I like to read and learn, but don't seem to get an
opportunity to finish as many books as I would
like.
Looking around my office, there are probably
20-30 books that I want to read and other things
have jumped in the way.
Here are a couple of titles that I have read recently:
The Trick to Money Is Having Some by Stuart Wilde.
I found this book to be very liberating, despite its
puzzling title.
I think it is almost universally true that most people
would like to have more money. But, despite all the
opportunities that we have in this country to succeed
economically, many of us have fallen in the trap of
thinking that we cannot do it.
Wilde helps outline how to acquire an "abundance
mentality" and to visualize success occurring for
yourself. And to understand that many of the
limitations that you face are self-imposed.
He espouses acquiring more money in a balanced
way - he does not want it to be an all-consuming
desire. He does want you to focus on making
money as a way to measure your contribution
and value to others, and not just accept praise
and meaningless titles instead.
There were a few concepts that I would not
accept without question, but it didn't diminish
my enjoyment of the book or acceptance of
those ideas that I think have validity.
I would certainly recommend this book as a
vehicle to help you get a better idea of how
you can expand your thoughts to bring more
money into your life with integrity.
The Big Short, Inside the Doomsday Machine,
by Michael Lewis.
I wrote about this earlier in the year, but it is
worth mentioning again.
If you want to have a better understanding
of how the mortgage market collapsed several
years ago, Lewis' book helps explain the mechanics
behind it, and some of the major players who
participated.
Even being in the business for over 33 years, I
learned a lot about what happened with the
lenders, the investors, the bond traders, and the
manipulations that occurred.
I learned more how credit default swaps and
collateralized debt obligations worked. How
loans were packaged into tranches and received
ratings that were more optimistic than they
should have been.
It is well-written, and the story is told through
several major characters that allow the details
of complex transactions to flow through the
narrative.
It is a good read if you have an interest in how
we got in this situation.
Blindside, by Michael Lewis.
I like Michael Lewis, and have probably read
about 7 of his books.
There is a good chance that you saw the movie
starring Sandra Bullock. As good as that movie
was, I think the book was better. (I am probably
prejudiced toward books because they supply
such a richness of detail that the movie can't go
into).
In case you don't know the story, it centers
around Michael Oher, deprived of a normal
upbringing, encountering continual challenges,
and who tries to hide from everyone.
The thing is, he is huge, and despite his size,
he is incredibly athletic and agile. He really
can't hide.
He doesn't do well in school, doesn't communicate
well (or at all), sleeps wherever he can, eats what
he can and drifts through his days.
The Twohey family makes a decision to help him.
And beyond that, they demonstrate the depth of
their faith by bringing him into their home and
treating him like a son.
There is no question in my mind that they did this
out of the goodness of their hearts, but there was
an element of their generosity that paid off for their
school and their college alma mater. Michael Oher
was a tremendous left tackle in football and helped
his teams succeed and has become an NFL player
with the Baltimore Ravens.
It is a very uplifting story, and appeals to that part
of all of us who know we could do more to help
others in need.
The E-Myth Revisited by Michael Gerber.
This has been on my list for a long time, and I am
almost finished reading it.
It is a fascinating dissection of how small businesses
work - or don't work!
Most small businesses start because someone is
good at doing something. They understand that
there is an opportunity to make more of that talent
for themselves, instead of working for someone
else.
But just because someone is a good Technician
does not mean that they know how to run a
successful business. Gerber points out that two
other parts of their personality - the Entrepreneur
and the Manager - have to have their say in making
the business work.
It is that blending of the three facets of the person-
ality that has to come together in balance for the
business to succeed.
Gerber elaborates that the small business owner
has to get themselves out of the business. They
cannot continue to have everything revolve
around their efforts. They need to delegate, they
need to hire others, they need to put systems
in place and they need to think of their business
as an asset they are building for future sale.
I think it is important to learn from others, and
reading is one of the best ways to do that. We
cannot experience everything first-hand ourselves,
nor would we want to. I would much rather learn
from someone else's mistake than make the mistake
myself!
Please e-mail me back if you have some books
on your reading list that you have enjoyed or found
meaningful. I'd be interested in expanding my
book list!
Wednesday, December 15, 2010
Thursday, December 2, 2010
Plan Ahead - Avoid Disappointment
There are times when a real estate agent or a
borrower is in the middle of a transaction that
starts to unravel.
When it involves financing, I frequently get a
call to see if I can come up with a solution to
the problem that they are encountering.
Today I heard from a real estate agent who
described the following situation:
Purchase price was $2.0 million. The buyer
was putting $1.4 million as their down payment,
and wanted a new loan of $600,000. The
escrow was scheduled to close tomorrow, and
they just discovered that the lender they were
working with was only going to approve the
new loan at $500,000.
From what the agent was able to relate to me,
it apparently was because the borrower's debt-
to-income ratio was higher than the allowable
guidelines. The debt-to-income ratio is the
percentage of the borrower's monthly income
that is obligated by the new mortgage payment,
property taxes, insurance, and all other monthly
debts for things like car loans, personal loans, and
extended credit card payments.
As silly as it sounds, the lender put very little weight
on the fact that the borrower was putting 70% of
the purchase price as down payment, and only
wanted a loan of 30% of the value. Also, the agent
mentioned that the new house payments were
less than what the borrower was currently paying
in rent.
From a risk assessment standpoint, the lender
was in a very good position. They were asked to
make a very safe loan in relation to the value of
the property, the borrower had a credit history
that showed they could handle even higher
monthly obligations that what was proposed,
and they even had cash reserves beyond the
$1.4 million in down payment.
Many times we find that the underwriters get
paralyzed by the guidelines. There is a tendency
for them to be so absorbed in the details that
they no longer look at the big picture. And
their decisions don't seem to make much sense.
The agent was disappointed that such a solid
transaction was being disrupted at the last
minute.
In our discussion, I offered a couple of ideas
that I thought would allow him to keep his
transaction together with the existing lender.
Even though it was in my best interest to
get the opportunity to work with this client,
it was in the client's best interest to try to
keep the transaction together with the
existing lender and close quickly if possible.
Of course, I also offered to review a copy of
the clients loan package to see if I could place
the loan with one of my sources who could
meet the loan request of $600,000. I will
see if I can help them when I get the oppor-
tunity to look over their financial condition.
There is a lesson here for all prospective
purchasers.
Please get your paperwork into your lender
even before you go into contract on a property.
No matter how solid your loan request may
seem, (and I can't think of one more solid
than this one that the agent was asking me
about), things have changed in the lending
world.
Don't assume that everything will go well, and
give yourself the advantage of having your
loan pre-qualified or pre-approved before
negotiating on the home.
It is such an emotional upheaval to miss the
closing date after having your moving plans
all in place, and after the anticipation of getting
into your new home.
Plan ahead so that your transaction is not
delayed at the last minute.
borrower is in the middle of a transaction that
starts to unravel.
When it involves financing, I frequently get a
call to see if I can come up with a solution to
the problem that they are encountering.
Today I heard from a real estate agent who
described the following situation:
Purchase price was $2.0 million. The buyer
was putting $1.4 million as their down payment,
and wanted a new loan of $600,000. The
escrow was scheduled to close tomorrow, and
they just discovered that the lender they were
working with was only going to approve the
new loan at $500,000.
From what the agent was able to relate to me,
it apparently was because the borrower's debt-
to-income ratio was higher than the allowable
guidelines. The debt-to-income ratio is the
percentage of the borrower's monthly income
that is obligated by the new mortgage payment,
property taxes, insurance, and all other monthly
debts for things like car loans, personal loans, and
extended credit card payments.
As silly as it sounds, the lender put very little weight
on the fact that the borrower was putting 70% of
the purchase price as down payment, and only
wanted a loan of 30% of the value. Also, the agent
mentioned that the new house payments were
less than what the borrower was currently paying
in rent.
From a risk assessment standpoint, the lender
was in a very good position. They were asked to
make a very safe loan in relation to the value of
the property, the borrower had a credit history
that showed they could handle even higher
monthly obligations that what was proposed,
and they even had cash reserves beyond the
$1.4 million in down payment.
Many times we find that the underwriters get
paralyzed by the guidelines. There is a tendency
for them to be so absorbed in the details that
they no longer look at the big picture. And
their decisions don't seem to make much sense.
The agent was disappointed that such a solid
transaction was being disrupted at the last
minute.
In our discussion, I offered a couple of ideas
that I thought would allow him to keep his
transaction together with the existing lender.
Even though it was in my best interest to
get the opportunity to work with this client,
it was in the client's best interest to try to
keep the transaction together with the
existing lender and close quickly if possible.
Of course, I also offered to review a copy of
the clients loan package to see if I could place
the loan with one of my sources who could
meet the loan request of $600,000. I will
see if I can help them when I get the oppor-
tunity to look over their financial condition.
There is a lesson here for all prospective
purchasers.
Please get your paperwork into your lender
even before you go into contract on a property.
No matter how solid your loan request may
seem, (and I can't think of one more solid
than this one that the agent was asking me
about), things have changed in the lending
world.
Don't assume that everything will go well, and
give yourself the advantage of having your
loan pre-qualified or pre-approved before
negotiating on the home.
It is such an emotional upheaval to miss the
closing date after having your moving plans
all in place, and after the anticipation of getting
into your new home.
Plan ahead so that your transaction is not
delayed at the last minute.
Wednesday, November 17, 2010
Credit Scores To Be Revised Amid Soaring Mortgage Defaults
This is a reprint of an article by Kenneth Harney,
a columnist for the Washington Post Writers Group.
***
With foreclosures soaring - and some homeowners
with unblemished payment histories walking away
from their houses with no advance warning - the
two major producers of credit scores have begun
changing how they evaluate consumer risks of
default. The revisions could touch you the next
time you apply for a loan.
In late October, both FICO score developer Fair
Isaac and VantageScore Solutions, a joint venture
by the three national credit bureaus and marketer
of competing VantageScore, outlined modifications
they are making to handle the vast credit disrup-
tions caused by the housing bust, the recession,
high unemployment and behavioral changes.
Overall, credit industry experts agree, consumer
creditworthiness has deteriorated in the United
States since 2006 - especially among what used
to be considered the credit elite, people with the
highest scores.
For example, a study this year by VantageScore
found that the probability of serious delinquency
- defined as nonpayment for 90 days or more -
had increased by 417 percent among "super-
prime" borrowers between June 2007 and June
2009. Default risk during the same period rose
by 406 percent for the second-highest rated
category of "prime" consumers and nearly
doubled for those at the "near prime" scoring
level.
The driving force, said Sarah Davies, Vantage-
Score's senior vice president for analytics and
research, is the "significant change in consumer
credit repayment behavior" that began during
the housing bust and recession.
Not only are borrowers who previously were
rated outstanding credit risks far more likely
to default today, she said, but many home-
owners are defying longstanding credit industry
assumptions by going delinquent on their first
mortgage payments while simultaneously
continuing to pay their credit card balances
and second mortgages on time. Strategic
defaults - walkaways - by high score borrowers
also have been an unexpected and shocking
development, she said.
To adjust its statistical models to these new
realities, VantageScore says it conducted
extensive research on 45 million active credit
files obtained from the databases of its joint
venture partners, Equifax, Experian and
TransUnion.
The research examined the same files - with
personal identifiers removed - during set
time periods between 2006 and 2009 in order
to capture emerging behavioral patterns
associated with defaults on various types of
credit accounts.
The resulting VantageScore 2.0, which is
expected to be rolled out nationwide to lenders
in January, focuses in on the subtle warning
signs of credit stress that might have been
missed earlier - and penalizes or rewards
consumers with higher or lower risk scores
than they would have received before.
Joanne Gaskin, director of mortgage scoring
solutions for Fair Isaac, said her company's
new FICO 8 Mortgage Score is based on
similarly exhaustive research into consumer
credit-behavior changes over the past four
years. When used by a lender to rate the risk
of new applicants or existing mortgage customers,
Gaskin says the Mortgage Score is likely to be
anywhere from 15 percent to 25 percent more
accurate in detecting signs of future default,
compared with the standard FICO model.
Though she would not discuss proprietary
details about the early warning signs that the
new score monitors, Gaskin said they include
broad patterns such as the following: A borrower
with a current 720 FICO score might have average
balances on a first mortgage, home equity lines
and other accounts that are higher than norms
pinpointed by the revised scoring software. A 720
FICO is considered a good score by most mortgage
lenders - often qualifying for favorable rates and
terms.
However, the same applicant might rate just a
680 FICO or lower if the lender used the new
Mortgage Score. The lender would then have a
choice: reject the applicant, quote a higher interest
rate on the mortgage or require a larger down
payment.
Gaskin said the reverse could also occur: The FICO
8 Mortgage Score could come in higher than the
standard FICO - indicating lower risk for the future -
in situations in which formerly troubled borrowers
manage to put themselves back on a healthier credit
track.
Experts in the credit industry say the new scoring
efforts by Fair Isaac and VantageScore should prove
to be a net positive for the housing and the mortgage
industries if they can do what they claim: spot subtle
risk patterns and nascent hints of improvement.
But as a mortgage applicant you should know that
your next score might not look anything like the
score you thought you had. You might end up
getting a better deal - or worse - when lenders
quote you rates and terms.
a columnist for the Washington Post Writers Group.
***
With foreclosures soaring - and some homeowners
with unblemished payment histories walking away
from their houses with no advance warning - the
two major producers of credit scores have begun
changing how they evaluate consumer risks of
default. The revisions could touch you the next
time you apply for a loan.
In late October, both FICO score developer Fair
Isaac and VantageScore Solutions, a joint venture
by the three national credit bureaus and marketer
of competing VantageScore, outlined modifications
they are making to handle the vast credit disrup-
tions caused by the housing bust, the recession,
high unemployment and behavioral changes.
Overall, credit industry experts agree, consumer
creditworthiness has deteriorated in the United
States since 2006 - especially among what used
to be considered the credit elite, people with the
highest scores.
For example, a study this year by VantageScore
found that the probability of serious delinquency
- defined as nonpayment for 90 days or more -
had increased by 417 percent among "super-
prime" borrowers between June 2007 and June
2009. Default risk during the same period rose
by 406 percent for the second-highest rated
category of "prime" consumers and nearly
doubled for those at the "near prime" scoring
level.
The driving force, said Sarah Davies, Vantage-
Score's senior vice president for analytics and
research, is the "significant change in consumer
credit repayment behavior" that began during
the housing bust and recession.
Not only are borrowers who previously were
rated outstanding credit risks far more likely
to default today, she said, but many home-
owners are defying longstanding credit industry
assumptions by going delinquent on their first
mortgage payments while simultaneously
continuing to pay their credit card balances
and second mortgages on time. Strategic
defaults - walkaways - by high score borrowers
also have been an unexpected and shocking
development, she said.
To adjust its statistical models to these new
realities, VantageScore says it conducted
extensive research on 45 million active credit
files obtained from the databases of its joint
venture partners, Equifax, Experian and
TransUnion.
The research examined the same files - with
personal identifiers removed - during set
time periods between 2006 and 2009 in order
to capture emerging behavioral patterns
associated with defaults on various types of
credit accounts.
The resulting VantageScore 2.0, which is
expected to be rolled out nationwide to lenders
in January, focuses in on the subtle warning
signs of credit stress that might have been
missed earlier - and penalizes or rewards
consumers with higher or lower risk scores
than they would have received before.
Joanne Gaskin, director of mortgage scoring
solutions for Fair Isaac, said her company's
new FICO 8 Mortgage Score is based on
similarly exhaustive research into consumer
credit-behavior changes over the past four
years. When used by a lender to rate the risk
of new applicants or existing mortgage customers,
Gaskin says the Mortgage Score is likely to be
anywhere from 15 percent to 25 percent more
accurate in detecting signs of future default,
compared with the standard FICO model.
Though she would not discuss proprietary
details about the early warning signs that the
new score monitors, Gaskin said they include
broad patterns such as the following: A borrower
with a current 720 FICO score might have average
balances on a first mortgage, home equity lines
and other accounts that are higher than norms
pinpointed by the revised scoring software. A 720
FICO is considered a good score by most mortgage
lenders - often qualifying for favorable rates and
terms.
However, the same applicant might rate just a
680 FICO or lower if the lender used the new
Mortgage Score. The lender would then have a
choice: reject the applicant, quote a higher interest
rate on the mortgage or require a larger down
payment.
Gaskin said the reverse could also occur: The FICO
8 Mortgage Score could come in higher than the
standard FICO - indicating lower risk for the future -
in situations in which formerly troubled borrowers
manage to put themselves back on a healthier credit
track.
Experts in the credit industry say the new scoring
efforts by Fair Isaac and VantageScore should prove
to be a net positive for the housing and the mortgage
industries if they can do what they claim: spot subtle
risk patterns and nascent hints of improvement.
But as a mortgage applicant you should know that
your next score might not look anything like the
score you thought you had. You might end up
getting a better deal - or worse - when lenders
quote you rates and terms.
Wednesday, November 3, 2010
Glossary of Common Mortgage Terms
When you do research for a new home loan, it is not
uncommon to hear industry "shorthand" being used.
You may not always choose to have the person
explain the terms for fear of looking uninformed.
Here are some common acronyms and terms that
may help you better understand what you are
hearing.
APR The Annual Percentage Rate gives the
borrower a basis for comparing competing
interest rate and fee quotes by taking into
account the effect of the finance charges
expressed as an effective interest rate.
AUS An Automated Underwriting System is a
web-based program available to mortgage
lenders. With proper data input, it renders
an underwriting decision based on the
compatibility of the loan request to FNMA
and FHLMC guidelines.
CLTV Combined Loan to Value ratio is the
comparison of the loan amounts on the
first loan plus the second loan in relation to
the value of the home. For example, a first
loan amount of $300,000 combined with a
second loan amount of $100,000 on a
property valued at $500,000 represents a
CLTV of 80%.
FHA The Federal Housing Administration is part
of the Department of Housing and Urban
Development. FHA provides a system for
insurance of loans with lesser down payments.
FHLMC Known as "Freddie Mac", the Federal Home
Loan Mortgage Corporation was created in
1970 as a Government Sponsored Enterprise
to purchase loans from lenders and provide
liquidity to the mortgage market.
FICO FICO stands for Fair Isaac Corporation and
Scores has become the generic label applied to
credit scoring models. Through proprietary
modeling, each of the three repositories -
Experian, TransUnion and Equifax - produce
scores ranging from 300 to 850. Higher
scores are designed to be predictive of
more credit-worthy borrowers.
FNMA Known as "Fannie Mae", the Federal National
Mortgage Association was created in 1938 as
a Government Sponsored Enterprise to
purchase loans from lenders and provide
liquidity to the mortgage market.
GFE The Good Faith Estimate is a required
disclosure from lenders to the borrower, and
is to be provided within 3 business days from
receipt of a loan application. It's purpose is
to provide an estimate of fees and costs in
obtaining the home loan.
LTV Loan to Value ratio is the comparison of the
loan amount on the first loan in relation to the
value of the home. For example, a loan
amount of $400,000 on a property valued at
$500,000 represents an LTV of 80%.
Points A point equals 1 percent of the loan amount.
For example, on a loan amount of $200,000,
one point equals $2,000. When interest rates
are quoted there is often an origination fee
disclosed based on a certain number of points.
Pricing Refers to a combination of interest rate and
origination fee quoted on your transaction.
For example, you may hear pricing models
such as 4.5% with a loan fee of 1 point (see
above) or 4.75% with a loan fee of zero points.
TIL The Truth-In-Lending disclosure is designed
to show the borrower an effective interest
rate based on the combination of interest rate
and finance charges. The most significant part
of the disclosure is the Annual Percentate Rate.
VA The Home Loan Guaranty division of the
Department of Veterans Affairs guarantees
home loans to lenders for loans made to eligible
veterans. Loans made under this program often
allow the veteran to purchase a home with no
down payment.
uncommon to hear industry "shorthand" being used.
You may not always choose to have the person
explain the terms for fear of looking uninformed.
Here are some common acronyms and terms that
may help you better understand what you are
hearing.
APR The Annual Percentage Rate gives the
borrower a basis for comparing competing
interest rate and fee quotes by taking into
account the effect of the finance charges
expressed as an effective interest rate.
AUS An Automated Underwriting System is a
web-based program available to mortgage
lenders. With proper data input, it renders
an underwriting decision based on the
compatibility of the loan request to FNMA
and FHLMC guidelines.
CLTV Combined Loan to Value ratio is the
comparison of the loan amounts on the
first loan plus the second loan in relation to
the value of the home. For example, a first
loan amount of $300,000 combined with a
second loan amount of $100,000 on a
property valued at $500,000 represents a
CLTV of 80%.
FHA The Federal Housing Administration is part
of the Department of Housing and Urban
Development. FHA provides a system for
insurance of loans with lesser down payments.
FHLMC Known as "Freddie Mac", the Federal Home
Loan Mortgage Corporation was created in
1970 as a Government Sponsored Enterprise
to purchase loans from lenders and provide
liquidity to the mortgage market.
FICO FICO stands for Fair Isaac Corporation and
Scores has become the generic label applied to
credit scoring models. Through proprietary
modeling, each of the three repositories -
Experian, TransUnion and Equifax - produce
scores ranging from 300 to 850. Higher
scores are designed to be predictive of
more credit-worthy borrowers.
FNMA Known as "Fannie Mae", the Federal National
Mortgage Association was created in 1938 as
a Government Sponsored Enterprise to
purchase loans from lenders and provide
liquidity to the mortgage market.
GFE The Good Faith Estimate is a required
disclosure from lenders to the borrower, and
is to be provided within 3 business days from
receipt of a loan application. It's purpose is
to provide an estimate of fees and costs in
obtaining the home loan.
LTV Loan to Value ratio is the comparison of the
loan amount on the first loan in relation to the
value of the home. For example, a loan
amount of $400,000 on a property valued at
$500,000 represents an LTV of 80%.
Points A point equals 1 percent of the loan amount.
For example, on a loan amount of $200,000,
one point equals $2,000. When interest rates
are quoted there is often an origination fee
disclosed based on a certain number of points.
Pricing Refers to a combination of interest rate and
origination fee quoted on your transaction.
For example, you may hear pricing models
such as 4.5% with a loan fee of 1 point (see
above) or 4.75% with a loan fee of zero points.
TIL The Truth-In-Lending disclosure is designed
to show the borrower an effective interest
rate based on the combination of interest rate
and finance charges. The most significant part
of the disclosure is the Annual Percentate Rate.
VA The Home Loan Guaranty division of the
Department of Veterans Affairs guarantees
home loans to lenders for loans made to eligible
veterans. Loans made under this program often
allow the veteran to purchase a home with no
down payment.
Wednesday, October 20, 2010
Subordination Requests for Existing Lines of Credit
With interest rates so low right now, there has been
a wave of refinances. There are tremendous savings
for borrowers to reduce their interest rates on their
home loans.
A large percentage of borrowers have both a first
loan and a second loan on their homes. Many times
the second loan is the popular Home Equity Line of
Credit (HELOC) which borrowers like to have
available to use in case of emergencies, or if an
opportunity presents itself.
When a borrower requests a refinance, and if there
is a second loan on the property, we need to make
sure that the borrower understands their options.
Assuming that the property value supports the
loan request the borrower may elect to:
A. Payoff the first loan and the second loan and
close the HELOC.
B. Payoff the first loan and the second loan and
retain the availability of the HELOC.
C. Payoff the first loan and retain the balance and
availability of the HELOC.
Each of these choices involve some different
considerations. Let's recap what needs to be done
to meet these different outcomes.
It is helpful to think of the loans on the property
as being rungs on a ladder. The existing first
loan is the top rung, the existing second loan is
the next in line.
When we refinance, the new loan that is being
created is designed to be the new first loan.
In scenario A, above, the new loan pays off
the existing first loan and existing second loan,
removing those rungs from the ladder and the
new loan becomes the top rung.
In scenario B, the new loan pays off the existing
first loan and pays the existing second loan to
a zero balance, but does not close out the HELOC.
In scenario C, the new loan pays off the existing
first loan and does not pay to zero or close out
the existing HELOC.
In scenarios B and C, the existing first loan is
gone, removing the top rung of the ladder.
However, whether the balance is zero or not,
the existing HELOC is now the top rung of the
ladder and the new loan is in the second position.
But wait, the new loan is supposed to be in first
position. What can be done?
This is where the process of subordination comes
into play. In this case, subordination refers to
the situation where the existing second lender
agrees to move their loan back down to a secondary
position to the new first loan that is being created.
As a practical matter, the new first lender will
have guidelines and requirements that not only
stipulate the percentage of value that the first loan
can be (loan-to-value ratio or LTV), but will also
have requirements for the percentage of value
that the combination of the new first loan and
existing HELOC can be (combined loan-to-value
ratio or CLTV).
Additionally, the existing HELOC lender will also
have CLTV guidelines and requirements. As a
general rule, they do not want to be in a largely
riskier position when approving the subordination
request.
Let's take a look at a couple of examples.
Property value $500,000.
Existing first loan $300,000. (LTV = 60%)
Existing second loan $100,000. (CLTV = 80%)
New loan request of $300,000 to replace the
existing first loan. (LTV = 60%)
In this case, the existing HELOC lender is in a
reasonably secure position, with their exposure
to risk at the 80% level. Under the new loan
request, they are being asked to consider keeping
their exposure to risk at the 80% level. There is
a good likelihood that they would approve the
subordination request without modifying the
amount of the HELOC.
Property value $500,000.
Existing first loan $300,000 (LTV = 60%)
Existing second loan $100,000 (CLTV = 80%)
New loan request of $400,000 to payoff first
loan and pay HELOC to zero. Wants to retain
availability of the HELOC going forward.
In this case the new LTV would be 80%. The
request to the existing lender to subordinate
their HELOC would put their exposure to risk
at 100% ($400,000 first loan and $100,000
available on the HELOC). It is highly unlikely
that the lender would approve this subordination
request and would probably insist that the
HELOC be closed out, since the lender will not
want to increase their risk exposure to that
level.
Subordination requests are useful tools to help
a borrower meet their financial planning goals.
But it takes proper research to make sure that
we can navigate through the guidelines of both
the new first lender and the existing HELOC
lender.
Also, borrowers need to be patient as well. We
are finding that the HELOC lenders are taking
as much as 30-45 days to process these requests.
This can affect the ability to meet interest rate
lock expiration dates, or become more costly to
the borrower if rate lock extension fees are
necessary.
Make sure that your goals are well-defined as
you beginn this process to that a strategic plan
is developed to avoid any pitfalls through the
process.
a wave of refinances. There are tremendous savings
for borrowers to reduce their interest rates on their
home loans.
A large percentage of borrowers have both a first
loan and a second loan on their homes. Many times
the second loan is the popular Home Equity Line of
Credit (HELOC) which borrowers like to have
available to use in case of emergencies, or if an
opportunity presents itself.
When a borrower requests a refinance, and if there
is a second loan on the property, we need to make
sure that the borrower understands their options.
Assuming that the property value supports the
loan request the borrower may elect to:
A. Payoff the first loan and the second loan and
close the HELOC.
B. Payoff the first loan and the second loan and
retain the availability of the HELOC.
C. Payoff the first loan and retain the balance and
availability of the HELOC.
Each of these choices involve some different
considerations. Let's recap what needs to be done
to meet these different outcomes.
It is helpful to think of the loans on the property
as being rungs on a ladder. The existing first
loan is the top rung, the existing second loan is
the next in line.
When we refinance, the new loan that is being
created is designed to be the new first loan.
In scenario A, above, the new loan pays off
the existing first loan and existing second loan,
removing those rungs from the ladder and the
new loan becomes the top rung.
In scenario B, the new loan pays off the existing
first loan and pays the existing second loan to
a zero balance, but does not close out the HELOC.
In scenario C, the new loan pays off the existing
first loan and does not pay to zero or close out
the existing HELOC.
In scenarios B and C, the existing first loan is
gone, removing the top rung of the ladder.
However, whether the balance is zero or not,
the existing HELOC is now the top rung of the
ladder and the new loan is in the second position.
But wait, the new loan is supposed to be in first
position. What can be done?
This is where the process of subordination comes
into play. In this case, subordination refers to
the situation where the existing second lender
agrees to move their loan back down to a secondary
position to the new first loan that is being created.
As a practical matter, the new first lender will
have guidelines and requirements that not only
stipulate the percentage of value that the first loan
can be (loan-to-value ratio or LTV), but will also
have requirements for the percentage of value
that the combination of the new first loan and
existing HELOC can be (combined loan-to-value
ratio or CLTV).
Additionally, the existing HELOC lender will also
have CLTV guidelines and requirements. As a
general rule, they do not want to be in a largely
riskier position when approving the subordination
request.
Let's take a look at a couple of examples.
Property value $500,000.
Existing first loan $300,000. (LTV = 60%)
Existing second loan $100,000. (CLTV = 80%)
New loan request of $300,000 to replace the
existing first loan. (LTV = 60%)
In this case, the existing HELOC lender is in a
reasonably secure position, with their exposure
to risk at the 80% level. Under the new loan
request, they are being asked to consider keeping
their exposure to risk at the 80% level. There is
a good likelihood that they would approve the
subordination request without modifying the
amount of the HELOC.
Property value $500,000.
Existing first loan $300,000 (LTV = 60%)
Existing second loan $100,000 (CLTV = 80%)
New loan request of $400,000 to payoff first
loan and pay HELOC to zero. Wants to retain
availability of the HELOC going forward.
In this case the new LTV would be 80%. The
request to the existing lender to subordinate
their HELOC would put their exposure to risk
at 100% ($400,000 first loan and $100,000
available on the HELOC). It is highly unlikely
that the lender would approve this subordination
request and would probably insist that the
HELOC be closed out, since the lender will not
want to increase their risk exposure to that
level.
Subordination requests are useful tools to help
a borrower meet their financial planning goals.
But it takes proper research to make sure that
we can navigate through the guidelines of both
the new first lender and the existing HELOC
lender.
Also, borrowers need to be patient as well. We
are finding that the HELOC lenders are taking
as much as 30-45 days to process these requests.
This can affect the ability to meet interest rate
lock expiration dates, or become more costly to
the borrower if rate lock extension fees are
necessary.
Make sure that your goals are well-defined as
you beginn this process to that a strategic plan
is developed to avoid any pitfalls through the
process.
Wednesday, October 6, 2010
Meeting the Client's Needs
I recently had a couple of reminders about how
important it is to meet our clients' needs.
Those of us in the service business need to remember
that it is the clients' perspectives that are most
important, not necessarily our point of view.
The first reminder came the last time I was getting
my hair cut. I overheard the receptionist talking
with one of the stylists in the shop.
The receptionist was the one who made the
reminder calls for the appointments the day
before they were scheduled. Since she was
making calls for all the stylists, she had
thirty to fifty calls to make each day.
In order to get through the calls, she found it
useful to leave them as quickly as possible.
One of the customers had said to her that it was
difficult to understand her message because she
spoke so fast, and that the customer had to replay
it a couple of times to make sure of what was
being communciated.
After relating what the customer had said to her,
the receptionist said to the stylist (as if she was
talking to the customer): "You try making more
than thirty calls, and see how fast you leave the
messages".
What struck me about this brief conversation was
that the purpose of the call had been overlooked.
Although the receptionist was being efficient, the
purpose of the reminder call was to be caring and
welcoming to the customer. And if there was a
reason why the appointment couldn't be kept, to
open the lines of communication so that the stylist
didn't have an open appointment time.
Even though it may have been the receptionist's
thirtieth call, it was the first one received by that
customer. In an effort to get her task completed
as quickly as possible, the receptionist lost sight
of the fact that the customer was somewhat incon-
venienced by having to replay the message several
times.
It was a great reminder for me to constantly
recommit to serving my clients. Every one who
calls me for information, for rates or to help them
solve a problem deserves for me to treat them like
it is my first call of the day.
They are calling me to help them meet their goals,
for their reasons. I owe it to them to be patient,
considerate and thorough.
The second reminder came tonight. My wife Sheri
and I went to see Van Morrison in concert at the
Civic Theater in San Diego. It was the first time he
had performed in San Diego in 37 years!
He performed for about 90 minutes and I thought
he put on a great show. Even though he is 65 years
old, he brought energy, professionalism, and a
virtuosity to his concert.
I know that not all of my readers will know his
music, but at his age, how many times do you think
he has sang "Gloria", "Brown Eyed Girl", "Moon-
dance" and his other hits? Thousands, I am sure.
What struck me, was that even though these songs
have been sung by him an untold number of times,
this was my first opportunity to hear him live. And he
delivered a high-quality performance that respected
those in attendance and brought credit to his pro-
fessional reputation.
I suppose he could have just "mailed it in". But
that would serve no one. The audience would have
been justifiably disappointed and felt cheated.
Van Morrison would have diminished his reputation
as a performer by delivering a sub-par effort.
The lesson I took away from this was that I need
to always remind myself that my customer may
only have one encounter with me. I need to respect
their concerns and deliver the highest quality
service that I can in that encounter.
They may ask me to be part of their team of trusted
advisors for a period of time to help them meet their
goals. They are inviting me into their financial lives,
asking for my assistance, and paying me for my
services.
My clients deserve nothing less than my best effort
when we work together. And I can thank the salon
receptionist and a professional entertainer for the
reminders.
important it is to meet our clients' needs.
Those of us in the service business need to remember
that it is the clients' perspectives that are most
important, not necessarily our point of view.
The first reminder came the last time I was getting
my hair cut. I overheard the receptionist talking
with one of the stylists in the shop.
The receptionist was the one who made the
reminder calls for the appointments the day
before they were scheduled. Since she was
making calls for all the stylists, she had
thirty to fifty calls to make each day.
In order to get through the calls, she found it
useful to leave them as quickly as possible.
One of the customers had said to her that it was
difficult to understand her message because she
spoke so fast, and that the customer had to replay
it a couple of times to make sure of what was
being communciated.
After relating what the customer had said to her,
the receptionist said to the stylist (as if she was
talking to the customer): "You try making more
than thirty calls, and see how fast you leave the
messages".
What struck me about this brief conversation was
that the purpose of the call had been overlooked.
Although the receptionist was being efficient, the
purpose of the reminder call was to be caring and
welcoming to the customer. And if there was a
reason why the appointment couldn't be kept, to
open the lines of communication so that the stylist
didn't have an open appointment time.
Even though it may have been the receptionist's
thirtieth call, it was the first one received by that
customer. In an effort to get her task completed
as quickly as possible, the receptionist lost sight
of the fact that the customer was somewhat incon-
venienced by having to replay the message several
times.
It was a great reminder for me to constantly
recommit to serving my clients. Every one who
calls me for information, for rates or to help them
solve a problem deserves for me to treat them like
it is my first call of the day.
They are calling me to help them meet their goals,
for their reasons. I owe it to them to be patient,
considerate and thorough.
The second reminder came tonight. My wife Sheri
and I went to see Van Morrison in concert at the
Civic Theater in San Diego. It was the first time he
had performed in San Diego in 37 years!
He performed for about 90 minutes and I thought
he put on a great show. Even though he is 65 years
old, he brought energy, professionalism, and a
virtuosity to his concert.
I know that not all of my readers will know his
music, but at his age, how many times do you think
he has sang "Gloria", "Brown Eyed Girl", "Moon-
dance" and his other hits? Thousands, I am sure.
What struck me, was that even though these songs
have been sung by him an untold number of times,
this was my first opportunity to hear him live. And he
delivered a high-quality performance that respected
those in attendance and brought credit to his pro-
fessional reputation.
I suppose he could have just "mailed it in". But
that would serve no one. The audience would have
been justifiably disappointed and felt cheated.
Van Morrison would have diminished his reputation
as a performer by delivering a sub-par effort.
The lesson I took away from this was that I need
to always remind myself that my customer may
only have one encounter with me. I need to respect
their concerns and deliver the highest quality
service that I can in that encounter.
They may ask me to be part of their team of trusted
advisors for a period of time to help them meet their
goals. They are inviting me into their financial lives,
asking for my assistance, and paying me for my
services.
My clients deserve nothing less than my best effort
when we work together. And I can thank the salon
receptionist and a professional entertainer for the
reminders.
Wednesday, September 22, 2010
Lower Interest Rates Deliver Powerful Savings
When we go through a period of lower interest rates
as we are now doing, borrowers are always looking
for the benefits that may come with refinancing.
There are several ways that you can compare
the numbers to see if the savings that you may
experience meet your goals.
Let's take a look at a couple of examples from
recent discussions with clients:
Borrower currently has a loan that started at
$535,000 at an interest rate of 5.0%. Payments
are $2,872, balance is $525,000 and the borrower
has made 16 payments.
The quotes at the time were for a new 30-year
fixed rate loan at 4.5%. The loan fee was zero
points, (one point equals 1% of the loan amount)
and transactional costs would be about $3500.
If we compare costs to interest rate savings the
recovery period is fairly short. $3500 is .667%
of the loan amount ($3500/$525,000). The
interest savings per year is .50% (5.0% - 4.5%).
So it would only take about 16 months to
break even and start saving money (.667 divided
by .50 is 1 1/3 years, i.e. 16 months).
If we make comparisons of the monthly payments
it works out like this: $2872 current payment to
$2660 new payment is $212 per month savings.
$3500 in costs divided by $212 is about 16.5
months. Once again, a fairly quick recovery of
costs.
And if you are committed to staying in the home,
comparing the costs over the remaining life of
the loans provides another measure of the
benefits of considering the refinance.
There are 344 payments remaining on the existing
loan (360 scheduled payments minus the 16 already
made). 344 payments at $2872 per month means
that you would pay $987,968 over the remainder
of the loan term.
On the new loan, you would have 360 payments
at $2660 per month for a total outgo of $957,600
over the 30 years.
So, would it be worth it to spend $3500 to save
$30,368 with a new refinance? Many borrowers
who are committed to a long-term strategy
choose to go this direction.
I had a discussion with a different borrower. He
was definitely committed to a long-term strategy
and wanted to see how much he could save by
obtaining a lower interest rate and shortening
the term of his loan from 30 years to 15 years.
His existing loan had a balance of $408,000,
interest rate of 5.0%, payments of $2238 and
had 341 installments left.
The new proposal was for $408,000 with an
interest rate of 4.25%, with a one-point loan
fee and $3500 in costs. The new 15-year
payment would be $3069 per month.
The interest rate comparison works out like
this: $7580 in fees ($4080 + $3500) is about
1.86% of the loan amount ($7580 divided by
$408,000). The interest rate difference is
.75% (5.0% minus 4.25%). It would take about
2.5 years to recover the costs with interest
savings (1.86 divided by .75). Not a particulary
great recovery period.
It would not make sense to compare monthly
payments, because we are not comparing
"apples to apples". The monthly payment
on the 15-year loan is much higher to retire
the principal balance over the shorter period
of time.
There are 341 payments remaining on the
existing loan. At $2238 per month the total
outgo will be $763,158.
On the new loan there will be 180 payments
at $3069 for a total of $552,420.
This borrower was definite in his decision.
It was very much worth $7580 to save
$210,738!
It is important to understand whether your
goals are short-term or long-term, and then
to analyze your choices from several different
approaches. More often than not, the answer
becomes fairly obvious what will work best
for you.
As always, let me know how I can help you
with exploring your options.
as we are now doing, borrowers are always looking
for the benefits that may come with refinancing.
There are several ways that you can compare
the numbers to see if the savings that you may
experience meet your goals.
Let's take a look at a couple of examples from
recent discussions with clients:
Borrower currently has a loan that started at
$535,000 at an interest rate of 5.0%. Payments
are $2,872, balance is $525,000 and the borrower
has made 16 payments.
The quotes at the time were for a new 30-year
fixed rate loan at 4.5%. The loan fee was zero
points, (one point equals 1% of the loan amount)
and transactional costs would be about $3500.
If we compare costs to interest rate savings the
recovery period is fairly short. $3500 is .667%
of the loan amount ($3500/$525,000). The
interest savings per year is .50% (5.0% - 4.5%).
So it would only take about 16 months to
break even and start saving money (.667 divided
by .50 is 1 1/3 years, i.e. 16 months).
If we make comparisons of the monthly payments
it works out like this: $2872 current payment to
$2660 new payment is $212 per month savings.
$3500 in costs divided by $212 is about 16.5
months. Once again, a fairly quick recovery of
costs.
And if you are committed to staying in the home,
comparing the costs over the remaining life of
the loans provides another measure of the
benefits of considering the refinance.
There are 344 payments remaining on the existing
loan (360 scheduled payments minus the 16 already
made). 344 payments at $2872 per month means
that you would pay $987,968 over the remainder
of the loan term.
On the new loan, you would have 360 payments
at $2660 per month for a total outgo of $957,600
over the 30 years.
So, would it be worth it to spend $3500 to save
$30,368 with a new refinance? Many borrowers
who are committed to a long-term strategy
choose to go this direction.
I had a discussion with a different borrower. He
was definitely committed to a long-term strategy
and wanted to see how much he could save by
obtaining a lower interest rate and shortening
the term of his loan from 30 years to 15 years.
His existing loan had a balance of $408,000,
interest rate of 5.0%, payments of $2238 and
had 341 installments left.
The new proposal was for $408,000 with an
interest rate of 4.25%, with a one-point loan
fee and $3500 in costs. The new 15-year
payment would be $3069 per month.
The interest rate comparison works out like
this: $7580 in fees ($4080 + $3500) is about
1.86% of the loan amount ($7580 divided by
$408,000). The interest rate difference is
.75% (5.0% minus 4.25%). It would take about
2.5 years to recover the costs with interest
savings (1.86 divided by .75). Not a particulary
great recovery period.
It would not make sense to compare monthly
payments, because we are not comparing
"apples to apples". The monthly payment
on the 15-year loan is much higher to retire
the principal balance over the shorter period
of time.
There are 341 payments remaining on the
existing loan. At $2238 per month the total
outgo will be $763,158.
On the new loan there will be 180 payments
at $3069 for a total of $552,420.
This borrower was definite in his decision.
It was very much worth $7580 to save
$210,738!
It is important to understand whether your
goals are short-term or long-term, and then
to analyze your choices from several different
approaches. More often than not, the answer
becomes fairly obvious what will work best
for you.
As always, let me know how I can help you
with exploring your options.
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