Credit Repair Software

Credit Repair Magic

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Shape Up Your Credit Profile

Go to www.myfico.com and print copies of your credit reports and credit scores. Examine your reports for errors. If you find errors, start the paperwork now. Correcting credit errors can require weeks and sometimes months. If your debt load is too high or your payment record too slow, commit now to positive change. Reduce your balances. Pay all accounts before their due date. Fortunately, when the myfico computer program calculates your credit score, the credit scorers will give your recent and righteous credit experience more weight than your past undisciplined credit habits. (You'll find many more tips on credit scoring in Chapter 3.)

Credit Scores Count Most

With a very strong credit score, lenders will lay aside their magnifying glass. With strong credit you will need to worry far less about high qualifying ratios, low down payments, self-employment (difficult to determine income), piles of verifications, inconsistent life patterns, or character flaws. As a strong credit borrower you will win the lowest interest rate, the best terms, and the fastest approval. You need never suffer the claw marks of predatory (hard money) lenders. In contrast, if you do need to improve your credit score, here's the knowledge you will need to gain that platinum-power borrowing status.

Your Money and Your Credit

Start by taking a financial snapshot of where you are today. How much cash do you have How much credit What is your credit score Requesting a copy of your credit report and obtaining a financial statement from a bank or mortgage company will help you to determine what you want to do with your real estate investing as you put these activities into practice. Six months or a year from now, you can compare your snapshot then with now. Realize that you have to know where you are today to be able to get to where you want to be tomorrow.

What Is Credit Scoring

Through credit scoring, lenders try to minimize individual human judgment in the mortgage lending decision. Credit scoring data with auto loans, department store accounts, and credit cards proves that computer statistical programs can distinguish among platinum, gold, copper, lead, and plastic borrowers far better than back-office loan clerks or frontoffice loan reps. To create these credit scoring programs, math whizzes study the credit profiles, borrowing habits, and payback records of hundreds of thousands of people. Then they search for statistically significant correlations that tend to rate borrowers along a continuum from walks on water (say, 800 or higher) to let's pray they drown (say, 500 or lower). Supposedly, credit scores may range from 350 to 900, but more than 75 percent of Americans fall within the range of 600 to 800.

Credit Scoring Spreads Its Influence

If you've received a preapproved credit card in the mail, or obtained instant credit at Sears, Home Depot, or Best Buy, you've been run through a credit scoring program. That's why the store could make the credit decision so quickly with only minimal information from you (Social Security number, name, address). Even insurance companies (especially auto and homeowners) are now turning to credit scores to decide whether to Learn how to raise your credit score. insure you, and if so, at what price. Employers, too, have started running credit scores on job applicants and, in some cases, current employees. We are approaching the time when people will no longer say, You are what you eat. Instead, they'll remark, You are your credit score. With that world fast approaching, you must do all you can to strengthen your score. And if your score now shines out in platinum territory, learn to do what's necessary to keep it there. In the United States of tomorrow, Mensa will become old hat. You will...

Your Credit Score Doesnt Necessary Represent Your Credit Strength

Contrary to what many loan reps (and others) believe, your credit score doesn't necessarily represent your credit strength. You may never have paid a bill late in your life and still earn a credit score of less than 660. Credit Scoring Doesn't Rate You Personally The credit scorers select certain characteristics that you share with others who have (or have not) paid their bills as scheduled. Then, based on these selected characteristics, the scorer's mathematical formula assigns you a number. Supposedly, this assessment accurately gauges the risks you present to the lender. But it doesn't. Why Because you are a unique individual. Although you share some similarities with this computer sample of debtors, you also differ in many ways of which the credit scoring programs have no knowledge. These unaccounted-for differences may give you far more (or far less) borrowing credibility than your credit score indicates. Employers and insurers also judge you by your credit score. Your perfect...

Discover Your Credit Scores

To discover your credit scores, go to www.myfico.com. There you can see (for a fee) all of your credit reports (Trans Union, Experian, Equifax). Each report will also include an associated credit score. The three scores provided for you may not vary much from each other. But sometimes they do. That's because Equifax, Experian, and TU don't share credit data with each other. Different credit data yield different credit scores. Big differences in credit bureau data may yield big differences in each of the credit scores they assign you.

How You Can Improve Your Credit Score

Credit scorers place your credit data into their computer programs and out pops a number. But they won't tell you precisely how they calculated that figure. However, after you've paid your fee at myfico.com, the website info will give you some pointers on how to improve your Bea-con -FICO score. To learn how much your score actually does improve (if any) over the next 12 months, you will need to pay another fee. For that cost, you get four more periodic Beacon -FICO reports. Unfortunately, the information provided by FICO still doesn't go far enough. It's more like,try this (really, pay us) to see what happens.You really can't tell ahead of time the specific score boost that suggested changes might bring about. Nevertheless, piecing together clues from myfico.com and several helpful loan reps, here are some good tips on how to raise your credit scores 4. Credit inquiries. Whenever someone checks your credit file, it counts against your score. However, multiple checks within, say, two...

Your ExSpouse Can Ruin Your Credit and Other Tales of Double Counting

Are you divorced, married, or planning to wed Might you buy a property with a partner or significant other Then you're going to face the multiple-score, multiple-person problem of credit scoring and mortgage approval. Your Ex-Spouse Can Ruin Your Credit Even worse than debt overload (for purposes of mortgage approval), your ex-spouse's poor repayment habits on joint debts will show up to bruise your credit. These same types of problems can also confront married couples who are separated (either legally or by informal agreement). When ending your personal lives together, abolish all joint credit accounts. Sometimes a lender will permit you to explain away poor credit where the full responsibility actually falls on your ex, but the lender will not overlook joint credit obligations that remain open. When the law imposes legal liability on you for the debt, then as far as the lender's concerned, it's your debt. Or it's your credit line for as long as it remains open or unpaid. The lesson...

Credit Rating Frequency

All credit ratings have a frequency of 1 except for Baal, which has a frequency of 3. Therefore, the modal credit rating of U.S. department stores as of the date of the Moody's report was Baal. Moody's considers bonds rated Baal to be medium-grade obligations they are neither highly protected nor poorly secured. Solution to 2. For the group n 9, an odd number. The group's median occupies the (n + l) 2 10 2 5th position. We see from Table 3-12 that Baal occupies the fifth position. Therefore the median credit rating at September 2002 was Baal.

Maxing out your credit cards

Maxing out your credit cards to purchase a car, clothes, electronics, groceries, and other items that provide no return on your investment is never a good idea. Using your credit cards to purchase investment properties that offer a solid, relatively quick return on your investment, however, can be a savvy financial move. Following are some tips to maximize the use of credit card debt when investing in real estate i Check your credit card statements to determine your current limits. Depending on your credit history and the credit card company, you may have a credit limit in excess of 10,000 per card. i Pay off your charges as quickly as possible. Paying off your credit card debt quickly not only saves you from paying high finance charges, but it can also raise your credit rating, so you qualify for future loans at lower interest rates.

Obtaining your credit report

Your bank or mortgage broker is going to inspect your credit history before approving a loan, so you should know ahead of time what that credit history says about you. Check your credit report every three months or so, correct any errors, and take steps to improve your credit rating. No irregularity is too small to correct. You can obtain your credit report through any of the following three credit reporting services, but because lenders may report to only one service, ideally, you should check all three i Equifax (800) 685-1111 or online at www.equifax.com. i Experian (888) 397-3742 or online at www.experian.com. i TransUnion (800) 916-8800 or online at www.transunion.com. For the complete picture of your credit history, request a tri-merge report that compiles information from all three credit reporting agencies. Some creditors don't report to all three agencies, but when lenders check your credit history, they're probably going to look at everything, so you should, too. Read on for...

Examining your credit report

When you receive your credit report, inspect it carefully for the following red flags i Aliases you've never used, which may indicate that someone else is using your social security number or the credit-reporting agency has mixed someone else's data into yours. i Multiple social security numbers, flagging the possibility that information for someone with the same name has made it into your credit report. (When you apply for a loan, the lender typically runs an inquiry on your credit report, and that shows up on the report.) j NG An address of a place you've never lived or records of accounts, loans, and credit cards you never had may be a sign that somebody has stolen your identity. Contact the credit-reporting company immediately and request that a fraud alert be placed on your credit report. For tips on protecting yourself against identity theft and recovering from it, check out Preventing Identity Theft For Dummies by Michael J. Arata, Jr. (Wiley).

Boosting your credit score

Last but certainly not least Your credit report should contain your credit score. (If it doesn't, contact the credit-reporting agency and request your score.) Credit-reporting agencies often assign you a credit score that ranges roughly between 300 (you never paid a bill in your life) and 900 (you've had a credit card for a long time, borrow small amounts often, always pay your bills on time, and don't carry any huge balances). Each credit reporting agency may use a different scoring method and range of scores, so you can expect some variation. Your credit score determines not only whether you qualify for a loan but also how much you're qualified to borrow and at what interest rate. A high credit score lets you borrow more money at a lower interest rate. A credit score of 700 or higher is superb. Anything below about 680 raises red flags. If your credit rating dips below 700, take steps to improve it, such as the following l Dispute any erroneous items on your credit report. Most...

Thoroughly Screen All Tenant Applicants

You must thoroughly screen all tenant applicants uniformly in order to avoid renting to immature, uncivilized, financially irresponsible, and managementintensive people, better known as tenants from hell The best way to weed out potentially undesirable tenants is to check, verify, and evaluate their 1. Credit history. The best way to avoid unwittingly renting to professional deadbeats and career criminals is to obtain consumer and business credit and criminal background reports on all tenant applicants to check, verify, and evaluate their credit and criminal histories. Contact the following credit reporting agencies to obtain credit and criminal background reports on tenant applicants Equifax Credit Information Services www.equifax.com Trans Union, LLC www.transunion.com Experian Consumer Credit Services www.experian.com Dunn & Bradstreet Business Information Reports www.dnb.com Experian Business Profile Reports www.experian.com To help defray the cost of screening tenant...

Obtain a credit report

The first thing to do after reviewing the application is obtain a credit report. If the applicant doesn't pay her bills on time, you know they she not pay the rent on time. You can obtain credit reports online or by telephoning the companies directly and paying a fee. The following three major credit bureaus provide credit reports Experian www.experian.com Equifax www.equifax.com

The Role of Credit Rating

Whenever a company sells debt it should get its issue rated by a credit rating agency such as Standard & Poor's or Moody's. The issuer approaches the agency to rate its issue and update the rating throughout the life of the issue. For this service, the agency is paid a fee. The foundation of Credit Ratings was laid when Moody's introduced the first bond ratings as a part of Moody's Analyses of Rail Road Investments in 1909. Since then, Credit Ratings have blossomed into a full-blown business, providing investors with an impartial measure of an issuer's credit worthiness. Most financial institutions today have guidelines on investment based on the ratings issued by the major credit rating agencies. Standard & Poor's started operations in 1916. These two agencies have today come to be acknowledged as the two most influential agencies in the business. S& P was the first analytical organization to publish its ratings criteria and procedures and has been the pioneer in rating a...

Letting Others Borrow Your Credit

Partnerships can work out if one person puts up his or her credit to get financing and the other puts up cash, labor, or finds the good deals. If you're the person putting up the credit, be careful. Your credit is extremely important. It can be ruined if you're not in control of the deal. If you put up your credit on a deal, don't let someone else make your payments. Instead, make the payments yourself or set up an online payment system with your bank to make sure you can verify the payments are being made. Just being a few months late can result in a severe hit to your credit score, so make sure you have full access to your mortgage accounts to make sure they are being paid on time.

Improve Your Credit Score So You Can Buy Property More Easily

You must have a good credit score and if you don't, try to improve it. Lenders have been tightening their belts and being more restrictive about to whom they're willing to lend money. More than ever, a low credit score could cost you, even to the point of losing out on a great investment opportunity. To get traditional financing for a property, you must have a credit score of 680 or higher. To get the best rate on a mortgage, you need a score in the range of 780 to 820. A perfect score is 850, and that is an A++ credit rating. If your credit score is below 680, you're going to pay a higher interest rate on your mortgage, if you can get one. If you can boost your credit score, for example, from 660 to 740, you can lower your mortgage rate by a quarter of a point or more. Lenders are also getting very strict. No-document loans loans not backed up by income verification documents are out of the question if you decide to try bank financing, no matter what your credit score is. If your...

Default Rates 1921 Credit Ratings

A credit rating is an evaluation of creditworthiness issued by a rating agency. More technically, it has been defined by Moody's, a ratings agency, as an opinion of the future ability, legal obligation, and willingness of a bond issuer or other obligor to make full and timely payments on principal and interest due to investors. Table 19-1 presents the interpretation of various credit ratings issued by the two major rating agencies, Moody's and Standard and Poor's. These ratings correspond to long-term debt other ratings apply to short-term debt. Generally, the two agencies provide similar ratings for the same issuer. Table 19-1. Classification by Credit Ratings Table 19-1. Classification by Credit Ratings The agencies use a number of criteria to decide on the credit rating, among other accounting ratios. Table 19-2 presents median value for selected accounting ratios for industrial corporations. The first column (under leverage) shows that the ratio of total debt to total capital...

Bond ladders tax and creditworthiness the case of US municipal bonds

E Whether the municipal bond issue has call provisions which enable the issuer to repay the bond at par (or a specified premium to par) early. Whether the issuer chooses to exercise this option will depend on whether this would reduce the debt interest burden. Call provisions will undermine the usefulness of a bond as part of a ladder intended to secure future income, because the bond will be called when it suits the issuer, not the investor. Call provisions always undermine the interests of investors and provide a valuable option for the issuer, so a callable bond should offer investors a higher yield than a non-callable bond. e The creditworthiness of the municipal bond issue, as any issue which is less creditworthy than the US government should offer a premium yield on a strictly like-for-like comparison. There is a difference in the creditworthiness of the two main types of municipal bonds general obligation bonds and revenue bonds. General obligation bonds are backed by the full...

Your Credit Is Worth More Than Cash

Just because you put up credit and no cash does not mean you aren't at risk. Cash is easy to come by, but good credit takes years to build, and only months to ruin. As I write this book, an investor friend of mine (we'll call him Brian) recalls his first deal. Brian was a neophyte investor who was approached by an experienced investor with the following proposal You put up your credit to get the loan I'll put up the cash for the down payment. Brian bought the property with the investor in this manner, but Brian did not manage the property. Brian received a call from the lender a year later and was informed that the mortgage loan had not been paid in several months. Brian was unable to locate his partner who had apparently collected the rents and skipped town. The moral of this story Use your credit wisely cash can be recouped in a few months, but credit blemishes can take years to fix.

Corruption and Private Credit Rating Agencies

Private rating agencies, which need to maintain their reputation by making right calls, can be a positive force against corruption. Their term country risk refers to creditworthiness of sovereign governments who have a larger leeway in structuring debts and payment schedules than private businesses. However, global money traders (hot money transfer agents) gather background information from rating agencies (S& P and Moody's) regarding actual deficits in different countries. Since rating agencies can potentially negate domestic fiscal policies of sovereign countries, policy makers often resent the power of money traders and such rating agencies. On the other hand, this creates a balance of power and forces some fiscal discipline on various countries without involving the IMF. For example, Thailand took on debt to build super highways and was punished for it by declining Thai Baht. In short, the positive contribution We must also mention the negative role of hot money transfers when...

Credit Rating Agencies

A rating agency is one that evaluates the creditworthiness of an obligor and assigns a credit rating that publicly reflects its opinion. The rating assigned by the agency is a reflection of the agencies opinion regarding the borrowers creditworthiness arrived at from the public and private information available to it about the borrower and through its rigorous analytical work using this information. The higher the assigned rating, the higher the perceived quality and the lower the risk associated with the borrower similarly, the lower the assigned rating, the lower the perceived quality, and hence the higher the risk associated with the borrower. Rating agencies have been performing this function for over a century and the importance of their role and the influence of their opinion on the market has increased significantly during this time - on the one hand, their opinion influences the borrowers access to the market and the cost of their borrowing on the other, it influences which...

Bad Creditor Borrowing Games

It seemed to me that the customer was selling the deep call options on the conversion and collecting cash at an unattractive implied interest rate, so I asked, What does this customer do and how is his credit rating The student said, He has a company that is strapped to the gills with debt and he cannot borrow anymore from our bank. What has that got to do with a no-risk European-style conversion My reply was, There is your answer. The bank will not lend him another penny at even three times your rate, but you just lent him 30 million at a half of a percent over your rate. The student was flabbergasted. This

Know the Credit history of the Person to whom Youre Lending Money

It's surprising how many people don't check out the credit history of the people to whom they are lending money. To illustrate, here's an example of another investment It sounds like a good plan, right Unfortunately, this example is a horror story, not a success story. As we've said throughout this book, part of financing business notes is doing your due diligence, and one party in this deal failed to do his. In this case, Walter's due diligence consisted of making sure that Carl's auto repair shop really existed and taking a look at the lease that Carl had signed to occupy the business because he needed to make sure that the lease was valid and had plenty of time left on the remaining term. Walter also needed to know a little bit about the credit history of the borrower because that was vitally important in assessing whether this was a good deal. He also ran a Dun & Bradstreet background check on Carl's business, and he made sure that the Better Business Bureau didn't have any...

Find Property Where Your Credit Is Not in Question

I f you have followed this procedure and the result is that you really do have bad credit for valid reasons, all is not lost. The next part of the equation is to answer the question Can you meet the obligations to pay on a mortgage Your credit might be in the toilet because you refuse to pay on something you do not owe or feel you do not owe. However, until you remove the problem and get a proper resolution of the situation, your credit report is going to show that you have not met your financial obligations. Assume, then, that you are working on that problem, and in the meantime want to proceed to attempt to purchase real estate. The first step is to find a property where good credit is not the criteria you will have to meet. Where do you find this kind of property Just about everywhere. It is not the property that is going to check your credit it will be the seller or an existing mortgagee that would do that. Some sellers are so anxious to get rid of the property that the question...

Do Not Let Bad Credit Be an Anchor around Your Neck

There is nothing worse than living with bad credit. If you have it now, make yourself a promise that you will solve that problem as soon as you can. The quicker you can go from a negative to a positive, the better your chances for a future as a real estate investor. If you are truly up to your neck in debt, the best solution may be to talk to a good bankruptcy lawyer. This can help get you back on the positive side of your finances, and there is no negative stigma to bankruptcy. Some of the most wealthy real estate investors in America have found out that bankruptcy was their road to success.

FIGURE 206 KMVs EDF and Credit Rating

Figure 20-6 displays movements in EDFs and credit rating for Worldcom, using the same vertical scale. Worldcom went bankrupt on July 21, 2002. With 104 billion in assets, this was America's largest bankruptcy ever. The agency rating was BBB until April 2002. It gives no warning of the impending default. In contrast, starting one year before the default, the EDF starts to move up. In April, it reached 20 , presaging bankruptcy. Figure 20-6 displays movements in EDFs and credit rating for Worldcom, using the same vertical scale. Worldcom went bankrupt on July 21, 2002. With 104 billion in assets, this was America's largest bankruptcy ever. The agency rating was BBB until April 2002. It gives no warning of the impending default. In contrast, starting one year before the default, the EDF starts to move up. In April, it reached 20 , presaging bankruptcy.

Measuring the Distribution of Credit Losses

Chapter 18 gave an example of a loss distribution for a simple portfolio with three counterparties. This example was tractable as we could enumerate all possible states. In general, we need to consider many more credit events. We also need to account for movements and comovements in risk factors, which drive exposures, uncertain recovery rates, and correlations among defaults. This can only be done with the help of Monte Carlo simulations. Once this is performed for the whole portfolio, we obtain a distribution of credit losses on a target date. Figure 23-1 describes a typical distribution. FIGURE 23-1 Distribution of Credit Losses FIGURE 23-1 Distribution of Credit Losses The distribution of credit losses is highly skewed to the left, in contrast to that of market risk factors, which is in general roughly symmetrical. This distribution is actually similar to a short position in an option. This analogy is formalized in the Merton model, which equates a risky bond to a risk-free bond...

Credit Ratings

Credit ratings are just one of the benchmarks of banking and fund management industrial standards. They are a good attempt to protect against potentially wayward performance in the financial markets, but they represent only one technique. They provide a short single figure or code e.g. AA, B-. The research figures distilled into one succinct summary may be fine for a university, but it can be dangerous when looking deeply into market investments. Risk management systems embody the knowledge or assumptions of industrial best-practice norms that have been built up over the years. Thus, the up-to-date credit rating of counter-party firms are essentially a reactive move to risk-monitor companies, quite possibly using data that might be up to 12 months old. Also, bank decision makers may take the individual ratings and amalgamate them, thus losing data accuracy or granularity. This introduces risk of its own. See Table 6.2. There are real dangers about using credit ratings as a proxy for...

Check Your Credit

Everyone has the right to check his or her own credit report. In most states, you can do this relatively easily, and if you have just been turned down for something due to a bad credit report, you will be able to get a copy of that report free. The first step in this process is to ascertain if a credit report was actually obtained, and which company issued the report. You may be turned down for something without knowing that a credit report has been obtained. If you have applied for a job, a credit card, to buy something on time, to rent a car, apartment, furniture, a television set, or just about anything that will require you to meet some financial obligation, a credit report may have been obtained on you. I f you are told you cannot get the job, card, or rent something, ask why you are being turned down. If the answer is because we checked your credit, that may or may not be true. It is easy to say, Your credit is bad. In any event, ask which company issued the report because it is...

Your Credit Score

Your credit history is maintained primarily by three large companies, known as the credit bureaus Equifax, TransUnion, and Expe-rian (formerly TRW). Your credit report has headers that contain information about your addresses (every one they can find), phone numbers (even the unlisted ones), employer, Social Security number, aliases, and date of birth. This information is usually reported by banks and credit card companies that report to the credit bureaus (be careful about giving your unlisted address or phone number to your credit card company it may end up on your credit file). Some information comes from public records, such as court filings and property records. Your credit report also contains a history of nearly every charge card, loan, or other extension of credit that you ever had. It will show the type of loan (e.g., installment loan or revolving credit), the maximum you can borrow on the account, a history of payments, and the amount you currently owe. It will also show...

The Best Odds for Your Success

William Nickerson, author and rehab millionaire, began fixing rental houses over 50 years ago. Bill quite accurately concludes in his best-selling book, How I Turned 1,000 into Five Million in Real Estate in My Spare Time (revised, New York Simon and Schuster, 1980), The chances for success are 1,600 times better owning and operating rental properties than for starting another type of business. If you need more convincing, I suggest you write to Bank of America Business Services Dept. or Dun & Bradstreet Credit Rating Service, Inc. The information they provide about starting other businesses and the odds of success are quite gloomy by comparison.

Money Market Securities

Other Short-Term Instruments Although all short-term instruments are considered to have very low risk, they do tend to offer slight differences in returns according to the type and even specific institution that offers them. CDs (negotiable certificates of deposit) are time deposits with a bank. Bankers' acceptances are contracts by a bank to pay a specific sum of money on a particular date. Both instruments sell at rates which depend on the credit rating of the bank that backs them, although CDs are insured by the Federal Deposit Insurance Corporation up to a limit of 10,000. Eurodollar and Eurodollar CDs are dollar denominated deposits backed by a foreign bank or a European branch of an American bank. Because foreign banks are often subject to less regulation than U.S. banks, instruments issued by foreign banks usually carry larger interest payments than similar instruments issued by U.S. banks. Commercial paper is a short-term debt instrument issued by large well-known...

Must Dos That Will Speed Up Your Success

Most building supply stores will give you 10 discounts. It's not automatic you must ask for the discounts. Besides saving money, you build a solid credit history. Another benefit is you don't need to always have a pocket full of money. Paying monthly statements is better for bookkeeping.

Capital Market Securities

Fixed Income Securities Fixed income securities have a specified payment schedule. Most are traditional bonds and promise to pay specific amounts at specific times.2 Usually this is in the form of prespecified dates for the payment of interest and a specific date for the repayment of principal. In almost all cases, failure to meet any specific payment puts the bond into default with all remaining payments (missed interest plus principal) due immediately. Fixed income securities differ from each other in promised return because of differences which include the maturity of the bonds, the creditworthiness of the issuer, and the taxable status of the bond. We will start by examining the safest type of fixed income securities, those offered by the U.S. federal government.3

Asset Swaps Excluding Convertible Bonds

A corporate yield spread arbitrageur will value corporate bonds in a way that expresses this view. They will consider corporate bonds as a credit free debt instrument plus a default option which is priced at an appropriate spread over the risk free rate. Not only cash instruments will be considered for long and short positions but derivatives as well. These may be single credit reference entities or sub-indi-cies which are groups of credits. The single reference entities or credit default swaps allow the arbitrageur to purchase or sell the same credit considered in the cash markets but at perhaps a cheaper or richer price. (Below is a discussion of corporate bond basis trading, which describes the decision process by which an arbitrageur would prefer a cash or derivative instrument on the same credit.) The sub-indicies, which contain multiple names, are a subset of one of the broader indicies such as the CDX investment grade index. The sub-indicies allow for the broader hedging of a...

Depository Institutions

Depository institutions are financial intermediaries that accept deposits. They include commercial banks (or simply banks), savings and loan associations (S& Ls), savings banks, and credit unions. It is common to refer to depository institutions other than banks as thrifts. Depository institutions are highly regulated and supervised because of the important role that they play in the financial system.

Varieties Of Mortgage Loans

Since the loan was originated), loan-to-value (LTV) ratios, and borrower credit scores that are used to differentiate mortgages into more refined product types. These include, but are not limited to, property type (Single Family, Condo, or Multi-Family), occupancy (Owner-Occupied, Second-Home, or Investor), as well as geography. In particular, location of the residence also matters at the state and even county level as some regions have mortgage or property purchase taxes which may vary, and regions may experience varying degrees of home price appreciation. Such attributes contribute to different prepayment, and recovery behavior.

The buyandhold strategy versus active investing strategy

On the other hand, proponents of active trading reject the wisdom of a buy-and-hold strategy by citing numerous examples of once prestigious companies that now are forgotten, such as Zenith, Pan Am and Eastern Airlines. In fact, Eastern went from an AAA credit rating to default in approximately five years, the same period considered by many buy-and-hold strategists as optimal. Advocates of active trading also evaluate this strategy against the 1973-1974 bear market. The Nasdaq reached its high peak in 1972, went down by nearly 60 by September 1974, and never broke permanently off from that period until March 1980. What good did a buy-and-hold strategy do from December 1972 through March 1980, they ask This argument, however, could be considered naive, as the buy-and-hold strategy recommends diversifying away from securities when the

What Private Lending Isand What Its

In the old days, when businesses or individuals wanted to borrow money, they borrowed it from commercial banks or other traditional sources, such as credit unions or nonprofit financial institutions. The primary way people obtained loans was by borrowing money from a bank. Of course, some people also did crazy things, like racking up their credit cards all the way (which some people still do today) and paying those 18 to 20 percent interest rates every month on their minimum payments. Many people also refinanced their house and mortgage or got a line of credit against the refinancing on their house, so they would have the cash to do whatever they needed.

Varieties Of Mortgagebacked Securities

In the Non-Agency world, packages of loans are often structured so that the largest part of the cashflows carries an AAA credit rating. Credit subordination absorbs defaults up to a substantial, 'safe' level in order to receive an AAA rating from one or more of the bond rating agencies. The AAA bonds may have three or more levels of credit subordination (with the lowest level being unrated). Cashflows from the AAA part might then be structured along the lines of an Agency CMO in some of the ways previously discussed.

Analytic Methods And Models

Ture the evolving nature of the retail mortgage lending. New kinds of mortgages offer new temptations to borrowers, and technological improvements in processing mortgages continues to lower the cost of mortgage origination for mortgage bankers and innovations such as the internet are making it cheaper for borrowers to locate lower-cost mortgages than those typically offered by the neighborhood mortgage retailer. Although prepayment models are commonly calibrated to historical data using statistical techniques, prepayment analysts typically tune models to their views of how existing mortgages will respond to new mortgage products and how the changing cost of origination will influence future prepayments. The ability to adjust models to evolving views of the market is an important mortgage hedge fund management skill. Default and recovery models. To analyze mortgage credit risk, a wide variety of models have been created. Such models are at the core of the mortgage business for the bond...

The Impact of Interest Rates and Forex Movements

Following global interest rates is important to forex trading to gain insight about which countries' economies are performing better. When New Zealand increased its interest rates, the Australian dollar became weaker because money was getting a better return in New Zealand. The recent era of low rates during in the past few years has also had a profound impact on equity markets. The concept of the carry trade comes into effect. Because it is easy to borrow cheaply in currencies that have low interest rates, traders begin to borrow money in that currency and invest it elsewhere, hoping for a greater return. This is similar to borrowing on your credit card to invest in stocks. It is a highly leveraged investment and increases the volatility in the market

Yields on Money Market Instruments

Although most money market securities are of low risk, they are not risk-free. For example, as we noted earlier, the commercial paper market was rocked by the Penn Central bankruptcy, which precipitated a default on 82 million of commercial paper. Money market investors became more sensitive to creditworthiness after this episode, and the yield spread between low- and high-quality paper widened.

Know the Timing of the Transaction Better Than the Other Party Does

In negotiations with a loan officer, there are some important facts to know. These include the time periods for submission to loan committees, quotas that the loan officer has to meet, and other time traps that affect you in your need for money. For example, a 90-day delay while your credit is being checked, or the 90-day down time to have an appraisal made when you only have 60 days to meet some contract provision to keep your deal alive can be disastrous.

Filing for bankruptcy

Filing for bankruptcy sounds like a permanent solution to any significant financial predicament like foreclosure, but it's not the ideal solution. It destroys the homeowner's credit rating for seven years or so and doesn't exactly wipe all debt off the books. Bankruptcy simply relieves some of the debt burden and provides homeowners some extra time to restructure their remaining debt.

Small Deals Build Large Bank Accounts

This deal is just a plain and simple garden variety transaction. It's not very hard to do at all. If the seller accepts your offer, you will need 2,500 for materials, plus closing costs. Use your credit card or split the deal with a friend who has the money. You can do the fix-up labor yourself.

Positive Ways To Save

Many banks now will give you an ATM or debit card when you have a checking or savings account with them. This can be a helpful tool in addition to your credit cards. Because the card is directly tied to your bank account, your spending limit is the amount of money you have in the account. Many stores and restaurants accept these cards as if they were regular charge cards. They also function as debit cards at some stores, enabling you to get cash back if you are short on actual cash. For example, you spend 25.52 at a retail store. By using your ATM card as a debit card, you can increase that total amount to 40.52. You will then receive the other 15 from the cashier as cash. Be careful, though, that you don't spend so much that you deplete your bank account, and make sure you know what fraud protection comes with the card since policies aren't the same as credit cards. If you find that you can't seem to get out of the debt cycle, and you have equity in your home, consider taking out a...

Volume Of Investment Activity

The best way to eliminate fees of this type is by negotiating with your lender for a line of credit. A line of credit will provide you with a predetermined amount of money to draw against to finance not only the purchase of the houses, but also the repair work that will be needed as well. A line of credit is just like a credit card, but with a much higher limit. An investor can borrow as much as needed up to the predetermined credit limit. Since funds are borrowed only as they are needed, this helps to reduce the overall carrying costs the investor otherwise might incur.

Market Operations as a Business Endeavor

That ease of entry is not the case in any other form of business activity. Usually, if we are applying for a job, we have to demonstrate that we have the requisite experience or qualifications. Starting a new business is also an involved process. There are government regulations to follow, credit checks to make, leases for equipment and office space to sign, employees to hire, and customers to attract. By comparison, entry into a financial market is a stroll in the park.

Balance of Payments Theory

Fixed Income (Bond) Markets The effect the fixed income markets have on currencies is similar to that of the equity markets and is a result of capital movements. The investor's interest in the fixed income market depends on the company's specifics and credit rating, as well as on the general health of the economy and the country's interest rates. The movement of foreign capital into and out of fixed income markets leads to change in the demand and supply for currencies, hence impacting the currencies' exchange rates.

Example 35 Calculating a Mode

Table 3-11 gives the credit ratings on senior unsecured debt as of September 2002 of nine U.S. department stores rated by Moody's Investors Service. In descending order of credit quality (increasing expected probability of default), Moody's ratings are Aaa, Aal, Aa2, Aa3, Al, A2, A3, Baal, Baa2, Baa3, Bal, Ba2, Ba3, Bl, B2, B3, Caa, Ca, and C.18 Credit Rating 1. State the modal credit rating. 2. State the median credit rating. Solution to 1. The group of companies represents seven distinct credit ratings, ranging from A2 to B1. To make our task easy, we first organize the ratings into a frequency distribution. 18 For more information on credit risk and credit ratings, see Fabozzi (2004a). TABLE 3-12 Senior Unsecured Debt Ratings U.S. Department Stores, Distribution of Credit Ratings

You Do Not Need a Big Checkbook to Become an Option Investor

One of the main reasons real estate options appeal to so many people is that you do not need a six-figure income, a hefty bank account, an 850 FICO score. The term FICO refers to the name of the company, Fair Isaac Corporation, that developed the popular credit scoring model named FICO, and a lifetime employment contract in order to become an option investor. The fact of the matter is that buyers of options usually face very little financial scrutiny. For example, when buying an option, you almost always avoid having to pass any of the financial tests income, debt, and credit scoring that are such an integral part of the buying process. This is mainly because many property owners involved in an option transaction seem to focus only on the amount of the option fee they will receive from the deal and pay scant attention to the party buying the option. The only financial test that most people must pass when buying a real estate option is having the cash necessary to pay the option...

Use Fixed Rate Low Interest Lines of Unsecured Credit to Buy Options

Currently use two 40,000 lines of unsecured credit, which have fixed-interest rates of between 3.4 percent and 4.5 percent. I am able to obtain these low-rate lines of unsecured credit because I have zero consumer debt and a credit score in the top 5 percent. The real beauty in using unsecured lines of credit, instead of secured credit lines such as a home equity line of credit (HELOC), is that you do not have to put your home on the line and pay those exorbitant closing costs that lenders generally charge borrowers for the privilege of doing business with them. In fact, the most that I have ever had to pay when using an unsecured line of credit was a 50 transfer fee.

An Example of a Followon Offering

The bond offering process resembles the IPO process. The primary difference lies in (1) the focus of the prospectus (a prospectus for a bond offering will emphasize the company's stability and steady cash flow, whereas a stock prospectus will usually play up the company's growth and expansion opportunities), and (2) the importance of the bond's credit rating (the company will want to obtain a favorable credit rating from a debt rating agency like S& P or Moody's, with the help of the credit department of the investment bank issuing the bond the bank's credit department will negotiate with the rating agencies to obtain the best possible rating). As covered in Chapter 5, the better the credit rating - and therefore, the safer the bonds - the lower the interest rate the company must pay on the bonds to entice investors to buy the issue. Clearly, a firm issuing debt will want to have the highest possible bond rating, and hence pay a lower interest rate (or yield).

Promissory Note Is a Personal Obligation

Because promissory notes are personal obligations, the history of payments will appear on your credit file, even if the debt is used for investment. If you fail to pay on the note, your credit will be adversely affected, and you risk a lawsuit from the lender. Some notes are nonrecourse, that is, the lender cannot sue you personally. Although not always possible, you should try to make sure most of your debt is nonrecourse.

The Impact Of Economic Trends On The Accessibility Of Capital

Even as the government has increased appropriations for SBA loans with the Small Business Guaranteed Credit Enhancement Act of 1993, even as it has permitted a capital gains exclusion for certain small business stock investments with the Omnibus Budget Reconciliation Act of 1993 and the 2003 Tax Act, and even as it has eased the burden of financial institutions lending to small business with the Capital Availability Program, capital continues to shrink. Adding to this shrinkage has been the increased investment of financial institutions in government securities.

Where Can You Find Low DownPayment HighLTV Owner Occupied Mortgages

Everywhere Look through the yellow section of your telephone book under mortgages. Then start calling banks, savings institutions, mortgage bankers, mortgage brokers, and credit unions. Also, many mortgage lenders advertise in local daily newspapers.1 Check, too, with your state, county, or city departments of housing finance. Homebuilders and Realtors also will know various types of low- or nothing-down home finance programs. An hour or two on the telephone will turn up dozens of possibilities.

Cash Flow before Taxes

Cash flow is even more straightforward. As we suggested in the Introduction, think of it as your property's checkbook. It is everything that comes in, less everything that goes out. By starting with NOI, you have already accounted for all of the rent revenue, credit losses, and operating expenses. Where else do you spend or receive money

The Four Biggest Barriers to Traditional Investing

What does it mean to buy an investment property the traditional way You find a property, pay a substantial down payment, and finance the balance through a mortgage lender. Of course, to buy a property the traditional way, your lender is going to check three things. Do you have a down payment (for most investment properties you'll need 20 percent to 25 percent down) Do you have good credit And do you have a steady source of monthly income

Standards That Make A Loan Conventional

Other restrictions that affect you, as a borrower, are the percentage of loan-to-value ratio that the lender is allowed to lend. This percentage depends on the kind or category of loan and may vary between lenders. For example, most savings banks (both state and federal) are allowed to lend up to a set amount that is determined by a percentage of the appraised value of that property. But, and most important, most of these institutions have internal limits that they set on their own lending practices that generally limit those amounts to a lower amount. This may depend on the borrower's credit history and credit scores. There are many things you can do to improve your credit history. The most important of all is to simply pay off your obligations in full, or at least meet all your scheduled payments on time. Credit card debt is the major reason that people have a poor credit history, mainly because it is promptly reported by the credit card companies...

Tougher Credit Standards and Lower Cost Private Mortgage Insurers

Fannie Mae and Freddie Mac low-down-payment loans do apply tougher credit standards than either FHA or VA, but their loan limits reach substantially higher. Also, borrowers whose credit scores top 680 (possibly 620) will probably pay less for private mortgage insurance with these loan programs than they would with FHA. On the other hand, borrowers with FICO scores of less than 620 may find that FHA's mortgage insurance premiums (MIP) now fall below the premiums of the private insurers who guarantee Fannie Mae and Freddie Mac's low-down-payment mortgages (LTVs greater than 80

Institutional Lenders

Loans or thrifts, credit unions, mortgage banking companies, pension funds, and insurance companies. These lenders generally make loans based on the income and credit of the borrower, and they generally follow standard lending guidelines. Private lenders are individuals or small companies that do not have insured depositors and are generally not regulated by the federal government.

Assessing the Pros and Cons of Partnerships

Don't partner with someone who has little or no income, a poor credit rating, lousy cash flow, or is in a precarious financial position. Each of you should fully disclose up front your financial situation and how the money is to be handled.

Notes and Trust Deeds

Real estate investors who buy and sell trust deeds are also often interested in making private hard money loans (loans on top of the first mortgage made by a traditional lender) to property owners or other real estate investors. These hard money loans are secured by the owner's equity in the property and offer potentially favorable returns for the lender willing to make loans to borrowers that often have poor credit. Although your risk increases when the borrower has credit issues, the terms can be quite attractive typically above-market interest rates ranging from 10 to 15 percent, plus loan fees of 3 to 5 points (a point is 1 percent of the loan amount and is essentially prepaid interest), plus prepayment penalties that lock in the high interest rates or require a hefty payment for the privilege of refinancing.

Finding a Cash Stash Knowing Your Financing Options

I Conventional loans Money you qualify to borrow from a bank or other conventional lending institutions based on your income, net worth (the value of what you own minus the value of what you owe), and credit history. To find out more about conventional loans, check out Financing Your Venture with Conventional Loans, later in this chapter. i Credit card loans Some investors shore up their investments or pay for renovations using their credit cards. If you can flip the house quickly and pay off your credit card charges within a few months, this option isn't as risky as you may think. I discuss the credit card option later in this chapter in the section Maxing out your credit cards. i Real risky Burying yourself in credit card debt is risky, but it's often a viable option if you don't have the cash on hand to pay for repairs and renovations. Instead of letting the house just sit there, get the repairs and renovations completed, even if you have to use your credit card to pay for them,...

Sublease Options Appeal Mostly to Credit Challenged WouldBe Homebuyers

Another very good reason I am not a proponent of the sublease-option strategy is that, for the most part, the only people that sublease-options appeal to are credit-challenged, would-be homebuyers with a track record of being financially irresponsible. These are people who lack the income and creditworthiness required to obtain a mortgage or deed of trust loan in order to finance the purchase of a home. They are also the same type of people who require constant prodding in order to get them to take care of the property and pay their rent on time. The real problem with this class of tenant-buyers is that 9 out of 10 of them will never be able to exercise their option and actually buy the property. What generally happens in cases

On The Steadiness Of Trade In Countries Employing A Metallic Currency

Such being the theory of this branch of my subject, I have the satisfaction to state in regard to the practice under it, upon the testimony of a respectable American merchant, who resided and carried on extensive operations for near twenty years at Gibraltar, where there has never been any but a metallic currency, that he never knew during that whole period, such a thing as a general pressure for money. He has known individuals fail from incautious speculations, or indiscreet advances, or expensive living but he never saw a time that money was not readily obtainable, at the ordinary rate of interest, by any merchant in good credit. He assured me, that no such thing as a general rise or fall in the prices of commodities, or property was known there and that so satisfied were the inhabitants of the advantages they enjoyed from a metallic currency, although attended by the inconvenience of keeping in iron chests, and of counting large sums in Spanish dollars and doubloons. that several...

Consumer Installment Credit

The net change in consumer installment credit is reported by the Federal Reserve Board between five and six weeks after the end of the month. This series is based on data from monthly surveys from several sources commercial banks, finance companies, savings institutions, and credit unions. The figures are reported in current dollars and on a seasonally adjusted basis. Unadjusted data are also readily available. From one month to the next, consumer installment credit is revised substantially and the series also undergoes annual benchmark and seasonal adjustment revisions. Changes in credit outstanding are available by major credit type (revolving and nonrevolving), or by major credit holder (commercial banks, finance companies, credit unions, savings institutions, nonfinancial business, federal government and Sallie Mae, and pools of securitized assets). Table 3.4 shows the relative importance of each category. With the release of the August 2003 figures, the Federal Reserve Board...

Changes in forward and derivative trading

The 1988 Basel Accord on capital adequacy required that banks set aside sufficient capital to cover the risks they took in the marketplace. For various reasons, exchange-traded derivatives require less capital to be set aside. These include the fact that the counterparty to these transactions is a central clearer (with a AAA credit rating) and the fact that positions are traded on margin and then daily marked-to-market. Taken together, there is less settlement risk (since less capital is at risk) and less chance of a sudden large loss appearing.

Jays Income Property Analysis Form

Line No. 3-Uncollectable or Credit Losses. Allow a minimum of 5 of total gross income for this line. Generally it's more for rundown properties, like I purchase, because people problems are likely to be present with property problems. This line reflects losses from tenants who skip out without paying and evicted tenants who are forced to leave after a judgment. Chances of collecting any money from them are slim to none. It's difficult to argue against vacancies (Line 2) and credit losses (Line 3). That's because all rental properties have vacancies from time to time and tenants who don't pay rent for one reason or another. The combined total of 10 for both of these occurrences is not the least bit exaggerated. Some properties consistently operate at much higher losses. Uncollectable or Credit Losses (Rents due but not collected)

Value Added Real Estate

Typical tactics employed by value-added real estate managers include retenanting, recapitalization, repositioning or rehabilitation, redevelopment, and new development.3 The concept of retenanting a property has a focus on increasing occupancy and upgrading tenants, either in terms of the credit quality of the tenant pool or the pricing and length of the leases with tenants. Higher occupancy rates increase funds from operations and raise a property's overall appraised value. Higher-credit tenants, higher lease rates, and longer leases improve property cash flows and reduce risk, thereby raising the price that other operators are willing to pay for the facilities. Recapitalization of properties relates to reducing the interest rate on debt associated with a building, thereby increasing net funds from operations, or reducing the total amount of leverage on a property, thereby improving the equity value and credit rating of the property. Repositioning or rehabilitating properties include...

Opportunistic Real Estate

Examples of distressed sellers include the following a highly leveraged operating company that possesses a facility that has become distressed or is of marginal utility to the company in its ongoing business a real estate operating company that is in default to its lenders and is forced to sell properties into a weak market two companies that have merged and are forced to liquidate some properties in order to raise cash, eliminate redundancies in overlapping markets, or resolve antitrust concerns and a large company that has a strong credit rating and good financial flexibility but that owns a small property with significant distress, in which case the corporation may wish to liquidate the parcel perhaps at any cost in order to limit the risk of contingent liabilities spreading from the property to the corporation and jeopardizing its pristine financial condition.

Building relationships with lenders

One way to sabotage a relationship with a lender is to exaggerate or stretch the truth about your current financial situation or about the potential for your proposed property acquisition. Most lenders require supporting documents for your income and assets and will obtain a current credit report. When you don't oversell yourself or your proposed property, lenders are often more willing to work with you and even offer better terms.

Mechanics Of Interest Rate Swaps

We now give an example of how comparative advantages can lead to an interest rate swap.1 We suppose that two companies, A and B, both wish to borrow 10 million for 5 years and have been offered the rates shown in Table 5.1. We assume that company B wants to borrow at a fixed rate of interest, while company A wants to borrow floating funds at a rate linked to 6-month LIBOR. Company B clearly has a lower credit rating than company A since it pays a higher rate of interest than company A in both fixed and floating markets.

Benefits to Tenant Buyers an Eager Market

Qualifying for a lease option may be no more difficult than qualifying for a lease (sometimes easier). Generally, your credit and employment record need meet only minimum standards. Most property owners will not place your financial life under a magnifying glass as would a mortgage lender. 6. Reestablish credit. A lease option also can help you buy when you need time to build or reestablish a solid credit record. Judy and Paul Davis wanted to buy a home before prices or interest rates in their area rose above their reach. But the Davises needed time to clear up credit problems created by too much borrowing and Judy's layoff. The lease option proved to be the possibility that helped the Davises achieve their goal of home ownership.

Analysis of Growth Potential

Creditors also are interested in a firm's growth potential because the firm's future success is the major determinant of its ability to pay obligations, and the firm's future success is influenced by its growth. Some financial ratios used in credit analysis measure the book value of a firm's assets relative to its financial obligations, assuming the firm can sell these assets to pay off the loan in case of default. Selling assets in a forced liquidation will typically yield only about 10 to 15 cents on the dollar. currently, it is widely recognized that the more relevant analysis is the ability of the firm to pay off its obligations as an ongoing enterprise, and its growth potential indicates its future status as an ongoing enterprise. This analysis is also relevant if you are interested in changes of bond ratings.

Credit Health and Liquidity

The best way to understand a company's financial health is to project its cash flows and develop a financing plan for a number of cash-flow scenarios. As a first step, an analysis of historical performance provides some early insights. Since this book's focus is not credit analysis, we will just touch on some of the important measures we use to analyze financial health. Exhibit 9.9 shows an analysis of Hershey Foods' historical financial health.

No One Reports Too Much Income to the IRS

It's quite common for investment property owners to be overly optimistic about their net rental income numbers. For example, the income property analysis form (Fixer Jay's Six Ugly Houses, which follows at the end of this chapter) shows a total gross income of 2,100 per month. If the seller's tax return, Schedule E, shows property rents of only 20,000 for the taxable year, my question is What happened to the 5,200 My guess is vacancies and credit losses (deadbeat tenants). Obviously, transitioning properties might have gone through rent increases since the last tax filing however, that's fairly easy to determine.

Discovering Various Types of Brokerage Accounts

When you decide to start investing in the stock market, you have to somehow actually pay for the stocks you buy. Most brokerage firms offer investors several different types of accounts, each serving a different purpose. I present three of the most common types in the following sections. The basic difference boils down to how particular brokers view your creditworthiness when it comes to buying and selling securities. If your credit isn't great, your only choice is a cash account. If your credit is good, you can open either a cash account or a margin account. Once you qualify for a margin account, you can (with additional approval) upgrade it to do options trades.

Securities Regulations

Chapter VI sets forth regulations on securities companies. The requirements for setting up a securities firm are (1) Having a corporation constitution that meets the relevant laws and administrative regulations, (2) The major shareholders having the ability to make profits successively, enjoying good credit standing and having no irregular or rule-breaking record over the latest three years, and its net asset being no less than RMB 0.2 billion, (3) Having a registered capital that meets the provisions of the present Law, (4) The directors, supervisors, and senior managers thereof having the post-holding qualification and its practitioners having the qualification to engage in securities business, (5) Having a complete risk management system as well as an internal control system, (6) Having a qualified business place and facilities for operation, and (7) Meeting any other requirement as prescribed by laws and administrative regulations as well as the provisions of the securities...

Typical Negotiations Work Like This

That's a hard question for sellers to answer. They look at the property analysis form, then they stare at the 240 on line 14. They might mumble something like Maybe you won't have too many vacancies or credit losses. That would give you 10 more income or Perhaps you would consider giving up your 5 management fee. That's 105 per month or maybe even 15 for maintenance and repairs That really sounds too high.

An Application of Jump Processes Credit Derivatives

Credit derivatives are instruments sensitive to changes in either the credit quality of the issuer of an underlying security, or to so-called credit events affecting the issuer of the underlying security. Among the credit events that affect the quality of the issuer are defaults and changes in credit rating. In principle, a corporate bond can be viewed as a credit derivative much the same way a nondefaultable bond can be viewed as an interest rate derivative. The market has agreed to call credit derivatives instruments specifically designed to manage credit risk, either by mitigating the risk or by gaining exposure to credit risk.

Multifamily Mortgage Risk Sharing Programs Sections 542b and 542c

Section 542(c) enables HUD to carry out a program in conjunction with qualified state and local housing finance agencies (HFAs) to provide federal credit enhancement for loans for affordable multifamily housing through a system of risk- sharing agreements. Agreements provide for risk sharing between 10 percent and 90 percent.

Forgetting the myth of no money down

Getting in the door with good credit Don't underestimate the importance of establishing good credit, because the best returns on real estate rely upon the use of credit to obtain the leverage of using OPM (other people's money). Lenders, property sellers, potential partners, and so on all prefer to deal with you if you've established a reputation for paying your bills. Good to great credit is essential. Why pay more for money when you can show the ability to handle it properly and be rewarded with a lower price Both of us began building our credit through the responsible use of credit cards in our 20s (paying monthly bills in full), and to this day, our high FICO scores have allowed us to borrow at favorable rates and terms and save tens of thousands of dollars per year in financing costs. And that difference will sometimes enable you to make a deal work that otherwise won't. We cover the importance of good credit and ways to remove unsightly blemishes on your credit history that may...

Year Amortization versus 30Year Amortization

In general, 15-year loans tend to have a slightly lower interest rate. In addition, you reach your financial goal of free and clear faster. However, there are three downsides to the 15-year loan. The first is that you are obligated to a higher payment that reduces your cash flow. Second, the higher monthly obligation appears on your credit report, which affects your debt ratios and thus your ability to borrow more money (discussed later in this chapter). Third, your monthly payment is less interest and more principal. While this may sound like a good thing, it doesn't give you the same tax benefits interest payments are deductible, principal payments are not.

Determining the appropriate rental price

If you price the property too high, it will sit vacant and you will have a loss of income that you will never be able to recapture. Usually, you need to price your rental according to the current market. Tenants who are willing to pay an above-market rent for a property usually have bad credit or have been forced to move. Of course, if your market has more demand than supply, even with a high rent, you probably will receive several applications as bidding wars occur.

Convertible Bonds And The Outright Market

Issue more straight debt, which, whereas not dilutive, may have high current financing costs, depending upon interest rates and the company's credit rating. As companies within both of these sectors tend to have high cash requirements, raising capital via convertibles made sense. However, due to their rapid use of cash (or burn rates), their credit quality tends to be lower than for other sectors and, in many cases, these companies are practically startups with little operating history and no credit rating whatsoever. So only

Sell Unnecessary Assets

Your decision to sell wasteful assets becomes even more important when you're shelling out money for monthly payments. Possessions you finance not only eat up your cash, they also drag down your credit score and borrowing power. Get rid of those unnecessary assets now. The returns you earn over time will permit you to later replace them many times over. (Also, as I have noted, you may find that cutting back on your costly toys and material possessions actually leads you to a higher quality of life.)

Call Retail Finance Companies

Located in malls and shopping centers, these companies make high-risk loans to high-risk borrowers. Look them up in the Yellow Pages under finance companies. Some of their names are Associates, Beneficial, and American General. They make all kinds of loans, but also lend money to people who may not have perfect credit. Some will have local, regional, or national foreclosure centers where you can call about properties available. Often, they will sell them for the outstanding amount of the loan.

Myth 6 indexing is Only for Equities

Bond funds simply don't vary that much in return within their classes. Funds specializing in high-grade corporate bonds pretty much stick together, as do government-debt bonds and high-yield bonds (junk bonds). Credit rating agencies such as Mergent (formerly Moody's) and Standard & Poor's do a fairly good job on average of rating companies' risk of default. They fail to catch firms such as Enron who are less creditworthy than they seem, but by and large they prove a better bellwether of success than equity analysts' earnings estimates. This is no surprise since the credit rating agencies have fewer obvious conflicts of interest, as they do not offer investment banking services to the same firms they are rating. Also, their job is made easier by the fact that most bonds are sold by firms with a track record of free cash flow to investors seeking relative safety and generally modest returns. Either the interest payments (sometimes called coupons) are paid or they aren't, so analysis...

The Required Rate of Return for Debt Cost of Debt

The Cost of Debt and Non-Equity is the marginal return currently expected by the providers of that capital (i.e. based on current risk factors). The Cost of Debt, therefore, is the market required rate of return1 the yield for equivalent maturity government bonds (the risk free rate) plus a premium for the borrower's risk of default and other risks. If quoted debt securities are priced at par, the yield and Cost of Debt would equal the coupon rate. For bank loans and overdrafts, the effective cost will be the current required floating or fixed rate, unless the redemption amount is at a premium or discount to the nominal value of the debt (the IRR would need to be used). For private companies, the marginal medium to long term Cost of Debt could be estimated by assuming a given credit rating for the company and determining the implied Cost of Debt from quoted bond yields on similar rated debt.

Solving Potential Loan Predicaments

The best defense against loan rejection is avoiding it in the first place. To head off potential rejection, disclose anything that may cause a problem before you apply for the loan. For example, if you already know that your credit report indicates some late payments from when you were out of the country for an extended period or your family was in turmoil over a medical problem, write a letter to your lender that explains this situation. Or perhaps you're self-employed and your income from two years ago on your tax return was artificially much lower due to a special tax write-off. If that's the case, explain that in writing to the lender. Even if you're the ideal mortgage borrower in the eyes of every lender, you may encounter financing problems with some properties. And of course, not all real estate buyers have a perfect credit history, lots of spare cash, and no debt. If you're one of those borrowers who must jump through more hoops than others to get a loan, don't give up hope....

Sweat Equity Creating Value through Renovations

To enhance value through improvements and renovations, buy a fix-up property with 100 percent financing. Say you find a property that should sell (in tip-top condition) for around 300,000. Yet, because of its sorry state of repair as well as an eager seller, you can buy this property for 160,000 with short-term no-money-down owner financing. You then contribute your labor and buy 10,000 in materials with your credit card (or signature loan). Once you complete your work and bring the property up to its 300,000 market value, you arrange a 70 percent LTV mortgage with a lender. Then with the loan proceeds of 210,000, you pay off the seller and your credit card account. Voil you not only have achieved 100 percent financing for your acquisition price and expenses, you've created 130,000 of instant equity (wealth).

Setting Up in Hong Kong

Another option is to establish a branch in Hong Kong. Unlike a subsidiary, a branch leverages off the credit rating of the foreign company. One key difference between a branch and a subsidiary is the operating scope and tax treatment. The overseas company must submit to the Registrar of Companies the completed Form F1 (lists particulars of the company) and certified copies of incorporation, company's constitution, and account statements. The normal process takes 22 business days to process and issue a certificate of registration.

Embedded Options Within Convertible Bonds

However, arbitrageurs may also take directional bets by hedging either much heavier or much lighter on the shorting of stock. They may take event-oriented positions on distressed convertible securities by developing their understanding of a particular company through deep credit analysis. Some managers may also enter into private placement convertible opportunities, though these typically have a longer investment time horizon.

The Five Main Reasons Many Rental Properties Become Mismanaged

Lack of knowledge and professional property management skills necessary to screen and select qualified tenant applicants as customers This results in tenants who will not or cannot pay their rent on time and creates a negative cash flow, which the owner must subsidize from personal funds in order to keep the mortgage or deed of trust loan current.

The Development or Construction Loan Usually Relies on the Permanent End Loan

Any of these permanent loans are made by commercial banks, credit unions, insurance companies, REITs, pension funds, and other sources. These loans are the pay-off for the earlier development and construction loan. Although the borrower may have a commitment for the end loan, it is not placed on the property until construction is completed.

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Credit Score Booster

Credit Score Booster

There are many misconceptions about credit scores out there. There are customers who believe that they don’t have a credit score and many customers who think that their credit scores just don’t really matter. These sorts of misconceptions can hurt your chances at some jobs, at good interest rates, and even your chances of getting some apartments.

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