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Why Shares of Home Loan Servicing Solutions Gapped Up

Although we don’t believe in timing the market or panicking over market movements, we do like to keep an eye on big changes — just in case they’re material to our investing thesis.

What : Shares of Home Loan Servicing Solutions rose as much as 11% after the company announced that it has agreed to be acquired by New Residential Investment for $18.25 per share in an all-cash deal that values the company at $1.3 billion.

So what : The acquisition price represents a meager 9% premium over Friday’s closing price and is 28% below the stock’s July 2013 all-time high. Note that shares of New Residential are up almost as much as those of Home Loan Servicing today, which suggests the market believes the acquirer is capturing a significant value in the transaction.

Indeed, based on the daily price chart I’m looking at, it appears Home Loan Servicing Solutions ;shares have been trading at or above New Residential’s offer price since shortly after 10 a.m. EST. That suggests that the market might expect some (but not much) improvement on the offer.

However, the statement from Home Loan Servicing Solutions ;CEO John Van Vlack suggests that he didn’t enter negotiations with tremendous bargaining power or ambitions [my emphasis]: “I am pleased that this transaction offers our investors cash equivalent to the book value of their shares and addresses the uncertainty associated with our future financing obligations.” Getting paid book value is something to celebrate?

Now what : For investors who didn’t already own shares of Home Loan Servicing Solutions, I wouldn’t recommend buying them now — merger arbitrage (i.e., betting on the completion of announced transactions) is not an arena for individual investors. For existing shareholders, it might be worth hanging on to the shares for a couple weeks to see if a raised offer or new bidder emerges. Beyond that, it’s probably time to sell and move on the next opportunity. New Residential’s acquisition of Home Loan Servicing Solutions is expected to close in the second quarter.

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The article Why Shares of Home Loan Servicing Solutions Gapped Up originally appeared on Fool.com.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 – 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

[…]

Will Fannie Mae and Freddie Mac’s Low Down Payment Loans Cause Another Housing Collapse?

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Fannie Mae and Freddie Mac both recently introduced programs to clearly define their lending standards and give homebuyers loans with as little as 3% down. This has prompted criticism from many people as to the safety and responsibility of this type of loan. After all, didn’t the abundant availability of low down payment loans contribute to the housing collapse?

While that’s definitely been true in the past, things are a little different this time around. There is a right way and a wrong way to let people become homeowners without a lot of cash up front, and it looks like Fannie and Freddie are getting it right this time.

The new loan programs
Fannie Mae’s 3% down loan program is available right now, and is limited to first-time homebuyers, which are defined as anyone who has not owned a home in the past three years. And even if a borrower does not meet the “first-time” standard, a conventional mortgage can be obtained with as little as 5% down.

Freddie Mac’s 3% down program is called Home Possible Advantage, and will be available for settlement dates on or after March 23. Unlike Fannie Mae’s program, the Home Possible Advantage loan program is not limited to first-time buyers.

Both programs limit the low down payment options to single-unit primary homes. So, investment properties, second homes, and properties such as duplexes are disqualified.

What’s different this time around?
Low down payments all by themselves aren’t necessarily a bad thing, if used correctly. And Fannie and Freddie are taking steps to make sure things are different this time around.

One big difference is that the low down payment loans are limited to standard (up to 30-year) fixed-rate mortgages. The “exotic” loan options that used to be widely available with little or no money down, such as interest-only and negative amortization loans, are a thing of the past. And adjustable-rate loans are not eligible for this option, to prevent cash-strapped borrowers from finding themselves in over their heads when the interest rate jumps.

The level of documentation required is another big difference from the housing collapse. Prospective homebuyers are now expected to be able to document every detail of their financial situation. In fact, it’s not uncommon for a mortgage application packet to consist of more than 100 pages of various income, employment, and financial documentation.

And finally, credit standards have relaxed in recent years but are still much higher than they ever were in the years leading up to the collapse. This is especially true for low down payment loans. According to Fannie Mae’s loan-eligibility matrix , a borrower needs a minimum credit score of 680 in order to qualify for a down payment of less than 25%, which is significantly higher than the 620 required for loans with higher down payments.

In a nutshell, the difference is that even though you can once again buy a home with a low down payment, borrowers are being held to a higher standard in order to do so.

If you want to become a homeowner
If you’re a renter and have been thinking of taking the plunge into homeownership, this could be the opportunity you were waiting for. In order to make the process go smoothly, there are a few things that you should do before applying for a loan.

For starters, you need to know where you stand credit-wise since the new loan programs require reasonably good credit. And, if your score is a little bit low, here are some suggestions on how to improve it . And, you should know exactly what to expect throughout the mortgage process and what lenders are looking for. You’ll not only need credit, but enough income to justify the loan, a solid employment history, and the ability to document your savings and other financial assets.

It could be a good catalyst for housing in 2015
Along with the already popular FHA loan options, there are now plenty of ways for people to become homeowners without large amounts of money down. And the new programs prompted the FHA to significantly lower its mortgage insurance premiums in order to remain a competitive loan option.

These loans seem to me to be less likely to contribute to another housing collapse, and could actually do a lot of good for the housing market. First-time homebuyers currently make up a much lower share of the market than they have historically, and if these new programs are successful, an influx of first-time buyers could go a long way toward a healthy U.S. housing market.

Bank of America + Apple? This device makes it possible.
Apple recently recruited a secret-development “dream team” to guarantee its newest smart device was kept hidden from the public for as long as possible. ;But the secret is out , and some early viewers are claiming it’s ;destined to change everything from banking to health care. In fact, ;ABI Research ;predicts 485 million of this type of device will be sold per year. But one small company makes ;Apple’s ;gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple’s newest smart gizmo, just click here !

The article Will Fannie Mae and Freddie Mac’s Low Down Payment Loans Cause Another Housing Collapse? originally appeared on Fool.com.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 – 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

[…]

1 Alarming Financial Trend in America

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According to a report by the Federal Reserve, there are many positive trends in personal finance in America. In general, people are borrowing less and saving more, which is definitely a positive sign that we learned a lesson from the financial crisis.

Source: Wikipedia .

However, I saw one statistic that is rather troubling. Over the past several years, the percentage of Americans who use payday loans has risen significantly. Just how many people use these dangerous loans, and what makes them so bad?

What exactly is a “payday loan”?
The name is somewhat misleading, because these loans don’t necessarily need to be linked to the borrower’s payday. The term “payday loan” refers to a relatively small, short-term, unsecured loan, and is sometimes also referred to as a cash advance loan or payday advance.

There is typically no credit or background check required, just a verification of employment and a bank account. In the traditional payday lending model, the borrower writes a postdated check to the lender for the full amount of the loan. The borrower is expected to repay the loan in person, or else the lender can redeem the check.

In recent years, the concept of an online payday loan has grown in popularity, which could explain some of the recent surge in payday lending. The borrower applies online, and then receives funds via direct deposit, and the funds (plus any interest and fees) are withdrawn on the agreed-upon date.

Growing in popularity
According to the latest Survey of Consumer Finances ;(link opens a PDF) from the Federal Reserve Board of Governors, the percentage of Americans who have taken out a payday loan over the previous year nearly doubled from 2.4% in 2007 to4.2% in 2013.

Although this is still a low percentage on an absolute basis, it’s way too much. Quite frankly, no one should take out a payday loan unless it is a last resort.

The alarmingly high cost of payday lending
Now, the concept of a payday loan isn’t necessarily a bad one. After all, sometimes people need to pay for things a few days before their next paycheck arrives. The problem is how much some payday lenders will charge their customers.

Due to the short time frames involved, the real cost of these fees is somewhat hidden. Let’s say you take out a $500 payday loan to be paid back in two weeks (14 days). If your lender charges a $60 fee for the loan, which is actually on the low end, it equates to 12% of the principal amount. On an annualized basis, this is an interest rate of more than 300%.

In other words, if you get a new payday loan for $500 every two weeks for a year, you’ll pay more than $1,560 in just interest, even though you will never owe more than $500.

So it’s no wonder that payday lending is illegal (or severely limited) in many places throughout the U.S. In fact, 18 states have either banned,or severely limited, the amount of interest that payday lenders are allowed to charge . In an extreme example, payday lending is specifically forbidden in Georgia and is actually a violation of racketeering laws. New York and New Jersey prohibit payday loans as well.

Other states still allow payday loans, but with specific terms. For instance, Oregon permits payday loans with a one-month minimum term and a 36% maximum annual interest rate, plus a $10 fee per $100 borrowed.

However, the other 32 states have all passed legislation authorizing payday lending with absurdly high interest rates. For example, Florida allows a 419% APR on a 14-day loan. Alaska is even worse, as borrowers can expect to pay an annual rate of 520%. And Louisiana allows for interest charges and fees that combine to produce a staggering 780% APR.

Avoid at all costs
Payday loans are about the worst place you could turn for your borrowing needs, aside from actually going to a loan shark or engaging in some other illegal activity. It’s alarming that so many Americans turn to this kind of loan when they need some quick cash.

Bank loans, borrowing from friends and relatives, and even running up your credit cards are all better alternatives. Avoid these loans and their ridiculously high expenses at all costs, and over the long run you’ll keep a lot more money in your pocket.

Invest smart, and you’ll never need to use a payday loan
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The article 1 Alarming Financial Trend in America originally appeared on Fool.com.

Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 – 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

[…]

Bad Credit? No Problem. Here's How to Get a Home Loan

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Image Source: Images Money

You’ve found the house . You have the savings for a down payment and the cash flow in your budget to afford the payments. Everything is great, except for one thing: Your credit score is bad. Is this a death knell for your home purchase?

Maybe. But then again, maybe not. Here are the best strategies and tactics you can follow to overcome that credit score and buy the house in spite of it.

What is a bad credit score?
Generally speaking, credit scores break down as follows:

760+ Excellent 710-760 Good 650-709 Average 620-649 Below Average Below 620 Poor

There are tons of different reasons a credit score could fall; however, moving into that below average or poor range takes a pretty serious event like several missed payments, bankruptcies, foreclosures, or collection accounts. But don’t worry… life happens to even the best people, and a missed payment in the past is not the end of your home buying journey.

A bad credit score simply indicates to a bank that you’ve had trouble repaying debts in the past. To overcome that history, you must take extra steps to prove to the bank that history won’t repeat itself. To do this, you must think like a bank.

How to think like a bank
Banks care first and foremost about getting repaid. That means you must prove to the bank that the loan will be repaid. Remember, as we work through these concepts, you probably won’t have every “i” dotted and “t” crossed. That’s OK. At the end, we will bring it all together with a solution for the worst-case scenario.

Question 1 : How are you going to repay the loan?
Typically, the answer to this question is through your monthly cash flow. This is the income from your job after you subtract your living expenses like food, water, electricity, debt, etc. Banks use a ratio called the debt-to-income ratio to determine if your monthly cash flow is sufficient to afford the debt. The ratio is calculated by dividing your total monthly debt payments into your total monthly income (before taxes).

Image Source: Images Money .

For borrowers with good credit, a 40%-50% debt-to-income ratio is typically enough to qualify for the loan. For those with credit problems, this ratio needs to be much less.

Question 2 : If that doesn’t work out, what is the backup plan?
What happens if you lose your job? That could be the reason your credit score isn’t the best in the first place. The reality is that this can happen and, when it does, both bank and borrower feel the financial pressure. That’s why banks always look for a backup plan.

Do you have any savings or cash hidden under the mattress? Banks will want to see enough savings to cover your living expenses and debt payments for at least six months. The more savings, the better.

Image Source: Images Money

It gives the bank comfort that, if something goes wrong, you, your family, and the bank will all be financially stable until you can find another income source.

Question 3: What happens if your backup plan fails?
It may seem like overkill, but banks want a backup plan for the backup plan. When all else fails, the bank wants to make sure that if the house must be sold, the loan will be repaid. Unfortunately, this often means foreclosure.

To you, that means a bigger down payment. By putting in more of your money up front, it creates breathing room for the loan if it must be sold quickly. If a conventional mortgage requires a 20% down payment, try to put down 30%, 40%, or more.

You may be thinking, “Why should my family put in more money now just so the bank won’t lose money later?” Well, if you don’t do this, you most likely won’t get the loan. And if you accept the loan, you’re giving your word that you’ll repay the debt. As long as you pay the monthly payments as you’ve agreed to do, you have nothing to worry about.

Putting down a bigger down payment will benefit you by lowering the monthly payment, as well, making it less likely that you’ll ever be in the worst-case scenario in the first place. Even further, it gives you more leeway to sell the house yourself prior to foreclosure, saving your credit score from further damage in the future.

Again, the idea with all of these considerations is that, because your credit score is low, you need to prove beyond a shadow of a doubt that you can and will repay the loan.

The worst-case scenario
What if you’ve worked hard, saved up, dotted your “i’s” and crossed your “t’s,” but the bank still won’t approve your loan? You have the cash flow, the savings, and the down payment, but you still get declined for a conventional mortgage?

At this point, it’s time to look at subprime options. Subprime is a kind of dirty word in the post-financial crisis world; but that doesn’t mean it’s not a viable solution for many families.

Image Source: Images Money

With a subprime loan, the specialized banks and lenders mitigate the perceived risks of a loan by charging a substantially higher interest rate. They lower their lending standards so that you can get the money you need. The higher interest rate is, in essence, the bank charging more for lowering those standards.

The subprime loan will be much more expensive, but at least you’re able to get the financing you need to buy the home. Over time, as your credit score improves, you should be able to refinance that subprime loan into a conventional loan with a better rate.

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The article Bad Credit? No Problem. Here’s How to Get a Home Loan originally appeared on Fool.com.

Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 – 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

[…]

Why You Should Avoid Payday Loans

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Payday loans have become a life-line for many American families strapped for cash. Payday loans are basically high-interest, high-risk, short-term loans largely made to sub-prime borrowers who don’t have any other means of obtaining much needed funds.

According to research figures released by the Pew Charitable Trust in 2012, 12 million American adults depended on payday loans in 2010 to make ends meet while figures will most certainly have further risen until 2014.

In 2010, the average borrower took out eight loans per year with a loan size of $375 each and paid a whopping $520 on interest.

Payday loan companies providers clearly take advantage of cash-hungry, vulnerable consumers who need quick cash and are desperate enough to turn to these financing companies.

Source: Wikimedia Commons

While it is widely accepted in American society to take on consumer debt, payday loans should clearly be the absolutely last solution for people who need a short-term cash influx.

Payday loans are usually available on the spot, but they pose the very real danger of creating a dependency that could lead to a devastating debt spiral. So when you think about taking out a payday loan, you better understand very well what you are getting into.

The dangers of easy cash
The popularity of payday loans can largely be explained by how easy it is to obtain them. All you have to do is fill out on application, possibly on the Internet, agree to the lending terms and you get your cash fairly quickly.

Unfortunately, the availability of easy cash can seduce consumers and encourage them to adopt unhealthy spending habits.

Of course, there might be situations in which a short-term cash infusion will help you with an emergency such as paying for a car repair or a medical bill.

However, be aware that payday loans can push you in a debt spiral in which you are required to roll over one payday loan into the next one, with little hope of breaking the cycle.

Excessive interest rates
Make sure you understand, that payday loans are very short-term loans that need to be paid back in full plus sizable interest and fee components.

Annualized interest rates (also called annual percentage rates, or APRs) can be as much as a couple of hundred percent according to information from the Consumer Financial Protection Bureau and it is not unusual for borrowers to pay back a total of interest and fees that exceeds the amount borrowed.

If you take out a payday loan, be prepared to pay 100% or more of your requested loan size in interests and fees. There is a reason why payday loan companies can be compared to loan sharking operations.

Payday loans as a last resort
Given the excessive interest rates and fees being charged, payday loans clearly should be avoided at all costs. If you have any other chance of making up for your cash shortfall, by all means use it.

Do not use payday loans to finance purchases of consumption goods and resist the urge of taking advantage of easy credit. You will pay dearly.

The Foolish Bottom Line
Payday loans should be the absolutely last resort if you are strapped for cash. You are well advised to tap all other possible funding sources first and avoid payday loans like the plague.

The easy availability of fast credit also poses a significant risk of creating a short-term debt dependency in which consumers roll over their expensive payday loans into new loans on a consistent basis.

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The article Why You Should Avoid Payday Loans originally appeared on Fool.com.

Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 – 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

[…]