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.

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.

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.