Last issue, I went through the mechanics of how the
Option ARM loan worked. The fact that it allows for low
introductory interest rates and payments creates the
possibility that the borrower may defer interest and owe
more later than they originally borrowed.
When these loans were originally offered, the lenders
would limit them to no higher than 75%-80% of the
value of the property. The idea, of course, was that if
the borrower made payments in a manner that let the
deferred interest accrue, that the loan would never
"grow" to be higher than the value of the property.
Over the past several years, and prior to the pullbacks
created by the mortgage turmoil about five months ago,
the lenders got more aggressive and expanded their
underwriting guidelines to accept more risk.
It was not uncommon for the lenders to offer these loans
up to 90% of value, or to couple the first loan up to 80%
with a second loan of 20%, allowing the borrower to
finance 100% of the value of the property.
Any prudent person could see that if property values
did not continue to climb, that this type of financing
package would create problems. It would not take
much for the loan balances to be higher than the value
of the property, and when that happens the willingness
of the borrower to continue making payments wanes.
So, when property values stopped increasing, and in fact
started to decline, the riskiness inherent in these financing
packages was finally exposed.
The headlines focused on the sub-prime loans, those that
were made to borrowers with low credit scores, but still
allowed for high loan balances in relation to the value of
the property.
But the more extreme Option ARM packages were also
destined to create problems for the lenders.
And now Option ARM loans are painted with the brush
that they are "predatory" or put borrowers in a position
that the lenders knew they couldn't sustain. As the
lenders revert back to more prudent lending standards,
there is a place for borrowers to consider this financing
tool as part of their options.
There is a place for this loan for both short-term and
long-term strategies, depending on the goal of the
borrower.
It is an effective tool for investors, who are primarily
concerned about cash flow from the property, especially
amid the uncertainty of tenant turnover, unexpected
expenses and prolonged vacancies. The ability for
an owner to begin with low payments and know
exactly how much they will increase each year is
very valuable in these situations. Of course, the
owner must have sufficient equity in their property so
that as they make the decision to make the minimum
payment and have their loan balance increase, it all
fits into their plan for the property.
It is also a loan that may work for seniors, who are
equity rich, but cash-strapped. They can take out
the loan, have very low payments and by making
the minimum payments, they can borrow from the
equity in their home on a monthly basis. This
plan also gives them some security of a nest-egg
which can be used as a sinking fund to supplement
their income to make the payments.
For those that have a short-term strategy, they
can use the loan to keep monthly expenses low,
knowing that they will never be "hurt" by loan balance
increases for the time that they will own the property.
And, there are times that a borrower wants to buy
their new home before having their existing loan
completely sold. They need a substantial amount
of the equity from their home in order to provide the
down payment for the new home. The Option ARM
can be a way to take cash out of the home, keep
their payments as low as possible, and close
escrow on the new home.
As you can see, the suitable use of this mortgage
is not a "one size fits all" approach. Those mortgage
lenders that pushed this to every borrower regardless
of individual circumstances were irresponsible and
not keeping their clients best interests in mind.
The media reporting on the mortgage difficulties that
we are sorting out right now do not understand the
nuances of the mortgage business. It is important
that when you want to survey your mortgage options
that you meet with a professional who can help you
find the right mortgage product to meet your needs.
Saturday, December 22, 2007
Wednesday, December 5, 2007
The Option ARM Loan - A Useful Tool That Has Been Abused
Included in all the news about the mortgage crisis are stories
of borrowers who have been taken advantage of by being
placed in inappropriate loan products. Perhaps the program
that is most misunderstood, and prone to abuse is the one
known as the Option ARM (for adjustable rate mortgage).
This loan is also known as a 4-pay ARM, or a negative
amortization ARM, or a deferred interest option ARM,
and it is distinct in the marketplace for using non-traditional
features to help clients in certain circumstances.
When the use of this mortgage became more widespread,
when the underwriting guidelines of the lenders became
less strict, and when the sale of this product was offered
to borrowers who were either led astray, or did not
understand what they were getting, the seeds of future
problems were planted.
When the real estate values began to take a downturn,
and borrowers had used the Option ARM to finance their
homes with very little down payment, these problems
began to bloom as part of the garden of the mortgage
crisis that we are working our way through now.
Let's go over the major features of this loan and how it
is different so that you have a thorough understanding
of how it works.
The traditional thirty year mortgage creates payments
that are split between the interest owing on the loan
and some contribution to the principal balance, decreasing
the loan balance over time. This calculation of equal
payments to retire the loan over the term of the loan is
known as amortization.
The Option ARM allows the minimum payment to be created
using a low, introductory interest rate. After the first month,
this minimum payment no longer has any direct association
with the interest rate calculation on the loan for the next five
years.
So, the first thing you need to understand is that the minimum
payments and the interest rate are operating under two entirely
different calculations, and that they are no longer tied directly
together.
The minimum payments will continue with a specified increase
on an annual basis, usually 7.5% of the original payment. For
example, if the first year payment was $1,000 per month, the
minimum payment in the second year will be $1,075, the third
year $1,156 per month, the fourth year $1,242 and the fifth
year $1,335 per month. At the end of each five years, there
is a provision for a reset of the payments, which I will discuss
later.
The interest rate begins with the below-market, introductory rate
and after the first month the interest rate will be determined
by a combination of an independent index value derived from
the financial markets and a margin determined by the lender
(you can think of that as the lender's profit margin). So,
every month the loan will probably have at least a slightly
different interest rate that will determine how much interest
is owed for that month.
As an example, when these loans were most aggressively
marketed, the introductory rate was 1.0%. Many lenders
used an index known as the Monthly Treasury Average index.
This was derived from data from the Federal Government that
the lender had no control over, but was accepted as a reasonable
measure to determine whether rates were higher or lower.
It averaged the last 12 months treasury figures to determine
the index value. Next month it would include the newest figure
and drop the oldest one, so it would still average the most recent
12 months of data. Today's 12 Month Treasury Average figure is
4.69%.
The lender offered their loans using this index an adding a margin.
A common margin was say, 2.5%.
So, the borrower received a 1.0% interest rate for the first month.
In month two, the rate is no longer 1.0%, but is now calculated
based on index plus margin: 4.69% + 2.5% = 7.19%.
Let's bring all of this together. A loan amount of approximately
$311,000 at 1.0% gives us an amortized payment of $1,000
approximately. This means in the first month, the borrower is
actually paying $259 in interest, and $741 in principal. (So
we don't get bogged down in precise numbers, let's act as
if the loan remains at $311,000 as we work through the example).
In month two, the introductory rate is gone, and the new interest
rate is now 7.19%. The borrower is still allowed to make his
minimum payment of $1,000, but now the interest that is owing
on this loan is $1,863. If the borrower makes the minimum
payment, the unpaid interest of $863 will be added to the
principal balance owing meaning that he would now owe more
than he originally borrowed.
If interest rates continue to rise, the difference between the
minimum payment and the interest accruing on the loan will
increase. If interest rates go down, the interest owing will
get closer to the minimum payment.
This is why this loan is called the Option ARM. The borrower
has the option to pay the minimum payment of $1,000, or an
interest only payment of $1,863. In addition, the lender will
offer the borrower two additional choices of a 30-year amortized
payment ($2,104) or a 15-year amortized payment ($2,822).
That is how it gets the name of the 4-pay ARM. And because
the borrower may allow his principal balance to increase due
to the deferred interest, the terms "negative amortization" and
"deferred interest option ARM" are also used to describe this
loan.
The lenders have built in some mechanisms so that the loan
doesn't spiral out of control without an attempt to rein it in.
Every five years, there will be a reset or recasting of the
payment to bring it back to reality. At that time, the unpaid
balance, at the interest rate calculated at that point, and
using the 25 years remaining on the loan will determine the
new minimum monthly payment irrespective of the 7.5%
limitation allowed in the first five years.
Using our example, if the borrower chose to pay the interest
payment and if interest rates remained constant at the 7.19%
(impossible, but useful for this illustration), the new minimum
payment at the end of five years would be $2,236 ($311,000
at 7.19% over 25 years).
If the borrower elected to defer the $863 per month over those
five years, he would owe something over $362,000, creating
a new minimum payment of at least $2,455. (I am ignoring
the effect of compounding on the deferred interest in order
to make this easy and simplify the concept).
You can see that if a borrower was only able to budget $1,000
per month, there will be a tremendous payment shock at the
end of five years if their new payment is now $2,455.
In the next issue, I will go into more discussion of this loan.
It has a suitable purpose for specific situations, and its
overuse helped unknowledgeable borrowers get into deep
financial trouble.
of borrowers who have been taken advantage of by being
placed in inappropriate loan products. Perhaps the program
that is most misunderstood, and prone to abuse is the one
known as the Option ARM (for adjustable rate mortgage).
This loan is also known as a 4-pay ARM, or a negative
amortization ARM, or a deferred interest option ARM,
and it is distinct in the marketplace for using non-traditional
features to help clients in certain circumstances.
When the use of this mortgage became more widespread,
when the underwriting guidelines of the lenders became
less strict, and when the sale of this product was offered
to borrowers who were either led astray, or did not
understand what they were getting, the seeds of future
problems were planted.
When the real estate values began to take a downturn,
and borrowers had used the Option ARM to finance their
homes with very little down payment, these problems
began to bloom as part of the garden of the mortgage
crisis that we are working our way through now.
Let's go over the major features of this loan and how it
is different so that you have a thorough understanding
of how it works.
The traditional thirty year mortgage creates payments
that are split between the interest owing on the loan
and some contribution to the principal balance, decreasing
the loan balance over time. This calculation of equal
payments to retire the loan over the term of the loan is
known as amortization.
The Option ARM allows the minimum payment to be created
using a low, introductory interest rate. After the first month,
this minimum payment no longer has any direct association
with the interest rate calculation on the loan for the next five
years.
So, the first thing you need to understand is that the minimum
payments and the interest rate are operating under two entirely
different calculations, and that they are no longer tied directly
together.
The minimum payments will continue with a specified increase
on an annual basis, usually 7.5% of the original payment. For
example, if the first year payment was $1,000 per month, the
minimum payment in the second year will be $1,075, the third
year $1,156 per month, the fourth year $1,242 and the fifth
year $1,335 per month. At the end of each five years, there
is a provision for a reset of the payments, which I will discuss
later.
The interest rate begins with the below-market, introductory rate
and after the first month the interest rate will be determined
by a combination of an independent index value derived from
the financial markets and a margin determined by the lender
(you can think of that as the lender's profit margin). So,
every month the loan will probably have at least a slightly
different interest rate that will determine how much interest
is owed for that month.
As an example, when these loans were most aggressively
marketed, the introductory rate was 1.0%. Many lenders
used an index known as the Monthly Treasury Average index.
This was derived from data from the Federal Government that
the lender had no control over, but was accepted as a reasonable
measure to determine whether rates were higher or lower.
It averaged the last 12 months treasury figures to determine
the index value. Next month it would include the newest figure
and drop the oldest one, so it would still average the most recent
12 months of data. Today's 12 Month Treasury Average figure is
4.69%.
The lender offered their loans using this index an adding a margin.
A common margin was say, 2.5%.
So, the borrower received a 1.0% interest rate for the first month.
In month two, the rate is no longer 1.0%, but is now calculated
based on index plus margin: 4.69% + 2.5% = 7.19%.
Let's bring all of this together. A loan amount of approximately
$311,000 at 1.0% gives us an amortized payment of $1,000
approximately. This means in the first month, the borrower is
actually paying $259 in interest, and $741 in principal. (So
we don't get bogged down in precise numbers, let's act as
if the loan remains at $311,000 as we work through the example).
In month two, the introductory rate is gone, and the new interest
rate is now 7.19%. The borrower is still allowed to make his
minimum payment of $1,000, but now the interest that is owing
on this loan is $1,863. If the borrower makes the minimum
payment, the unpaid interest of $863 will be added to the
principal balance owing meaning that he would now owe more
than he originally borrowed.
If interest rates continue to rise, the difference between the
minimum payment and the interest accruing on the loan will
increase. If interest rates go down, the interest owing will
get closer to the minimum payment.
This is why this loan is called the Option ARM. The borrower
has the option to pay the minimum payment of $1,000, or an
interest only payment of $1,863. In addition, the lender will
offer the borrower two additional choices of a 30-year amortized
payment ($2,104) or a 15-year amortized payment ($2,822).
That is how it gets the name of the 4-pay ARM. And because
the borrower may allow his principal balance to increase due
to the deferred interest, the terms "negative amortization" and
"deferred interest option ARM" are also used to describe this
loan.
The lenders have built in some mechanisms so that the loan
doesn't spiral out of control without an attempt to rein it in.
Every five years, there will be a reset or recasting of the
payment to bring it back to reality. At that time, the unpaid
balance, at the interest rate calculated at that point, and
using the 25 years remaining on the loan will determine the
new minimum monthly payment irrespective of the 7.5%
limitation allowed in the first five years.
Using our example, if the borrower chose to pay the interest
payment and if interest rates remained constant at the 7.19%
(impossible, but useful for this illustration), the new minimum
payment at the end of five years would be $2,236 ($311,000
at 7.19% over 25 years).
If the borrower elected to defer the $863 per month over those
five years, he would owe something over $362,000, creating
a new minimum payment of at least $2,455. (I am ignoring
the effect of compounding on the deferred interest in order
to make this easy and simplify the concept).
You can see that if a borrower was only able to budget $1,000
per month, there will be a tremendous payment shock at the
end of five years if their new payment is now $2,455.
In the next issue, I will go into more discussion of this loan.
It has a suitable purpose for specific situations, and its
overuse helped unknowledgeable borrowers get into deep
financial trouble.
Wednesday, November 21, 2007
House Passes Bill To Correct Problems That Created Mortgage Melt Down
Because of the problems that contributed to the "sub-prime" crisis
and have a large number of borrowers facing default and foreclosure,
the House passed bill 3915 in an effort to limit abuses and bad
business practices in the mortgage industry.
The proposed legislation would include:
- Require a nationwide licensing system for mortgage
brokers and bank loan officers called the Nationwide
Mortgage Licensing System and Registry.
- Ban lenders from making loans that borrowers don't have
the ability to repay.
- Prohibit lenders from steering homeowners into refinanced
mortgages that don't provide benefit to the borrower, or
into mortgages that are at a higher rate than what the
borrower truly qualifies for.
- Prohibit the financing of points and fees and practices
like balloon payments that increase the risk of foreclosure.
(See MY COMMENTS below regarding these items).
The proposal is designed to prevent a recurrence of granting
loans to prospective borrowers with poor credit at low initial
interest rates that would reset to higher, unaffordable rates and
payments in the near future.
Opponents to the bill are concerned that congressional intrusion
could make things worse. They reasoned that the bill could make
it harder for borrowers to reset at higher interest rates, and make
the default problem deeper and more severe than it needs to be.
"Congress does two things very well: one is nothing and two is
overreact," said Rep. Tom Price, R-Ga. "While we have had a
period here where some credit, some loans, were unwisely given,
but allowing individuals, allowing Americans to purchase homes
and realize their American dream is a good thing."
Republicans voiced displeasure with the concept of lenders being
responsible for knowing whether borrowers can actually pay back
the loan. "This kind of murky language would invite litigation from
every borrower who misses a payment," said Rep. Ed Royce, R-CA.
The bill will go to the Senate, where a similar bill has been stalled
for weeks.
White House comment indicated that they were concerned that
the bill as drafted would unduly restrict access to credit for potential
homebuyers and reduce refinancing opportunities.
MY COMMENTS:
Requiring a nationwide licensing system for mortgage brokers
and bank loan officers may not be the best solution. In California,
we are licensed through the California Department of Real Estate,
and there are many safeguards for consumers to check for
complaints filed against their mortgage broker. It would seem
that each state could do a more effective job of legislating their
mortgage process and protecting their constituents.
Banning lenders from making loans that borrowers don't have the
ability to repay, although well-meaning, is probably impossible
to determine. Whenever I encounter a borrower that does not
meet the published lending guidelines, one of the first questions
that I ask is how they plan to make things work for themselves.
I may find that they have support of family members, roommates,
funds coming from an unseasoned, but still reliable source, or
plans to take on a second job to make it all work. Do they have
the ability to repay? On paper, I probably couldn't prove it to the
lender's satisfaction, but the borrower is confident it will all work
out. They are probably as well qualified as most borrowers who
are one layoff away from a catastrophic financial circumstance.
Prohibiting lenders from steering homeowners into refinanced
mortgages that don't provide benefit to the borrower, or into
mortgages that are at a higher rate than what the borrower
truly qualifies for may be difficult to determine in some cases.
There are many situations where a borrower will accept a higher
interest rate if they can benefit from lower payments. Or will
opt for higher payments to shorten the time they will have the
loan. Are higher interest rates or higher payments working
against the best interests of the borrower? The key would be
that the borrower is making an informed decision and under-
stands the tradeoffs they are making. And I think that is what
the legislation is trying to arrive at: give the borrowers enough
information to understand their benefits, their costs, and their
alternatives. With education, borrowers will make a decision
that serves their interests, and not allow a mortgage person to
make a sale of a loan product that earns themselves a fee, but
hurts the borrower.
Prohibiting the financing of points and fees and practices like
balloon payments that increase the risk of foreclosure is a mixed
bag. I can tell you from experience that if borrowers were not
allowed to finance points and fees, that it would severely limit
their opportunity to refinance. As an example, most borrowers
would prefer to pay an extra $35 per month by financing their
fees than they would to come up with $5000 in closing costs.
Most borrowers do not have $5000 set aside for this purpose
and it would stop them from moving forward. Balloon payments
are not a good thing for a borrower. It is too risky for the borrower
to be put in a position that as of a certain date they will be forced
to pay the loan in full and that there will be acceptable financing
available to help them accomplish that. It is too risky for the
borrower to be put in that position.
It is probably good that Congress is trying to find acceptable
solutions. But, in their interest to protect consumers, they may
be creating unintended problems and obstacles that will keep
the mortgage industry from meeting the needs of borrowers.
and have a large number of borrowers facing default and foreclosure,
the House passed bill 3915 in an effort to limit abuses and bad
business practices in the mortgage industry.
The proposed legislation would include:
- Require a nationwide licensing system for mortgage
brokers and bank loan officers called the Nationwide
Mortgage Licensing System and Registry.
- Ban lenders from making loans that borrowers don't have
the ability to repay.
- Prohibit lenders from steering homeowners into refinanced
mortgages that don't provide benefit to the borrower, or
into mortgages that are at a higher rate than what the
borrower truly qualifies for.
- Prohibit the financing of points and fees and practices
like balloon payments that increase the risk of foreclosure.
(See MY COMMENTS below regarding these items).
The proposal is designed to prevent a recurrence of granting
loans to prospective borrowers with poor credit at low initial
interest rates that would reset to higher, unaffordable rates and
payments in the near future.
Opponents to the bill are concerned that congressional intrusion
could make things worse. They reasoned that the bill could make
it harder for borrowers to reset at higher interest rates, and make
the default problem deeper and more severe than it needs to be.
"Congress does two things very well: one is nothing and two is
overreact," said Rep. Tom Price, R-Ga. "While we have had a
period here where some credit, some loans, were unwisely given,
but allowing individuals, allowing Americans to purchase homes
and realize their American dream is a good thing."
Republicans voiced displeasure with the concept of lenders being
responsible for knowing whether borrowers can actually pay back
the loan. "This kind of murky language would invite litigation from
every borrower who misses a payment," said Rep. Ed Royce, R-CA.
The bill will go to the Senate, where a similar bill has been stalled
for weeks.
White House comment indicated that they were concerned that
the bill as drafted would unduly restrict access to credit for potential
homebuyers and reduce refinancing opportunities.
MY COMMENTS:
Requiring a nationwide licensing system for mortgage brokers
and bank loan officers may not be the best solution. In California,
we are licensed through the California Department of Real Estate,
and there are many safeguards for consumers to check for
complaints filed against their mortgage broker. It would seem
that each state could do a more effective job of legislating their
mortgage process and protecting their constituents.
Banning lenders from making loans that borrowers don't have the
ability to repay, although well-meaning, is probably impossible
to determine. Whenever I encounter a borrower that does not
meet the published lending guidelines, one of the first questions
that I ask is how they plan to make things work for themselves.
I may find that they have support of family members, roommates,
funds coming from an unseasoned, but still reliable source, or
plans to take on a second job to make it all work. Do they have
the ability to repay? On paper, I probably couldn't prove it to the
lender's satisfaction, but the borrower is confident it will all work
out. They are probably as well qualified as most borrowers who
are one layoff away from a catastrophic financial circumstance.
Prohibiting lenders from steering homeowners into refinanced
mortgages that don't provide benefit to the borrower, or into
mortgages that are at a higher rate than what the borrower
truly qualifies for may be difficult to determine in some cases.
There are many situations where a borrower will accept a higher
interest rate if they can benefit from lower payments. Or will
opt for higher payments to shorten the time they will have the
loan. Are higher interest rates or higher payments working
against the best interests of the borrower? The key would be
that the borrower is making an informed decision and under-
stands the tradeoffs they are making. And I think that is what
the legislation is trying to arrive at: give the borrowers enough
information to understand their benefits, their costs, and their
alternatives. With education, borrowers will make a decision
that serves their interests, and not allow a mortgage person to
make a sale of a loan product that earns themselves a fee, but
hurts the borrower.
Prohibiting the financing of points and fees and practices like
balloon payments that increase the risk of foreclosure is a mixed
bag. I can tell you from experience that if borrowers were not
allowed to finance points and fees, that it would severely limit
their opportunity to refinance. As an example, most borrowers
would prefer to pay an extra $35 per month by financing their
fees than they would to come up with $5000 in closing costs.
Most borrowers do not have $5000 set aside for this purpose
and it would stop them from moving forward. Balloon payments
are not a good thing for a borrower. It is too risky for the borrower
to be put in a position that as of a certain date they will be forced
to pay the loan in full and that there will be acceptable financing
available to help them accomplish that. It is too risky for the
borrower to be put in that position.
It is probably good that Congress is trying to find acceptable
solutions. But, in their interest to protect consumers, they may
be creating unintended problems and obstacles that will keep
the mortgage industry from meeting the needs of borrowers.
Wednesday, November 7, 2007
It's A Great Time For A Mortgage Loan-As published in Barron's
I was interviewed and included in an article by Mike Hogan
that appeared October 15, 2007 in Barron's. Here is the
text of the article:
Things are so, so bad that some wag has created the Mortgage Lender Implode-O-Meter to count lender defunctions. What a great time to borrow or refinance.
Widespread pain in real estate makes for one of those classic situations where cash is king -- or, in this case, a decent down payment and credit score, at least, gets you into the castle. Its dark humor aside, the Implode-O-Meter lists survivors and dishes daily updates on this turbulent market for the benefit of borrowers and investors alike.
Not every lender’s business was built on subprime loans. Alt-A or “low-doc/no-doc” loans are just a narrow slice of the portfolios of deep-pocket institutions like CitiMortgage, Wells Fargo, Wachovia and Washington Mutual. They still have to keep the lights on, offsetting losses to subprime defaults with loans to qualified borrowers.
“If you fit the Fannie or Freddie guidelines, they’d love to make you a loan,” says Doug Brennecke, a mortgage broker with San Diego’s Mike Dunn & Associates. “Conforming loans are very available with rates and fees in the low-to-moderate end of the spectrum.”
“Guidelines” refer to standards lenders must follow before Fannie Mae or Freddie Mac will buy conforming loans within the $417,000 legal limit. Already-low rates on most conforming loans have been trending lower since the subprime meltdown began, reports Brennecke. And while rates and other terms are incredibly variable, you can drill down on offerings in your town at HSH Associates, a nationwide database updated daily. Likewise, Bankrate.com’s encyclopedic data bank shows a nationwide average of the benchmark 30-year fixed-rate falling from 6.30% in July to 6.05% in early October.
Chase Mortgage increased its loan originations 41% in the second quarter, reports spokesman Thomas Kelly, including subprime and jumbo loans that can’t be layed off on Freddie or Fannie. Qualifications are stricter and prices higher than for conforming loans. But Chase views the current market distress as an opportunity to increase market share, explains Kelly, and is willing to carry the paper until investors warm up to mortgage-backed securities again.
Plummeting home sales have resulted in a stunning lack of demand. The 21.5% year-to-year decline reported by the National Association of Realtors in September is only the latest in a long string of sales declines. In response, Countrywide Home Loans, the nation’s largest mortgage lender, is sending 7,000 home loan consultants to open houses and real estate sales offices nationwide, looking for borrowers. Having lost $595 million to defaults during the first half of the year, Countrywide also has mobilized an army of home retention specialists to help delinquent borrowers keep their homes. The lender claims to have saved 40,000 mortgages from foreclosure so far this year, including 17,000 through mortgage rate modification.
Other forms of outreach include Bank of America’s No Fee Mortgage Plus, which subsidizes loan origination, title and a dozen other closing costs. BofA claims it can save a borrower $3,000 or more on a $200,000 home loan. These costs vary widely by state, but a recent Bankrate.com survey found a national median of $2,692.
There are many such offers, but they bear close scrutiny. It’s common practice to simply offset some of these saving with a higher interest rate. You should be able to suss out real loan costs through careful examination of the preliminary Truth-in-Lending statement. The Federal Trade Commission also is a wellspring of tips, definitions and other consumer protection information.
Although lending standards have tightened considerably, lenders are still more flexible than they were before the subprime craze took them afield, says Brennecke, who has 30 years matching borrowers and lenders. All loans are individual negotiations but, generally, lenders look for borrowers with steady employment, a debt-to-income ratio of about 40%, a 640 or better FICO credit score, and a 10-to-20% downpayment.
The more cash down or lower loan-to-home value when refinancing, the higher your FICO score, the better your bargaining position. myFICO offers two FICO reports a year for $90. It also sponsors a free ballpark estimator on Bankrate.com. Alternately, everyone is entitled to one free credit report a year from all three credit bureaus via AnnualCreditReport.com.
Despite gory headlines, real estate pain is very localized. Most defaults are found in Nevada, Colorado, California, Arizona and Florida, states that were the loci of speculation, notes RealtyTrac. After roughly doubling in 5 years, the national median price of an existing home is virtually unchanged from a year ago -- $224,500 in NAR’s most recent survey.
Unless you foresee prices crashing permanently in your town, now might be a good time to lock in a low cost on your real estate investment.
that appeared October 15, 2007 in Barron's. Here is the
text of the article:
Things are so, so bad that some wag has created the Mortgage Lender Implode-O-Meter to count lender defunctions. What a great time to borrow or refinance.
Widespread pain in real estate makes for one of those classic situations where cash is king -- or, in this case, a decent down payment and credit score, at least, gets you into the castle. Its dark humor aside, the Implode-O-Meter lists survivors and dishes daily updates on this turbulent market for the benefit of borrowers and investors alike.
Not every lender’s business was built on subprime loans. Alt-A or “low-doc/no-doc” loans are just a narrow slice of the portfolios of deep-pocket institutions like CitiMortgage, Wells Fargo, Wachovia and Washington Mutual. They still have to keep the lights on, offsetting losses to subprime defaults with loans to qualified borrowers.
“If you fit the Fannie or Freddie guidelines, they’d love to make you a loan,” says Doug Brennecke, a mortgage broker with San Diego’s Mike Dunn & Associates. “Conforming loans are very available with rates and fees in the low-to-moderate end of the spectrum.”
“Guidelines” refer to standards lenders must follow before Fannie Mae or Freddie Mac will buy conforming loans within the $417,000 legal limit. Already-low rates on most conforming loans have been trending lower since the subprime meltdown began, reports Brennecke. And while rates and other terms are incredibly variable, you can drill down on offerings in your town at HSH Associates, a nationwide database updated daily. Likewise, Bankrate.com’s encyclopedic data bank shows a nationwide average of the benchmark 30-year fixed-rate falling from 6.30% in July to 6.05% in early October.
Chase Mortgage increased its loan originations 41% in the second quarter, reports spokesman Thomas Kelly, including subprime and jumbo loans that can’t be layed off on Freddie or Fannie. Qualifications are stricter and prices higher than for conforming loans. But Chase views the current market distress as an opportunity to increase market share, explains Kelly, and is willing to carry the paper until investors warm up to mortgage-backed securities again.
Plummeting home sales have resulted in a stunning lack of demand. The 21.5% year-to-year decline reported by the National Association of Realtors in September is only the latest in a long string of sales declines. In response, Countrywide Home Loans, the nation’s largest mortgage lender, is sending 7,000 home loan consultants to open houses and real estate sales offices nationwide, looking for borrowers. Having lost $595 million to defaults during the first half of the year, Countrywide also has mobilized an army of home retention specialists to help delinquent borrowers keep their homes. The lender claims to have saved 40,000 mortgages from foreclosure so far this year, including 17,000 through mortgage rate modification.
Other forms of outreach include Bank of America’s No Fee Mortgage Plus, which subsidizes loan origination, title and a dozen other closing costs. BofA claims it can save a borrower $3,000 or more on a $200,000 home loan. These costs vary widely by state, but a recent Bankrate.com survey found a national median of $2,692.
There are many such offers, but they bear close scrutiny. It’s common practice to simply offset some of these saving with a higher interest rate. You should be able to suss out real loan costs through careful examination of the preliminary Truth-in-Lending statement. The Federal Trade Commission also is a wellspring of tips, definitions and other consumer protection information.
Although lending standards have tightened considerably, lenders are still more flexible than they were before the subprime craze took them afield, says Brennecke, who has 30 years matching borrowers and lenders. All loans are individual negotiations but, generally, lenders look for borrowers with steady employment, a debt-to-income ratio of about 40%, a 640 or better FICO credit score, and a 10-to-20% downpayment.
The more cash down or lower loan-to-home value when refinancing, the higher your FICO score, the better your bargaining position. myFICO offers two FICO reports a year for $90. It also sponsors a free ballpark estimator on Bankrate.com. Alternately, everyone is entitled to one free credit report a year from all three credit bureaus via AnnualCreditReport.com.
Despite gory headlines, real estate pain is very localized. Most defaults are found in Nevada, Colorado, California, Arizona and Florida, states that were the loci of speculation, notes RealtyTrac. After roughly doubling in 5 years, the national median price of an existing home is virtually unchanged from a year ago -- $224,500 in NAR’s most recent survey.
Unless you foresee prices crashing permanently in your town, now might be a good time to lock in a low cost on your real estate investment.
Wednesday, October 24, 2007
Some Effects of the Southern California Wildfires on Mortgage Lending
The fires that have been raging through San Diego County have
had immediate consequences to hundreds of thousands of
people. From evacuations, to property damage, to complete
loss of homes, and blessedly, only a few fatalities so far, we
all probably have been directly affected or know a family member
or friend who has been affected.
I sincerely hope that you have been spared from severe
consequences from these fires.
There are some procedures that you can expect to encounter
if you are in the midst of a transaction right now. Each lender
will ascertain their own approach to risk assessment, but these
would be fairly standard:
APPRAISAL UPDATES: If the lender has already received an
appraisal of the home and has based their approval on the
condition that was in effect at the time of the inspection, you
can expect that they will not move forward on the closing of
your loan without requiring the appraisal to make an updated
inspection of the property.
This inspection (with new photos) is designed to show that
the home is still standing, that there has not been any damage
to it, and that all the factors that went into the original valuation
of the property are still valid.
Availability of services such as gas and electric, sewer, and
water will be necessary. Any health or safety concerns will
need to be addressed and found acceptable.
This will obviously create some additional timing concerns, and
the lender is now free to make a new decision based on the new
facts as disclosed by the appraiser.
INSURANCE UPDATES: The insurance companies will also be
important players in the closing process. With substantial
losses anticipated with existing policies, you may find that the
insurance company that you were planning on using does not
have an interest in extending new policies in the area.
You may need to find a new insurance company to consider
your request. Also, you may find that the cost of the insurance
is now higher because of the higher risk associated with
insurance coverage in these impacted areas.
TIMING CONSIDERATIONS: Everyone's schedules have
been disrupted this week. Businesses have been closed,
employees have been taking care of their immediate
personal issues, Government offices have been closed as
well.
You may be eager to move on with your plans and finalize
your transaction.
But we have seen disruptions with the County Recorder's
Office being closed, so that transactions cannot be finalized.
Lenders have been closed, or short-staffed, so that their
normal work flow is much slower than usual. Loans are
moving through the pipeline with more scrutiny. This
all contributes to new conditions to be satisfied (such as
the appraisal and insurance discussed above), additional
review of new material, and fundings being scheduled
when offices and staff support warrants them.
To summarize, be prepared for delays and some confusion.
Do not expect things to go as smoothly as they normally
do.
Understand too, that the person you are dealing with, who
you may think is contributing to making your life more
difficult, may be going through their own personal issues
with disruptions, losses, or family problems.
We are truly all in this together right now. Search for the
people that can help you reach your goal and who can
demonstrate that they are working as hard as they can
to help you through a difficult time.
had immediate consequences to hundreds of thousands of
people. From evacuations, to property damage, to complete
loss of homes, and blessedly, only a few fatalities so far, we
all probably have been directly affected or know a family member
or friend who has been affected.
I sincerely hope that you have been spared from severe
consequences from these fires.
There are some procedures that you can expect to encounter
if you are in the midst of a transaction right now. Each lender
will ascertain their own approach to risk assessment, but these
would be fairly standard:
APPRAISAL UPDATES: If the lender has already received an
appraisal of the home and has based their approval on the
condition that was in effect at the time of the inspection, you
can expect that they will not move forward on the closing of
your loan without requiring the appraisal to make an updated
inspection of the property.
This inspection (with new photos) is designed to show that
the home is still standing, that there has not been any damage
to it, and that all the factors that went into the original valuation
of the property are still valid.
Availability of services such as gas and electric, sewer, and
water will be necessary. Any health or safety concerns will
need to be addressed and found acceptable.
This will obviously create some additional timing concerns, and
the lender is now free to make a new decision based on the new
facts as disclosed by the appraiser.
INSURANCE UPDATES: The insurance companies will also be
important players in the closing process. With substantial
losses anticipated with existing policies, you may find that the
insurance company that you were planning on using does not
have an interest in extending new policies in the area.
You may need to find a new insurance company to consider
your request. Also, you may find that the cost of the insurance
is now higher because of the higher risk associated with
insurance coverage in these impacted areas.
TIMING CONSIDERATIONS: Everyone's schedules have
been disrupted this week. Businesses have been closed,
employees have been taking care of their immediate
personal issues, Government offices have been closed as
well.
You may be eager to move on with your plans and finalize
your transaction.
But we have seen disruptions with the County Recorder's
Office being closed, so that transactions cannot be finalized.
Lenders have been closed, or short-staffed, so that their
normal work flow is much slower than usual. Loans are
moving through the pipeline with more scrutiny. This
all contributes to new conditions to be satisfied (such as
the appraisal and insurance discussed above), additional
review of new material, and fundings being scheduled
when offices and staff support warrants them.
To summarize, be prepared for delays and some confusion.
Do not expect things to go as smoothly as they normally
do.
Understand too, that the person you are dealing with, who
you may think is contributing to making your life more
difficult, may be going through their own personal issues
with disruptions, losses, or family problems.
We are truly all in this together right now. Search for the
people that can help you reach your goal and who can
demonstrate that they are working as hard as they can
to help you through a difficult time.
Wednesday, October 10, 2007
Some Normalcy Is Returning to the Mortgage Market
Whenever we go through these wild gyrations in the market,
the correction to the problem is usually a very conservative
reaction, many times overly conservative.
In the last eight weeks, as the sub-prime mortgage market
created doubt among the investors that the quality of the
loan products was as good as they were led to believe, the
investors also pulled out of the jumbo loan market (those
loans over $417,000).
The absence of liquidity rippled through, from the investors
to the lenders to the cutbacks in lending programs to fewer
opportunities for borrowers to get the loan that they needed.
We are now seeing that after this reaction, that the lenders
are now resuming some loan categories and products that
have been missing for the last two months.
Specifically, there has been a resumption of the stated income
jumbo loan products. These allow borrowers to represent their
incomes without having to provide documentation as proof.
The guidelines have not snapped back to where they were
before the meltdown, but they are moving in the right direction
to benefit borrowers.
At first, the lenders dropped these loans to only 80% of the
home value, but would allow a second loan of 10% so that a
buyer could still purchase a home with only 10% cash down
payment.
Now there are jumbo lenders who will do a stated income
loan up to 95% of the value. The qualifications are somewhat
more stringent than they were before, but at least the program
is now available, which will help many borrowers.
There are also proposals in Congress to expand both the
conforming limits substantially beyond the $417,000 limit and
to the FHA program. In the San Diego area, the $417,000
limit has not served the high-priced areas very well, and FHA
has been essentially dormant for much of the county for quite
some time.
If these changes go through, we will see many more opportunities
for borrowers to obtain favorable financing with the support of
the FHLMC, FNMA and FHA programs.
Keep in mind that our far-reaching lending resources can help
you find solutions to your mortgage needs that many other
lenders cannot provide.
the correction to the problem is usually a very conservative
reaction, many times overly conservative.
In the last eight weeks, as the sub-prime mortgage market
created doubt among the investors that the quality of the
loan products was as good as they were led to believe, the
investors also pulled out of the jumbo loan market (those
loans over $417,000).
The absence of liquidity rippled through, from the investors
to the lenders to the cutbacks in lending programs to fewer
opportunities for borrowers to get the loan that they needed.
We are now seeing that after this reaction, that the lenders
are now resuming some loan categories and products that
have been missing for the last two months.
Specifically, there has been a resumption of the stated income
jumbo loan products. These allow borrowers to represent their
incomes without having to provide documentation as proof.
The guidelines have not snapped back to where they were
before the meltdown, but they are moving in the right direction
to benefit borrowers.
At first, the lenders dropped these loans to only 80% of the
home value, but would allow a second loan of 10% so that a
buyer could still purchase a home with only 10% cash down
payment.
Now there are jumbo lenders who will do a stated income
loan up to 95% of the value. The qualifications are somewhat
more stringent than they were before, but at least the program
is now available, which will help many borrowers.
There are also proposals in Congress to expand both the
conforming limits substantially beyond the $417,000 limit and
to the FHA program. In the San Diego area, the $417,000
limit has not served the high-priced areas very well, and FHA
has been essentially dormant for much of the county for quite
some time.
If these changes go through, we will see many more opportunities
for borrowers to obtain favorable financing with the support of
the FHLMC, FNMA and FHA programs.
Keep in mind that our far-reaching lending resources can help
you find solutions to your mortgage needs that many other
lenders cannot provide.
Wednesday, September 26, 2007
The Hybrid Adjustable Rate Mortgage - A Useful Tool
The hybrid ARMS - those are the loans that fix the interest
rates for an initial period of time and then turn into adjustable
rate loans for the remainder of the term - have been versatile
loan products to help clients save money.
When I discuss loan programs with clients, I usually will
give them an idea of their choices by showing them a
spectrum of typical mortgage products.
These include the following:
30-year fixed rate loan - most stable, highest rate
15-year fixed rate loan - retires loan quicker, higher payments
10-year hybrid ARM - targeted to cover a period of ownership
7-year hybrid ARM - targeted to cover a period of ownership
5-year hybrid ARM - targeted to cover a period of ownership
3-year hybrid ARM - targeted to cover a period of ownership
1 year adjustable rate loan - useful for short-term strategies
Semi-annual adjustable rate loan - useful for short-term strategies
Monthly adjustable rate loan - lowest payments, allows for
negative amortization
Some clients will prefer the 30-year fixed rate loan because they
will be guaranteed that there will be no surprises in that loan. If
they can afford the payments today, they should be able to
continue to afford the payments in the future.
The 15-year fixed rate loan has appeal to those clients who want
to have their loan paid in full, usually to coincide with a retirement
strategy. The interest rate on the 15-year loan is generally a little
less than the rate offered on a 30-year loan.
The 1-year and semi-annual adjustable rate loans are usually of
interest to borrowers who have a very short term strategy in owning
the home. They enjoy the benefit of the lower interest rate that
the adjustable rate loan offers initially, and plan to dispose of the
property before the loan has an opportunity to adjust to any large
degree. Because these loans offer interest rate caps per adjustment
period, they can forecast what their worst-case scenario would be in
the near future.
The monthly adjustable rate loan is also known as the deferred
interest option loan, or the negative amortization loan. This program
allows a borrower to make a minimum payment that is actually less
than the interest owing at the time. If the borrower pays the
minimum payment, the unpaid interest gets added to the principal
balance of the loan and the loan gets larger each month. This loan
can be the right mortgage vehicle in certain circumstances, but
the client deserves to fully understand how this loan works so that
there are no surprises. In a future issue, I will feature this loan.
The 10-year, 7-year, 5-year and 3-year hybrid ARM loans serve a
very useful purpose for a majority of borrowers. The longer that a
lender is asked to guarantee an interest rate, the rate is usually
higher. So, a 30-year loan carries a higher interest rate than a
15-year loan, which in turn is higher than the 10-year hybrid
ARM, the 7-year hybrid ARM, the 5-year hybrid ARM, and the
3-year hybrid ARM.
The key to a suitable recommendation for a client is to determine
how long they intend to own the home. If they intend to own the
home for 5 years, it would not be wise to recommend the 3-year
hybrid ARM, because they would face an adjustment to the
interest rate before they planned on moving. In this case the 5-year,
7-year, or 10-year hybrid ARMS would be worthy of consideration
to protect the borrower with a guaranteed interest rate for the
period of time they intend to own the home, and to give them
additional protection in the event that their time frame slipped
from their initial plan.
The hybrids function like this:
The term of the loan is typically 30 years, with the initial interest
rate guaranteed for a specified period of time - 10, 7, 5 or 3 years.
When the loan reaches the end of that guaranteed period of time -
let's use the 5 -year as our example - the loan ceases its fixed rate
period and turns into an annual adjustable rate loan. So, beginning
after the 60th month, the new interest rate is calculated by using an
index that is specified in the loan documents and determining the
index value at that point in time, and adding to it a "margin" that is
also specified in the loan documents that can best be thought of
as the lender's profit margin.
Many of these loans use the 1-year LIBOR index and have a margin
of say, 2.75%. Using today's rates as an example, a borrower could
expect their new interest rate to be 4.893% for the LIBOR value plus
2.75% margin, giving the borrower a new rate of 7.643% for the next
year. The payments would be calculated on the remaining balance
at the end of the 5 years over a 25-year period (the remaining term
of the loan) at an interest rate of 7.643%.
At the end of that year, the lender would do a new calculation using
the same formula but setting the payments over a 24-year period.
There are additional features of these loans to be considered. Many
programs will allow for interest-only payments which allows the
borrower to make the lowest possible payment and it keeps their
principal balance on the loan level. Many lenders will also allow
for slightly lower interest rates or fees if the borrower will accept a
prepayment fee for the first year or 3 years.
Since these loans have been introduced, many borrowers have
chosen them as their preferred mortgage product. As always,
make sure that the details and the answers to your "What if..."
questions are fully explained to you so that you can make an
informed decision.
rates for an initial period of time and then turn into adjustable
rate loans for the remainder of the term - have been versatile
loan products to help clients save money.
When I discuss loan programs with clients, I usually will
give them an idea of their choices by showing them a
spectrum of typical mortgage products.
These include the following:
30-year fixed rate loan - most stable, highest rate
15-year fixed rate loan - retires loan quicker, higher payments
10-year hybrid ARM - targeted to cover a period of ownership
7-year hybrid ARM - targeted to cover a period of ownership
5-year hybrid ARM - targeted to cover a period of ownership
3-year hybrid ARM - targeted to cover a period of ownership
1 year adjustable rate loan - useful for short-term strategies
Semi-annual adjustable rate loan - useful for short-term strategies
Monthly adjustable rate loan - lowest payments, allows for
negative amortization
Some clients will prefer the 30-year fixed rate loan because they
will be guaranteed that there will be no surprises in that loan. If
they can afford the payments today, they should be able to
continue to afford the payments in the future.
The 15-year fixed rate loan has appeal to those clients who want
to have their loan paid in full, usually to coincide with a retirement
strategy. The interest rate on the 15-year loan is generally a little
less than the rate offered on a 30-year loan.
The 1-year and semi-annual adjustable rate loans are usually of
interest to borrowers who have a very short term strategy in owning
the home. They enjoy the benefit of the lower interest rate that
the adjustable rate loan offers initially, and plan to dispose of the
property before the loan has an opportunity to adjust to any large
degree. Because these loans offer interest rate caps per adjustment
period, they can forecast what their worst-case scenario would be in
the near future.
The monthly adjustable rate loan is also known as the deferred
interest option loan, or the negative amortization loan. This program
allows a borrower to make a minimum payment that is actually less
than the interest owing at the time. If the borrower pays the
minimum payment, the unpaid interest gets added to the principal
balance of the loan and the loan gets larger each month. This loan
can be the right mortgage vehicle in certain circumstances, but
the client deserves to fully understand how this loan works so that
there are no surprises. In a future issue, I will feature this loan.
The 10-year, 7-year, 5-year and 3-year hybrid ARM loans serve a
very useful purpose for a majority of borrowers. The longer that a
lender is asked to guarantee an interest rate, the rate is usually
higher. So, a 30-year loan carries a higher interest rate than a
15-year loan, which in turn is higher than the 10-year hybrid
ARM, the 7-year hybrid ARM, the 5-year hybrid ARM, and the
3-year hybrid ARM.
The key to a suitable recommendation for a client is to determine
how long they intend to own the home. If they intend to own the
home for 5 years, it would not be wise to recommend the 3-year
hybrid ARM, because they would face an adjustment to the
interest rate before they planned on moving. In this case the 5-year,
7-year, or 10-year hybrid ARMS would be worthy of consideration
to protect the borrower with a guaranteed interest rate for the
period of time they intend to own the home, and to give them
additional protection in the event that their time frame slipped
from their initial plan.
The hybrids function like this:
The term of the loan is typically 30 years, with the initial interest
rate guaranteed for a specified period of time - 10, 7, 5 or 3 years.
When the loan reaches the end of that guaranteed period of time -
let's use the 5 -year as our example - the loan ceases its fixed rate
period and turns into an annual adjustable rate loan. So, beginning
after the 60th month, the new interest rate is calculated by using an
index that is specified in the loan documents and determining the
index value at that point in time, and adding to it a "margin" that is
also specified in the loan documents that can best be thought of
as the lender's profit margin.
Many of these loans use the 1-year LIBOR index and have a margin
of say, 2.75%. Using today's rates as an example, a borrower could
expect their new interest rate to be 4.893% for the LIBOR value plus
2.75% margin, giving the borrower a new rate of 7.643% for the next
year. The payments would be calculated on the remaining balance
at the end of the 5 years over a 25-year period (the remaining term
of the loan) at an interest rate of 7.643%.
At the end of that year, the lender would do a new calculation using
the same formula but setting the payments over a 24-year period.
There are additional features of these loans to be considered. Many
programs will allow for interest-only payments which allows the
borrower to make the lowest possible payment and it keeps their
principal balance on the loan level. Many lenders will also allow
for slightly lower interest rates or fees if the borrower will accept a
prepayment fee for the first year or 3 years.
Since these loans have been introduced, many borrowers have
chosen them as their preferred mortgage product. As always,
make sure that the details and the answers to your "What if..."
questions are fully explained to you so that you can make an
informed decision.
Wednesday, September 12, 2007
Learning From Others-A Cautionary Tale
Over this last weekend, I did a fund-raising charity ride for the
benefit of United Cerebral Palsy in San Diego. At dinner on
Saturday I was talking with another rider and when she
found out that I was a mortgage broker, she asked me a
number of questions and I learned about her current predicament.
She had worked through another mortgage originator previously.
She has had her existing loan for about a year and a half. She
discovered, too late, that it was one that allowed for deferred
interest or "negative amortization". This loan was a refinance
due to a divorce situation, so she pulled cash out of the prop-
erty to pay off her former spouse.
At that time, she financed 90% of the value of the home, and
she was qualified based on the "stated income" program.
She had a strong credit history and credit score, but limited
savings or retirement funds, so she needed every advantage
to qualify for the new loan and keep her condominium for
herself and her two children.
And, in the "Add Insult to Injury" Department, she also has
a prepayment penalty on the loan that was not made clear
to her.
She could be the Poster Girl for the current excesses that
have taken place in liberal underwriting and approvals, and
also how misplaced trust in financial advisors can create
bigger problems.
Let's look closely at some of these details.
First, she was emotionally attached to wanting to keep her
condominium for comfort and security and that framed her
decision-making at every turn. She never seriously considered
selling the home and splitting the proceeds with her former
spouse because she didn't want to rent or downsize to a
smaller place.
Second, the low payments that the deferred interest option
loan offered were very attractive to her, and were affordable.
Although she seemed to recall having some of the conse-
quences of that loan explained to her, she never thoroughly
understood how it worked.
When she got the loan, the amount of interest deferral was
modest, but as interest rates have increased over the last
year and a half, she is looking at her loan balance increasing
significantly each month.
The loan allows for the principal balance to increase no higher
than 110% of the original loan amount. When the loan began
the projection was that it would not happen for many years,
but with the higher interest deferral she may be facing signi-
ficantly higher payments within the next year.
Third, she obtained her loan, and bought out her ex-husband
near the top of the real estate market. Property values have
dropped, and combined with her loan balance increasing, her
equity is being squeezed very close to nothing.
Fourth, by relying on the "stated income" qualifying feature,
she allowed herself to be put into a situation that could become
increasingly unaffordable. I did not get all the details of what
she really made versus what was represented on her loan
submission, but she may have been optimistic about having
additional income that did not come to fruition.
Lastly, the prepayment penalty handcuffs her to the existing
loan unless she wants to pay thousands of dollars to get out
of it. Of course, she does not have the equity in the property
or the cash in reserves to absorb this kind of expense.
What can we learn from her ordeal?
A. Seek out many solutions to the problem and don't rule out
any of them until you have a chance to assess the merits
of all of them.
There is a saying that when your only tool is a hammer,
you treat everything like a nail. But be cautious that the
person from whom you are seeking advice is helping you
brainstorm solutions to your problem and not just promoting
their product.
In too many cases, if you speak with a real estate agent,
they will want you to list the house with them. If you speak
with a mortgage originator, they want to sell you a new loan.
But there are quality professionals in both industries that will
give you honest advice and resources to explore to make sure
that you are well-cared for.
B. Thoroughly understand why the proposal that is being
offered is good for you, and take the time to understand the
details.
I know that the mortgage business can be confusing, and some
originators are not that great on explaining the features without
using verbal shorthand, but you have to insist that they keep
explaining it until you understand it properly. If they are unable
to communicate to you effectively, you should find someone
who can. The consequences of misunderstandings or failure
to disclose pertinent terms to you are just too expensive in
both dollars and emotional distress.
C. Forecast what the "worst-case scenario" is, especially if
you are considering an adjustable rate loan. We can make
projections based on reasonable assumptions but insist on
knowing how the loan performs if everything goes crazy.
That is the only way that you can satisfy yourself that you
have a plan that can work for you no matter what.
I know that I keep repeating this, but it is important that you
find the right people to counsel you, and who are truly looking
out for you best interests.
If she comes to me to help brainstorm a solution to her
problem, I will do my best to help her, irrespective of whether
it creates a new loan for me or not.
When you come to me for help, advice, or mortgage services
you can be confident that I will do the same for you.
benefit of United Cerebral Palsy in San Diego. At dinner on
Saturday I was talking with another rider and when she
found out that I was a mortgage broker, she asked me a
number of questions and I learned about her current predicament.
She had worked through another mortgage originator previously.
She has had her existing loan for about a year and a half. She
discovered, too late, that it was one that allowed for deferred
interest or "negative amortization". This loan was a refinance
due to a divorce situation, so she pulled cash out of the prop-
erty to pay off her former spouse.
At that time, she financed 90% of the value of the home, and
she was qualified based on the "stated income" program.
She had a strong credit history and credit score, but limited
savings or retirement funds, so she needed every advantage
to qualify for the new loan and keep her condominium for
herself and her two children.
And, in the "Add Insult to Injury" Department, she also has
a prepayment penalty on the loan that was not made clear
to her.
She could be the Poster Girl for the current excesses that
have taken place in liberal underwriting and approvals, and
also how misplaced trust in financial advisors can create
bigger problems.
Let's look closely at some of these details.
First, she was emotionally attached to wanting to keep her
condominium for comfort and security and that framed her
decision-making at every turn. She never seriously considered
selling the home and splitting the proceeds with her former
spouse because she didn't want to rent or downsize to a
smaller place.
Second, the low payments that the deferred interest option
loan offered were very attractive to her, and were affordable.
Although she seemed to recall having some of the conse-
quences of that loan explained to her, she never thoroughly
understood how it worked.
When she got the loan, the amount of interest deferral was
modest, but as interest rates have increased over the last
year and a half, she is looking at her loan balance increasing
significantly each month.
The loan allows for the principal balance to increase no higher
than 110% of the original loan amount. When the loan began
the projection was that it would not happen for many years,
but with the higher interest deferral she may be facing signi-
ficantly higher payments within the next year.
Third, she obtained her loan, and bought out her ex-husband
near the top of the real estate market. Property values have
dropped, and combined with her loan balance increasing, her
equity is being squeezed very close to nothing.
Fourth, by relying on the "stated income" qualifying feature,
she allowed herself to be put into a situation that could become
increasingly unaffordable. I did not get all the details of what
she really made versus what was represented on her loan
submission, but she may have been optimistic about having
additional income that did not come to fruition.
Lastly, the prepayment penalty handcuffs her to the existing
loan unless she wants to pay thousands of dollars to get out
of it. Of course, she does not have the equity in the property
or the cash in reserves to absorb this kind of expense.
What can we learn from her ordeal?
A. Seek out many solutions to the problem and don't rule out
any of them until you have a chance to assess the merits
of all of them.
There is a saying that when your only tool is a hammer,
you treat everything like a nail. But be cautious that the
person from whom you are seeking advice is helping you
brainstorm solutions to your problem and not just promoting
their product.
In too many cases, if you speak with a real estate agent,
they will want you to list the house with them. If you speak
with a mortgage originator, they want to sell you a new loan.
But there are quality professionals in both industries that will
give you honest advice and resources to explore to make sure
that you are well-cared for.
B. Thoroughly understand why the proposal that is being
offered is good for you, and take the time to understand the
details.
I know that the mortgage business can be confusing, and some
originators are not that great on explaining the features without
using verbal shorthand, but you have to insist that they keep
explaining it until you understand it properly. If they are unable
to communicate to you effectively, you should find someone
who can. The consequences of misunderstandings or failure
to disclose pertinent terms to you are just too expensive in
both dollars and emotional distress.
C. Forecast what the "worst-case scenario" is, especially if
you are considering an adjustable rate loan. We can make
projections based on reasonable assumptions but insist on
knowing how the loan performs if everything goes crazy.
That is the only way that you can satisfy yourself that you
have a plan that can work for you no matter what.
I know that I keep repeating this, but it is important that you
find the right people to counsel you, and who are truly looking
out for you best interests.
If she comes to me to help brainstorm a solution to her
problem, I will do my best to help her, irrespective of whether
it creates a new loan for me or not.
When you come to me for help, advice, or mortgage services
you can be confident that I will do the same for you.
Thursday, August 30, 2007
Borrowers Should Not Be Abandoned
Over-Reaction by Investors and Lenders-
They Need to Allow for a "Soft Landing"
The news about the mortgage defaults and foreclosures is in
all the media, several times a week. Statistics show that the
rate of defaults is much higher than they have been over the
last few years.
When the real estate market peaks and property values
start to decline even a little bit, the mistakes that the lenders
have made with aggressive lending practices start to be
revealed.
This is what we have been seeing, starting with the what has
become to be called the "sub-prime" crisis. The underwriting
of these loans was very aggressive, allowing cumulative loans
up to 100% of the value of the home, allowing below-average
credit scores, little insistence on documenting the income
for qualifying and not caring if there was much in the way of
cash reserves for the borrower.
As a result, these high-risk loans are having trouble performing
by having payments being made on time. This makes the
investors nervous, and there are monetary losses up and down
the line when the money doesn't arrive as planned.
Now the investors, and by extension the lenders, have with-
drawn many lending programs and over-reacted to the situation.
Just a few months ago, they saw reasonable risk associated
with certain credit profiles and they were willing to make those
loans. In today's environment, these same credit profiles are
representing unacceptable risk at any price.
So, the pendulum has swung from being very permissive to
very restrictive in such a short period of time that borrowers
are finding themselves without many acceptable choices
for restructuring their debt.
The borrowers need to have some confidence that the rug
has not been pulled out from under them. For their well-
being, a reasonable plan would have been for the investors/
lenders to slowly pull back from their most risky lending
profiles and continue to accept reasonable risk. This would
have allowed borrowers to still have an opportunity to
restructure their debt, albeit with fewer choices and possibly
somewhat higher rates and fees. But at least they could
pursue options.
Instead, the investors/lenders have lost all confidence in their
ability to assess mortgage risk. They do not know where the
line is where clients will still invest in their mortgage-backed
security pools, so they have decided to withdraw to a large
degree from offering loan programs that rely on funding through
Wall Street.
It will take some time for these investors/lenders to slowly
introduce different degrees of risk in their mortgage offerings
from the very conservative posture they are now taking. They
will have to discover where the clients' appetite is for any new
mortgage offering. They know that there will be a market among
the borrowing public because they are effectively creating pent-up
demand by withdrawing programs from the market.
I have always tried my best to fully inform my clients of how
their particular loan works, what the moving parts are in their
home mortgage, where they have stability in the loan and where
there are risks of which they need to be aware. My clients and
myself discussed exit strategies and time horizons to do forward
planning for restructuring their loans if necessary.
What is happening now is that the assumptions we made about
mortgage products continuing to be available as they had been
are proving to be troublesome. The wholesale changes we have
seen - the over-reaction and severe cutbacks in lending programs -
will create a default problem for borrowers that will be much deeper
than it needs to be.
The lending community needs to recognize that there are many
borrowers who want to improve their mortgage situation, especially
those who are facing resets of their interest rates and payments
who opted for loans with rates that were fixed for 3 or 5 years. Many
of these borrowers have good credit scores, sufficient equity in their
homes, solid employment, income and cash reserves.
These borrowers deserve to have their needs met by a responsive
lending market. They are currently the proverbial baby being thrown
out with the bath water.
While it is unfortunate that there are borrowers who will face
foreclosure because they borrowed more than they could ultimately
afford (for many reasons), that does not mean that the vast majority
of borrowers need to be under-served with reasonable lending
alternatives.
If you, or anyone you know, needs to investigate their options for
a new mortgage, have them call me. I still have access to
lending choices that may provide a solution.
They Need to Allow for a "Soft Landing"
The news about the mortgage defaults and foreclosures is in
all the media, several times a week. Statistics show that the
rate of defaults is much higher than they have been over the
last few years.
When the real estate market peaks and property values
start to decline even a little bit, the mistakes that the lenders
have made with aggressive lending practices start to be
revealed.
This is what we have been seeing, starting with the what has
become to be called the "sub-prime" crisis. The underwriting
of these loans was very aggressive, allowing cumulative loans
up to 100% of the value of the home, allowing below-average
credit scores, little insistence on documenting the income
for qualifying and not caring if there was much in the way of
cash reserves for the borrower.
As a result, these high-risk loans are having trouble performing
by having payments being made on time. This makes the
investors nervous, and there are monetary losses up and down
the line when the money doesn't arrive as planned.
Now the investors, and by extension the lenders, have with-
drawn many lending programs and over-reacted to the situation.
Just a few months ago, they saw reasonable risk associated
with certain credit profiles and they were willing to make those
loans. In today's environment, these same credit profiles are
representing unacceptable risk at any price.
So, the pendulum has swung from being very permissive to
very restrictive in such a short period of time that borrowers
are finding themselves without many acceptable choices
for restructuring their debt.
The borrowers need to have some confidence that the rug
has not been pulled out from under them. For their well-
being, a reasonable plan would have been for the investors/
lenders to slowly pull back from their most risky lending
profiles and continue to accept reasonable risk. This would
have allowed borrowers to still have an opportunity to
restructure their debt, albeit with fewer choices and possibly
somewhat higher rates and fees. But at least they could
pursue options.
Instead, the investors/lenders have lost all confidence in their
ability to assess mortgage risk. They do not know where the
line is where clients will still invest in their mortgage-backed
security pools, so they have decided to withdraw to a large
degree from offering loan programs that rely on funding through
Wall Street.
It will take some time for these investors/lenders to slowly
introduce different degrees of risk in their mortgage offerings
from the very conservative posture they are now taking. They
will have to discover where the clients' appetite is for any new
mortgage offering. They know that there will be a market among
the borrowing public because they are effectively creating pent-up
demand by withdrawing programs from the market.
I have always tried my best to fully inform my clients of how
their particular loan works, what the moving parts are in their
home mortgage, where they have stability in the loan and where
there are risks of which they need to be aware. My clients and
myself discussed exit strategies and time horizons to do forward
planning for restructuring their loans if necessary.
What is happening now is that the assumptions we made about
mortgage products continuing to be available as they had been
are proving to be troublesome. The wholesale changes we have
seen - the over-reaction and severe cutbacks in lending programs -
will create a default problem for borrowers that will be much deeper
than it needs to be.
The lending community needs to recognize that there are many
borrowers who want to improve their mortgage situation, especially
those who are facing resets of their interest rates and payments
who opted for loans with rates that were fixed for 3 or 5 years. Many
of these borrowers have good credit scores, sufficient equity in their
homes, solid employment, income and cash reserves.
These borrowers deserve to have their needs met by a responsive
lending market. They are currently the proverbial baby being thrown
out with the bath water.
While it is unfortunate that there are borrowers who will face
foreclosure because they borrowed more than they could ultimately
afford (for many reasons), that does not mean that the vast majority
of borrowers need to be under-served with reasonable lending
alternatives.
If you, or anyone you know, needs to investigate their options for
a new mortgage, have them call me. I still have access to
lending choices that may provide a solution.
Wednesday, August 15, 2007
Saving Money in The Mortgage Process-Keeping an Eye on the Costs
Would you like to save money on your next mortgage? Who
wouldn't?!
There are at least three distinct ways to save money and two of
them work very well together.
1. Try to get the fees reduced from as many service providers
as possible.
2. Make sure that you are treated fairly by paying reasonable
fees, and don't overpay.
3. Make sure that the mortgage product you are getting is
truly suitable for you so that you are not forced to go
through the process prematurely or pay additional fees
upon payoff.
Let's take a look at how these strategies can work for you.
1. Getting the fees reduced.
In my opinion, this strategy is the least productive for a
number of reasons.
A couple of issues ago, I went through a list of typical costs
that borrowers encounter on their settlement statement. Most
of these were fixed costs for things like appraisal, credit report,
processing fees, document preparation, sign-up service,
escrow fee, title fee and loan origination fee.
It is very difficult to generate substantial savings by working
on most of these fees. We are not going to be able to ask
Federal Express or UPS to reduce their messenger fees.
There is no negotiation for credit report fees, flood deter-
mination fees, most escrow or title fees or the fee structure
that the lenders impose for their administrative fees.
In fact, because of the scrutiny by regulators, lenders in
particular cannot negotiate their fees. They could be
accused of discriminatory lending practices for reducing
the fee to one borrower and maintaining a higher fee for
someone else.
Also, there are some diminishing returns even if you are
successful in negotiating reasonable service fees downward.
We all work to provide for ourselves and our families. If a
service provider is attentive, conscientious, competent, and
delivers what they promise, they deserve a reasonable fee
for their service. If you are successful in "grinding" them
down on their fees, you may find that their incentive to do
a quality job for you is diminished. If they have a choice to
finish their work on a transaction for which they will be paid
in full, or to prioritize a job for the client who is paying them
less than their standard fee, they will probably work harder
for the full fee.
This does not mean that you should blindly pay anything
that is asked of you. Which leads us to Point 2.
2. Pay Reasonable Fees, and Don't Overpay.
As part of your research for getting your mortgage, you
should have a good idea of what is considered a normal
range for the closing costs.
You may choose to have them enumerated to you, or
to compare the Good Faith Estimates that are provided
to you shortly after loan application.
You may just want to know the total amounts, figuring
that there will be some variance on each of the individual
fees, but that your final amount should not exceed a
limit that you have determined.
You will definitely want to determine who can be your
trusted advisor to help you understand what the fees are
for, if they are warranted in your case, and if the amounts
being charged are reasonable.
If that person is someone like me, you will get straight
answers and thorough explanations without the mumbo-
jumbo that is common in the mortgage business.
In fact, every good decision that you make will be as a
result of finding the right people to help you through the
process.
What you want to avoid are the loan originators who have
mark-ups on services provided to them, and who negotiate
additional payments from the lenders without informing you
and then charging you as if they weren't receiving that
compensation.
For example, credit reports are usually billed at $15-20.
If your lender charges you $50, you are being overcharged
in an unscrupulous manner. Your trusted advisor could
help you uncover that kind of activity.
In mortgage brokerage, we are provided a matrix of
pricing choices from the lenders. They tell us on a daily
basis what interest rates are available, and what the
"price" is for that rate. The prices can either be quoted
as 'discount", "par", or "premium".
Discount points mean that the borrower will pay the
lender to obtain the corresponding interest rate in addition
to the loan origination fee. The borrower would be getting
an interest rate that is lower than the "normal" rate of the
day.
Par means that the lender will neither receive a fee or
pay a fee for that interest rate. This interest rate is
considered "normal" for the day. The borrower pays the loan
origination fee in this case and that should be properly disclosed
by the broker.
Premium means that the lender will pay a fee to obtain
an interest rate that is higher than the "normal" rate of
the day. The fee that the lender is paying, plus the
fee quoted to the borrower for loan origination would
comprise the compensation to the mortgage broker.
The way you "save" money in these cases is to be attentive to
the fees you are quoted. Accept the fact that you will pay
reasonable fees for the services performed. But, refuse to
do business with companies or persons who will try to slip
the extra, unwarranted costs along to you, or who attempt
to be extraordinarily compensated without adding additional
value.
3. Suitability of Mortgage Product.
When you go through the mortgage process, you will probably
pay a few thousand dollars for closing costs in addition to any
loan origination fee that you agree to pay.
It's easy to lose sight of that cost in the sheer magnitude of
the amount of money being borrowed.
There are times that ending your mortgage contract early and
paying additional fees to refinance your loan is to your obvious
benefit. An easy example is when interest rates drop and you
can have the benefit of a lower rate and lower payment, and
the costs for the refinance can be recovered over a short period
of time.
These choices should be made voluntarily by you because the
rewards to you are so clear.
There are times that you may feel the need to refinance, and it
is still beneficial, but the need should never have existed in the
first place.
Before you finalize your decision on the type of loan you are
seeking, make sure that your loan originator is doing a good job
of understanding your needs, your goals, your risk tolerance and
your time horizons.
Without a candid conversation about these areas, you may very
well find yourself placed in a loan that is inappropriate for you.
When that happens, you will seek a new solution to the problem
it creates and you will spend more money for a new loan that
may never have been needed if things had been done properly
at the beginning.
Let's say that you plan on living in the home for 5-10 years. If a
loan originator understands this, they should be seeking loans for
you that include 30-year loans, as well as those that are fixed for
5, 7, and 10 years. A recommendation for a 3-year fixed rate loan,
or an adjustable rate loan should only be made when you fully
understand the risks of rate changes that those loans would entail.
There are times that your credit score, or employment situation may
dictate that a 3-year fixed or an adjustable rate loan are the only
available choices. But, this needs to be fully explained to you, and
you should be able to verify it with your trusted advisor. Otherwise,
you have fallen prey to someone who will be paid for that piece of
business, and is hoping to "churn" your mortgage for additional future
compensation without regard to your needs.
Another thing to look out for is the prepayment penalty. Again, there
are times that the best terms available may include this clause in
the documents. But you need to know what the alternative rate and
fee structure would be without a prepayment penalty so that you can
make an informed decision. Or you need to accept the prepayment
clause for a limited period of time - say, 1 year or 3 years - if that
fits your comfort zone.
The unscrupulous loan originator will accept compensation from the
lender (as a premium) for including a prepayment fee in the loan.
They will fail to inform you of that fact, and when you are ready to
pay off the loan, you will discover that it costs additional thousands
of dollars to get out of the loan.
Don't let these kind of things happen to you.
And the best way to save money in the mortgage process is to
combine Strategies 2 & 3, and it all starts with working with the
right person. They will care about your goals and your needs, and
will deliver their service at fair compensation levels. No mark-ups,
or trying to slip in extra fees or terms that trigger the early payoff
of your loan because you can't tolerate what you were put into.
Look for the right person.
wouldn't?!
There are at least three distinct ways to save money and two of
them work very well together.
1. Try to get the fees reduced from as many service providers
as possible.
2. Make sure that you are treated fairly by paying reasonable
fees, and don't overpay.
3. Make sure that the mortgage product you are getting is
truly suitable for you so that you are not forced to go
through the process prematurely or pay additional fees
upon payoff.
Let's take a look at how these strategies can work for you.
1. Getting the fees reduced.
In my opinion, this strategy is the least productive for a
number of reasons.
A couple of issues ago, I went through a list of typical costs
that borrowers encounter on their settlement statement. Most
of these were fixed costs for things like appraisal, credit report,
processing fees, document preparation, sign-up service,
escrow fee, title fee and loan origination fee.
It is very difficult to generate substantial savings by working
on most of these fees. We are not going to be able to ask
Federal Express or UPS to reduce their messenger fees.
There is no negotiation for credit report fees, flood deter-
mination fees, most escrow or title fees or the fee structure
that the lenders impose for their administrative fees.
In fact, because of the scrutiny by regulators, lenders in
particular cannot negotiate their fees. They could be
accused of discriminatory lending practices for reducing
the fee to one borrower and maintaining a higher fee for
someone else.
Also, there are some diminishing returns even if you are
successful in negotiating reasonable service fees downward.
We all work to provide for ourselves and our families. If a
service provider is attentive, conscientious, competent, and
delivers what they promise, they deserve a reasonable fee
for their service. If you are successful in "grinding" them
down on their fees, you may find that their incentive to do
a quality job for you is diminished. If they have a choice to
finish their work on a transaction for which they will be paid
in full, or to prioritize a job for the client who is paying them
less than their standard fee, they will probably work harder
for the full fee.
This does not mean that you should blindly pay anything
that is asked of you. Which leads us to Point 2.
2. Pay Reasonable Fees, and Don't Overpay.
As part of your research for getting your mortgage, you
should have a good idea of what is considered a normal
range for the closing costs.
You may choose to have them enumerated to you, or
to compare the Good Faith Estimates that are provided
to you shortly after loan application.
You may just want to know the total amounts, figuring
that there will be some variance on each of the individual
fees, but that your final amount should not exceed a
limit that you have determined.
You will definitely want to determine who can be your
trusted advisor to help you understand what the fees are
for, if they are warranted in your case, and if the amounts
being charged are reasonable.
If that person is someone like me, you will get straight
answers and thorough explanations without the mumbo-
jumbo that is common in the mortgage business.
In fact, every good decision that you make will be as a
result of finding the right people to help you through the
process.
What you want to avoid are the loan originators who have
mark-ups on services provided to them, and who negotiate
additional payments from the lenders without informing you
and then charging you as if they weren't receiving that
compensation.
For example, credit reports are usually billed at $15-20.
If your lender charges you $50, you are being overcharged
in an unscrupulous manner. Your trusted advisor could
help you uncover that kind of activity.
In mortgage brokerage, we are provided a matrix of
pricing choices from the lenders. They tell us on a daily
basis what interest rates are available, and what the
"price" is for that rate. The prices can either be quoted
as 'discount", "par", or "premium".
Discount points mean that the borrower will pay the
lender to obtain the corresponding interest rate in addition
to the loan origination fee. The borrower would be getting
an interest rate that is lower than the "normal" rate of the
day.
Par means that the lender will neither receive a fee or
pay a fee for that interest rate. This interest rate is
considered "normal" for the day. The borrower pays the loan
origination fee in this case and that should be properly disclosed
by the broker.
Premium means that the lender will pay a fee to obtain
an interest rate that is higher than the "normal" rate of
the day. The fee that the lender is paying, plus the
fee quoted to the borrower for loan origination would
comprise the compensation to the mortgage broker.
The way you "save" money in these cases is to be attentive to
the fees you are quoted. Accept the fact that you will pay
reasonable fees for the services performed. But, refuse to
do business with companies or persons who will try to slip
the extra, unwarranted costs along to you, or who attempt
to be extraordinarily compensated without adding additional
value.
3. Suitability of Mortgage Product.
When you go through the mortgage process, you will probably
pay a few thousand dollars for closing costs in addition to any
loan origination fee that you agree to pay.
It's easy to lose sight of that cost in the sheer magnitude of
the amount of money being borrowed.
There are times that ending your mortgage contract early and
paying additional fees to refinance your loan is to your obvious
benefit. An easy example is when interest rates drop and you
can have the benefit of a lower rate and lower payment, and
the costs for the refinance can be recovered over a short period
of time.
These choices should be made voluntarily by you because the
rewards to you are so clear.
There are times that you may feel the need to refinance, and it
is still beneficial, but the need should never have existed in the
first place.
Before you finalize your decision on the type of loan you are
seeking, make sure that your loan originator is doing a good job
of understanding your needs, your goals, your risk tolerance and
your time horizons.
Without a candid conversation about these areas, you may very
well find yourself placed in a loan that is inappropriate for you.
When that happens, you will seek a new solution to the problem
it creates and you will spend more money for a new loan that
may never have been needed if things had been done properly
at the beginning.
Let's say that you plan on living in the home for 5-10 years. If a
loan originator understands this, they should be seeking loans for
you that include 30-year loans, as well as those that are fixed for
5, 7, and 10 years. A recommendation for a 3-year fixed rate loan,
or an adjustable rate loan should only be made when you fully
understand the risks of rate changes that those loans would entail.
There are times that your credit score, or employment situation may
dictate that a 3-year fixed or an adjustable rate loan are the only
available choices. But, this needs to be fully explained to you, and
you should be able to verify it with your trusted advisor. Otherwise,
you have fallen prey to someone who will be paid for that piece of
business, and is hoping to "churn" your mortgage for additional future
compensation without regard to your needs.
Another thing to look out for is the prepayment penalty. Again, there
are times that the best terms available may include this clause in
the documents. But you need to know what the alternative rate and
fee structure would be without a prepayment penalty so that you can
make an informed decision. Or you need to accept the prepayment
clause for a limited period of time - say, 1 year or 3 years - if that
fits your comfort zone.
The unscrupulous loan originator will accept compensation from the
lender (as a premium) for including a prepayment fee in the loan.
They will fail to inform you of that fact, and when you are ready to
pay off the loan, you will discover that it costs additional thousands
of dollars to get out of the loan.
Don't let these kind of things happen to you.
And the best way to save money in the mortgage process is to
combine Strategies 2 & 3, and it all starts with working with the
right person. They will care about your goals and your needs, and
will deliver their service at fair compensation levels. No mark-ups,
or trying to slip in extra fees or terms that trigger the early payoff
of your loan because you can't tolerate what you were put into.
Look for the right person.
Wednesday, August 1, 2007
It Is Not "Business As Usual"-
More Underwriting Changes
If you have been following the headlines in the business
section, you know that there has been a lot of publicity
about the increase in mortgage defaults and foreclosures,
the losses that the lenders have been experiencing and
the losses that are rippling through many brokerage funds
that Wall Street investors bought into.
As a result of this, there is a continuing trend of tightening
up the underwriting and approval process, of limiting loan
amounts and loan-to-value ratios, and requiring higher
credit scores than they had been requiring in the past.
Some of the recent changes to be aware of:
100% financing is much tougher than it was before, and
there has been a withdrawal from doing these on a
"stated income" basis.
Interest only loans are still available, but the qualifying
for these loans will be based on the fully amortized
payment of the note rate, or on some calculation of
the fully-indexed rate if the loan is adjustable rate.
Minimum credit scores have been elevated. Where we
could have program availability with lower scores a
few months ago, they are now demanding higher
scores for the same lending program.
Appraisals are going through a more rigorous review
with the lenders and investors. Since the real estate
market has peaked, and dipped in some areas, the
reliance on the valuation is more important than ever.
More emphasis is being placed on cash reserves,
especially on the stated income loans. The guide-
lines are being closely adhered to, and approvals
on loans with marginal liquidity are much tougher
to come by.
The investors are at the top of the food chain. They have
the funds that fuel the entire process because they are
the ones that buy the Mortgage Backed Securities (MBS)
that are marketed through Wall Street.
The investors stipulate the levels of risk that they are
willing to accept in the MBS pools. They determine the
minimum credit scores, the loan-to-value ratios, the
monthly debt-to-income ratios, and the amount of cash
reserves the borrower needs.
They will also prescribe whether they will accept fixed
or adjustable rate loans, detached homes or condos, and
whether the pool will include stated income loans or
fully-documented loans.
From there, the lenders create loans based on those
guidelines. It is important for the lenders to create loans
that will fit into these MBS pools because they do not
want to keep these loans in their own portfolios and tie
up their available funds.
There are lenders that will create loans for their own
portfolios and not rely on selling the loans through the
MBS system. They generally will only offer adjustable
rate loans, their loan-to-value ratios are generally more
conservative, and their minimum credit score guidelines
are higher.
At times, it is difficult to understand why some lenders'
and investor guidelines are seemingly arbitrary and
incongruent.
But that is also my value as a mortgage broker. Because
there are so many investors, programs, and lenders, I have
a lot of choices to investigate to make the best match I can
for my clients. I would not want everyone's answer to be
exactly the same.
So, as we go through this tightening in the credit markets,
there are still many ways to put transactions together. It
is not as easy as it was a few months back, so it is time
to draw on my 30 years experience to brainstorm solutions
for this changing market.
More Underwriting Changes
If you have been following the headlines in the business
section, you know that there has been a lot of publicity
about the increase in mortgage defaults and foreclosures,
the losses that the lenders have been experiencing and
the losses that are rippling through many brokerage funds
that Wall Street investors bought into.
As a result of this, there is a continuing trend of tightening
up the underwriting and approval process, of limiting loan
amounts and loan-to-value ratios, and requiring higher
credit scores than they had been requiring in the past.
Some of the recent changes to be aware of:
100% financing is much tougher than it was before, and
there has been a withdrawal from doing these on a
"stated income" basis.
Interest only loans are still available, but the qualifying
for these loans will be based on the fully amortized
payment of the note rate, or on some calculation of
the fully-indexed rate if the loan is adjustable rate.
Minimum credit scores have been elevated. Where we
could have program availability with lower scores a
few months ago, they are now demanding higher
scores for the same lending program.
Appraisals are going through a more rigorous review
with the lenders and investors. Since the real estate
market has peaked, and dipped in some areas, the
reliance on the valuation is more important than ever.
More emphasis is being placed on cash reserves,
especially on the stated income loans. The guide-
lines are being closely adhered to, and approvals
on loans with marginal liquidity are much tougher
to come by.
The investors are at the top of the food chain. They have
the funds that fuel the entire process because they are
the ones that buy the Mortgage Backed Securities (MBS)
that are marketed through Wall Street.
The investors stipulate the levels of risk that they are
willing to accept in the MBS pools. They determine the
minimum credit scores, the loan-to-value ratios, the
monthly debt-to-income ratios, and the amount of cash
reserves the borrower needs.
They will also prescribe whether they will accept fixed
or adjustable rate loans, detached homes or condos, and
whether the pool will include stated income loans or
fully-documented loans.
From there, the lenders create loans based on those
guidelines. It is important for the lenders to create loans
that will fit into these MBS pools because they do not
want to keep these loans in their own portfolios and tie
up their available funds.
There are lenders that will create loans for their own
portfolios and not rely on selling the loans through the
MBS system. They generally will only offer adjustable
rate loans, their loan-to-value ratios are generally more
conservative, and their minimum credit score guidelines
are higher.
At times, it is difficult to understand why some lenders'
and investor guidelines are seemingly arbitrary and
incongruent.
But that is also my value as a mortgage broker. Because
there are so many investors, programs, and lenders, I have
a lot of choices to investigate to make the best match I can
for my clients. I would not want everyone's answer to be
exactly the same.
So, as we go through this tightening in the credit markets,
there are still many ways to put transactions together. It
is not as easy as it was a few months back, so it is time
to draw on my 30 years experience to brainstorm solutions
for this changing market.
Wednesday, July 18, 2007
It's Like Herding Cats-Your Closing
Costs Go Many Different Directions
Through the course of your purchase or refinance transaction
there are many companies that perform services essential to
the timely and successful closing.
When you review your good faith estimate at the beginning of
the transaction, or your closing statement from the escrow
company at the conclusion of it, you will see fees being
disbursed to many different service providers. You may also
wonder who they are and what did they do to earn their fee.
Let's work our way through a typical escrow closing (or settle-
ment) statement, and describe the services that were paid for.
APPRAISAL FEE: This goes to the individual appraiser or
the appraisal company that was hired to value the home. Their
job is to ascertain the market value by comparing the home to
be appraised with recently closed escrows on homes that are
most similar.
TAX SERVICE: This fee goes to a company that provides one
of two services to the lender. If you have an impound account
where your taxes are collected monthly with your payment, the
tax service company provides copies of the tax bills each year
to the lender for payment. If you do not have an impound
account, they monitor your property's records so that they can
inform the lender is the taxes are going unpaid. The lender
wants this information because unpaid property taxes can
supersede their lien interest on the property and potentially
wipe out their loan in a tax-sale auction.
FLOOD CERTIFICATION FEE: This fee goes to a company
that reviews the latest maps issued by the Federal Government
that determine where the flood zones are. If your property falls
within a flood zone, there is a separate requirement for you to
purchase Federal flood insurance.
WIRE FEE: When your loan is funded by the lender, the most
widely accepted way to get the funds to escrow is by using
the Federal Reserve wire system. There is a cost that you
end up paying, but it is small compared to relying on the
issuance of a cashier's check. If the check were to create
even a one-day delay, your daily interest cost would be higher
than the wire fee.
PROCESSING FEE: At our mortgage brokerage, there is
a fee that we collect for the processing of your loan. It is a
standard fee that is designed to cover administrative costs in
connection with your loan request.
SETTLEMENT/CLOSING/ESCROW FEE: The escrow company
is responsible for pulling together the various components of
the transaction so that it closes successfully. These would
include the lender, title company, insurance agent, real estate
agents, notary services, homeowner's associations, and of
course the clients. This fee goes to them for their work.
TITLE INSURANCE: You provide a policy of title insurance for
the benefit of the lender to insure them that they have the first
lien on the property. (Or second lien, if that was what they
intended to provide). The lender's lien on the property will
always be behind unpaid property taxes and there may be some
exclusions that run with the property that the lender will have to
find acceptable. There may be special endorsements that are
charged separately in connection with the title insurance.
LOAN SIGNING/NOTARY FEE: In recent years, there has
developed a growing group of independent contractors who
specialize in signing up the clients with their loan documents.
Many times they will either meet the client at the escrow
company, or may travel to the homes or businesses of the
clients to administer the sign-up and notarize their signatures.
DOCUMENT DOWNLOAD: Until recently, the lender would
charge for the creation of the loan documents and they would
send them by messenger to the escrow company to coordinate
the signing. Now that electronic transmission is more readily
accepted, the escrow companies are imposing a modest
charge for paper/toner/time to create the documents.
MESSENGER SERVICES: There is usually a messenger
charge to return the signed loan documents back to the lender.
Since time is of the essence and it is important to be able to
track the documents, messenger service is the best way to
accomplish the return of the documents.
LOAN TIE-IN FEE: This fee is charged by the title company
for receiving the wired loan proceeds and to be the "deep-
pockets" company to be accountable for the funds. Since
escrow companies are not required to have substantial
financial reserves, there is a reluctance to send hundreds
of thousands or millions of dollars to them. Title companies,
on the other hand, have strong financial backing and are
insured by the state. This fee covers some administrative
costs.
LOAN ORIGINATION FEE: Many times we create the new
home loan so that it is priced as a "zero-point" transaction.
That means that the lender will pay us for our service of
originating the loan. Sometimes, the borrower would like to
receive a lower interest rate and is willing to pay the loan
origination fee and receive the benefit of the lower rate over
the life of the loan.
This covers most of the standard fees that are charged in
connection with a new loan on a property.
There has been some attempts to "bundle" the services and
fees to create some economies for the borrower. Title
companies have begun to offer a consolidated price for the
title insurance when using their escrow services. Some
lenders will collect for the appraisal fee and pay it to their
appraiser without it being delineated separately.
But, as you can see, there are a number of different companies
that have each developed their own special area of expertise.
They are necessary service providers to the successful closing
of the transaction and each earn a fee for their service.
Costs Go Many Different Directions
Through the course of your purchase or refinance transaction
there are many companies that perform services essential to
the timely and successful closing.
When you review your good faith estimate at the beginning of
the transaction, or your closing statement from the escrow
company at the conclusion of it, you will see fees being
disbursed to many different service providers. You may also
wonder who they are and what did they do to earn their fee.
Let's work our way through a typical escrow closing (or settle-
ment) statement, and describe the services that were paid for.
APPRAISAL FEE: This goes to the individual appraiser or
the appraisal company that was hired to value the home. Their
job is to ascertain the market value by comparing the home to
be appraised with recently closed escrows on homes that are
most similar.
TAX SERVICE: This fee goes to a company that provides one
of two services to the lender. If you have an impound account
where your taxes are collected monthly with your payment, the
tax service company provides copies of the tax bills each year
to the lender for payment. If you do not have an impound
account, they monitor your property's records so that they can
inform the lender is the taxes are going unpaid. The lender
wants this information because unpaid property taxes can
supersede their lien interest on the property and potentially
wipe out their loan in a tax-sale auction.
FLOOD CERTIFICATION FEE: This fee goes to a company
that reviews the latest maps issued by the Federal Government
that determine where the flood zones are. If your property falls
within a flood zone, there is a separate requirement for you to
purchase Federal flood insurance.
WIRE FEE: When your loan is funded by the lender, the most
widely accepted way to get the funds to escrow is by using
the Federal Reserve wire system. There is a cost that you
end up paying, but it is small compared to relying on the
issuance of a cashier's check. If the check were to create
even a one-day delay, your daily interest cost would be higher
than the wire fee.
PROCESSING FEE: At our mortgage brokerage, there is
a fee that we collect for the processing of your loan. It is a
standard fee that is designed to cover administrative costs in
connection with your loan request.
SETTLEMENT/CLOSING/ESCROW FEE: The escrow company
is responsible for pulling together the various components of
the transaction so that it closes successfully. These would
include the lender, title company, insurance agent, real estate
agents, notary services, homeowner's associations, and of
course the clients. This fee goes to them for their work.
TITLE INSURANCE: You provide a policy of title insurance for
the benefit of the lender to insure them that they have the first
lien on the property. (Or second lien, if that was what they
intended to provide). The lender's lien on the property will
always be behind unpaid property taxes and there may be some
exclusions that run with the property that the lender will have to
find acceptable. There may be special endorsements that are
charged separately in connection with the title insurance.
LOAN SIGNING/NOTARY FEE: In recent years, there has
developed a growing group of independent contractors who
specialize in signing up the clients with their loan documents.
Many times they will either meet the client at the escrow
company, or may travel to the homes or businesses of the
clients to administer the sign-up and notarize their signatures.
DOCUMENT DOWNLOAD: Until recently, the lender would
charge for the creation of the loan documents and they would
send them by messenger to the escrow company to coordinate
the signing. Now that electronic transmission is more readily
accepted, the escrow companies are imposing a modest
charge for paper/toner/time to create the documents.
MESSENGER SERVICES: There is usually a messenger
charge to return the signed loan documents back to the lender.
Since time is of the essence and it is important to be able to
track the documents, messenger service is the best way to
accomplish the return of the documents.
LOAN TIE-IN FEE: This fee is charged by the title company
for receiving the wired loan proceeds and to be the "deep-
pockets" company to be accountable for the funds. Since
escrow companies are not required to have substantial
financial reserves, there is a reluctance to send hundreds
of thousands or millions of dollars to them. Title companies,
on the other hand, have strong financial backing and are
insured by the state. This fee covers some administrative
costs.
LOAN ORIGINATION FEE: Many times we create the new
home loan so that it is priced as a "zero-point" transaction.
That means that the lender will pay us for our service of
originating the loan. Sometimes, the borrower would like to
receive a lower interest rate and is willing to pay the loan
origination fee and receive the benefit of the lower rate over
the life of the loan.
This covers most of the standard fees that are charged in
connection with a new loan on a property.
There has been some attempts to "bundle" the services and
fees to create some economies for the borrower. Title
companies have begun to offer a consolidated price for the
title insurance when using their escrow services. Some
lenders will collect for the appraisal fee and pay it to their
appraiser without it being delineated separately.
But, as you can see, there are a number of different companies
that have each developed their own special area of expertise.
They are necessary service providers to the successful closing
of the transaction and each earn a fee for their service.
Monday, July 9, 2007
Appraisals Are Lower-More Lender Scrutiny
Appraisals Are Reflecting Lower Values
in the Market-And Being Scrutinized More
Closely
Over the past year, property values have stopped their upward
trend, stabilized in some areas, and have experienced a drop
in values in other areas.
It's the appraiser's assignment to ascertain a fair market value
for the subject property. They need to draw upon available data
from closed escrows and current homes listed for sale to help
them reach their conclusions.
The governing idea at work is that if a willing buyer has the
choice to buy any of the properties available and make a comp-
arison as to features and amenities, how much will they pay
for the subject property.
When the appraiser receives their assignment, they need to
perform an inspection of the property. In fact, the final valuation
they give is based on the property condition as of the date of
inspection.
When a client meets the appraiser at the property, they are
often surprised at how little time the appraiser spends at the
home. An experienced appraiser can take the measurements,
make note of the amenities, features and upgrades in the
home and finalize the room count very quickly.
The biggest part of the appraiser's job is to find homes that
have closed escrow or that are currently on the market that
are in close proximity to the subject property and that are
the most similar to the home to be appraised.
The appraiser will then do an analysis of those homes that
they have selected as being the best comparable sales or
"comps", and make dollar adjustments to make the comp
more like the subject property. For example, if the comp
has a superior view to the subject, the appraiser will subtract
their estimate of the value of the difference of that view from
the comp's value.
After making these kind of comparisons on a long list of
features of the homes, the appraiser arrives at an adjusted
value of the comp. They will perform this type of analysis on
3-6 closed sales and current listings to arrived at a reconciled
value of the subject property. It is not an arithmetic average,
but rather a reasoned sense of the value of the subject property
from the conclusions drawn from the analysis of the comparable
properties.
In today's market the closed sales, which may be up to about
6 months old, probably would lead to higher valuations. But,
the appraiser has to consider properties that are currently
listed for sale, and these comps are tending to lead to lower
property valuations.
Even after we arrange for an independent appraiser to perform
the appraisal, the lender is very interested in making sure that
the best possible data has been used to determine value, and
that the dollar adjustments made to come to the final conclusion
are reasonable and valid.
In the event the borrower doesn't make the payments as required,
the lender's final security for making sure that they can recover
the amount of the loan is their ability to force the sale of the
property. If the property value has been inflated, and the lender
does not perform due diligence to make sure that the valuation
is solid, they risk over-lending on a property and not being able
to protect their interests.
Because there has been a reaction from the lenders to tighten
their approval process and not be as lenient as they were 6-12
months ago, we are seeing that there is much more scrutiny
from the lenders in reviewing the appraisals.
It's important to understand that while these new guideline
changes are taking place, and appraisals are getting a closer
look, that the loan request now has more quality control checks
than it did in the past.
At times, this can create last-minute difficulties if a serious
difference of opinion develops between the appraiser and the
person reviewing their work. It may result in delays while the
differences are worked out, or a lesser loan amount being
approved, or the inability to work with that lender on that
property at that time.
I always try to ascertain the underwriting patterns of the lenders
with whom I place loan requests, and if there are changes
occurring that will affect my client. I always do my best to help
the client have a reasonable sense of what to expect on their
transaction.
in the Market-And Being Scrutinized More
Closely
Over the past year, property values have stopped their upward
trend, stabilized in some areas, and have experienced a drop
in values in other areas.
It's the appraiser's assignment to ascertain a fair market value
for the subject property. They need to draw upon available data
from closed escrows and current homes listed for sale to help
them reach their conclusions.
The governing idea at work is that if a willing buyer has the
choice to buy any of the properties available and make a comp-
arison as to features and amenities, how much will they pay
for the subject property.
When the appraiser receives their assignment, they need to
perform an inspection of the property. In fact, the final valuation
they give is based on the property condition as of the date of
inspection.
When a client meets the appraiser at the property, they are
often surprised at how little time the appraiser spends at the
home. An experienced appraiser can take the measurements,
make note of the amenities, features and upgrades in the
home and finalize the room count very quickly.
The biggest part of the appraiser's job is to find homes that
have closed escrow or that are currently on the market that
are in close proximity to the subject property and that are
the most similar to the home to be appraised.
The appraiser will then do an analysis of those homes that
they have selected as being the best comparable sales or
"comps", and make dollar adjustments to make the comp
more like the subject property. For example, if the comp
has a superior view to the subject, the appraiser will subtract
their estimate of the value of the difference of that view from
the comp's value.
After making these kind of comparisons on a long list of
features of the homes, the appraiser arrives at an adjusted
value of the comp. They will perform this type of analysis on
3-6 closed sales and current listings to arrived at a reconciled
value of the subject property. It is not an arithmetic average,
but rather a reasoned sense of the value of the subject property
from the conclusions drawn from the analysis of the comparable
properties.
In today's market the closed sales, which may be up to about
6 months old, probably would lead to higher valuations. But,
the appraiser has to consider properties that are currently
listed for sale, and these comps are tending to lead to lower
property valuations.
Even after we arrange for an independent appraiser to perform
the appraisal, the lender is very interested in making sure that
the best possible data has been used to determine value, and
that the dollar adjustments made to come to the final conclusion
are reasonable and valid.
In the event the borrower doesn't make the payments as required,
the lender's final security for making sure that they can recover
the amount of the loan is their ability to force the sale of the
property. If the property value has been inflated, and the lender
does not perform due diligence to make sure that the valuation
is solid, they risk over-lending on a property and not being able
to protect their interests.
Because there has been a reaction from the lenders to tighten
their approval process and not be as lenient as they were 6-12
months ago, we are seeing that there is much more scrutiny
from the lenders in reviewing the appraisals.
It's important to understand that while these new guideline
changes are taking place, and appraisals are getting a closer
look, that the loan request now has more quality control checks
than it did in the past.
At times, this can create last-minute difficulties if a serious
difference of opinion develops between the appraiser and the
person reviewing their work. It may result in delays while the
differences are worked out, or a lesser loan amount being
approved, or the inability to work with that lender on that
property at that time.
I always try to ascertain the underwriting patterns of the lenders
with whom I place loan requests, and if there are changes
occurring that will affect my client. I always do my best to help
the client have a reasonable sense of what to expect on their
transaction.
Wednesday, June 20, 2007
Foreclosure Epidemic-Bad As It Seems?
Is The "Foreclosure Epidemic" as Bad as It Seems?
I'm sure that you have heard that foreclosures have increased.
The national and local media publicize the statistics that defaults
are up from last year on a month-to-month comparison.
The primary segment of the mortgage business that has exper-
ienced the biggest problem is the "sub-prime" loans.
When you consider the spectrum of lending, the most qualified
borrowers who seek mainstream lending products are classified
in the "A" category.
Qualified borrowers who seek less mainstream products, or who
need to obtain loans that allow them to borrow as much as 95%
to 100% of the purchase price are commonly classified in the"A-"
category.
When you categorize borrowers who have diminished credit
scores, who need loans approaching 100% of the purchase
price, and who may have difficulty documenting their income
and assets, they fall into the "B" and "C" classifications.
This is the category that is commonly called "sub-prime".
Over the past few years, the lenders and investors who purchase
loans have been much more liberal in their willingness to approve
loans in the "sub-prime" group. They were willing to accept
lower credit scores than normal; they were willing to accept
borrowers who merely stated their income without asking the
borrowers to prove it; they were willing to accept borrowers who
did not have much in the way of provable assets for downpayment,
closing costs, and cash reserves.
The media and legislators are making headlines out of the fact
that foreclosures have increased. There are some calls for more
legislation to protect borrowers from potentially losing their homes.
They suggest that all the defaults may be a result of
predatory mortgage practices and bad faith on the part of the
lenders to put people in this position.
The fact that lenders have been more permissive in the approval
process in the recent past has been a very good thing for many
people.
The appreciation of home values can be directly tied to the fact
that more borrowers had been able to qualify and that increased
demand kept prices high. The slowdown in property appreciation
and lenders tightening their underwriting practices have been
occurring at the same time.
The bigger point that I want to make is that there are many
people who want the American Dream of home ownership. If
we adhered to the old paradigm of loan approvals, we would
expect every loan to be fully documented, for borrowers to
have 20% cash down payment, and to have strong credit
histories with only the occasional blemish on their credit reports.
This old underwriting standard would eliminate many borrowers
from ever having a chance at home ownership. Because the
lending industry was creative in the development of new mort-
gage products and felt comfortable to be more liberal in their
qualifying (especially when they thought that property values
were increasing), many people were able to move from being
renters to homeowners.
Once they became homeowners, they have an opportunity for
any appreciation in property values to start adding to their
equity and to their net worth. They are no longer on the outside
looking in.
One statistic I heard recently was that about 13% of the sub-
prime borrowers were facing default and foreclosure. As bad
as that is for those borrowers, it still means that 87% of these
"lesser" qualified borrowers were still maintaining their payments
and still having the opportunity to build equity over time.
Now, please don't misunderstand me. I do not want to see
anyone lose their home to foreclosure. I especially feel bad for
borrowers who were not well-advised by their loan originator as
to potential risks for certain loan products that may not have
been a suitable fit for them. (You know that I have railed against
those less-than-scrupulous lenders who see borrowers
as dollar signs, and not as real people that deserve respect and
suitable advice.)
I don't think, however, that the system is broken when a certain
percentage of homeowners don't succeed in keeping their homes.
I don't think there is any benefit for legislators to create more laws
to protect against this spike in the number of foreclosures. Market
forces will be able to adapt to this much more efficiently and effectively.
Lenders will cut back on their approval process (like they are
now doing). They will insist on higher credit scores. They
will insist on the borrowers proving their income and their
assets to show that they providing accurate information for the
lender to make their decision. There will be fewer "unqualified"
borrowers obtaining home loans and once these new standards
are in place, there will be fewer foreclosures going forward.
I think it is important for us to realize that more people have
benefited from the opportunity to buy homes, to provide a more
stable home environment for their families, to realize the benefits
of the tax law for interest and property tax payments
(instead of paying rent and buying the landlord's property for
the landlord's benefit) and to have the pride of ownership that
comes with all of that.
The pendulum swung too far to the side of laxity in under-
writing and is now correcting itself by adhering to stricter
standards. The system works, despite some rough patches
at times.
I'm sure that you have heard that foreclosures have increased.
The national and local media publicize the statistics that defaults
are up from last year on a month-to-month comparison.
The primary segment of the mortgage business that has exper-
ienced the biggest problem is the "sub-prime" loans.
When you consider the spectrum of lending, the most qualified
borrowers who seek mainstream lending products are classified
in the "A" category.
Qualified borrowers who seek less mainstream products, or who
need to obtain loans that allow them to borrow as much as 95%
to 100% of the purchase price are commonly classified in the"A-"
category.
When you categorize borrowers who have diminished credit
scores, who need loans approaching 100% of the purchase
price, and who may have difficulty documenting their income
and assets, they fall into the "B" and "C" classifications.
This is the category that is commonly called "sub-prime".
Over the past few years, the lenders and investors who purchase
loans have been much more liberal in their willingness to approve
loans in the "sub-prime" group. They were willing to accept
lower credit scores than normal; they were willing to accept
borrowers who merely stated their income without asking the
borrowers to prove it; they were willing to accept borrowers who
did not have much in the way of provable assets for downpayment,
closing costs, and cash reserves.
The media and legislators are making headlines out of the fact
that foreclosures have increased. There are some calls for more
legislation to protect borrowers from potentially losing their homes.
They suggest that all the defaults may be a result of
predatory mortgage practices and bad faith on the part of the
lenders to put people in this position.
The fact that lenders have been more permissive in the approval
process in the recent past has been a very good thing for many
people.
The appreciation of home values can be directly tied to the fact
that more borrowers had been able to qualify and that increased
demand kept prices high. The slowdown in property appreciation
and lenders tightening their underwriting practices have been
occurring at the same time.
The bigger point that I want to make is that there are many
people who want the American Dream of home ownership. If
we adhered to the old paradigm of loan approvals, we would
expect every loan to be fully documented, for borrowers to
have 20% cash down payment, and to have strong credit
histories with only the occasional blemish on their credit reports.
This old underwriting standard would eliminate many borrowers
from ever having a chance at home ownership. Because the
lending industry was creative in the development of new mort-
gage products and felt comfortable to be more liberal in their
qualifying (especially when they thought that property values
were increasing), many people were able to move from being
renters to homeowners.
Once they became homeowners, they have an opportunity for
any appreciation in property values to start adding to their
equity and to their net worth. They are no longer on the outside
looking in.
One statistic I heard recently was that about 13% of the sub-
prime borrowers were facing default and foreclosure. As bad
as that is for those borrowers, it still means that 87% of these
"lesser" qualified borrowers were still maintaining their payments
and still having the opportunity to build equity over time.
Now, please don't misunderstand me. I do not want to see
anyone lose their home to foreclosure. I especially feel bad for
borrowers who were not well-advised by their loan originator as
to potential risks for certain loan products that may not have
been a suitable fit for them. (You know that I have railed against
those less-than-scrupulous lenders who see borrowers
as dollar signs, and not as real people that deserve respect and
suitable advice.)
I don't think, however, that the system is broken when a certain
percentage of homeowners don't succeed in keeping their homes.
I don't think there is any benefit for legislators to create more laws
to protect against this spike in the number of foreclosures. Market
forces will be able to adapt to this much more efficiently and effectively.
Lenders will cut back on their approval process (like they are
now doing). They will insist on higher credit scores. They
will insist on the borrowers proving their income and their
assets to show that they providing accurate information for the
lender to make their decision. There will be fewer "unqualified"
borrowers obtaining home loans and once these new standards
are in place, there will be fewer foreclosures going forward.
I think it is important for us to realize that more people have
benefited from the opportunity to buy homes, to provide a more
stable home environment for their families, to realize the benefits
of the tax law for interest and property tax payments
(instead of paying rent and buying the landlord's property for
the landlord's benefit) and to have the pride of ownership that
comes with all of that.
The pendulum swung too far to the side of laxity in under-
writing and is now correcting itself by adhering to stricter
standards. The system works, despite some rough patches
at times.
Wednesday, June 6, 2007
PMI Making A Comeback
PMI-Private Mortgage Insurance-is making
a comeback
In the mortgage lending business, a loan that is 80% of the value
of the home is considered to be a normal risk for the lender and
is considered to be the industry standard.
If a borrower needs financing that is more than 80% of the value
of the home (loan-to-value, LTV), that would represent a higher
risk to the lender and would be considered if the borrower has
better qualifications and if the lender were to receive higher than
normal rates and fees to compensate themselves for the higher
risk, or if that higher risk could be passed along to another party.
Private Mortgage Insurance (PMI) was developed in an effort to
give the lenders a feeling of comfort that they were not taking an
undue risk, and still provide a means for borrowers to obtain
home financing without needing 20% down payment.
PMI provides insurance to the lender in the case of a default in
payments by the borrower which would result in a monetary
loss to the lender. The borrower will be the one who pays the
cost of the policy and the premiums are usually collected with
each monthly payment from the borrower.
Let's take a look at an example. Let's say that the borrower is
buying a home valued at $500,000. They are able to provide a
down payment of $50,000 and they have additional funds for their
closing costs and cash reserves after closing. They need to
finance $450,000 which is a 90% LTV.
In the past few years the most popular way to put his
transaction together was to create a first loan of $400,000
(80% LTV) and couple it with a second loan of $50,000 for a
combined LTV of 90%. This was preferred because the first
loan was at the industry standard of 80%, so it was acceptable
risk to the lender and did not require PMI and was offered at
competitive interest rates and fees. The second loan of the
additional 10% was where the lender was experiencing the
additional risk. Rates and fees were higher only on this portion
of the financing to reflect that higher risk to the lender. Also,
the mortgage market was eager to create these second loans
because investors could receive higher rates, property values
were increasing and mortgage defaults were not common.
I'm sure that you have been hearing and reading that more
recently property values have leveled off and diminished in some
areas, and that mortgage defaults have increased. This has led
to less willingness of the lenders to create these second loans,
especially where the combined LTV was at 100%. As the
availability of these second loans is diminishing, we are seeing
that lenders are more willing to create one loan and to reduce
their risk by using PMI again.
The way the transaction would be put together using PMI is by
the lender creating a loan of $450,000 (90% LTV). The interest
rate on the loan itself would be at competitive rates and fees,
but the borrower would be required to qualify for and provide a
PMI policy to the lender. The PMI company would charge a
premium based on the LTV, whether the loan is fixed-rate or
adjustable-rate, whether the borrower qualified by providing
full documentation or was using stated income. The cost of
this policy could be in the range of $200-$300 per month.
But, it is a lot less expensive than trying to save another
$50,000 and missing out on home ownership in the meantime.
PMI is currently tax-deductible for borrowers whose adjusted
gross income (AGI) is $100,000 or less, is partially deductible
for AGI between $100,000-$109,000, and loses its deductibility
for AGI above $109,000.
Some lenders may offer to charge a higher rate on the loan, and
to have the mortgage insurance paid by them. This will then
show as interest being paid by the borrower, not insurance
premium, and will increase the chances of tax deductibility
without concern over the AGI limitations.
As always, there are many nuances to be explored to make sure
that you are being well-served by the mortgage recommendation.
Be sure that you are getting complete information to make an
informed decision.
a comeback
In the mortgage lending business, a loan that is 80% of the value
of the home is considered to be a normal risk for the lender and
is considered to be the industry standard.
If a borrower needs financing that is more than 80% of the value
of the home (loan-to-value, LTV), that would represent a higher
risk to the lender and would be considered if the borrower has
better qualifications and if the lender were to receive higher than
normal rates and fees to compensate themselves for the higher
risk, or if that higher risk could be passed along to another party.
Private Mortgage Insurance (PMI) was developed in an effort to
give the lenders a feeling of comfort that they were not taking an
undue risk, and still provide a means for borrowers to obtain
home financing without needing 20% down payment.
PMI provides insurance to the lender in the case of a default in
payments by the borrower which would result in a monetary
loss to the lender. The borrower will be the one who pays the
cost of the policy and the premiums are usually collected with
each monthly payment from the borrower.
Let's take a look at an example. Let's say that the borrower is
buying a home valued at $500,000. They are able to provide a
down payment of $50,000 and they have additional funds for their
closing costs and cash reserves after closing. They need to
finance $450,000 which is a 90% LTV.
In the past few years the most popular way to put his
transaction together was to create a first loan of $400,000
(80% LTV) and couple it with a second loan of $50,000 for a
combined LTV of 90%. This was preferred because the first
loan was at the industry standard of 80%, so it was acceptable
risk to the lender and did not require PMI and was offered at
competitive interest rates and fees. The second loan of the
additional 10% was where the lender was experiencing the
additional risk. Rates and fees were higher only on this portion
of the financing to reflect that higher risk to the lender. Also,
the mortgage market was eager to create these second loans
because investors could receive higher rates, property values
were increasing and mortgage defaults were not common.
I'm sure that you have been hearing and reading that more
recently property values have leveled off and diminished in some
areas, and that mortgage defaults have increased. This has led
to less willingness of the lenders to create these second loans,
especially where the combined LTV was at 100%. As the
availability of these second loans is diminishing, we are seeing
that lenders are more willing to create one loan and to reduce
their risk by using PMI again.
The way the transaction would be put together using PMI is by
the lender creating a loan of $450,000 (90% LTV). The interest
rate on the loan itself would be at competitive rates and fees,
but the borrower would be required to qualify for and provide a
PMI policy to the lender. The PMI company would charge a
premium based on the LTV, whether the loan is fixed-rate or
adjustable-rate, whether the borrower qualified by providing
full documentation or was using stated income. The cost of
this policy could be in the range of $200-$300 per month.
But, it is a lot less expensive than trying to save another
$50,000 and missing out on home ownership in the meantime.
PMI is currently tax-deductible for borrowers whose adjusted
gross income (AGI) is $100,000 or less, is partially deductible
for AGI between $100,000-$109,000, and loses its deductibility
for AGI above $109,000.
Some lenders may offer to charge a higher rate on the loan, and
to have the mortgage insurance paid by them. This will then
show as interest being paid by the borrower, not insurance
premium, and will increase the chances of tax deductibility
without concern over the AGI limitations.
As always, there are many nuances to be explored to make sure
that you are being well-served by the mortgage recommendation.
Be sure that you are getting complete information to make an
informed decision.
Wednesday, May 23, 2007
Understanding the Basics
Mortgage Basics-The Four C's of Underwriting
Your Loan Request
Many borrowers find the loan process bewildering and confusing. It doesn't help when those of us who are in the business use verbal shorthand and jargon that separates you from understanding what is going on and what your loan product will do for you.
The creation of your loan, and its approval are variations of four basic moving parts. I learned them as the Four C's: Cash, Credit, Capacity, and Collateral. When lenders design programs and
establish the pricing of the loan (interest rate plus loan fees), they are assessing the layers of risk associated with each of these categories.
Let's take a look at each of them.
Cash: The lender wants to know that you have enough money to provide for your down payment for the purchase of the home, that you can pay for your closing costs, and that have some level of cash reserves after the closing. They also want to know the source of those funds, so if money suddenly appears in your accounts just before closing they will be concerned that the new money is also borrowed. If you are refinancing, they will want to see that your closing costs and reserves are covered.
Credit: Until the advent and acceptance of credit scoring, the lender would review the credit report and make an assessment as to the paying habits, the types of credit the borrower had (mortgage, auto loans, credit cards, student loans, finance companies, charge-offs, collections), and whether they were prudent users or abusers of credit. It was a combination of objective and subjective analysis, and was more art than science.
The credit scoring systems now take all of these factors into account in a "black box" analysis and produce a score. Because each of the three credit repositories use proprietary systems, they don't publish exactly how their scores are produced. http://www.myfico.com/ is one site that will allow you to subscribe and do "what if?" scenarios if you are interested in pursuing a program to improve your credit score.
Capacity: This refers to your ability to pay the monthly payments. The two primary areas of interest are employment stability and that your income is sufficient to support the proposed new mortgage debt, taxes and insurance, homeowner's association fees, and all your consumer credit obligations. As a general rule, lenders are looking for continuous employment in the same job or line of work of at least two years. Also, they like to see that the sum of those monthly obligations listed above fit within about 40% of your gross monthly income if you are salaried or a wage-earner.
If you are self-employed or earn commissions the lenders will do their analysis based on your gross income less business expenses. This calculation gives them an idea of what your personal income is, and it puts you on an equal footing with the salaried person and wage-earner.
Collateral: A real estate loan is secured by a piece of property. The lender ultimately wants to have their loan secured so that if you don't make your payments, they have the ability to recover the unpaid balance of the loan through a foreclosure proceeding. This is why the lenders require an appraisal of the home, so that they can feel comfortable that their loan is well-secured. Lending guidelines change and risk assessments differ when the property is owner-occupied or a rental, if it is a detached home, a condominium, or if it is in a planned-unit development.
When you add in the variables of documenting the loan fully with paystubs, W-2 forms and tax returns, or if you are requesting a loan using the "stated income" option, where the lender makes their decision based on the reasonableness of the income presented without verifying it, or if you are pursuing a 'no-doc' loan, where the lender is making their judgment solely on the appraisal and credit history and scores, you can see that there are a myriad of possibilities and categories for a loan request to fit within.
When you are shopping for a mortgage, and the representative gives you a quote without exploring these variables with you, the information you are receiving is meaningless. Know with whom you are working and that they are taking care to provide you with accurate information so that you are not encouraged to begin the process with false expectations and to be presented with the real terms at a later date.
Your Loan Request
Many borrowers find the loan process bewildering and confusing. It doesn't help when those of us who are in the business use verbal shorthand and jargon that separates you from understanding what is going on and what your loan product will do for you.
The creation of your loan, and its approval are variations of four basic moving parts. I learned them as the Four C's: Cash, Credit, Capacity, and Collateral. When lenders design programs and
establish the pricing of the loan (interest rate plus loan fees), they are assessing the layers of risk associated with each of these categories.
Let's take a look at each of them.
Cash: The lender wants to know that you have enough money to provide for your down payment for the purchase of the home, that you can pay for your closing costs, and that have some level of cash reserves after the closing. They also want to know the source of those funds, so if money suddenly appears in your accounts just before closing they will be concerned that the new money is also borrowed. If you are refinancing, they will want to see that your closing costs and reserves are covered.
Credit: Until the advent and acceptance of credit scoring, the lender would review the credit report and make an assessment as to the paying habits, the types of credit the borrower had (mortgage, auto loans, credit cards, student loans, finance companies, charge-offs, collections), and whether they were prudent users or abusers of credit. It was a combination of objective and subjective analysis, and was more art than science.
The credit scoring systems now take all of these factors into account in a "black box" analysis and produce a score. Because each of the three credit repositories use proprietary systems, they don't publish exactly how their scores are produced. http://www.myfico.com/ is one site that will allow you to subscribe and do "what if?" scenarios if you are interested in pursuing a program to improve your credit score.
Capacity: This refers to your ability to pay the monthly payments. The two primary areas of interest are employment stability and that your income is sufficient to support the proposed new mortgage debt, taxes and insurance, homeowner's association fees, and all your consumer credit obligations. As a general rule, lenders are looking for continuous employment in the same job or line of work of at least two years. Also, they like to see that the sum of those monthly obligations listed above fit within about 40% of your gross monthly income if you are salaried or a wage-earner.
If you are self-employed or earn commissions the lenders will do their analysis based on your gross income less business expenses. This calculation gives them an idea of what your personal income is, and it puts you on an equal footing with the salaried person and wage-earner.
Collateral: A real estate loan is secured by a piece of property. The lender ultimately wants to have their loan secured so that if you don't make your payments, they have the ability to recover the unpaid balance of the loan through a foreclosure proceeding. This is why the lenders require an appraisal of the home, so that they can feel comfortable that their loan is well-secured. Lending guidelines change and risk assessments differ when the property is owner-occupied or a rental, if it is a detached home, a condominium, or if it is in a planned-unit development.
When you add in the variables of documenting the loan fully with paystubs, W-2 forms and tax returns, or if you are requesting a loan using the "stated income" option, where the lender makes their decision based on the reasonableness of the income presented without verifying it, or if you are pursuing a 'no-doc' loan, where the lender is making their judgment solely on the appraisal and credit history and scores, you can see that there are a myriad of possibilities and categories for a loan request to fit within.
When you are shopping for a mortgage, and the representative gives you a quote without exploring these variables with you, the information you are receiving is meaningless. Know with whom you are working and that they are taking care to provide you with accurate information so that you are not encouraged to begin the process with false expectations and to be presented with the real terms at a later date.
Wednesday, May 9, 2007
Approvals Are Getting Tougher
Plan Ahead For Your Mortgage Needs-
Lenders are Tightening Up on Approvals
You have probably been aware over the last few months that many lenders who specialized in the sub-prime lending markets (loans made to borrowers or on properties that present more risk to the lender, also known as "B" and "C" lending) experienced sizable losses and were forced to close their doors.
Many times, these sub-prime lending operations were owned by larger financial companies, and the losses rippled through to the more profitable lending operations. Whenever lenders go through this part of the business cycle, they analyze what contributed to the losses and seek to make corrections.
As such, the lenders that are continuing in the sub-prime markets are restricting the scope of the lending programs from what they were even three to six months ago. They seek to limit their risk by not granting loans to as large a percentage of the value of the home as they did before. For example, where they would make a loan to 100% of value, they are not limiting the loan to no higher than 95% of value.
They can also limit their risk by requiring higher credit scores than they used to. It has not been uncommon to see programs that used to require a score as low as 620 now have a higher threshold at 640 or 660.
The underwriting guidelines have also been tightened in some cases by requiring more in the way of cash reserves after closing than they previously required. In the past, some programs wanted to see that the borrower had 2 months of mortgage payments in their bank accounts at the conclusion of the transaction. Now we are seeing requirements up to 6 months of mortgage payments.
In some cases, the lenders combine these changes to really restrict their risk. Whereas six months ago, we may have been able to get 100% financing with a 620 credit score and 2 months of mortgage payment reserves, the conservative lender may limit the loan to 95%, demand a score of 660, and require cash reserves of 4 months of mortgage payments.
As you can see, this would put a borrower who purchased under the more liberal terms a year or so ago, who was planning on refinancing into more favorable interest rates or payments, in a serious bind. The exit strategy that they had carefully crafted was removed by the changes in the guidelines as a result of the losses that the lenders had experienced.
Even though these examples were primarily dealing with the sub-prime lenders, the fact is that the prime lenders ("A" lending) also are going through tightening so that they don't start experiencing losses in the same way that the sub-prime lenders did.
The ways that "A" lenders have been attempting to reduce their risk include the increase of the minimum credit score threshold, and not being as aggressive on the percentage of loan in relation to the value of the home.
On refinances, they are also limiting the amount of cash that a borrower can receive through the transaction, and being less generous on loans on investment properties and condominiums. These categories - cash out, investment properties, and condominiums - all represent additional layers of risk to a lender and they are doing their best not to accept a lot of exposure to these risks.
The important point that I want to impart to you with this edition of my newsletter is that you should not think that everything is business as usual. Many times borrowers will wait until the last minute thinking that there have not been any changes, and that the application process will go as smoothly as it has in the past, or that the loan programs will continue without limits to their availability.
If you, or someone you know, has a loan that is scheduled for an interest rate or payment reset soon, let's have a conversation right away to make sure that we can do the best possible job of getting things taken care of.
This is truly one of those times that it is better to act sooner than later.
Lenders are Tightening Up on Approvals
You have probably been aware over the last few months that many lenders who specialized in the sub-prime lending markets (loans made to borrowers or on properties that present more risk to the lender, also known as "B" and "C" lending) experienced sizable losses and were forced to close their doors.
Many times, these sub-prime lending operations were owned by larger financial companies, and the losses rippled through to the more profitable lending operations. Whenever lenders go through this part of the business cycle, they analyze what contributed to the losses and seek to make corrections.
As such, the lenders that are continuing in the sub-prime markets are restricting the scope of the lending programs from what they were even three to six months ago. They seek to limit their risk by not granting loans to as large a percentage of the value of the home as they did before. For example, where they would make a loan to 100% of value, they are not limiting the loan to no higher than 95% of value.
They can also limit their risk by requiring higher credit scores than they used to. It has not been uncommon to see programs that used to require a score as low as 620 now have a higher threshold at 640 or 660.
The underwriting guidelines have also been tightened in some cases by requiring more in the way of cash reserves after closing than they previously required. In the past, some programs wanted to see that the borrower had 2 months of mortgage payments in their bank accounts at the conclusion of the transaction. Now we are seeing requirements up to 6 months of mortgage payments.
In some cases, the lenders combine these changes to really restrict their risk. Whereas six months ago, we may have been able to get 100% financing with a 620 credit score and 2 months of mortgage payment reserves, the conservative lender may limit the loan to 95%, demand a score of 660, and require cash reserves of 4 months of mortgage payments.
As you can see, this would put a borrower who purchased under the more liberal terms a year or so ago, who was planning on refinancing into more favorable interest rates or payments, in a serious bind. The exit strategy that they had carefully crafted was removed by the changes in the guidelines as a result of the losses that the lenders had experienced.
Even though these examples were primarily dealing with the sub-prime lenders, the fact is that the prime lenders ("A" lending) also are going through tightening so that they don't start experiencing losses in the same way that the sub-prime lenders did.
The ways that "A" lenders have been attempting to reduce their risk include the increase of the minimum credit score threshold, and not being as aggressive on the percentage of loan in relation to the value of the home.
On refinances, they are also limiting the amount of cash that a borrower can receive through the transaction, and being less generous on loans on investment properties and condominiums. These categories - cash out, investment properties, and condominiums - all represent additional layers of risk to a lender and they are doing their best not to accept a lot of exposure to these risks.
The important point that I want to impart to you with this edition of my newsletter is that you should not think that everything is business as usual. Many times borrowers will wait until the last minute thinking that there have not been any changes, and that the application process will go as smoothly as it has in the past, or that the loan programs will continue without limits to their availability.
If you, or someone you know, has a loan that is scheduled for an interest rate or payment reset soon, let's have a conversation right away to make sure that we can do the best possible job of getting things taken care of.
This is truly one of those times that it is better to act sooner than later.
Wednesday, April 25, 2007
Restoring Your Credit
Credit Restoration May Help Improve Your
Credit Scores-And Save You Money
If you have negative information showing on your credit report, you should develop a plan for getting any erroneous information rectified, and possibly begin a campaign to minimize the effect of the negative items that are properly reported.
As I'm sure you know, mortgage lending has fully adopted the credit scoring models to establish levels of risk on their loans, in addition to considering the property, employment and income, assets and debt levels. A high score allows a borrower to obtain the best terms, lower scores increase the cost to the borrower.
Anything you can do to increase your scores can help you save on fees and interest charges.
First, if you find erroneous information on your credit report, it is in your best interests to get it corrected. This may involve writing to the three credit repositories: Equifax, Experian and TransUnion (E,E,T) and working toward having the information corrected at the source where it is disseminated.
If the item that is in error is the result of a creditor's report to the repositories, you will be more effective by writing directly to the creditor and having them amend their records. That way, each time your credit record is submitted to E,E,T, it will be correct from the source of the information. Hopefully, you have maintained your records so that you can document your position and be able to prove your case that your payment record was better than reported.
You can also choose to embark on a campaign to use the Fair Credit Reporting Act (FCRA) to your benefit. This is the approach that commercial Credit Restoration companies use. Be aware that there is a distinction between Credit Restoration companies and debt management/negotiation companies.
The FCRA provides for the consumer to question any unverifiable, inaccurate or erroneous information reported on their credit file with E,E,T. Once the credit bureaus are notified of a disputed item on a consumer's report, they have 30 days to affirm the item in question with the creditor. If the creditor cannot verify the information within that time period, the credit item must be corrected or deleted from the consumer's credit file.
As you can see, once negative items are removed from your credit report, you credit score can increase and you will begin to be eligible for the benefits that higher credit scores can produce.
If you have the time, patience and organization to administer a do-it-yourself campaign, or if you choose to hire a credit restoration company, you should see significant results within 90 days. Even if the creditor affirms the information that was reported, you still have the ability to file another dispute and have the repository and creditor repeat the process. If the creditor fails to verify the information within 30 days, the item should be deleted.
If you choose to hire a credit restoration company, expect to be quoted a fee up to approximately $400. A higher fee does not necessarily mean that you will receive better service or better results. Also, be cautious about companies that charge monthly fees because they may be motivated to drag out the process to earn higher fees. Be diligent in your research so that you feel comfortable with the stability, experience, efficiency, cost for the service and the testimonials from their past clients.
The best strategy for high credit scores is to develop a strong credit history over time by making all your payments on time, staying within your credit limits and using your credit responsibly. But, if you have some items that are reported as less than perfect, using credit restoration techniques, or hiring a credit restoration company may be a good approach for you.
Credit Scores-And Save You Money
If you have negative information showing on your credit report, you should develop a plan for getting any erroneous information rectified, and possibly begin a campaign to minimize the effect of the negative items that are properly reported.
As I'm sure you know, mortgage lending has fully adopted the credit scoring models to establish levels of risk on their loans, in addition to considering the property, employment and income, assets and debt levels. A high score allows a borrower to obtain the best terms, lower scores increase the cost to the borrower.
Anything you can do to increase your scores can help you save on fees and interest charges.
First, if you find erroneous information on your credit report, it is in your best interests to get it corrected. This may involve writing to the three credit repositories: Equifax, Experian and TransUnion (E,E,T) and working toward having the information corrected at the source where it is disseminated.
If the item that is in error is the result of a creditor's report to the repositories, you will be more effective by writing directly to the creditor and having them amend their records. That way, each time your credit record is submitted to E,E,T, it will be correct from the source of the information. Hopefully, you have maintained your records so that you can document your position and be able to prove your case that your payment record was better than reported.
You can also choose to embark on a campaign to use the Fair Credit Reporting Act (FCRA) to your benefit. This is the approach that commercial Credit Restoration companies use. Be aware that there is a distinction between Credit Restoration companies and debt management/negotiation companies.
The FCRA provides for the consumer to question any unverifiable, inaccurate or erroneous information reported on their credit file with E,E,T. Once the credit bureaus are notified of a disputed item on a consumer's report, they have 30 days to affirm the item in question with the creditor. If the creditor cannot verify the information within that time period, the credit item must be corrected or deleted from the consumer's credit file.
As you can see, once negative items are removed from your credit report, you credit score can increase and you will begin to be eligible for the benefits that higher credit scores can produce.
If you have the time, patience and organization to administer a do-it-yourself campaign, or if you choose to hire a credit restoration company, you should see significant results within 90 days. Even if the creditor affirms the information that was reported, you still have the ability to file another dispute and have the repository and creditor repeat the process. If the creditor fails to verify the information within 30 days, the item should be deleted.
If you choose to hire a credit restoration company, expect to be quoted a fee up to approximately $400. A higher fee does not necessarily mean that you will receive better service or better results. Also, be cautious about companies that charge monthly fees because they may be motivated to drag out the process to earn higher fees. Be diligent in your research so that you feel comfortable with the stability, experience, efficiency, cost for the service and the testimonials from their past clients.
The best strategy for high credit scores is to develop a strong credit history over time by making all your payments on time, staying within your credit limits and using your credit responsibly. But, if you have some items that are reported as less than perfect, using credit restoration techniques, or hiring a credit restoration company may be a good approach for you.
Wednesday, April 11, 2007
Find the Right Person!
Shopping for a loan is important, shopping for
the person is everything!
The call starts out with the best of intentions:
"What are your rates and fees for ..."
The borrower wants to do their homework.
They want to get a good deal.
They don't want to overpay for the home loan.
They want to believe what they are being told.
When I receive these calls, I am concerned for the borrower. I know that in many cases they are setting themselves up for a disappointment, because their focus is on the wrong thing. They want to feel good about getting the lowest rates and fees at the time and not leave any money on the table.
But, the less scrupulous lenders out there find it easy to tell the borrower what they want to hear, and then deliver the real terms when the borrower is too deep into the transaction to comfortably make a change.
They do it by telling them "today's rates". Unless the file is already approved and ready to go to loan documents, "today's rates" can't be delivered to the borrower.
They do it by quoting an interest rate, but not discussing fees.
They do it by quoting terms that may include a prepayment penalty and not mentioning it, whether that it something that is acceptable to the borrower or not.
They do it by quoting monthly payments that conveniently ignore how long the rate and payments are guaranteed. The borrower may fall in love with the low payments and not understand (until it is too late) that it is an adjustable rate loan which may or may not meet
their needs.
They do it by intentionally lying about the availability of rates and programs with the hopes that they can get deep enough into the transaction so that the borrower has to accept the real terms because it is too costly to back out. Or worse, that they risk losing the home they want because of the additional time it would take to make a change.
What these borrowers need to focus on is the person with whom they are working.
A good mortgage originator will ask questions before quoting rates and fees and programs.
What is your credit score?
How long do you intend to own the home?
How much equity or down payment is there in the transaction?
Are you interested in a fixed rate loan or are you open to adjustable rates?
Would you rather keep fees as low as possible, or are you interested in a lower rate by paying loan fees?
Can we document all of your income to qualify, or do we need to consider stated income or no documentation loans?
What is important to you about your home financing?
What would be the best outcome that you could envision for this transaction?
The answers to these types of questions help the originator and the borrower create a framework for proposals and discussion. It is a client-focused approach, with the understanding that the best match possible needs to be made between what the clients wants and needs and what is available in the mortgage market.
A good mortgage originator is willing to take the time to make sure you understand what you are getting.
A good mortgage originator is able to clearly explain how the recommended home loans work, and the advantages and disadvantages of each.
A good mortgage originator is patient, understanding that obtaining the right loan is an important decision on your part.
Hearing the best terms from the wrong person can only lead to disappointment, headaches and higher costs.
Hearing competitive terms in a suitable program from the right person can lead you to a proper decision for yourself, a comfortable process and many times a truly less costly experience.
Look for the caring, experienced mortgage originator that wants to help you find a program suited to your needs. You will remember the quality of that experience long after the close of your transaction.
the person is everything!
The call starts out with the best of intentions:
"What are your rates and fees for ..."
The borrower wants to do their homework.
They want to get a good deal.
They don't want to overpay for the home loan.
They want to believe what they are being told.
When I receive these calls, I am concerned for the borrower. I know that in many cases they are setting themselves up for a disappointment, because their focus is on the wrong thing. They want to feel good about getting the lowest rates and fees at the time and not leave any money on the table.
But, the less scrupulous lenders out there find it easy to tell the borrower what they want to hear, and then deliver the real terms when the borrower is too deep into the transaction to comfortably make a change.
They do it by telling them "today's rates". Unless the file is already approved and ready to go to loan documents, "today's rates" can't be delivered to the borrower.
They do it by quoting an interest rate, but not discussing fees.
They do it by quoting terms that may include a prepayment penalty and not mentioning it, whether that it something that is acceptable to the borrower or not.
They do it by quoting monthly payments that conveniently ignore how long the rate and payments are guaranteed. The borrower may fall in love with the low payments and not understand (until it is too late) that it is an adjustable rate loan which may or may not meet
their needs.
They do it by intentionally lying about the availability of rates and programs with the hopes that they can get deep enough into the transaction so that the borrower has to accept the real terms because it is too costly to back out. Or worse, that they risk losing the home they want because of the additional time it would take to make a change.
What these borrowers need to focus on is the person with whom they are working.
A good mortgage originator will ask questions before quoting rates and fees and programs.
What is your credit score?
How long do you intend to own the home?
How much equity or down payment is there in the transaction?
Are you interested in a fixed rate loan or are you open to adjustable rates?
Would you rather keep fees as low as possible, or are you interested in a lower rate by paying loan fees?
Can we document all of your income to qualify, or do we need to consider stated income or no documentation loans?
What is important to you about your home financing?
What would be the best outcome that you could envision for this transaction?
The answers to these types of questions help the originator and the borrower create a framework for proposals and discussion. It is a client-focused approach, with the understanding that the best match possible needs to be made between what the clients wants and needs and what is available in the mortgage market.
A good mortgage originator is willing to take the time to make sure you understand what you are getting.
A good mortgage originator is able to clearly explain how the recommended home loans work, and the advantages and disadvantages of each.
A good mortgage originator is patient, understanding that obtaining the right loan is an important decision on your part.
Hearing the best terms from the wrong person can only lead to disappointment, headaches and higher costs.
Hearing competitive terms in a suitable program from the right person can lead you to a proper decision for yourself, a comfortable process and many times a truly less costly experience.
Look for the caring, experienced mortgage originator that wants to help you find a program suited to your needs. You will remember the quality of that experience long after the close of your transaction.
Wednesday, March 28, 2007
Controlled Business Arrangements-Is there a reason for that referral?
The ABC's of CBA's
When you have a real estate agent represent you on the purchase of your home, you may find that they make recommendations for the mortgage provider, the escrow company, the title company and other related services.
Many times, the agent will make the recommendation because they have had positive experiences with these service providers, they trust them to take care of you, the client. They have a track record of confidence in the service provider's ability to keep their word and deliver on the level of service that all parties deserve.
There may be other reasons for recommendations from the real estate agent. It could be that the companies they are asking you to patronize are associated with the real estate company in the form of a CBA - a Controlled Business Arrangement. In most cases, the larger real estate companies that have national name recognition have a mortgage company, an escrow company, and a title company in which they have an ownership interest.
In and of itself, there is nothing wrong with a real estate agent wanting to maximize profit to the parent company by creating more business with their client base. A problem could arise if you are not made aware that there is a CBA in place, and if the service providers are not offering low, competitive costs for their service.
The agent has a duty to their client to put the client's interests ahead of their own (or ahead of their real estate company). The agent or their company should not be profiting without the consent of the client, which means that disclosure is required. It could be construed as a breach of their fiduciary responsibility to their clients to steer them to higher-cost services that benefits the broker or agent financially.
The agents are highly "encouraged" to refer the CBAs because there is more money flowing into the company's coffers - and this extra profit is often distributed to include the sales managers and the agent. It could be in the form of a check after closing, contributions to retirement plans, contributions to marketing expenses, or into bonus pools that are distributed periodically to the deserving participants.
What should you do? If you are presented with these kind of recommendations, ask some questions. Ask if there is a CBA between the companies. Ask what the agent's motivation is for making the recommendation. Ask for several trusted service providers from the agent so that you can shop among several sources.
Remember that it is your right to shop for the service providers based on their quality/cost or to seek the lowest cost services. The important thing is that you make an informed decision and that disclosures are properly made to you.
I rely on real estate agents to recommend my services based on my 30 year track record of providing a high-quality experience for them and their clients. I am willing to take the time to educate you, shop for the best terms I can find, be organized and efficient in the placing of your loan and always be available to answer questions and brainstorm solutions. There are no financial arrangements between me and my referring agents.
Our common goal is to do a great job of servicing you, our client.
When you have a real estate agent represent you on the purchase of your home, you may find that they make recommendations for the mortgage provider, the escrow company, the title company and other related services.
Many times, the agent will make the recommendation because they have had positive experiences with these service providers, they trust them to take care of you, the client. They have a track record of confidence in the service provider's ability to keep their word and deliver on the level of service that all parties deserve.
There may be other reasons for recommendations from the real estate agent. It could be that the companies they are asking you to patronize are associated with the real estate company in the form of a CBA - a Controlled Business Arrangement. In most cases, the larger real estate companies that have national name recognition have a mortgage company, an escrow company, and a title company in which they have an ownership interest.
In and of itself, there is nothing wrong with a real estate agent wanting to maximize profit to the parent company by creating more business with their client base. A problem could arise if you are not made aware that there is a CBA in place, and if the service providers are not offering low, competitive costs for their service.
The agent has a duty to their client to put the client's interests ahead of their own (or ahead of their real estate company). The agent or their company should not be profiting without the consent of the client, which means that disclosure is required. It could be construed as a breach of their fiduciary responsibility to their clients to steer them to higher-cost services that benefits the broker or agent financially.
The agents are highly "encouraged" to refer the CBAs because there is more money flowing into the company's coffers - and this extra profit is often distributed to include the sales managers and the agent. It could be in the form of a check after closing, contributions to retirement plans, contributions to marketing expenses, or into bonus pools that are distributed periodically to the deserving participants.
What should you do? If you are presented with these kind of recommendations, ask some questions. Ask if there is a CBA between the companies. Ask what the agent's motivation is for making the recommendation. Ask for several trusted service providers from the agent so that you can shop among several sources.
Remember that it is your right to shop for the service providers based on their quality/cost or to seek the lowest cost services. The important thing is that you make an informed decision and that disclosures are properly made to you.
I rely on real estate agents to recommend my services based on my 30 year track record of providing a high-quality experience for them and their clients. I am willing to take the time to educate you, shop for the best terms I can find, be organized and efficient in the placing of your loan and always be available to answer questions and brainstorm solutions. There are no financial arrangements between me and my referring agents.
Our common goal is to do a great job of servicing you, our client.
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