Oct
19
Easy Home Loans
Filed Under Home Loans | Comments Off
webmaster home
These days its fact that its not hard to get home loans. Either its home equity loan or its mortgage loan and availability of easy home equity loans is in full bloom. These loans are uncomplicated, tenable, easily available, very flexible and tailor-made for homeowners. The best part about all this is that almost every loan lending or financial institution offers them.
Most home buyers have to borrow money in order to purchase their home. Few have enough money sitting in the bank, or in other easily saleable assets, to pay the entire cost of the home at once. (Even those few who do have enough money usually find it financially advantageous – perhaps for extra tax relief — to borrow some of the money.) The home loans they receive is called a mortgage. Generally, a mortgage is a loan of money to the home owner secured by a “lien” on the real estate.
Own house is the dream of every person. For a middle class person, it is considered as a life time achievement as it requires quite a huge amount of money. Banks play a pivotal role in fulfilling this basic need. The products they offer and the services they provide are of immense use to people who intend to have their own house. For a safe and beneficial home loan, proper awareness over the products, policies, terms and conditions of the bank is most important as ignorance may result in more payments to the bank in terms of principal and interest components.
A mortgage is a security document that allows the borrower to keep title of the property while using the property as security or collateral for a loan. The lender then places a lien on the property in the event the owner does not pay the agreed payment. When the borrower pays off the loan, the lender gives the borrower a satisfaction of mortgage that removes the lien from the property. About half the states in the U.S. use mortgage foreclosure as the means of satisfying the loan balance.
Mortgage allows investors to pool money in a trust to lend to individuals and companies. They secure their borrowing by a mortgage over residential or commercial properties. The trust collects the interest paid on these loans and then distributes the interest, less charges, as income to investors.
Borrowers should bear in mind that there are two different kinds of mortgage points-discount points and origination points-and that lenders do not all charge the same amount for these different types of points. Discount points refer to an amount of money paid to a lender to obtain a loan at a specific interest rate. These points are like pre-paid interest on a loan that a borrower takes out for a new home, with each point equalling to 1% of the total principal amount of the loan. Origination points are used to pay for the costs of obtaining the loan in the first place. They are much less popular than discount points, as they do not provide borrowers with any valuable benefits and are not tax deductible. Borrowers are therefore better off trying to get a loan that does not require them to acquire these kinds of points.
These days its fact that its not hard to get home loans. Either its home equity loan or its mortgage loan and availability of easy home equity loans is in full bloom. These loans are uncomplicated, tenable, easily available, very flexible and tailor-made for homeowners. The best part about all this is that almost every loan lending or financial institution offers them.
Most home buyers have to borrow money in order to purchase their home. Few have enough money sitting in the bank, or in other easily saleable assets, to pay the entire cost of the home at once. (Even those few who do have enough money usually find it financially advantageous – perhaps for extra tax relief — to borrow some of the money.) The home loans they receive is called a mortgage. Generally, a mortgage is a loan of money to the home owner secured by a “lien” on the real estate.
Own house is the dream of every person. For a middle class person, it is considered as a life time achievement as it requires quite a huge amount of money. Banks play a pivotal role in fulfilling this basic need. The products they offer and the services they provide are of immense use to people who intend to have their own house. For a safe and beneficial home loan, proper awareness over the products, policies, terms and conditions of the bank is most important as ignorance may result in more payments to the bank in terms of principal and interest components.
A mortgage is a security document that allows the borrower to keep title of the property while using the property as security or collateral for a loan. The lender then places a lien on the property in the event the owner does not pay the agreed payment. When the borrower pays off the loan, the lender gives the borrower a satisfaction of mortgage that removes the lien from the property. About half the states in the U.S. use mortgage foreclosure as the means of satisfying the loan balance.
Mortgage allows investors to pool money in a trust to lend to individuals and companies. They secure their borrowing by a mortgage over residential or commercial properties. The trust collects the interest paid on these loans and then distributes the interest, less charges, as income to investors.
Borrowers should bear in mind that there are two different kinds of mortgage points-discount points and origination points-and that lenders do not all charge the same amount for these different types of points. Discount points refer to an amount of money paid to a lender to obtain a loan at a specific interest rate. These points are like pre-paid interest on a loan that a borrower takes out for a new home, with each point equalling to 1% of the total principal amount of the loan. Origination points are used to pay for the costs of obtaining the loan in the first place. They are much less popular than discount points, as they do not provide borrowers with any valuable benefits and are not tax deductible. Borrowers are therefore better off trying to get a loan that does not require them to acquire these kinds of points.
Oct
18
What’s the Low Down on Loan to Value?
Filed Under Home Loans | Comments Off
Kristin Abouelata - Home Loans
It’s not very often that a borrower takes into heavy consideration what his loan to value is when shopping for a loan. In fact, if the subject is brought up by the customer, it’s mostly in relation to avoiding paying monthly mortgage insurance. But sometimes, a loan to value can affect even more aspects of your loan – like pricing and approval!
What is loan to value? Well, it’s exactly what it says. The loan amount compared to the value of the home you are buying or refinancing. For example, if you are buying a $100,000 home, and your loan amount is only $50,000, your loan to value or “LTV” is 50%. It’s also very common to refinance a home to obtain a lower LTV and drop mortgage insurance that was before required.
Different types of loans have different minimum requirements for LTV’s. With primary residence purchases, for instance, an FHA loan can have as high as a 97.75% LTV (soon to change to 96.5% in 2009). A conventional loan can have as high as a 97% LTV (but more common is 95% LTV). VA and Rural Housing loans can have 100% LTV’s. People who have cash to put down on the property they are buying and financing with a conventional loan oftentimes try to amass 20% of the purchase price in order to avoid mortgage insurance. Mortgage insurance is required when your LTV for a primary residence is above 80% and is issued by independent mortgage insuring companies like Genworth Financial or PMI. Fannie and Freddie, the big purchasers of conventional loans, will require one of these or other approved companies issue mortgage insurance unless the loan has an 80% LTV. And if you’re refinancing the home you live in? The whole grid of acceptable LTV’s changes for the most part, with a few exceptions. And furthermore, if you’re talking about investment properties, it’s another can of worms.
But when else does LTV mean something? Consider when a loan specialist prices your loan. Oftentimes there are pricing differentials based upon the loan to value. For instance, if you carry mortgage insurance and your LTV is 85.01% or higher, you might actually get a better interest rate than if you had an 85% LTV (but don’t get too excited because your monthly mortgage insurance will be higher). Or if your LTV is 60% or lower, you might also get a better interest rate. If you are close to tipping the scales on one of these ratios, it may be to your benefit to ask your loan specialist how close you are to a pricing break one way or another. You’d be surprised to find out it might change your mind as to how much money you decide to put down on your loan.
And guess what else? A low loan to value may be the difference between loan approval and loan denial. Why is that? Because if you are investing enough of your own money into the equity of a property, chances are you won’t default on the loan. And if you do, it’s probably a last recourse. Not to mention, the lender who holds the note won’t lose money because there is enough equity in the property to cover foreclosure costs, re-sale costs and any value loss from an upside down market. The lender is covered. So, the lender will consider the loan less risky and a higher debt to income ratio is tolerated when reviewed with a high credit score.
It’s not very often that a borrower takes into heavy consideration what his loan to value is when shopping for a loan. In fact, if the subject is brought up by the customer, it’s mostly in relation to avoiding paying monthly mortgage insurance. But sometimes, a loan to value can affect even more aspects of your loan – like pricing and approval!
What is loan to value? Well, it’s exactly what it says. The loan amount compared to the value of the home you are buying or refinancing. For example, if you are buying a $100,000 home, and your loan amount is only $50,000, your loan to value or “LTV” is 50%. It’s also very common to refinance a home to obtain a lower LTV and drop mortgage insurance that was before required.
Different types of loans have different minimum requirements for LTV’s. With primary residence purchases, for instance, an FHA loan can have as high as a 97.75% LTV (soon to change to 96.5% in 2009). A conventional loan can have as high as a 97% LTV (but more common is 95% LTV). VA and Rural Housing loans can have 100% LTV’s. People who have cash to put down on the property they are buying and financing with a conventional loan oftentimes try to amass 20% of the purchase price in order to avoid mortgage insurance. Mortgage insurance is required when your LTV for a primary residence is above 80% and is issued by independent mortgage insuring companies like Genworth Financial or PMI. Fannie and Freddie, the big purchasers of conventional loans, will require one of these or other approved companies issue mortgage insurance unless the loan has an 80% LTV. And if you’re refinancing the home you live in? The whole grid of acceptable LTV’s changes for the most part, with a few exceptions. And furthermore, if you’re talking about investment properties, it’s another can of worms.
But when else does LTV mean something? Consider when a loan specialist prices your loan. Oftentimes there are pricing differentials based upon the loan to value. For instance, if you carry mortgage insurance and your LTV is 85.01% or higher, you might actually get a better interest rate than if you had an 85% LTV (but don’t get too excited because your monthly mortgage insurance will be higher). Or if your LTV is 60% or lower, you might also get a better interest rate. If you are close to tipping the scales on one of these ratios, it may be to your benefit to ask your loan specialist how close you are to a pricing break one way or another. You’d be surprised to find out it might change your mind as to how much money you decide to put down on your loan.
And guess what else? A low loan to value may be the difference between loan approval and loan denial. Why is that? Because if you are investing enough of your own money into the equity of a property, chances are you won’t default on the loan. And if you do, it’s probably a last recourse. Not to mention, the lender who holds the note won’t lose money because there is enough equity in the property to cover foreclosure costs, re-sale costs and any value loss from an upside down market. The lender is covered. So, the lender will consider the loan less risky and a higher debt to income ratio is tolerated when reviewed with a high credit score.
Oct
18
Does the inflation decide the changes in interest rates?
Filed Under Home Loans | Comments Off
Mathangie
Does the inflation decide the changes in interest rates?
Observably countries do adjust interest rates when there are fluctuations in key economic factors or indicators. It is always believed that monetary policy of a country, inflation, the Supply and demand of money funds are the significant causes that decide the changes in interest rates.
Out of these above three indicators, inflation is the most common factor that makes severe impacts on interest rates of a country. Interest rates influence the level of inflation. Inflation and the interest rates have a positive relationship between them. There is a simple economic reasoning behind this.
Interest rates create direct opportunities and even obstacles in the credit markets. When there are high interest rates, we can observe a decline in the money borrowing rates. As a common thought a country’s government will always have an ultimate aim of achieving high employment, unwavering prices and a constant growth in the economy by adjusting the interest rates. Since low interest rates encourage citizens’ purchasing and consuming habits in a country, a drop down in interest rates will increase the consumer spending and also it may stimulate a growth in the economy.
Most of the economists who believe in practical concepts say that an excessive economic growth will be anyway harmful to a country. A rapid growing economy might lead to a hyper inflation ending with high unemployment and high prices. Automatically it will reduce the level of consumer spending and the growth rate of economy resulting with extremely sky-scraping interest rates. On the other hand having incredibly low inflation is also not healthy for a well performing economy. An interest rate policy must be reasonable. So we can obviously say that the inflation might be controlled by the fluctuations of interest rates.
When looking at the other side inflation also decides the change in interest rates. Countries’ monetary policies are made up to encourage both local investments and the foreign investments. When there is a high inflation rate, that country’s investors will have a problem with the actual value of money. The actual return that they gain after some years will be really low after some years. In order to save investors’ real wealth and to encourage them, economy should increase the interest rates with the level of inflation. The long term bond holders face severe problems with inflation and the rates of interest.
Let’s assume that a country is facing a hyper inflation just like what happens in the Zimbabwe economy at present. After experiencing a very high rate of inflation, lenders will want to have high interest rates as they have a necessity to get back their actual wealth. If a country does not increase interest rates with the level of inflation, the lenders will be the losers and the borrowers will be gainers from it.
Anyhow an interest rate policy of a country is supposed to encourage the saving habits of that country’s citizens. So the deposit and lending rates differ with the level of inflation. If the country does not increase the interest rates with the increased level of inflation, people will realize that the actual value for their savings come down. It may discourage the saving habits. So there will be a decline in the saving rates.
Eventhough inflation and interest rates have a positive linear relationship; there might be some exceptional situations. There are situations where there were no relationships between interest rates and inflation and even negative relationships. This happens rarely when natural disasters take place.
Does the inflation decide the changes in interest rates?
Observably countries do adjust interest rates when there are fluctuations in key economic factors or indicators. It is always believed that monetary policy of a country, inflation, the Supply and demand of money funds are the significant causes that decide the changes in interest rates.
Out of these above three indicators, inflation is the most common factor that makes severe impacts on interest rates of a country. Interest rates influence the level of inflation. Inflation and the interest rates have a positive relationship between them. There is a simple economic reasoning behind this.
Interest rates create direct opportunities and even obstacles in the credit markets. When there are high interest rates, we can observe a decline in the money borrowing rates. As a common thought a country’s government will always have an ultimate aim of achieving high employment, unwavering prices and a constant growth in the economy by adjusting the interest rates. Since low interest rates encourage citizens’ purchasing and consuming habits in a country, a drop down in interest rates will increase the consumer spending and also it may stimulate a growth in the economy.
Most of the economists who believe in practical concepts say that an excessive economic growth will be anyway harmful to a country. A rapid growing economy might lead to a hyper inflation ending with high unemployment and high prices. Automatically it will reduce the level of consumer spending and the growth rate of economy resulting with extremely sky-scraping interest rates. On the other hand having incredibly low inflation is also not healthy for a well performing economy. An interest rate policy must be reasonable. So we can obviously say that the inflation might be controlled by the fluctuations of interest rates.
When looking at the other side inflation also decides the change in interest rates. Countries’ monetary policies are made up to encourage both local investments and the foreign investments. When there is a high inflation rate, that country’s investors will have a problem with the actual value of money. The actual return that they gain after some years will be really low after some years. In order to save investors’ real wealth and to encourage them, economy should increase the interest rates with the level of inflation. The long term bond holders face severe problems with inflation and the rates of interest.
Let’s assume that a country is facing a hyper inflation just like what happens in the Zimbabwe economy at present. After experiencing a very high rate of inflation, lenders will want to have high interest rates as they have a necessity to get back their actual wealth. If a country does not increase interest rates with the level of inflation, the lenders will be the losers and the borrowers will be gainers from it.
Anyhow an interest rate policy of a country is supposed to encourage the saving habits of that country’s citizens. So the deposit and lending rates differ with the level of inflation. If the country does not increase the interest rates with the increased level of inflation, people will realize that the actual value for their savings come down. It may discourage the saving habits. So there will be a decline in the saving rates.
Eventhough inflation and interest rates have a positive linear relationship; there might be some exceptional situations. There are situations where there were no relationships between interest rates and inflation and even negative relationships. This happens rarely when natural disasters take place.
Oct
15
Federal Funds Rate and My Finances
Filed Under Home Loans | Comments Off
Manuel Davis Jr.
Lately there has been a lot of talk about the federal funds rate. This is something that dominates headlines whenever there is a change in this rate. Most recently the Federal Reserve made a huge rate drop. The 1st drop was 3/4ths of a percent, then shortly after by another ½ percent bringing the rate all the way down to 3%. Why such the hype? How does this affect individuals finances?
What is the Federal Funds Rate?
The federal funds rate is the interest rate that banks lend balances to other depository institutions, usually overnight. This rate is the rate that banks can borrow from the Federal Reserve, or in other words, it is the lowest possible rate that banks can charge on interest. Changing this rate is one of the primary tools that the Federal Reserve uses to regulate the supply of money in the US economy.
The Effect of lowering the Federal Funds Rate
By lowering the rate, borrowing becomes cheaper for banks and with competition among the banks they will pass this savings onto their customers. This will make borrowing cheaper for individuals because the rate at which banks can lend is less and the default risk also goes down because there is not as much interest to pay by the individual. The purpose of lowering the Federal Funds rate is to create a domino effect that will eventually stimulate the economy. The cycle it is suppose to follow is this: the Federal Reserve lowers rates, banks lower rates, individuals will borrow more money, the borrowed money buys goods, the sellers of the goods make more money and deposit into banks, banks have more money to lend, then repeat this cycle and the economy is stimulated.
What this means to most individuals in the near and distant future?
This will help out many individuals with their credit card interest rates because the prime rate, which directly influences credit card interest is highly correlated to the Federal Funds rate. From the domino effect, credit card lenders are also able to obtain a lower borrowing rate and therefore competition will force them to decrease their rates. This is one thing that individuals that carry balances on their credit card should be aware of because sometimes the lender will keep charging the same rate. An individual who is aware of this can most of the time, contact the credit card company and demand a lower rate.
The lowering of the federal funds rate will also decrease the interest earned in savings accounts and in CDs. This can force many individuals to seek better investment options for their funds because the interest earned in savings accounts and CDs is very minimal, most likely not even enough to keep up with inflation. This can also be good for the stock market because this can cause higher demand for publicly traded stocks, therefore driving up the prices and increase returns. (Also returns can go up from the domino effect created from the dropping of the fed rate, which also explains why there is a sudden surge in stock prices when there was an unexpected decrease of the federal funds rate)
One misconception about the fed lowering the Federal Funds rate is that it directly influences mortgage rates. Mortgage rates are much more complex in how they are determined than just by the Federal Funds rate. Mortgage rates are based on long term rates, while federal funds rate is a short term rate. Mortgages are priced like the stock market, if there is a expected drop in the federal funds rate, the mortgage rate will price it into the rate before the rate drop even happens. An unexpected rate drop can influence mortgage rates, but only by a small amount. The fed rate is an indirect factor in determining the long term rates. Even though it is only a small indirect factor, long term interest rates are very low right now and locking in a safe, low fixed rate at the current time may be a good idea.
Overall, the rate cut is a good thing for credit card interest and other short term loans, but on the negative side, savings accounts will not earn as much interest. If all goes as planned the economy will get the extra boost it needs to stay out of a recession, while also indirectly making a positive influence on long term interest rates and keeping inflation in check.
Lately there has been a lot of talk about the federal funds rate. This is something that dominates headlines whenever there is a change in this rate. Most recently the Federal Reserve made a huge rate drop. The 1st drop was 3/4ths of a percent, then shortly after by another ½ percent bringing the rate all the way down to 3%. Why such the hype? How does this affect individuals finances?
What is the Federal Funds Rate?
The federal funds rate is the interest rate that banks lend balances to other depository institutions, usually overnight. This rate is the rate that banks can borrow from the Federal Reserve, or in other words, it is the lowest possible rate that banks can charge on interest. Changing this rate is one of the primary tools that the Federal Reserve uses to regulate the supply of money in the US economy.
The Effect of lowering the Federal Funds Rate
By lowering the rate, borrowing becomes cheaper for banks and with competition among the banks they will pass this savings onto their customers. This will make borrowing cheaper for individuals because the rate at which banks can lend is less and the default risk also goes down because there is not as much interest to pay by the individual. The purpose of lowering the Federal Funds rate is to create a domino effect that will eventually stimulate the economy. The cycle it is suppose to follow is this: the Federal Reserve lowers rates, banks lower rates, individuals will borrow more money, the borrowed money buys goods, the sellers of the goods make more money and deposit into banks, banks have more money to lend, then repeat this cycle and the economy is stimulated.
What this means to most individuals in the near and distant future?
This will help out many individuals with their credit card interest rates because the prime rate, which directly influences credit card interest is highly correlated to the Federal Funds rate. From the domino effect, credit card lenders are also able to obtain a lower borrowing rate and therefore competition will force them to decrease their rates. This is one thing that individuals that carry balances on their credit card should be aware of because sometimes the lender will keep charging the same rate. An individual who is aware of this can most of the time, contact the credit card company and demand a lower rate.
The lowering of the federal funds rate will also decrease the interest earned in savings accounts and in CDs. This can force many individuals to seek better investment options for their funds because the interest earned in savings accounts and CDs is very minimal, most likely not even enough to keep up with inflation. This can also be good for the stock market because this can cause higher demand for publicly traded stocks, therefore driving up the prices and increase returns. (Also returns can go up from the domino effect created from the dropping of the fed rate, which also explains why there is a sudden surge in stock prices when there was an unexpected decrease of the federal funds rate)
One misconception about the fed lowering the Federal Funds rate is that it directly influences mortgage rates. Mortgage rates are much more complex in how they are determined than just by the Federal Funds rate. Mortgage rates are based on long term rates, while federal funds rate is a short term rate. Mortgages are priced like the stock market, if there is a expected drop in the federal funds rate, the mortgage rate will price it into the rate before the rate drop even happens. An unexpected rate drop can influence mortgage rates, but only by a small amount. The fed rate is an indirect factor in determining the long term rates. Even though it is only a small indirect factor, long term interest rates are very low right now and locking in a safe, low fixed rate at the current time may be a good idea.
Overall, the rate cut is a good thing for credit card interest and other short term loans, but on the negative side, savings accounts will not earn as much interest. If all goes as planned the economy will get the extra boost it needs to stay out of a recession, while also indirectly making a positive influence on long term interest rates and keeping inflation in check.
Oct
14
Fixed Rate Bonds vs. ISA’s
Filed Under Home Loans | Comments Off
Sam Gooch
It is difficult to know where to put your money these days to get the best returns, especially with the way the economy has suffered over recent months, pushing the Bank of England to make a string of cuts to its Base rate which have in turn been passed on to savers rates.
With the Base rate now down to the lowest level ever recorded, rates on normal savings accounts have been slashed, which has limited our saving options.
The two obvious choices in today’s savings market are Fixed Term Bonds, and Individual Savings Accounts (ISA). Although both types of savings accounts have their similarities, there are several advantages and disadvantages to each and it is this topic of discussion that this article will be focussing on.
Fixed Term Bonds
Fixed Term Bonds provide a rate that is fixed throughout the duration of the bond, giving savers a predictable income with no surprises. Once you have chosen a fixed term account, you are able to calculate exactly how much interest you will earn, minus the tax, to give you your end balance.
Most Fixed Term Bonds offer very high deposit limits, generally between £500,000 to £2 million, but some, such as ICICI, will let you invest as much as you like. You must deposit the full amount upon opening the account and cannot add to this once active.
There are no limits to how many fixed term bond accounts you can open within any one year, so unlike ISA accounts, if you decide to close your account for any reason, you can still invest any amount elsewhere at any time.
Fixed Term Bonds generally offer the highest saving rates available, but these tend to be on shorter-term bonds, as they carry less risk to significant rate cuts leading to banks and building societies paying you over the odds in interest for long periods of time.
‘What goes up must come down’
If you are extremely lucky – and do your research, you could open a fixed term bond before rates significantly fall, allowing you to earn well above savings rates offered to new and variable rate customers. If you cast your mind back to October last year, when the Base rate stood at 5%, you would be very happy with yourself if you were earning this kind of rate on your savings today, with the Base rate now at 0.5%.
A big element to a fixed term bond account is the “fixed term”. You must be realistic with your finances and only go for this option if you can afford to lock your money away for some time. If you find that you need to withdraw any amount from your account, the bond will close and in most cases you will lose any interest to accumulated to date.
As well as the possibility of rates falling during the life of your bond, you could see the opposite effect, with rates significantly rising, leaving you locked in at a low rate. It is always a good idea to look at recent trends in Base rate changes to enable you to make an educated prediction on the direction it’s headed. Many economists believe that rates will continue to fall during 2009, going as low as 0%.
Like any normal savings account, you have to pay tax on any interest accumulated, as this counts as income. The general tax rate is 20% for those earning less that £34,800 per annual, and 40% for anything above. There are other conditions to non-earners so check out the HM Revenue for more information.
Individual Savings Accounts
Individual Savings Accounts (ISA’s) offer a tax free alternative to saving. Unlike normal savings accounts, the interest you earn on an ISA is not subject to tax deduction. Every year you are entitled to add up to £3,600 to your ISA, and the interest accumulated from your total balance will be tax free for life. You can deposit up to £3,600 between now and April 2009, which is when your allowance is renewed.
Like many savings accounts, ISA’s offer a variety of options such as instant access, fixed rate, and base rate guarantees.
Unlike a fixed term account, most ISA’s allow you to deposit as many times as you like throughout the year, as long as you stay within your £3,600 annual limit. It is better if you can afford to deposit the full amount at the beginning of the tax year, as this will allow you to earn the maximum possible interest, but for those that would rather have the flexibility to save as they earn, ISA’s are great for making monthly deposits from a salary.
As with fixed term bonds, ISA’s encourage savers to leave their money without making withdrawals. However, rather than deducting the interest earned to date and closing the account, ISA’s simply give savers an annual deposit limit of £3,600, and once this has been reached, no more can be added, regardless of any withdrawals.
Because savers can get good returns from paying no tax on the interest they earn, ISA’s tend to offer lower rates than Fixed Term Bonds.
Most ISA’s are affected by cuts made to the Bank of England Base rate, so if you open an ISA when rates are high, you cannot guarantee they will stay high. Fixed rate ISA’s allow you to fix in at a rate for a specified term, but this does carry some risk, as rates change, especially over a long term.
Always check out what kind of compensation scheme is used by your proposed bank or building society to ensure that your savings are covered in full. For more information on this, see Which4U’s Top Ten Savings Tips.
The bottom line for all savings accounts is to ensure you are earning the highest possible returns on your money. Although ISA’s offer tax free interest, you may find that the difference in rates offered against fixed term bonds will in fact leave you worse off. Before making a choice, compare the savings market for the best deals, and use your new found knowledge of these accounts to make an educated decision on where to invest your savings.
One last thing to remember is to always make sure (where possible) you keep the interest rates paid on your account above the rate of inflation (incuding tax deductions), as anything below would result in your money actually losing value. Inflation is used to measure the rate at which prices will increase, so if this level is higher than the interest you are earning, your money will be slowly eroding.
It is difficult to know where to put your money these days to get the best returns, especially with the way the economy has suffered over recent months, pushing the Bank of England to make a string of cuts to its Base rate which have in turn been passed on to savers rates.
With the Base rate now down to the lowest level ever recorded, rates on normal savings accounts have been slashed, which has limited our saving options.
The two obvious choices in today’s savings market are Fixed Term Bonds, and Individual Savings Accounts (ISA). Although both types of savings accounts have their similarities, there are several advantages and disadvantages to each and it is this topic of discussion that this article will be focussing on.
Fixed Term Bonds
Fixed Term Bonds provide a rate that is fixed throughout the duration of the bond, giving savers a predictable income with no surprises. Once you have chosen a fixed term account, you are able to calculate exactly how much interest you will earn, minus the tax, to give you your end balance.
Most Fixed Term Bonds offer very high deposit limits, generally between £500,000 to £2 million, but some, such as ICICI, will let you invest as much as you like. You must deposit the full amount upon opening the account and cannot add to this once active.
There are no limits to how many fixed term bond accounts you can open within any one year, so unlike ISA accounts, if you decide to close your account for any reason, you can still invest any amount elsewhere at any time.
Fixed Term Bonds generally offer the highest saving rates available, but these tend to be on shorter-term bonds, as they carry less risk to significant rate cuts leading to banks and building societies paying you over the odds in interest for long periods of time.
‘What goes up must come down’
If you are extremely lucky – and do your research, you could open a fixed term bond before rates significantly fall, allowing you to earn well above savings rates offered to new and variable rate customers. If you cast your mind back to October last year, when the Base rate stood at 5%, you would be very happy with yourself if you were earning this kind of rate on your savings today, with the Base rate now at 0.5%.
A big element to a fixed term bond account is the “fixed term”. You must be realistic with your finances and only go for this option if you can afford to lock your money away for some time. If you find that you need to withdraw any amount from your account, the bond will close and in most cases you will lose any interest to accumulated to date.
As well as the possibility of rates falling during the life of your bond, you could see the opposite effect, with rates significantly rising, leaving you locked in at a low rate. It is always a good idea to look at recent trends in Base rate changes to enable you to make an educated prediction on the direction it’s headed. Many economists believe that rates will continue to fall during 2009, going as low as 0%.
Like any normal savings account, you have to pay tax on any interest accumulated, as this counts as income. The general tax rate is 20% for those earning less that £34,800 per annual, and 40% for anything above. There are other conditions to non-earners so check out the HM Revenue for more information.
Individual Savings Accounts
Individual Savings Accounts (ISA’s) offer a tax free alternative to saving. Unlike normal savings accounts, the interest you earn on an ISA is not subject to tax deduction. Every year you are entitled to add up to £3,600 to your ISA, and the interest accumulated from your total balance will be tax free for life. You can deposit up to £3,600 between now and April 2009, which is when your allowance is renewed.
Like many savings accounts, ISA’s offer a variety of options such as instant access, fixed rate, and base rate guarantees.
Unlike a fixed term account, most ISA’s allow you to deposit as many times as you like throughout the year, as long as you stay within your £3,600 annual limit. It is better if you can afford to deposit the full amount at the beginning of the tax year, as this will allow you to earn the maximum possible interest, but for those that would rather have the flexibility to save as they earn, ISA’s are great for making monthly deposits from a salary.
As with fixed term bonds, ISA’s encourage savers to leave their money without making withdrawals. However, rather than deducting the interest earned to date and closing the account, ISA’s simply give savers an annual deposit limit of £3,600, and once this has been reached, no more can be added, regardless of any withdrawals.
Because savers can get good returns from paying no tax on the interest they earn, ISA’s tend to offer lower rates than Fixed Term Bonds.
Most ISA’s are affected by cuts made to the Bank of England Base rate, so if you open an ISA when rates are high, you cannot guarantee they will stay high. Fixed rate ISA’s allow you to fix in at a rate for a specified term, but this does carry some risk, as rates change, especially over a long term.
Always check out what kind of compensation scheme is used by your proposed bank or building society to ensure that your savings are covered in full. For more information on this, see Which4U’s Top Ten Savings Tips.
The bottom line for all savings accounts is to ensure you are earning the highest possible returns on your money. Although ISA’s offer tax free interest, you may find that the difference in rates offered against fixed term bonds will in fact leave you worse off. Before making a choice, compare the savings market for the best deals, and use your new found knowledge of these accounts to make an educated decision on where to invest your savings.
One last thing to remember is to always make sure (where possible) you keep the interest rates paid on your account above the rate of inflation (incuding tax deductions), as anything below would result in your money actually losing value. Inflation is used to measure the rate at which prices will increase, so if this level is higher than the interest you are earning, your money will be slowly eroding.
Oct
13
Home Loan Modifications and Your Credit Score
Filed Under Home Loans | Comments Off
Loan Modification Attorney
A Home Loan Modification can help you stop foreclosure and stay in your home. But if you’re like most homeowners, you’re probably wondering how it will affect your credit, and whether in a good or bad way. Unfortunately, there’s no single answer—it all depends on how far behind you are and the kind of mortgage loan modification you’ll be granted.
Best-case scenarios
Technically, since you’re not borrowing any money, a home loan modification won’t hurt your credit score. If you’re paying less in interest, you have a smaller debt burden. And since most lenders prefer an interest rate reduction, there’s a pretty good chance that a Home loan modification will improve your credit score.
The implications are even better if your lender forgives part of the principal, although this is less common. If they write off $50,000 from your loan amount, it will show up on your report as a smaller loan, which can increase your credit score.
The lender factor
Unfortunately, it doesn’t always happen that way. It also depends on how your lender reports the home loan modification to the credit bureaus. Many of them will consider it paid for less than the original amount owed, which will count against your score. If you’re already in foreclosure, the impact on your credit can be substantial. Of course, compared to a short sale or a foreclosure, a Mortgage Loan Modification is still the best way to maintain your credit standing.
Tax implications
One of the early problems with Loan modification is that the amount forgiven is usually taxable. That means if your debt is reduced by $50,000, the IRS views it as income and imposes the corresponding tax. This can catch homeowners off guard during tax season, as many of them don’t know the tax implications at the time of the modification.
To avoid such incidents, the IRS announced in 2007 that Loan modification would no longer be classified as “prohibited transactions.” This applied to all loans originated from January 2004 to July 2007, the peak of the sub-prime boom, and those due to adjust from January 2009 to July 2012. If your mortgage falls under these categories, you won’t have to file a 1099 declaring the change as taxable.
A loan modification is much like going to court: you can save your money and get a court-appointed lawyer, or you can invest in professional representation and get the best mortgage assistance. Your loss mitigation won’t happen overnight, but if with a capable Loan Modification Attorney, you can be sure you’re in good hands.
A Home Loan Modification can help you stop foreclosure and stay in your home. But if you’re like most homeowners, you’re probably wondering how it will affect your credit, and whether in a good or bad way. Unfortunately, there’s no single answer—it all depends on how far behind you are and the kind of mortgage loan modification you’ll be granted.
Best-case scenarios
Technically, since you’re not borrowing any money, a home loan modification won’t hurt your credit score. If you’re paying less in interest, you have a smaller debt burden. And since most lenders prefer an interest rate reduction, there’s a pretty good chance that a Home loan modification will improve your credit score.
The implications are even better if your lender forgives part of the principal, although this is less common. If they write off $50,000 from your loan amount, it will show up on your report as a smaller loan, which can increase your credit score.
The lender factor
Unfortunately, it doesn’t always happen that way. It also depends on how your lender reports the home loan modification to the credit bureaus. Many of them will consider it paid for less than the original amount owed, which will count against your score. If you’re already in foreclosure, the impact on your credit can be substantial. Of course, compared to a short sale or a foreclosure, a Mortgage Loan Modification is still the best way to maintain your credit standing.
Tax implications
One of the early problems with Loan modification is that the amount forgiven is usually taxable. That means if your debt is reduced by $50,000, the IRS views it as income and imposes the corresponding tax. This can catch homeowners off guard during tax season, as many of them don’t know the tax implications at the time of the modification.
To avoid such incidents, the IRS announced in 2007 that Loan modification would no longer be classified as “prohibited transactions.” This applied to all loans originated from January 2004 to July 2007, the peak of the sub-prime boom, and those due to adjust from January 2009 to July 2012. If your mortgage falls under these categories, you won’t have to file a 1099 declaring the change as taxable.
A loan modification is much like going to court: you can save your money and get a court-appointed lawyer, or you can invest in professional representation and get the best mortgage assistance. Your loss mitigation won’t happen overnight, but if with a capable Loan Modification Attorney, you can be sure you’re in good hands.
Sep
27
Credit Rating Agencies - Need for Reform
Filed Under Home Loans | Comments Off
Nagraj Gummala
Credit Rating Agencies (CRAs) – Need for Reform
1. Crisis – Spotlight on CRAs
“Credit-rating agencies use their control of information to fool investors into believing that a pig is a cow and a rotten egg is a roasted chicken. Collusion and misrepresentation are not elements of a genuinely free market ” - US Congressman Gary Ackerman
The smooth functioning of global financial markets depends in part upon reliable assessments of investment risks, and CRAs play a significant role in boosting investor confidence in those markets.
The above rhetoric although harsh beckons us to focus our lens on the functioning of credit rating agencies. Recent debacles as enunciated below make it all the more important to scrutinize the claim of CRAs as fair assessors.
i) Sub-Prime Crisis: In the recent sub-prime crisis, CRAs have come under increasing fire for their covert collusion in favorably rating junk CDOs in the sub-prime mortgage business, a crisis which is currently having world-wide implications. To give some background, loan originators were guilty of packaging sub-prime mortgages as securitizations, and marketing them as collateralized debt obligations on the secondary mortgage market. CRAs failed in their duty to warn the financial world of this malpractice through a fair and transparent assessment. Shockingly, they gave favorable ratings to the CDOs for reasons that need to be examined.
ii) Enron and WorldCom: These companies were rated investment grade by Moody’s and Standard & Poor’s three days before they went bankrupt. CRAs were alleged to have favorably rated risky products, and in some instances put these risky products together for a fat fee.
There may be other over-rated Enron’s and WorldComs waiting to go bust. CRAs need to be reformed to enable them pin-point such cancer well-in-advance thereby increasing security in the financial markets.
2. Credit Ratings and CRAs
i) Credit rating: is a structured methodology to rank the creditworthiness of, broadly speaking an entity, or a credit commitment (e.g. a product), or a debt or debt-like security as also of an Issuer of an obligation.
ii) Credit Rating Agency (CRA): is an institution specialized in the job of rating the above. Ratings by CRAs are not recommendations to purchase or sell any security but just an indicator.
Ratings can further be divided into
i) Solicited Rating: where the rating is based on a request say of a bank or company and which also participates in the rating process.
ii) Unsolicited Rating: where rating agencies claim to rate an organisation in the public interest.
CRAs help to achieve economies of scale as they help avoid investments in internal tools and credit analysis. It thereby enables market intermediaries and end investors to focus on their core competencies leaving the complex rating jobs to dependable specialized agencies.
3. CRAs of note
Agencies that assign credit ratings for corporations include
A. M. Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
Fitch Ratings (U.S.)
Moody’s (U.S.)
Standard & Poor’s (U.S.)
Pacific Credit Rating (Peru)
4. CRAs – Power and Influence
Various market participants that use and/or are affected by credit ratings are as follows
a) Issuers: A good credit rating improves the marketability of issuers as also pricing which in turn satisfies investors, lenders or other interested counterparties.
b) Buy-Side Firms : Buy side firms such as mutual funds, pension funds and insurance companies use credit ratings as one of several important inputs to their own internal credit assessments and investment analysis which helps them identify pricing discrepancies, the riskiness of the security, regulatory compliance requiring them to park funds in investment grade assets etc. Many restrict their funds to higher ratings which makes them more attractive to risk-averse investors.
c) Sell-Side Firms : Like buy-side firms many sell side firms like broker-dealers use ratings for risk management and trading purposes.
d) Regulators: Regulators mandate usage of credit ratings in various forms for e.g. The Basel Committee on banking supervision allowed banks to use external credit ratings to determine capital allocation. Or to quote another example, restrictions are placed on civil service or public employee pension funds by local or national governments.
e) Tax Payers and Investors: Depending on the direction of the change in value, credit rating changes can benefit or harm investors in securities through erosion of value and it also affects taxpayers through the cost of government debt.
f) Private Contracts: Ratings have known to significantly affect the balance of power between contracting parties as the rating is inadvertently applied to the organisation as a whole and not just to its debts.
Rating downgrade – A Death spiral:
A rating downgrade can be a vicious cycle. Let us visualise this in steps. First a rating downgrade happens. Banks now want full repayment anticipating bankruptcy. Company may not be in a position to pay leading to a further rating downgrade. This initiates a death spiral leading to the companys’ ultimate collapse and closure.
Enron faced this spiral where a loan clause stipulated full repayment in the event of a downgrade. When downgrade did take place, this clause added to the financial woes of Enron pushing it into deep financial trouble.
Pacific Gas and Electric Company is another case in point which was pressurised by aggrieved counterparties and lenders demanding repayment thanks to a rating downgrade. PG&E was unable to raise funds to repay its short term obligations which aggravated its slide into the death spiral.
5. CRAs as victims
CRAs face the following challenges
a) Inadequate Information: One complaint which CRAs have is their inability to access accurate and reliable information from issuers. CRAs cry that issuers deliberately withhold information not found in the public domain for instance undisclosed contingencies which may adversely affect the issuers’ liquidity.
b) System of compensation: CRAs act on behalf of investors but they are in most cases paid by the issuers. There lies a potential for conflict of interest. As rating agencies are paid by those they rate and not by the investor, the market view is that they are under pressure to give their clients a favourable rating – else the client will move to another obliging agency. CRAs are plagued by conflicts of interest that might inhibit them from providing accurate and honest ratings. There are conflicting noises with some CRAs admitting that if they depend on investors for compensation, they would go out of business. Others strongly deny conflicts of interest defending that fees received from individual issuers are a very small percentage of their total revenues so that no single issuer has any material influence with a rating agency.
c) Market Pressure : Allegations that ratings are expediency and not logic-based and that they would resort to unfair practices due to the inherent conflict of interest are dismissed by CRAs as malicious because the rating business is reputation based and incorrect ratings may lower the standing of the agency in the market. In short reputational concerns are sufficient to ensure that they exercise appropriate levels of diligence in the ratings process.
d) Ratings over-emphasised: Allegations float that CRAs actively promote an over-emphasis of their ratings and encourage corporations to do like-wise. CRAs counter saying that credit ratings are used out of context through no fault of their own. They are applied to the organizations per se and not just the organizations’ debts. A favourable credit rating is unfortunately used by companies as seals of approval for marketing purposes of unrelated products. A user needs to bear in mind that the rating was provided against the stricter scope of the investment being rated.
6. CRAs as Perpetrators
a) Arbitrary adjustments without accountability or transparency: CRAs can downgrade and upgrade and can cite lack of information from the rated party, or on the product as a possible defence. Unclear reasons for downgrade may adversely affect the issuer, as the market would assume that the agency is privy to certain information which is not in the public domain. This may render the issuers security volatile due to speculation.
Sometimes eextraneous considerations determine when an adjustment would occur. Credit rating agencies do not downgrade companies when they ought to. For example, Enron’s rating remained at investment grade four days before the company went bankrupt, despite the fact that credit rating agencies had been aware of the company’s problems for months.
b) Due diligence not performed: There are certain glaring inconsistencies which CRAs are reluctant to resolve due to the conflicts of interest as mentioned above. For instance if we focus on Moody’s ratings we find the following inconsistencies.
All three of the above have the same capital allocation forcing banks to move towards riskier investments.
c) Cozying up to management: Business logic has compelled CRAs to develop close bonds with the management of companies being rated and allowing this relationship to affect the rating process. They were found to act as advisors to companies’ pre-rating activities and suggesting measures which would have beneficial effects on the companys’ rating. Exactly on the other extreme are agencies which are accused of unilaterally adjusting the ratings while denying a company an opportunity to explain its actions.
e) Creating High Barriers to entry : Agencies are sometimes accused of being oligopolists, because barriers to market entry are high and rating agency business is itself reputation-based (and the finance industry pays little attention to a rating that is not widely recognized). All agencies consistently reap high profits (Moody’s for instance is greater than 50% gross margin), which indicate monopolistic pricing.
f) Promoting Ancillary Businesses: CRAs have developed ancillary businesses like pre-rating assessment and corporate consulting services to complement their core ratings business. Issuers may be forced to purchase the ancillary service in lieu of a favorable rating. To compound it all, except for Moody’s all other CRAs are privately held and their financial results do not separate revenues from their ancillary businesses.
7. Some Recommendations
a) Public Disclosures: The extent and the quality of the disclosures in the financial statements and the balance sheets need to be improved. More importantly the management discussion and analysis should require disclosure of off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments. Shortening the time period between the end of issuers’ quarter or fiscal year and the date of submission of the quarterly or annual report will enable CRAs to obtain information early. These measures will improve the ability of CRAs to rate issuers. If CRAs conclude that important information is unavailable, or an issuer is less than forthcoming, the agency may lower a rating, refuse to issue a rating or even withdraw an existing rating.
b) Due Diligence and competency of CRAs Analysts: Analysts should not rely solely on the words of the management but also perform their own due diligence by scrutinising various public filings, probing opaque disclosures, reviewing proxy statements etc. There needs to be a tighter (or broader) qualification to be a rating agency employee.
c) Abolition of Barriers to Entry: Increase in the number of players may not completely curtail the oligopolistic powers of the well-entrenched few but at best it would keep them on their toes by subjecting them to some level of competition and allowing market forces to determine which rating truly reflects the financial market best.
d) Rating Cost: As far as possible, the rating cost needs to be published. If revealing such sensitive information raises issues of commercial confidence, then the agencies must at least be subject to intense financial regulation. The analyst compensation should be merit-based based on the demonstrated accuracy of their ratings and not on issuer fees.
e) Transparent rating Process: The agencies must make public the basis for their ratings including performance measurement statistics historical downgrades and default rates. This will protect investors and enhance the reliability of credit ratings. The regulators should oblige CRAs to disclose their procedures and methodologies for assigning ratings. The rating agencies should conduct an internal audit of their rating methodologies.
f) Ancillary Business to be independent: Although the ancillary business is a small part of the total revenue, CRAs still need to establish extensive policies and procedures to firewall ratings from the ancillary business. Separate staff and not the rating analysts should be employed for marketing the ancillary business.
g) Risk Disclosure: Rating agencies should disclose material risks they uncover during the risk rating process or any risk that seems to be inadequately addressed in public disclosures, to the concerned regulatory authority for further action. CRAs need to be more proactive and conduct formal audits of issuer information to search for fraud not just restricting their role to assessing credit-worthiness of issuers. Rating triggers (for instance full loan repayment in the event of a downgrade) should be discouraged wherever possible and should be disclosed if it exists.
These measures if implemented can improve market confidence in CRAs, and their ratings may become a key tool for boosting investor confidence by enhancing the security of the financial markets in the broadest sense.
List of resources
i) http://www.zyen.com/Knowledge/Articles/assessing_credit_rating_agencies.htm
ii) http://www.chasecooper.com/News-Regulatory-Basel-II-2007-10-01.php
iii) http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0491.2005.00284.x?cookieSet=1&journalCode=gove
iv) http://www.house.gov/apps/list/speech/ny05_ackerman/WGS_092707.html
v) http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2373869.ece
vi) http://www.cfo.com/article.cfm/9861731/c_9866478?f=home_todayinfinance
vii) http://en.wikipedia.org/wiki/Credit_rating_agency
Credit Rating Agencies (CRAs) – Need for Reform
1. Crisis – Spotlight on CRAs
“Credit-rating agencies use their control of information to fool investors into believing that a pig is a cow and a rotten egg is a roasted chicken. Collusion and misrepresentation are not elements of a genuinely free market ” - US Congressman Gary Ackerman
The smooth functioning of global financial markets depends in part upon reliable assessments of investment risks, and CRAs play a significant role in boosting investor confidence in those markets.
The above rhetoric although harsh beckons us to focus our lens on the functioning of credit rating agencies. Recent debacles as enunciated below make it all the more important to scrutinize the claim of CRAs as fair assessors.
i) Sub-Prime Crisis: In the recent sub-prime crisis, CRAs have come under increasing fire for their covert collusion in favorably rating junk CDOs in the sub-prime mortgage business, a crisis which is currently having world-wide implications. To give some background, loan originators were guilty of packaging sub-prime mortgages as securitizations, and marketing them as collateralized debt obligations on the secondary mortgage market. CRAs failed in their duty to warn the financial world of this malpractice through a fair and transparent assessment. Shockingly, they gave favorable ratings to the CDOs for reasons that need to be examined.
ii) Enron and WorldCom: These companies were rated investment grade by Moody’s and Standard & Poor’s three days before they went bankrupt. CRAs were alleged to have favorably rated risky products, and in some instances put these risky products together for a fat fee.
There may be other over-rated Enron’s and WorldComs waiting to go bust. CRAs need to be reformed to enable them pin-point such cancer well-in-advance thereby increasing security in the financial markets.
2. Credit Ratings and CRAs
i) Credit rating: is a structured methodology to rank the creditworthiness of, broadly speaking an entity, or a credit commitment (e.g. a product), or a debt or debt-like security as also of an Issuer of an obligation.
ii) Credit Rating Agency (CRA): is an institution specialized in the job of rating the above. Ratings by CRAs are not recommendations to purchase or sell any security but just an indicator.
Ratings can further be divided into
i) Solicited Rating: where the rating is based on a request say of a bank or company and which also participates in the rating process.
ii) Unsolicited Rating: where rating agencies claim to rate an organisation in the public interest.
CRAs help to achieve economies of scale as they help avoid investments in internal tools and credit analysis. It thereby enables market intermediaries and end investors to focus on their core competencies leaving the complex rating jobs to dependable specialized agencies.
3. CRAs of note
Agencies that assign credit ratings for corporations include
A. M. Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
Fitch Ratings (U.S.)
Moody’s (U.S.)
Standard & Poor’s (U.S.)
Pacific Credit Rating (Peru)
4. CRAs – Power and Influence
Various market participants that use and/or are affected by credit ratings are as follows
a) Issuers: A good credit rating improves the marketability of issuers as also pricing which in turn satisfies investors, lenders or other interested counterparties.
b) Buy-Side Firms : Buy side firms such as mutual funds, pension funds and insurance companies use credit ratings as one of several important inputs to their own internal credit assessments and investment analysis which helps them identify pricing discrepancies, the riskiness of the security, regulatory compliance requiring them to park funds in investment grade assets etc. Many restrict their funds to higher ratings which makes them more attractive to risk-averse investors.
c) Sell-Side Firms : Like buy-side firms many sell side firms like broker-dealers use ratings for risk management and trading purposes.
d) Regulators: Regulators mandate usage of credit ratings in various forms for e.g. The Basel Committee on banking supervision allowed banks to use external credit ratings to determine capital allocation. Or to quote another example, restrictions are placed on civil service or public employee pension funds by local or national governments.
e) Tax Payers and Investors: Depending on the direction of the change in value, credit rating changes can benefit or harm investors in securities through erosion of value and it also affects taxpayers through the cost of government debt.
f) Private Contracts: Ratings have known to significantly affect the balance of power between contracting parties as the rating is inadvertently applied to the organisation as a whole and not just to its debts.
Rating downgrade – A Death spiral:
A rating downgrade can be a vicious cycle. Let us visualise this in steps. First a rating downgrade happens. Banks now want full repayment anticipating bankruptcy. Company may not be in a position to pay leading to a further rating downgrade. This initiates a death spiral leading to the companys’ ultimate collapse and closure.
Enron faced this spiral where a loan clause stipulated full repayment in the event of a downgrade. When downgrade did take place, this clause added to the financial woes of Enron pushing it into deep financial trouble.
Pacific Gas and Electric Company is another case in point which was pressurised by aggrieved counterparties and lenders demanding repayment thanks to a rating downgrade. PG&E was unable to raise funds to repay its short term obligations which aggravated its slide into the death spiral.
5. CRAs as victims
CRAs face the following challenges
a) Inadequate Information: One complaint which CRAs have is their inability to access accurate and reliable information from issuers. CRAs cry that issuers deliberately withhold information not found in the public domain for instance undisclosed contingencies which may adversely affect the issuers’ liquidity.
b) System of compensation: CRAs act on behalf of investors but they are in most cases paid by the issuers. There lies a potential for conflict of interest. As rating agencies are paid by those they rate and not by the investor, the market view is that they are under pressure to give their clients a favourable rating – else the client will move to another obliging agency. CRAs are plagued by conflicts of interest that might inhibit them from providing accurate and honest ratings. There are conflicting noises with some CRAs admitting that if they depend on investors for compensation, they would go out of business. Others strongly deny conflicts of interest defending that fees received from individual issuers are a very small percentage of their total revenues so that no single issuer has any material influence with a rating agency.
c) Market Pressure : Allegations that ratings are expediency and not logic-based and that they would resort to unfair practices due to the inherent conflict of interest are dismissed by CRAs as malicious because the rating business is reputation based and incorrect ratings may lower the standing of the agency in the market. In short reputational concerns are sufficient to ensure that they exercise appropriate levels of diligence in the ratings process.
d) Ratings over-emphasised: Allegations float that CRAs actively promote an over-emphasis of their ratings and encourage corporations to do like-wise. CRAs counter saying that credit ratings are used out of context through no fault of their own. They are applied to the organizations per se and not just the organizations’ debts. A favourable credit rating is unfortunately used by companies as seals of approval for marketing purposes of unrelated products. A user needs to bear in mind that the rating was provided against the stricter scope of the investment being rated.
6. CRAs as Perpetrators
a) Arbitrary adjustments without accountability or transparency: CRAs can downgrade and upgrade and can cite lack of information from the rated party, or on the product as a possible defence. Unclear reasons for downgrade may adversely affect the issuer, as the market would assume that the agency is privy to certain information which is not in the public domain. This may render the issuers security volatile due to speculation.
Sometimes eextraneous considerations determine when an adjustment would occur. Credit rating agencies do not downgrade companies when they ought to. For example, Enron’s rating remained at investment grade four days before the company went bankrupt, despite the fact that credit rating agencies had been aware of the company’s problems for months.
b) Due diligence not performed: There are certain glaring inconsistencies which CRAs are reluctant to resolve due to the conflicts of interest as mentioned above. For instance if we focus on Moody’s ratings we find the following inconsistencies.
All three of the above have the same capital allocation forcing banks to move towards riskier investments.
c) Cozying up to management: Business logic has compelled CRAs to develop close bonds with the management of companies being rated and allowing this relationship to affect the rating process. They were found to act as advisors to companies’ pre-rating activities and suggesting measures which would have beneficial effects on the companys’ rating. Exactly on the other extreme are agencies which are accused of unilaterally adjusting the ratings while denying a company an opportunity to explain its actions.
e) Creating High Barriers to entry : Agencies are sometimes accused of being oligopolists, because barriers to market entry are high and rating agency business is itself reputation-based (and the finance industry pays little attention to a rating that is not widely recognized). All agencies consistently reap high profits (Moody’s for instance is greater than 50% gross margin), which indicate monopolistic pricing.
f) Promoting Ancillary Businesses: CRAs have developed ancillary businesses like pre-rating assessment and corporate consulting services to complement their core ratings business. Issuers may be forced to purchase the ancillary service in lieu of a favorable rating. To compound it all, except for Moody’s all other CRAs are privately held and their financial results do not separate revenues from their ancillary businesses.
7. Some Recommendations
a) Public Disclosures: The extent and the quality of the disclosures in the financial statements and the balance sheets need to be improved. More importantly the management discussion and analysis should require disclosure of off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments. Shortening the time period between the end of issuers’ quarter or fiscal year and the date of submission of the quarterly or annual report will enable CRAs to obtain information early. These measures will improve the ability of CRAs to rate issuers. If CRAs conclude that important information is unavailable, or an issuer is less than forthcoming, the agency may lower a rating, refuse to issue a rating or even withdraw an existing rating.
b) Due Diligence and competency of CRAs Analysts: Analysts should not rely solely on the words of the management but also perform their own due diligence by scrutinising various public filings, probing opaque disclosures, reviewing proxy statements etc. There needs to be a tighter (or broader) qualification to be a rating agency employee.
c) Abolition of Barriers to Entry: Increase in the number of players may not completely curtail the oligopolistic powers of the well-entrenched few but at best it would keep them on their toes by subjecting them to some level of competition and allowing market forces to determine which rating truly reflects the financial market best.
d) Rating Cost: As far as possible, the rating cost needs to be published. If revealing such sensitive information raises issues of commercial confidence, then the agencies must at least be subject to intense financial regulation. The analyst compensation should be merit-based based on the demonstrated accuracy of their ratings and not on issuer fees.
e) Transparent rating Process: The agencies must make public the basis for their ratings including performance measurement statistics historical downgrades and default rates. This will protect investors and enhance the reliability of credit ratings. The regulators should oblige CRAs to disclose their procedures and methodologies for assigning ratings. The rating agencies should conduct an internal audit of their rating methodologies.
f) Ancillary Business to be independent: Although the ancillary business is a small part of the total revenue, CRAs still need to establish extensive policies and procedures to firewall ratings from the ancillary business. Separate staff and not the rating analysts should be employed for marketing the ancillary business.
g) Risk Disclosure: Rating agencies should disclose material risks they uncover during the risk rating process or any risk that seems to be inadequately addressed in public disclosures, to the concerned regulatory authority for further action. CRAs need to be more proactive and conduct formal audits of issuer information to search for fraud not just restricting their role to assessing credit-worthiness of issuers. Rating triggers (for instance full loan repayment in the event of a downgrade) should be discouraged wherever possible and should be disclosed if it exists.
These measures if implemented can improve market confidence in CRAs, and their ratings may become a key tool for boosting investor confidence by enhancing the security of the financial markets in the broadest sense.
List of resources
i) http://www.zyen.com/Knowledge/Articles/assessing_credit_rating_agencies.htm
ii) http://www.chasecooper.com/News-Regulatory-Basel-II-2007-10-01.php
iii) http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0491.2005.00284.x?cookieSet=1&journalCode=gove
iv) http://www.house.gov/apps/list/speech/ny05_ackerman/WGS_092707.html
v) http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2373869.ece
vi) http://www.cfo.com/article.cfm/9861731/c_9866478?f=home_todayinfinance
vii) http://en.wikipedia.org/wiki/Credit_rating_agency
Sep
27
Interest Rate Risk Management – Hedging - Caps, Collars & Swaps
Filed Under Home Loans | Comments Off
Ben Randall
The topic of interest rate hedging is becoming increasingly more discussed in current market conditions. Many borrowers have found themselves with no option other than to remain on a Lenders Standard Variable Rate (SVR), due to criteria, limited lending options and loan to value (LTV) restrictions narrowing the refinancing market to an unwelcome low.
With Businesses, Professional Landlords and residential owners unable to adjust their borrowing exposure to a product or Lender to suit their business plan and attitude to risk, stand alone Interest Rate Management products such as Caps, Collars and Swaps become a suitable alternative.
What is Interest Rate Hedging?
In brief: Interest Rate Hedging is minimising and maximising your exposure to interest fluctuations by entering into a financial derivative. When considering your residential, business or portfolio mortgage debt, different strategies will need to be applied that protect your exposure within a defined period,
How can it apply to me?
Interest rate risk management products can be used by businesses or individuals. Banks normally apply certain restrictions to the availability of these products as they can be viewed as high risk and the area of ‘advice’ surrounding such products can be a regulatory nightmare.
Residential Mortgage Owner
In the same way that your mortgage Broker or Financial Adviser will discuss the available mortgage product options such as fixed or tracker rates, interest rate hedging products can use certain aspects of these choices to suit your budget and attitude to risk. You may have wished to take advantage of current low interest rates, but were fearful that should they rise your mortgage payments would increase beyond your budget. In such circumstances a stand alone ‘base rate cap’ could protect your payments at your chosen level, but you would still be able to take a tracker product of your choice to take advantage of low interest rates, for as long as they last….
Professional Landlords and Investors
With Bank Base Rate at its current low you are no doubt tempted to take advantage of the tracker rates around that provide pay rates as low as 3.5%. This might be great news now, but you are of course aware that when interest rates inevitably return to a more ‘normal’ level the margins applied to the current products will result in a much higher rate than. A current tracker rate of 3.5% applies a margin of 3% over Bank Base Rate. If BBR should increase to 5% which is by no means unlikely, the resulting 8% pay rate could certainly impact on the yield of your portfolio to a critical level.
In the current climate with money still coming at a price, the Fixed rate options are by no means attractive and it therefore leaves the decision making of managing your portfolio a tough one at present.
Businesses
If you have a large business loan, you will be able to apply quite simple maths to know at what point increasing interest rates will make your payments unsustainable and therefore threaten your business. Alternatively, you may also know that currently the payments on your business finance actually leave a level of positive cash flow that could be put to better use. Many Business owners will apply an interest rate cap to ensure their payments do not reach a critical level. The cost of such a policy can be offset by applying a collar so that if their payments reach a certain floor (low), a premium is reversely payable.
Can’t Refinance?
With reduced loan to value (LTV) products across the buy to let market, many investors have no options when it comes to remortgaging at present, as the current loan will exceed the maximum LTV limits on the products available. Short of reducing the loan or taking in some cases a product switch (if the Lender will allow), your borrowing remains in the hands of the prevailing interest rates, and therefore leaves an unwelcome level of uncertainty.
What can be done?
Interest Rate Management Products can alleviate the above issues by allowing you to effect a policy that suits your individual requirements, risk profile and affordability. With a large portfolio and the differing margins and variable rates spread across the products it can sometimes take detailed analysis to calculate at what point interest rates would make sustaining your portfolio critical.
Using the services of an Independent Analyst can assist you make an informed decision of when prevailing interest rates would impact your investment to a critical point. Alternatively, you may already understand the level of increase required in Bank Base Rate that would result in negative cash flow or unsustainable mortgage payments.
If you do decide to enter into a derivative, think carefully before you do so and understand the pitfalls as well as the benefits. The question of when is the ‘right time’ can never been answered, particularly in today’s uncertain global financial climate.
The topic of interest rate hedging is becoming increasingly more discussed in current market conditions. Many borrowers have found themselves with no option other than to remain on a Lenders Standard Variable Rate (SVR), due to criteria, limited lending options and loan to value (LTV) restrictions narrowing the refinancing market to an unwelcome low.
With Businesses, Professional Landlords and residential owners unable to adjust their borrowing exposure to a product or Lender to suit their business plan and attitude to risk, stand alone Interest Rate Management products such as Caps, Collars and Swaps become a suitable alternative.
What is Interest Rate Hedging?
In brief: Interest Rate Hedging is minimising and maximising your exposure to interest fluctuations by entering into a financial derivative. When considering your residential, business or portfolio mortgage debt, different strategies will need to be applied that protect your exposure within a defined period,
How can it apply to me?
Interest rate risk management products can be used by businesses or individuals. Banks normally apply certain restrictions to the availability of these products as they can be viewed as high risk and the area of ‘advice’ surrounding such products can be a regulatory nightmare.
Residential Mortgage Owner
In the same way that your mortgage Broker or Financial Adviser will discuss the available mortgage product options such as fixed or tracker rates, interest rate hedging products can use certain aspects of these choices to suit your budget and attitude to risk. You may have wished to take advantage of current low interest rates, but were fearful that should they rise your mortgage payments would increase beyond your budget. In such circumstances a stand alone ‘base rate cap’ could protect your payments at your chosen level, but you would still be able to take a tracker product of your choice to take advantage of low interest rates, for as long as they last….
Professional Landlords and Investors
With Bank Base Rate at its current low you are no doubt tempted to take advantage of the tracker rates around that provide pay rates as low as 3.5%. This might be great news now, but you are of course aware that when interest rates inevitably return to a more ‘normal’ level the margins applied to the current products will result in a much higher rate than. A current tracker rate of 3.5% applies a margin of 3% over Bank Base Rate. If BBR should increase to 5% which is by no means unlikely, the resulting 8% pay rate could certainly impact on the yield of your portfolio to a critical level.
In the current climate with money still coming at a price, the Fixed rate options are by no means attractive and it therefore leaves the decision making of managing your portfolio a tough one at present.
Businesses
If you have a large business loan, you will be able to apply quite simple maths to know at what point increasing interest rates will make your payments unsustainable and therefore threaten your business. Alternatively, you may also know that currently the payments on your business finance actually leave a level of positive cash flow that could be put to better use. Many Business owners will apply an interest rate cap to ensure their payments do not reach a critical level. The cost of such a policy can be offset by applying a collar so that if their payments reach a certain floor (low), a premium is reversely payable.
Can’t Refinance?
With reduced loan to value (LTV) products across the buy to let market, many investors have no options when it comes to remortgaging at present, as the current loan will exceed the maximum LTV limits on the products available. Short of reducing the loan or taking in some cases a product switch (if the Lender will allow), your borrowing remains in the hands of the prevailing interest rates, and therefore leaves an unwelcome level of uncertainty.
What can be done?
Interest Rate Management Products can alleviate the above issues by allowing you to effect a policy that suits your individual requirements, risk profile and affordability. With a large portfolio and the differing margins and variable rates spread across the products it can sometimes take detailed analysis to calculate at what point interest rates would make sustaining your portfolio critical.
Using the services of an Independent Analyst can assist you make an informed decision of when prevailing interest rates would impact your investment to a critical point. Alternatively, you may already understand the level of increase required in Bank Base Rate that would result in negative cash flow or unsustainable mortgage payments.
If you do decide to enter into a derivative, think carefully before you do so and understand the pitfalls as well as the benefits. The question of when is the ‘right time’ can never been answered, particularly in today’s uncertain global financial climate.
Sep
26
Secured Home Loans: Squeeze the Potential of your Home
Filed Under Home Loans | Comments Off
Steve c clark
If you want to avail personal loan for reasons like purchasing a new car, renovating your home, paying your debt etc. You can avail secured home loans by placing your home as collateral against the loan amount. Secured home loans are offered with very low rate of interest and can be availed by both good credit holders and bad credit holders.
DETAILS REGARDING SECURED HOME LOANS
With secured home loan can avail a loan to fulfill personal needs like purchasing a car, going for a vacation, paying previous debts etc. to avail a secured home loan you’ll have place your home as collateral against the loan amount. As secured home loans are secured in nature they carry low interest rate and flexible repayment options. It can also be availed by people having bad credit history due to reasons like arrears, defaults, CCJ’s etc. In case of secured home loans lenders ignore the bad credit score of borrower because they have the security in the form of the borrower’s home. With secured home loans one can avail an amount ranging from £5, 000 to £ 75, 000. Loan amount also depends upon the value of collateral and the credit history of the borrower. The repayment duration ranges from 10 – 25 years. Secured home loans can be applied for via Internet also.
WHY OPT FOR SECURED HOME LOANS
If you own a home you can avail secured home loans. You have to place your home as security against the loan amount to avail secured home loans. Secured home loans carry low interest rate, that’s why, can be easily repaid. Also the repayment duration is very flexible ranging from 10 – 25 years, due to this monthly installments are very small. With growing competition in the market one can avail secured home loans at favorable terms and conditions. You can also avail secured home loans via Internet. It takes only few clicks to apply for a through Internet.
SECURED HOME LOANS: SUGGESTIONS
You should always read all the terms and conditions of loan agreement to avoid any unpleasant situation in future. You can search Internet for lenders of secured home loans.
With few clicks you can get quotes from many lenders and then you compare them to opt for the best one that suits your needs or the one that offers you secured home loans at lowest interest rate. But once the loan gets approved make sure to pay all the monthly installments on due time because failing to do so you may lose your home. Also while applying for secured home loans always prefer well-known lenders with good reputation.
If you want to avail personal loan for reasons like purchasing a new car, renovating your home, paying your debt etc. You can avail secured home loans by placing your home as collateral against the loan amount. Secured home loans are offered with very low rate of interest and can be availed by both good credit holders and bad credit holders.
DETAILS REGARDING SECURED HOME LOANS
With secured home loan can avail a loan to fulfill personal needs like purchasing a car, going for a vacation, paying previous debts etc. to avail a secured home loan you’ll have place your home as collateral against the loan amount. As secured home loans are secured in nature they carry low interest rate and flexible repayment options. It can also be availed by people having bad credit history due to reasons like arrears, defaults, CCJ’s etc. In case of secured home loans lenders ignore the bad credit score of borrower because they have the security in the form of the borrower’s home. With secured home loans one can avail an amount ranging from £5, 000 to £ 75, 000. Loan amount also depends upon the value of collateral and the credit history of the borrower. The repayment duration ranges from 10 – 25 years. Secured home loans can be applied for via Internet also.
WHY OPT FOR SECURED HOME LOANS
If you own a home you can avail secured home loans. You have to place your home as security against the loan amount to avail secured home loans. Secured home loans carry low interest rate, that’s why, can be easily repaid. Also the repayment duration is very flexible ranging from 10 – 25 years, due to this monthly installments are very small. With growing competition in the market one can avail secured home loans at favorable terms and conditions. You can also avail secured home loans via Internet. It takes only few clicks to apply for a through Internet.
SECURED HOME LOANS: SUGGESTIONS
You should always read all the terms and conditions of loan agreement to avoid any unpleasant situation in future. You can search Internet for lenders of secured home loans.
With few clicks you can get quotes from many lenders and then you compare them to opt for the best one that suits your needs or the one that offers you secured home loans at lowest interest rate. But once the loan gets approved make sure to pay all the monthly installments on due time because failing to do so you may lose your home. Also while applying for secured home loans always prefer well-known lenders with good reputation.
Sep
18
Chess Rating Calculation In Fide (World Chess Federation)
Filed Under Home Loans | Comments Off
Bohdan Vovk
You may know the name of the famous chess player Garry Kasparov who hit the highest rating in the history of FIDE at 2849. You must also know that the FIDE rating is calculated by the Elo rating system. But do you know how?
The Elo Rating System
The Elo system is named after Dr. Arpad Elo who improved the original system developed by Kenneth Harkness. It has been in use in the USA since 1960 and was taken on by FIDE in 1970. The Elo system is twofold:
1. It shows how strong the player is: Player A rated 2400 is stronger than Player B rated 2300.
2. The system also calculates the results of a game, tournament, or chess event as numerical Elo results.
Originally designed as a chess rating system, nowadays it is also being used in a number of other sports and computer games.
The Main Elo Idea
Each chess player has chance to win a game. The stronger player, the more chances to win. FIDE uses a special winning probability table for a game which is based on the rating difference between the two opponents. If the rating difference between the two is 0, each player has equal chances to win, and his or her winning probability is 0.50. If the rating difference is 100, the stronger player has the winning probability 0.64 while the weaker 0.36. Please remember 100, 0.64, and 0.36.
Let’s imagine that Player A rated 2400 and Player B rated 2300 are to officially play 100 games. The rating difference being 100, the expected result for Player A is therefore 0.64 and for Player B 0.36. And now the main Elo idea follows… If Player A is really playing as strong as 2400 and Player B as 2300, at the end of the event Player A will score 64 and Player B 36 for sure. If Player A scores only 55 (but not expected 64) and Player B 45 (more than expected 36), the Elo system will change their new ratings.
The K-factor
The Elo rating system uses the K-factor which is necessary for Elo calculation. The K-factor is assigned to the chess player, and its possible values in FIDE are 10, 15, and 25 as follows:
* 25 for players new to the rating list, until they have completed events with a total of at least 30 games.
* 15 for players with a rating under 2400.
* 10 once the player has reached 2400 and been registered for at least 30 games. Thereafter it remains permanently at 10, even if the player’s rating is under 2400 at a later stage.
Calculating the Rating Change
The current rating of the chess player changes after each game. The one-game Rating Change depends on:
* The player’s K-factor.
* The player’s score (1, 0.5, or 0).
* The player’s Expected Result for a game.
Example 1. With the K-factor 10, Player A rated 2400 defeated Player B rated 2300. The Rating Change for Player A is therefore calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x (1 - 0.64) = 10 x 0.36 = 3.6
Example 2. With the K-factor 10, Player A rated 2400 lost to Player B rated 2300. In this case, the Rating Change for Player A is calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x ( 0 - 0.64) = 10 x (- 0.64) = - 6.4
Example 3. With the K-factor 10, Player A rated 2400 made a draw with Player B rated 2300. The Rating Change for Player A is now calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x (0.5 - 0.64) = 10 x (- 0.14) = - 1.4
Conclusion
The new rating of the chess player is calculated based on the rating change. Updated, the FIDE rating list is available online on 1 January, 1 April, 1 July, and 1 October… To learn more on the topic, you are welcome to Chess Rating and More.
You may know the name of the famous chess player Garry Kasparov who hit the highest rating in the history of FIDE at 2849. You must also know that the FIDE rating is calculated by the Elo rating system. But do you know how?
The Elo Rating System
The Elo system is named after Dr. Arpad Elo who improved the original system developed by Kenneth Harkness. It has been in use in the USA since 1960 and was taken on by FIDE in 1970. The Elo system is twofold:
1. It shows how strong the player is: Player A rated 2400 is stronger than Player B rated 2300.
2. The system also calculates the results of a game, tournament, or chess event as numerical Elo results.
Originally designed as a chess rating system, nowadays it is also being used in a number of other sports and computer games.
The Main Elo Idea
Each chess player has chance to win a game. The stronger player, the more chances to win. FIDE uses a special winning probability table for a game which is based on the rating difference between the two opponents. If the rating difference between the two is 0, each player has equal chances to win, and his or her winning probability is 0.50. If the rating difference is 100, the stronger player has the winning probability 0.64 while the weaker 0.36. Please remember 100, 0.64, and 0.36.
Let’s imagine that Player A rated 2400 and Player B rated 2300 are to officially play 100 games. The rating difference being 100, the expected result for Player A is therefore 0.64 and for Player B 0.36. And now the main Elo idea follows… If Player A is really playing as strong as 2400 and Player B as 2300, at the end of the event Player A will score 64 and Player B 36 for sure. If Player A scores only 55 (but not expected 64) and Player B 45 (more than expected 36), the Elo system will change their new ratings.
The K-factor
The Elo rating system uses the K-factor which is necessary for Elo calculation. The K-factor is assigned to the chess player, and its possible values in FIDE are 10, 15, and 25 as follows:
* 25 for players new to the rating list, until they have completed events with a total of at least 30 games.
* 15 for players with a rating under 2400.
* 10 once the player has reached 2400 and been registered for at least 30 games. Thereafter it remains permanently at 10, even if the player’s rating is under 2400 at a later stage.
Calculating the Rating Change
The current rating of the chess player changes after each game. The one-game Rating Change depends on:
* The player’s K-factor.
* The player’s score (1, 0.5, or 0).
* The player’s Expected Result for a game.
Example 1. With the K-factor 10, Player A rated 2400 defeated Player B rated 2300. The Rating Change for Player A is therefore calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x (1 - 0.64) = 10 x 0.36 = 3.6
Example 2. With the K-factor 10, Player A rated 2400 lost to Player B rated 2300. In this case, the Rating Change for Player A is calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x ( 0 - 0.64) = 10 x (- 0.64) = - 6.4
Example 3. With the K-factor 10, Player A rated 2400 made a draw with Player B rated 2300. The Rating Change for Player A is now calculated as this:
Rating Change = K-factor x (Result - Expected Result)
Rating Change = 10 x (0.5 - 0.64) = 10 x (- 0.14) = - 1.4
Conclusion
The new rating of the chess player is calculated based on the rating change. Updated, the FIDE rating list is available online on 1 January, 1 April, 1 July, and 1 October… To learn more on the topic, you are welcome to Chess Rating and More.