Surviving the Bank Crisis

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Byline: Linda Stern

Last week’s banking news–the federal government stepped in to shore up mortgage-buying giants Freddie Mac and Fannie Mae and to take over the bad-loan dependent IndyMac Bank–left many consumers in a panic. But some experts see the intervention as an opportunity for folks to get their finances in order. “This is all good news for consumers,” says Kathleen Day of the Center for Responsible Lending, a Washington policy group. Here’s what the events mean for you.

* Mortgage shoppers: Last week’s actions may ease the supply of mortgage money, but qualifying for those loans remains a challenge. “The traffic has picked up, but only about half the people coming in are qualifying for a loan and having enough money to do the transaction,” says Marc Savitt, a mortgage broker from Martinsburg, W.Va., and president of the mortgage brokers’ trade group. At issue are higher fees and borrowing standards for anyone with credit scores below 680, a level that used to be high enough during the loan-pushing bubble. You’ll need to prove your salary and have enough cash in the bank to make a down payment as high as 20 percent. Start by checking your credit score at myfico.com, and do what you can to raise your score over 700 so you can get lower rates. Paying down some balances in a hurry or even raising your borrowing limits can sometimes bump up your score. Then cast a wide net for a lender that will give you the deal you like. “There are huge disparities on pricing from one side of town to the other,” reports Keith Gumbinger of research firm HSH Associates. “You can find pricing down in the 6 [percent range] and others up in the 8’s in the same city.” Check rates with a couple of local brokers, a national mortgage bank and at online sites like hsh.com. But don’t wait too long; interest rates are likely to rise.

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* Mortgage sufferers: If you’re already in a mortgage that’s causing you problems, this might be a golden opportunity for a refinance. Folks who have been making timely payments on subprime loans for two years or more could qualify for a more stable, lower-cost loan. If you’re in over your head, don’t wait for more trouble. Find a nonprofit housing counselor at the Housing and Urban Development Web site (hud.gov), or find an attorney who specializes in defending against foreclosure at the National Association of Consumer Advocates (naca.net). They may be able to negotiate a revision to your mortgage contract while the bank that holds it is facing its own problems and doesn’t want to foreclose.

* House hunters: First-time home buyers may be sitting pretty. Most housing markets are awash in inventory, interest rates remain low and they can take their own sweet time to shop for the best combination of price and loan. Use that time to build that down payment, and to ask all of those questions about the roof and the heating system that bubble-era buyers never had time to tackle.

* Savers: If you’ve just been minding your own business, making your mortgage payments on time and putting money in the bank for a rainy day, you should take some steps to protect yourself, too. Keep good records of the mortgage payments you’ve been making. Mortgage-servicing firms who get into trouble could get sloppy about recording your checks, and that would be bad.

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Bank savers need not panic: the Federal Deposit Insurance Corp. has been bending over backward to reassure depositors that IndyMac was an anomaly. Nonetheless, depositors who had uninsured money at the bank were getting 50 cents on the dollar last week, so it would be foolhardy to leave more than the insured amount in any one bank (all branches of a bank count as the same bank). That means $100,000 in coverage per individual, $250,000 for a retirement account and an additional $100,000 for each individual in a joint account. Cumulatively, that means as much as $450,000 per person in each bank. Any more than that, and you should consider investing it on Wall Street, where analysts say there are deals to be had in mortgage-backed securities and bank stocks. At least until that other shoe goes kerplunk.