanding its purchases of Countrywide mortgages and a decline in sales of them to Freddie.

In 1998, Countrywide sold $25.6 billion in loans to Fannie and $17.7 billion to Freddie. By 1999, the figures were $30.8 billion to $11.2 billion in Fannie’s favor. By 2004, the spread was much wider: $67.7 billion in Countrywide mortgages sold to Fannie Mae compared with $2.9 billion in mortgages sold to Freddie Mac.

Also among the subpoenaed documents was a May 2001 “confidential and proprietary” e-mail from a Countrywide official to other company officials discussing the sensitivity of the discounted VIP mortgage loan to Daniel Mudd, then Fannie’s vice chairman and chief operating officer. He later became chief executive.

“Make sure the branch and RVP understand the sensitivity of this deal,” the e-mail said. “We already are taking a loss, it would be horrible to add a service complaint on top and lose any benefit we generate.” The meaning of RVP is unclear.

Popularity: 2% [?]

So far nearly 6,400 borrowers have dropped out after the loan modification was made permanent. Most of those borrowers likely defaulted on their modified loans, but a handful either refinanced or sold their homes.

Credit ratings agency Fitch Ratings projects that about two-thirds of borrowers with permanent modifications under the Obama plan will default again within a year after getting their loans modified.

Obama administration officials contend that borrowers are still getting help — even if they fail to qualify. The administration published statistics showing that nearly half of borrowers who fell out of the program as of April received an alternative loan modification from their lender. About 7 percent fell into foreclosure.

Another option is a short sale — one in which banks agree to let borrowers sell their homes for less than they owe on their mortgage.

A short sale results in a less severe hit to a borrower’s credit score, and is better for communities because homes are less likely to be vandalized or fall into disrepair. To encourage more of those sales, the Obama administration is giving $3,000 for moving expenses to homeowners who complete such a sale or agree to turn over the deed of the property to the lender.

Administration officials said their work on several fronts has helped stabilize the housing market. Besides the foreclosure-prevention plan, they cited government efforts to provide money for home loans, push down mortgage rates and provide a federal tax credit for buyers.

“There’s no question that today’s housing market is in significantly better shape than anyone predicted 18 months ago,” said Shaun Donovan, President Barack Obama’s housing secretary.

The mortgage modification plan was announced with great fanfare a month after Obama took office.

It is designed to lower borrowers’ monthly payments — reducing their mortgage rates to as low as 2 percent for five years and extending loan terms to as long as 40 years. Borrowers who complete the program are saving a median of $514 a month. Mortgage companies get taxpayer incentives to reduce borrowers’ monthly payments.

Consumer advocates had high hopes for Obama’s program when it began. But they have since grown disenchanted.

“The foreclosure-prevention program has had minimal impact,” said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group. “It’s sad that they didn’t put the same amount of resources into helping families avoid foreclosure as they did helping banks.”

Popularity: 4% [?]

The Obama administration’s flagship effort to help people in danger of losing their homes is falling flat.

More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That exceeds the number of people who have managed to have their loan payments reduced to help them keep their homes.

Last month alone,155,000 borrowers left the program — bringing the total to 436,000 who have dropped out since it began in March 2009.

About 340,000 homeowners have received permanent loan modifications and are making payments on time.

Administration officials say the housing market is significantly better than when President Barack Obama entered office. They say those who were rejected from the program will get help in other ways.

But analysts expect the majority will still wind up in foreclosure and that could slow the broader economic recovery.

A major reason so many have fallen out of the program is the Obama administration initially pressured banks to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.

Many borrowers complained that the banks lost their documents. The industry said borrowers weren’t sending back the necessary paperwork.

Carlos Woods, a 48-year-old power plant worker in Queens, N.Y., made nine payments during a trial phase but was kicked out of the program after Bank of America said he missed a $1,600 payment afterward. His lawyer said they can prove he made the payment.

Such mistakes happen “more frequently than not, unfortunately,” said his lawyer, Sumani Lanka. “I think a lot of it is incompetence.”

A spokesman for Bank of America declined to comment on Woods’s case.

Treasury officials now require banks to collect two recent pay stubs at the start of the process. Borrowers have to give the Internal Revenue Service permission to provide their most recent tax returns to lenders.

Requiring homeowners to provide documentation of income has turned people away from enrolling in the program. Around 30,000 homeowners started the program in May. That’s a sharp turnaround from last summer when more than 100,000 borrowers signed up each month.

As more people leave the program, a new wave of foreclosures could occur. If that happens, it could weaken the housing market and hold back the broader economic recovery.

Even after their loans are modified, many borrowers are simply stuck with too much debt — from car loans to home equity loans to credit cards.

“The majority of these modifications aren’t going to be successful,” said Wayne Yamano, vice president of John Burns Real Estate Consulting, a research firm in Irvine, Calif. “Even after the permanent modification, you’re still looking at a very high debt burden.”

Popularity: 3% [?]

The U.S. House on Thursday approved a small-business loan measure supported by Gov. Martin O’Malley (D) and state business Secretary Christian S. Johansson, who testified in its support last month.

The legislation would provide additional funding to allow states to guarantee loans for small businesses that qualify. The national proposal is similar to a Maryland program that guarantees loans through community banks. A companion bill is pending in the Senate.

Mary Bass, vice president of Bass Machining, said a state-guaranteed loan allowed her Baltimore machinery manufacturing company to obtain a larger loan to buy needed equipment and open a line of credit to help complete a project than if the company had obtained a loan without the guarantee.

While the company’s regular lender, Bank of America, had approved a loan, it was for less and would have required more personal assets to be put up for collateral than with the state-guaranteed loan the company received through The Harbor Bank of Maryland in Baltimore, Bass said.

The loan was easier to obtain than other loans she had heard about involving the U.S. Small Business Administration.

“I’ve heard horror stories of those,” Bass said.

The company, which has made parts for customers ranging from the container industry to NASA, has 13 full- and three part-time workers, she said.

“If you need something made, we have a machine that will make it,” Bass said.

The House bill would provide $20 billion for states to expand their capital access programs in addition to an additional $30 billion small-business loan program.

Last month, Johansson, of the Maryland Department of Business and Economic Development, testified that small businesses employ about half of all workers, but find it difficult to get the loans they needed to expand.

“In the aftermath of Wall Street excesses, banks have been forced to adopt significantly stricter banking practices, which have reduced the flow of credit to their Main Street clients,” Johansson said.

“Expanding the capacity of existing State and U.S. territory small business loan guarantee programs offers a shovel ready solution to restore the flow of credit to our small businesses that have been crippled by tougher lending standards and devalued collateral,” O’Malley said in a statement.

O’Malley gained the support of 27 other governors at the National Governors Association meeting in February.

In Maryland, the Small Business Credit Recovery Program was launched in 2009.

“Once we got hooked up with Harbor Bank, it was much easier,” Bass said.

So far, two businesses have received loans through the state program, while final approval is pending on eight others, for a total of $5 million in loans through community banks such as Harbor Bank, which has provided the two loans.

“The state guarantee provides an additional source of support that has incented The Harbor Bank to increase lending to small businesses during these challenging economic times,” said Darius L. Davis, executive vice president and COO of Harbor Bank in a statement.

Popularity: 5% [?]

Short-term loans offered by some credit unions as alternatives to high-cost payday loans are as risky and deceptive as those they’re supposed to replace, some consumer groups say.

In recent years, hundreds of credit unions have introduced short-term loans for members who face a temporary cash crunch. But some of the loans “are only marginally cheaper than traditional payday loans,” says Lauren Saunders, an attorney with the National Consumer Law Center.

The National Credit Union Administration, which regulates federal credit unions, last week issued guidance to its members, alerting them to the “risks, compliance issues and responsibilities” associated with a short-term loan program.

The agency issued the letter in response to the rapid growth of these programs in recent months, says John McKechnie, spokesman for the agency.

Federally chartered credit unions are prohibited by law from charging more than 18% on loans, but some charge excessive fees that drive up the effective rate, Saunders says.

For example, Nevada Federal Credit Union says it offers a 0% annual percentage rate. Brad Beal, president of the credit union, says it charges an application fee of $70 for a 14-day loan of up to $700, or $60 for members with direct deposit. That’s half the fee charged by the average payday lender, he says. But the National Consumer Law Center points out that a $70 application fee for a $400, 14-day loan is the equivalent of a 455% APR.

Saunders’ consumer group has recommended capping the annual interest rate for payday loan alternatives at 36%, including fees. But Beal says that works out to less than $10 per loan and wouldn’t cover his credit union’s costs.

“We’re not out to take advantage of our members,” Beal says. “We’re just trying to find a way that’s economical for them and economical for us.”

Lois Kitsch of the National Credit Union Foundation, the charitable arm of the credit union industry, acknowledges loans offered by a handful of credit unions resemble traditional payday loans.

But, she says, “there are a huge number of others that don’t look like them at all.”

Many short-term loan programs offered by credit unions require members to deposit a small percentage of their loan payments in a savings account, Kitsch says.

“Eventually, they’ll have enough money so they can borrow against their own savings at a very low cost,” she says.

And unlike payday lenders, Kitsch says, many credit unions give members 30, 60 or even 90 days to repay their loans.

Popularity: 7% [?]

Ever wonder how that magical number – The Credit Score – is computed?

Whether you’re obsessing over your FICO score or your Beacon score, you’re likely shopping for credit. The FICO score was developed by Fair Isaac & Co., which began credit scoring in the late 1950s.

The point of the score is consolidate your credit profile into a single number. The Beacon score is a brand name used by Equifax, the largest credit-reporting agency. While Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed, whether you get a loan or not is a numbers game: The morapplye points you score on your credit app, the better you do.

There’s a reason you have to fill out so much information when you’re applying for credit. Everything counts. Your age, your address, and even your telephone number all have a role to play in whether or not you’ll get credit.

Young ‘uns and old folk are at a disadvantage since under 21 and over 65 likely means you aren’t working; no points for you. If you’re married, you’ll get a point for being “stable.” And while you might think that being divorced would work against you (all that spousal and child support), most creditors don’t give a whit.

No dependents? Zero points. You’re probably still gallivanting like a teenager since you haven’t yet “settled down.” One to three dependents? Score one point. You’re a solid citizen. More than three dependents? Score zero. Have you no self control! And don’t you know you that with all those mouths to feed you could get in debt over your head?

Your home address counts too. Live in a trailer park or with your parents? Bad risk, score zero points. You could skip town with nary a look over your shoulder. Rent an apartment? Give yourself one point.

Own a home with a big fat mortgage and you’ll score major points since someone has already done some checking and you qualified for a mortgage. Own your home free and clear? Even better. You’ve proven you can pay off a sizable debt and now you have a pile of equity that the card company would love to help you spend.

Previous Residence? Zero to five years (some applications only go to three years), score zero points since you move around too much. No land-line: zero points. How the Dickens are they gonna find you when you fall behind in payments. Since they can’t use your cell phone to actually locate you physically, it doesn’t count.

Less then one year at your present employer earns you no points. Again, it’s a stability and earning continuity thing. The longer you’re on the job, the more likely you are to be bored out of your mind but you’ll score more points. And, not to overstate the obvious, the more you make the better.

The more willing you are to make your lender rich, the higher your score will be. Since the FICO score was originally designed to measure customer profitability, if you pay off your balance in full every month, you’re going to score lower than the guy who only makes the minimum payment and pays huge amounts of interest.

Scores range from 300 to 900 and if you manage to hit 750 or above you’ll qualify for the best rates and terms. Score 620 or lower and you’ll pay premium interest if you even qualify; 620 is the absolute minimum credit score for insured mortgages.

Your credit score can change quickly. Payment history accounts for about 35% of your credit score and just one negative report can drop your pristine score into the doldrums. Since scores are updated monthly, your bad behaviour won’t go unpunished for long.

The type of credit you have counts for about 10% of your score. And your current level of indebtedness accounts for about 30% so going too close to your credit limit is another way to deflate your score. One rule of thumb is to keep your balances below the 65% mark. So if you have a limit of $1,000, you won’t ever carry a balance that’s more than $650.

Having too much credit available can also hurt your ability to borrow since the more credit you have, the more trouble you can get yourself into. If you’ve got a walletful of cards, canceling credit you’re not using can be a good thing – for both you and your credit score – over the long haul.

Careful though. If the card you’re eliminating is one with a long, positive history, you’ll eliminate what could be a very good record of your repayment when you cancel the card. You’d be better off cutting up the card so you aren’t tempted to use it, while you establish a track record (six months or more) before you actually cancel the account.

Credit shopping can also cost you points. Since about 10% of your credit score relates to the number and frequency of new credit enquiries, applying willy nilly for new credit will end up costing you.

However, it’s only when a lender checks your score that this registers on your score. Checking your own credit report/score is considered a “soft” inquiry and does not go against your score.

Popularity: 13% [?]

As many as 4 million small businesses might be eligible for federal tax credits to help cover the cost of health insurance for their workers, administration officials said Monday, one of the first benefits to flow from the recently enacted health-care overhaul.

Not all of the firms will be eligible for the credits immediately, because not all of them currently offer insurance, Assistant Treasury Secretary Michael Mundaca said on a conference call with reporters.

But all were sent government postcards alerting them to the availability of the credit — which covers up to 35 percent of their health-care costs — in hopes of spurring more to offer coverage, Mundaca said.

On Monday, the Internal Revenue Service also issued a series of rules clarifying eligibility for the credit, which is available to businesses with fewer than 25 employees and paying an average salary of less than $50,000 a year.

The value of the credit phases out as the number of workers and their salaries rise, with the full 35 percent credit available only to businesses with fewer than 10 full-time workers paying an average salary of less than $25,000.

The IRS said the value of the credit would not be reduced by state health-care tax credits, which exist in as many as 20 states, according to a list compiled by the National Conference of State Legislatures.

Businesses will also be permitted to apply the credit to vision, dental and other such coverage, so long as they pay at least 50 percent of their workers’ premiums.

The new rules also allow businesses to use one of three methods to determine number of full-time workers, counting bodies, weeks worked, or hours worked, whichever is easier and more beneficial.

And the IRS said it would permit businesses to claim the credit this year even if they do not currently meet a requirement under the law to provide the same level of coverage to every worker. Mundaca said tax officials were still trying to determine when businesses would have to meet that standard.

Although Mundaca and other administration officials touted the benefits of the new law, it has hardly been an unqualified hit in the small business community. One of the largest organizations of small employers, the National Federation of Independent Business, last week joined 20 states in suing to have the health-care law overturned.

The NFIB said it was particularly concerned about the impact of new fines on firms that fail to provide their workers coverage, which are scheduled to take effect after 2014. The suit, however, takes aim primarily at the constitutionality of the law’s requirement that individuals obtain coverage.

Popularity: 100% [?]

European politicians are fuming over the US credit ratings agencies and their role in various financial crises. But some experts say it was governments who allowed rating firms to gain too much power in the first place.

After stocks and the euro took a tumble this week on the announcement that credit rating agency Standard and Poor’s was downgrading Greece’s credit rating to junk status, new calls have gone out for ratings agencies to act “responsibly” and for the creation of an independent European rating agency.

But responsibility is not a word that has been associated with credit ratings agencies much in the wake of the global financial crisis, especially after it emerged that the business practices of the big three US ratings firms – Standard and Poor’s, Moody’s and Fitch – played a central role in helping bring about the economic meltdown.

“We should not make the welfare of Europe dependent on ratings agencies,” Peter Bofinger, a member of the German government’s independent economic advisory panel, told the newspaper Die Welt.

German Foreign Minister Guido Westerwelle, who called for a European credit rating agency, said rating agencies must not develop, sell and rate financial products at the same time.

“Conflicts of interest are guaranteed,” he said.

A top International Monetary Fund official questioned the agencies’ accuracy, arguing that that their assessments reflect mainly investors’ perceptions of a nation’s financial health.

“That’s why you shouldn’t believe too much in what they say,” IMF managing director Dominique Strauss-Kahn said last week.

But according to Manfred Jäger-Ambrozewicz of the Cologne Institute of Business Research, government regulators and governments themselves, who also depend on ratings agencies analysis, have played a role in the increase of the agencies’ influence.

“It’s kind of ridiculous that they’ve turned on them now,” he told Deutsche Welle. “They are the ones who have largely given them so much power.”

He added that the creation of a new European ratings agency would be possible, but that agencies are built on their reputations, and it would take some time for a brand-new ratings entity to become credible.

“But if in addition to the private rating we had something from a semi-state agency or a rating by a body like the IMF or the European Central Bank, that could be helpful,” Jäger-Ambrozewicz said.

Later this year, new EU rules which were hammered out last year will apply some regulation on already-existing agencies that operate in Europe.

The rules, which go into effect in December, will oblige the agencies to disclose information about the models and methods on which their ratings are based and require adherence to new corporate governance standards meant to guard against potential conflicts of interest.

Popularity: 17% [?]

The steps to improve credit rating involve:

• Paying bills on time and minimizing debt.
• Clearing incurred debt as soon as possible, and refrain from acquiring fresh debt.
• Avoidance to transferring debt balances.Keeping low or no balances on credit cards.
• Keeping old bank accounts operative.
• Interceding for an immediate intervention of a payment plan and outside help, if the debt incurred is more than you can handle.

It is very important to assess the situation from a third person perspective and work in tandem with a lender. It helps to earn goodwill via regular payments, to improve your credit rating.

The credit rating vouches for your credibility. You should focus on ironing out your previous history of borrowing and repayment and repair the liabilities-assets ratio, to feature more assets than debts.

It is critical to tally facts within the credit report and take remedial action to eliminate errors and omissions.

You can use factors such as transparency in the stock market and public investment enhancement patterns to your advantage. You need to apply all your energy to meet impromptu expenses and train yourself to optimize credit-in-hand.

Monitoring and reviewing past credits and identifying wanton expenses also help to maintain a good credit rating. The regularity with which you address repayment of incurred debt greatly reflects your financial stability. A credit rating addressed and repaired in time attracts smaller rates of interest and easily manageable credit balances.

Designing your own finance management strategy will help you to enjoy a stronger credit rating in the near future. Paying back high interest rate credit card debt and not spending more than 30% of your total credit limit are both highly beneficial to a sore credit rating.

Popularity: 24% [?]

Every individual and business entity earns a certain level of credit worthiness in a lifetime or phase of function. The credit rating is either evaluated as a credit score or as entries in a credit report. Credit ratings are awarded to individuals, business corporations and even countries. The calculations of the debit-credit facets are made at government-supported credit bureaus.

Calculations include averages summed up from the financial history of the individual or entity, and the available current assets and liabilities. A credit rating is a very important evaluation that tells an investor or lender whether or not a fiscal avenue being explored or the borrower is financially healthy enough to pay back the desired line of credit. Credit ratings are also sought to calculate and adjust insurance premiums and interest rates.

The readings, and sometimes the final score, help to determine employment eligibility. A poor credit rating simply attracts high interest rates and/or loan refusal. The factors that commonly influence credit rating include the amount of credit availed of, saving and spending patterns, incurred debt and current ability to repair the impaired history.

How to Improve Credit Rating:

Credit rating is usually compiled and maintained by the Experian, Equifax, and TransUnion credit bureaus. A person or business entity’s credit worthiness is usually determined via statistical analysis of the evaluated credit data. The records reveal a 3-digit credit score, also referred to as the FICO or Fair Isaac Corporation score.

The credit rating agencies calculate debt obligations and debt instruments that can be traded within a secondary market. Credit ratings are commonly accessed by investors, banks, issuers, broker-dealers and the government. The rating helps evaluate the current credit risk associated with the person or business.

Popularity: 34% [?]