Look For Gifts This Holiday Season

Interest rates are the lowest they have been all year,
right now!

Every year during the holiday period, I find that
borrowers don't want to engage in business between
Thanksgiving and New Year's.

With the distractions of the season, and their focus
on the fun things, many borrowers fail to recognize
that there are opportunities to improve their home
loan situation.

30-year fixed rate conforming loans (up to $417,000)
are currently running about 5.0%, with favorable
credit scores and with sufficient equity or down
payment in the home.

There are plenty of borrowers, maybe even you, that
could benefit greatly if we were able to obtain those
terms for them.

Be aware that when you hear about interest rates in
the media, or even if you are getting loan quotes
from lenders, that there are a number of moving parts
that affect the terms being quoted to you.

It's called risk-based pricing. And if the lender is
not asking you sufficient questions, you may find that
the loan quote is overly optimistic, and that you may
be set up for disappointment.

Let's take a look at some of the moving parts that need
to be explored to provide you with reliable information:

Loan-To-Value (LTV) Ratio:

The larger the loan is in relation to the value of the home
will create higher risk situations for the lender. You
will find that the interest rate and loan fee combination
will be higher for the higher risk categories.

For example, if the loan is 60% or less of the value of
the home, the pricing is very favorable. There will be
incremental increases in the loan fee charged at a specific
interest rate if the loan request falls between 60%-65%,
65%-70%, 70%-75% and 75%-80%. If the loan request is
higher than 80%, the lender will typically require private
mortgage insurance. This mortgage insurance will replace
the lender's need for increasing their fee for the higher
risk, because they now will have insurance for the higher
risk.

Credit Scores:

When we obtain a credit report, we usually are able to
obtain information and scores from the three major bureaus:
Equifax, TransUnion, and Experian. The lender will usually
use the middle of the three scores for evaluation purposes.

In today's market, a score above 740 will allow us to fit
within the most favorable pricing model. As with the LTV
model, there will be incremental increases in the loan
fee for a specific interest rate if the score falls between
720-739, 700-719, 680-699, 660-679, 640-659 and 620-639.

Loan Points:

In the past, before the mortgage market upheaval, it
was common for lenders to offer "no point" or even
"no point, no cost" loans. The market factored in a
value for interest rate changes. On a 30-year fixed
rate loan, a good rule of thumb used to be that for
adding a loan fee of .50 points, you could save .125%
in interest rate. This scale worked both directions,
so that if you wanted to do a "no point" loan, your
rate would be approximately .25% higher than if you
were willing to pay 1 point in loan fee.

In today's environment, lenders are assessing higher
risk to loans where the borrower puts as little into
the transaction as possible.

Lenders are no longer willing to offer "no point" loans
with such a small differential to the interest rate.
As an example, taken from today's rate sheet, an interest
rate of 5.0% is available at a loan fee of .25 points,
but to obtain a "no point" loan is at 5.125%. So, the
market is saying that .125% in interest rate is only
worth about .25 points in loan fee. This requires
a credit score of 740, with a LTV at 80% or less.


When you combine these factors, there is a huge range
of interest rate and fee quotes that a borrower could
encounter. A loan request of 80% with a credit score of
630 will be significantly higher than a 60% loan with a
credit score of 740.

If you are not advised of this information when you are
shopping for your loan, there is every likelihood that
the interest rate and fee that is finalized for you will
be more expensive than the original "quote".

So, if you are hopeful to obtain 30-year or 15-year fixed
rate financing, and maybe get away from an adjustable
rate loan that will be coming up for recast in the near
future, don't go through the holidays without checking in
with me.

A small investment of time to get paperwork started will
allow me to discuss locking in the loan for you, and
working toward completion in January.

What a great way to start the New Year - giving you some
peace of mind about your mortgage payments!

Happy Holidays.

A Special Announcement and A Correction

First, the Special Announcement:

After 19 years with Mike Dunn + Associates, I have a
new company with whom I am working.

Mike Dunn decided to merge his operations with Rancho
Financial Mortgage Center in Rancho Bernardo, and most
of us who served as loan originators with Mike, also
made the move effective December 1.

My new contact information will be:

Rancho Financial Mortgage Center
16456 Bernardo Center Dr.
Suite 201
San Diego, CA 92128

Office: 858-451-0620
Cell: 619-846-4322
E-mail: dbrennecke@roadrunner.com

Rancho Financial offers the full array of mortgage
brokerage choices that I have previously enjoyed, and
they also offer mortgage banking relationships with
GMAC, Suntrust, CitiMortgage, Amtrust, Chase, Wells
Fargo and Flagstar Mortgage. As a mortgage banker,
they offer expedited service with these lenders
for underwriting, loan document preparation, and
funding of the loan.

In addition, I have access to more extensive FHA
and VA programs.

Please make sure to give me a call with any of your
loan scenarios and I can see how my enhanced product
and service options can assist you in closing your
next transaction.


Second, the Correction.

Last issue I announced the changes to the FHLMC and
FNMA conforming loan limits, and I misinterpreted the
memo that I read.

Currently, the conforming limits are $417,000 for a
single-family home. Until the end of the year, the
Stimulus Act created a category commonly called
conforming-jumbo which allows loans to be created
up to $697,500 in San Diego, and FHLMC and FNMA can
purchase loans to that temporary limit.

I interpreted the announcement that the new conforming
limit for San Diego will be going to $546,250, and
that the conforming-jumbo category was expiring.

In fact, the conforming limit is remaining at $417,000.
In San Diego, the conforming-jumbo limit is set at
$546,250 for 2009.

The reason this makes a difference to you is because
there are underwriting and pricing differences that
can exist between the conforming and conforming-jumbo
loan programs.

So, as we offer mortgage loans through 2009, we will
still have three general categories of lending options:
conforming (up to $417,000), conforming-jumbo (between
$417,000 and $546,250 in San Diego), and jumbo loans
(those above $546,250 in San Diego).

As I've mentioned previously, there are limited choices
for jumbo loans at rates and fees that most would find
acceptable. The 30-year and 15-year jumbo fixed rate
loans are particularly expensive due to investor
reluctance to purchase these loans.

Explore any loan scenarios with me before you make a
final decision. My resources may be able to help yousave significantly.

New Conforming Limits Announced

Every year about this time, FHLMC (Freddie Mac) and
FNMA (Fannie Mae) adjust the limits on loans that
they will purchase from lenders.

These are called conforming loans because the loans
that are created for purchase by FHLMC and FNMA are
underwritten to a standard that conforms to their
guidelines. Mostly, these loans are for 30-year
and 15-year fixed rate loans.

The new limits for 2009 for San Diego County are:

1-family home $546,250
2-family home $699,300
3-family home $845,300
4-family home $1,050,500

The limit that was set for 2008 was $417,000 for a
1-family home. These new limits reflect a recognition
that San Diego needed a higher limit so that our market
could be better served.

You may recall that the Stimulus Act that was passed
earlier this year allowed for a temporary increase in
the loan limits that is scheduled to expire December 31,
2008. In San Diego, the temporary limit was $697,500.

There was some speculation that Congress may have
extended this temporary limit past the end of the year,
but the announcement of the new limits seems to put
this speculation to rest.

The lenders, for the most part, have already begun to
accept loan requests using the new loan limits.

What this means for you is that larger loan amounts
can now be eligible for the lower interest rates and
fees that conforming loans offer.

Loans above the conforming loan limits are known as
jumbo loans, and instead of these loans being sold
to FHLMC and FNMA (they are not eligible because of
the loan size) they are sold to investors.

These investors usually purchase these loans through
Wall Street when the jumbo loans are packaged into
bundles known as Mortgage-Backed Securities (MBS).

Recently, there has not been any investor appetite
for purchasing jumbo loans. This is because investors
purchased MBS in the past that included many loans
that were rated as good risks that turned out be much
higher risks.

The investors lost money in these MBS because the
quality was not what it was advertised and promoted to
be.

Until the investors are satisfied that the quality of
the loans that are bundled into these MBS are rated
fairly and the interest rates are commensurate with
the risks, they will not provide funds that flow
through the lenders to make jumbo loans.

So, at the present time the enhancements in the
conforming loan limits allow us to serve a larger
segment of the market at the most affordable terms
that are offered.

Keep in mind that there are 30-year jumbo loans that
are available where the interest rates are fixed for
the first 3, 5, 7, and 10 years. These have been
effective mortgage solutions and have been worthy of
consideration.

When 30-year and 15-year fixed rate jumbo loans are
offered at reasonable and competitive rates again,
we can then have a fuller menu of resources to serve
the entire market.

Please get in touch with me so that we can see how
these tools can be of benefit to you.

Update On The Agency-Jumbo Loans

When the Stimulus Bill was passed earlier this year,
it included a provision for FNMA (Fannie Mae) and
FHLMC (Freddie Mac) to purchase loans above the
conforming limit of $417,000.

This provision allowed for loan amounts up to
$697,500 in San Diego County (up to $729,750 in some
counties). It has an ending date of December 31, 2008.

Some of our lenders have stipulated that they want
these loans closed as early as December 1 to December
15, so that they have time to finalize the sales of
these loans to FNMA and FHLMC.

There is still time to process loan requests and meet
some of these deadlines for this loan program. It will
take everyone pulling in the same direction to handle
it as efficiently as possible.

But, there is always the chance (and many of think of
it as likely) that Congress will extend the date and
establish a new conforming limit.

Now that the elections are over, we can hope that
Congress can get back to doing the work for the people
and facilitate an extension. A new loan limit that
has been floated is $625,000, but we will have to wait
and see if Congress acts and to what degree.

If Congress does extend the expiration date, it will
remove some of the urgency that we are facing on the
mid-December deadline.

When the Agency-Jumbo loans were first announced, we
had high expectations that they would allow borrowers
to obtain jumbo loans at conforming interest rates.

As the shake-out occurred, conforming rates behaved in
a normal fashion, but jumbo rates skyrocketed. This
was because investors were no longer willing to buy
financial instruments that were backed by high-balance
loans. The investors that were willing to engage
demanded higher rates of return in exchange for the
higher perceived risk.

What developed was conforming rates that went up and
down in relation to market forces. Jumbo rates were
very high. And the Agency-Jumbo loan program had
rates that stayed in the middle. Currently, the
Agency-Jumbo rates are marginally above the conforming
rates.

The adjustment that FNMA and FHLMC have made, instead
of having interest rates reflect the increased risk, is
to be very stringent on the qualification process.

The good news is that the guidelines are pretty well
defined, so that we have a good opportunity to know
the likelihood of your request being approved.

If you have an interest in this loan program, give me
a call so that we can strategize about what it takes
to get things done for you.

I Work For You

As a mortgage broker, I have access to lenders and
programs that you as a borrower are unable to find
on your own.

For the most part, many of the big lenders that have
a local presence allow us to represent their loan
products as well.

When you apply to the local lender, you are putting
your eggs in that basket. If that lender is unable
to approve your loan request, you will need to
re-apply with another lender. This will probably
result in duplicate fees for appraisal of the
home and for credit reports.

Additionally, when you apply with the one lender,
your request will need to fit into that lender's
available loan programs and underwriting pattern.
The representative there will be working for the
lender and asking you to adapt to their policies.

Because I have the availability of many lenders and
many loan programs, I serve as an advocate for you
with the lenders.

When you complete an application with me, I am
going to package your loan request and select as
many potential lending prospects as possible.

If your qualifications are strong and many lenders
will be willing to approve your loan, I can select
among the lowest in price - that is interest rate
and loan fee - to get you the best terms possible.

The big advantage of this approach is that one
loan application with me makes available to you
the market of available loan products that I
represent.

If Lender A expresses an unwillingness to consider
some aspect of your loan request, I can roll your
loan application to Lender B, and so on.

You would not need to obtain a new credit report or
appraisal to gain access to the additional lenders.

If you have a borrower profile that limits my
choices, it will probably be necessary to have your
loan file submitted to any number of lenders who
provide loan products that fill a particular niche.

Once your loan application is in process, we have
the ability to get electronic loan approval through
our lenders. We submit the data from your file,
the automated underwriting system renders its
decision, and we receive a list of conditions that
must be satisfied to finalize the approval.

The list of conditions will include the lender's
review of the physical file so that they can
validate the data that we submitted.

The approval will typically notify us of the
maximum interest rate up to which the approval is
valid.

Because underwriting guidelines have tightened
recently, it is in your best interest to complete a
loan application early in your time frame for wanting
to purchase or refinance. This early action on your
part will allow us to get the preliminary loan
approval, and to have a list of conditions from the
lender that we can satisfy.

When the time becomes right - either the right home
you want to purchase presents itself, or when loan
pricing is where you want it to be - we can then
be in a position to move quickly on your request.
And, we will already know just what the lenders are
looking for to avoid surprises.

Give yourself every advantage to have your financing
of your home go smoothly. Give yourself lots of
choices, lots of flexibility, and be pro-active
in the process.

Start your loan application with me, and let me work for you!

Is There Any Mortgage Money Available Right Now?

Over the last few weeks, we have seen wild fluctuations
in the financial markets.

Congress couldn't agree on a "rescue plan", and then a
week later, finally put together legislation that was
signed immediately by President Bush.

A big rationale for the "rescue plan" was due to the
fact that credit markets had become very illiquid as
lenders and investors were forced to hold mortgage
loan assets. A larger-than-normal percentage of these
assets were not being repaid in a timely manner which
leads to foreclosure. There were no buyers for these
loans, or for other loans that are currently being paid
well, because investors have no confidence in the
quality of the loans.

So, the "rescue plan" was designed to have the govern-
ment buy these troubled assets to free up liquidity for
the financial institutions and allow them to start
lending more freely again.

But, throughout this process mortgage lending has
continued.

Despite the financial troubles they have been going
through, Freddie Mac (FHLMC) and Fannie Mae (FNMA)
have been purchasing loans up to their conforming
limit of $417,000 with regularity. They have also
been authorized to purchase loans up to $729,750
(depending on which county the property is in) through
the end of this year and loans have been created in
this categoy as well.

The jumbo loan category, those loans above $417,000
(and temporarily those above $729,750), has been
severely restricted. Institutional investors and
those buying mortgage-backed securities through Wall
Street have no appetite for buying these products
right now. Consequently, interest rates are high
for these loans, and availability is extremely limited.

Now, please understand that the qualifying standards
are not as liberal as they were in the past. For the
most part, loans that accept low credit scores, that
accept stated income from the borrower, and that are
above 90% of the value of the property are not readily
available.

So, the key to the kingdom is that your qualifications
include the following:

* Strong credit scores

* Provable, stable income that meets the lender's
current qualifying criteria.

* A strong equity position in your home, or a sizable
down payment on the home purchase.


Mortgage lending has not stopped. Qualifying is more
strict.

If you have an interest in buying a property while
prices are substantially lower than they have been,
or want to see about renegotiating your existing
home loan, just give me a call.

We can work together to see what is possible in this
lending environment, and do our best to help you reach
your goals.

Credit Scoring: Behind the Curtain

Credit scores have a huge impact on our lives. If you are
going to borrow money for a car or a home, the scores on
your credit report will help determine the loan amount
granted, and more importantly, the cost of your loan in
the form of interest rates and fees.

A while back, I went to a seminar where some of the
behind-the-scenes information was discussed.

First, some basics.

Credit scores range from 300-850 (some models may go to
900).

On the credit report, the top 4 reasons are listed as
to why the score is not perfect.

Originally, Fair, Isaac was asked to produce a model
that would predict the likelihood of a borrower having
a 90-day late in the next 24 months.

It is a dynamic modeling system, representing a moment in
time. The score can be different in the morning and afternoon
of the same day.

The model is weighted by the following factors:


35% of your score is based on history.

If there are lates, the model looks at recency, frequency,
and severity.

Recency:

There is a heavy impact if the late is within the last 6 months.

There is moderate impact if the late is within the 7-24 month
range.

There is little impact if the late is over 24 months ago.

Frequency:

Obviously the more often accounts are late, the more impact
on scores.

Severity:

The longer the late, the more impact on scores. For example
a 30-day late is less costly than a 60-day late which is less
costly than a 90-day late, etc.

Late payments and inquiries after a bankruptcy can be
costly to the score.


30% of your score is based on level of debt.

Higher credit card balances are an indicator of higher
likelihood of default.

Limited use of lots of available credit is favorable.

Don't close credit cards. This tends to skew your report
toward more recent credit and you lose the benefit of the
history of the old cards that will be closing.

Using cards to their maximum credit limit is less favorable.

Pay them down, spread the balances to existing cards,
or ask for increases to the credit limits.

Use 2-5 cards actively, meaning at least every 3-6 months.

HELOCs are scored as installment debt if the balance is
more than $30,000. This is more favorable in the credit
model. They are scored as revolving debt if less than $30,000,
and this is less favorable in the credit model.


15% of your score is based on length of credit history.

The model looks for a 30 year history.

Rotating revolving debt to new credit card at a high
balance-to-limit ratio works against the score. And,
as we said, closing the old card makes the credit history
look shorter, and does not score as well.


10% of your credit score is based on credit mix (open and
closed accounts).

Revolving debt has the most negative impact.

Finance company references hit the score the hardest.

Deferred payment accounts can be a problem. If you ever
make a payment on one before you have to, continue to
make even a small payment because the reporting system
is now activated to show it as a paying account, not a
deferred account. If you don't continue making even a
small payment, you will probably be reported with lates.

These deferred payment accounts also will report a high
balance on the report based on the add-on interest, and
will also show the inquiry. These are not invisible to the
credit report!


10% of your score is based on inquiries.

Inquiries stay on your report 2 years, they count in the
scoring for 1 year, and they actually show on your report
for 90 days.An inquiry can count for 2-15 points against
your score.

Companies can no longer run your credit without a signed
authorization.

Inquiries from auto companies within a 7-day period are
grouped as 1 inquiry.Inquiries from mortgage companies
within a 30-day period are grouped as 1 inquiry. Rolling
14-day inquries are considered as 1 inquiry. (Theoretically,
you could run the credit every 14 days for a mortgage and
have it only count as 1 inquiry).

Credit union inquiries can't always be determined: they
may be revolving (credit card), installment (auto), or mortgage.

Some statistics:

Median score is 720.

11% had a score >800 and had a default rate of 1%
29% had a score of 750-799 and had a default rate of 2%
20% had a score of 700-749 and had a default rate of 5%
16% had a score of 650-699 and had a default rate of 15%
11% had a score of 600-649 and had a default rate of 31%
7% had a score of 550-599 and had a default rate of 51%
5% had a score of 500-549 and had a default rate of 71%
1% had a score of <499 and had a default rate of 87%

As we take a look at the mortgage meltdown through the
prism of credit scoring we can see that even if there
were not a decline in property values, that the lenders
were putting themselves in a very vulnerable position.

Many programs allowed for scores of 640 or less, and they
allowed financing up to 100% without documenting income.
Statistically, they had a 40% to 87% chance of default
before accepting the additional risks of high loans in
relation to the value of the home, and accepting the
borrowers' representation of their incomes!

Use these guidelines as you make decsions about your
credit activity. Remember that the credit bureaus have
created these "black box" modeling systems and that the
process is not transparent.

Be sure to do adequate research so that if you decide to
apply for credit, pay off some credit items, or close
accounts that you feel comfortable with the potential
consequences to your credit score.

Keeping Your Existing Home When Buying A New Home

There are times when a borrower wants to buy their new
home, but want to or need to hold onto their existing
home and use it as a rental property.

In the current market, there are many homeowners who
owe more on their homes than they are now worth. Also,
they see that they could buy a comparable home to the
one that they own for a much lower purchase price.

What has developed recently is that some homeowners
found a solution to their problem that the lending community
didn't anticipate.

Before they developed credit problems on their existing
home loans, they would purchase a new home. As part of
the qualifying for the new home, they would represent
that they would rent out their existing home and move
into the new one.

The underwriting guidelines that were in place allowed
a portion of the rental income to offset the expenses
on the soon-to-be-rental property. Specifically, 75%
of the rental income was allowed to be used. The guide-
lines recognized that there would be vacancies and
maintenance costs which is why they did not allow the
full rental income.

These homeowners were able to buy their new home at a
signicantly reduced price compared to what they paid
for their existing home. After closing, and recognizing
that there was no advantage to them keeping and main-
taining the home they just departed, let that home
revert back to the lender through default and fore-
closure.

At that point, their credit becamed impacted, but because
they had already purchased their new home that they were
planning on living in for quite some time, the bad credit
that developed didn't keep them from reaching their goal.

Because this became a significant trend, there are now
new underwriting guidelines for retaining the existing
home and purchasing a new home.

1. If the current primary residence is pending sale but
will not be closed prior to the closing date of the new
primary residence, the borrower will have to qualify for
both the current and new mortgage principal, interest,
taxes and insurance amounts (PITI). No potential
rental income offset will be allowed.

2. If the current primary residence will become a second
home and there is at least 30% documented equity in the
current home, the borrower will have to qualify for both
the current and new mortgage principal, interest, taxes
and insurance amounts. This requires that there are at
least two months of PITI for both properties.

3. If the current primary residence will become a second
home and there is not at least 30% documented equity in the
current home, the borrower will have to qualify for both the
current and new mortgage principal, interest, taxes and
insurance amounts. This requires that there are at
least six months of PITI for both properties.

4. If the current primary residence will become a rental
property and there is at least 30% documented equity
in the current home, they will allow the 75% of rental income
to offset the expenses on the existing home. No longer
can the borrower merely represent the proposed rental
income, though. They would require a fully executed lease
agreement and proof that a security deposit was received
from the tenant and deposited into the borrower's account.

5. If the current primary residence will become a rental
property and there is not at least 30% documented equity
in the current home, the borrower will have to qualify for
both the current and new mortgage principal, interest, taxes
and insurance amounts. This requires that there are at
least six months of PITI for both properties.

To document the existence of the the 30% equity position,
the borrower would have to provide a full appraisal of the
existing home.

The lenders are hopeful that by instituting these changes
that they will prevent or slow down the number of borrowers
who buy the new home and then send the keys back on the
old home.

If a borrower has little equity in the home, but have the
financial capacity to qualify for the expenses on both
homes, the lenders are thinking that they will not be as
tempted to damage their credit for the future.

If a borrower has a lot of equity in the home, they are
more willing to allow the rental income offset, because
it is much less likely that the owner will sacrifice 30%
or more of the equity of the home by defaulting. They
would probably sell the home in the open market before
letting the lender take it back.

This is further evidence that the underwriting guidelines
are attacking every element of the process that they
can identify as having contributed to losses or fraud.

I always say it, but it bears repeating: You have to plan
ahead and start the conversation about what you are trying
to accomplish before you get involved in that new trans-
action.

Underwriting guidelines are more restrictive than at
anytime in recent memory, and they are changing
constantly.

Do not rely on old information or anecdotal stories from
your friends and co-workers.

Call me so that we can deal with your specific facts and
your unique qualifications.

Underwriting Tightened to Avoid Recurring Problems

As the mortgage crisis has unfolded, a recurring theme
has been: "How did it get this bad? Why didn't someone
take a closer look at what they were doing?"

Over the past several years prior to the mortgage
market's upheaval, there is no doubt that the process
had gotten very lax. It may be fair to say that all
the parties to the process thought that someone else
was making sure that everything was done properly.

The reality was that each step was done well enough
to advance it to the next level, but that no one took
ultimate responsibility for making sure that it was
all done correctly.

That has changed now.

Underwriters are now taking a very close look - a very
close look - at all elements of your application package.

Let's take a look at some of the areas that there is
more scrutiny, based on some recent experiences.


Employment:

Underwriting guidelines have always focused on job
stability over the previous two years. This does
not mean that you cannot change jobs, but the lender
is looking for continuity in a career field, and
lateral or upward moves to the new job.

For a person who receives hourly pay or a salary,
copies of W-2 forms for the last two years, a current
year-to-date paystub, and a verification of employment
(VOE) form that is completed by the employer would be
necessary.

The underwriters are now very diligent about cross-
checking all of these documents for any inconsistencies
and requiring clarification and letters of explanantion
for them. No matter how insignificant the discrepancy
may be, the underwriter wants it explained and they want
to make an assessment on all the facts.

What this means to you is that when we meet, we need to
discuss your situation and make sure that we have a
tight timeline and that all the numbers fit together
well. We want the presentation to the lender to be
very clean.


Self-Employment:

The two-year time requirement is also the guideline
for a person in business for themselves, or who derive
their income from commissions.

In this case, the lender wants two years of federal
tax returns, and possibly a current year profit-and-
loss statement.

If the income has increased from year-to-year, the
lender will average the income. If the income has
decreased, they will tend to use the lower figure
for what they define as stable income. They have
no way to assess whether income that is moving
downward is an aberration or truly a trend.

What this means to you is that you may need to think
ahead if you are planning to purchase or refinance
in the near future. Recognizing that the lender is
going to use the same information for income that you
are using to minimize your tax obligation may allow
you to make different choices when you put your tax
information together.


Asset Verification:

Verification of your bank accounts, investment accounts,
and retirement funds are important for the lender's review.

The guideline is to show current balances, as well as
the average balance for the last 60-90 days. The
lender is interested in seeing that the funds are
stable and seasoned in your name. If there have been
recent large deposits, the current balance and the
average balance will reveal the disparity.

The lender will want to know the source of the funds
that have recently arrived in your accounts. They will
need to come from a reasonable and acceptable source.

Deposits from bonuses, gifts from family members, or sale
proceeds from assets would typically be acceptable.

Deposits from personal loans, credit card advances, or
from unexplainable sources may not be acceptable.

What this means to you is that you need to pull together
your money well in advance of your loan application, or
be able to explain all the "new money" that arrives in
your accounts.

There is no substitute for strategic planning in advance.


Credit History:

Credit scores have become the big thing in mortgage
lending.

If you don't know your credit scores, and what is on
your credit report before you start the application
process, you could be unpleasantly surprised when you
are trying to obtain your home loan.

Increasingly, the lenders are offering their best
loan terms for borrowers with higher credit scores.
At one time, scores of 680 or more put borrowers in the
best position. Now, it is not uncommon for lenders to
want scores above 740 to offer preferential terms.

If you order your credit report in advance, you can
have the opportunity to make sure that all the items
are reported properly. And, if they are not, you can
get them corrected, processed through TransUnion,
Equifax, and Experian, and get your report re-scored
so that you can present the best possible picture to
the lender.

The underwriters will use the middle of the three
scores for the basis of the loan request, or if only
two scores are available, they use the lesser of the
two.

You are probably finding a recurring theme here.

Plan ahead. Take the time to sit down with me, fill
out some paperwork, run your credit report and let
me have the opportunity to assess your credit quali-
fications in light of current underwriting guidelines.

With all of the changes that have occurred in the
mortgage lending business, and how conservative
underwriting has become, it is the best way to help
you understand what to expect.

How to Shop For Your Mortgage Loan-Part 3

The two previous editions of this newsletter outlined
steps you can take to put you in a good position to
select your mortgage lender and the loan product that
will serve you the best.


Those steps were:
1. Know your outcome.
2. Be realistic.
3. Choosing a lender.
4. Deciding on a loan product.
5. Assessing rates and costs.

There are a couple of other items that would be
important to assess as you do your loan research.


A. Understand the trade-off between paying a
higher interest rate and zero points vs. paying a
lower interest rate and some points.

When you are offered a zero-point loan, you need
to realize that you are not getting something for
free.

A lender may be willing to create a loan for you
without requiring you to pay discount points (a
fee designed to "buy-down" the interest rate) or
to pay origination points (a fee designed to pay
the mortgage originator for their services).

The lender will absorb the cost of paying the
origination fee, but they will charge you, the
borrower, a slightly higher interest rate for doing
so.

Let's take a look at an example based on a loan
amount of $300,000:

30-year fixed rate of 6.625% with zero points, or
30-year fixed rate of 6.375% with a loan fee of 1 point.

Payments at 6.625% will be $1,920.93. Payments
will be lowered to $1,871.61 at the 6.375% rate, but
it will cost you $3,000.00 to obtain the lower rate
(1% of the loan amount = 1 point).

If you compare the 1/4% reduction of interest rate
vs. the cost, it would take you 4 years to recoup your
investment of the 1 point fee.

If you compare the difference in payments of $49.32
per month to the cost of $3,000.00, you will
calculate that it will take almost 61 months to recover
the 1 point cost.

So, if you have the resources to pay the loan fee,
and you plan on keeping the loan in place for at
least 4-5 years, it would be wise to go with the
lower interest rate. After the break-even points,
all the benefits of the lower interest rate will work
in your favor.

Whenever you are offered choices of interest
rates and loan fees, you should do a similar
analysis so that you have a good idea of the
wisdom of paying a higher interest rate, or paying
higher loan fees.

It is an important consideration as you finalize
the terms of your loan so that it is suitable for you
based on your time horizons.


B. Be sure to ask about whether there will be a
prepayment fee on your loan.

A prepayment fee, also known as a prepayment
penalty, is a clause included in your loan contract
that allows the lender to charge an additional fee
if you pay the loan off within the first three or five
years (depending on the clause).

The typical clause allows you to pay up to 20%
of the original loan amount each year without
paying any prepayment fee. If you should pay
more than the 20%, or pay the loan in full - which
is much more likely - you would be subject to
paying 6 months interest on the amount over
the 20%.

Let's do a calculation based on a loan amount
of $300,000 at 6.625%:

You would be allowed to pay 20%, that is $60,000,
with no penalty. If you paid the loan in full, the
remaining $240,000 would be subject to a 6 month's
interest charge.

Your prepayment fee would be $240,000 times
6.625% (.06625), which gives you the annual
interest, divided by 2, which gives you the figure
for 6 months. $240,000 x .06625 / 2 = $7,950.00.

If you even think that there is a likelihood that you
will pay off the loan within the prescribed 3- or 5-
year period, you would be much better negotiating
the prepayment fee away at the beginning of the
transaction.

Although each loan program may offer different
terms, a good rule of thumb may be that it would
cost you 1/4 point more in the loan fees at
origination to keep the prepayment clause out of
your loan contract.

The math becomes very simple at this point. Pay
$750 more at loan origination (1/4 of 1% of $300,000)
to avoid any possibility of paying as much as $7,950.00
if you were to pay off the loan early.

If you are convinced, however, that you will keep the
loan beyond the 3- or 5-year period, you can save
the additional fee at loan origination and never have
to deal with the prepayment fee either.

Ask lots of questions of your mortgage representative.

Make sure that they explain things so that you can
understand them. If they are unable to clearly
communicate the concepts and the math, you are
facing a situation where the loan product may not
be providing the benefits that you expect.

How to Shop For Your Mortgage Loan-Part 2

Last edition, we started laying out some guidelines
for helping you to shop for your mortgage loan.

The beginning topics were:

1. Know Your Outcome.
2. Be Realistic.

As mentioned in Part 1, realize that these "steps"
are fluid and part of a dynamic process. Don't
think of them as purely sequential, to be taken
one after another. In fact, topics 3, 4, and 5 are
pieces of a puzzle that will help you pull a workable
picture together for you.

Now, on to the next topic:

3. Choosing A Lender

You need to do proper research to make your best
decision. But how do you know who to trust for
solid information?

I suggest that you get recommendations from
people you know who have more experience or
who know the reliable players in the local market.

Ask your real estate agent for names of mortgage
originators. Although there are cases where real
estate agents and lenders work together in an
unhealthy manner, the best agents want their
clients to be served well, and want their transactions
to come to a successful conclusion as smoothly
as possible.

Ask your work associates if they had a good
experience with their lender and get recommendations
from them.

Treat print ads and radio ads with the understanding
that those ads are designed to get the lender's
phone to ring. If they are quoting interest rates,
realize that the quotes may be outdated by the time
you respond. Some lenders deliberately promote
very low rates, knowing that they won't have to deliver
them, but giving them the opportunity to start the
process with the borrower. Reality is presented at
a later date, sometimes when it is too late for the
borrower to make a change.

You should get 5-10 solid recommendations from
your trusted sources and additionally may want to
give a call to some of the advertising lenders.

As you make your research calls, think of it as an
interview process. You are going to do the hiring
of a loan originator to help you reach your goal.

Gathering loan data will be important, but I would
recommend that you also focus on the manner in
which your questions are answered, and how helpful,
considerate, and caring the originator is.

Does the originator:

A. Return your calls in a reasonable period of time?

B. Ask lots of questions to make sure that they
understand your situation, or do they offer a solution
before diagnosing what is appropriate?

C. Have a limited array of loan products that they
try to fit you into, or are they taking your needs and
qualifications to find the best match from the
marketplace?

D. Give you a feeling of transparency about the
transaction? You deserve straight answers to
your questions so that you can make an informed
decision that serves you well.

As you talk to several lenders, you will learn some
new things as you go along. If you can ascertain
a "red flag" that may be troublesome, make sure
you ask about that with each lender. How each
one answers that question may give you important
insights as to who you want to work with.


4. Deciding on a loan product.

As you speak with various lenders, you are going to
get some ideas about loan products that are both
appropriate for your situation, and that may be
approvable under current guidelines.

Unfortunately, sometimes the loan that best fits
your needs may not be available based on your
qualifications.

Factors that affect that availability can include:

A. Credit Score
B. Stability of employment, or self-employment.
C. Stability and adequacy of income.
D. Property considerations.
E. Amount of down payment.
F. Amount of cash reserves after closing.
G. Percentage of monthly obligations in relation to
your income.

I would suggest that as you gather information from
your loan originator prospects, you also get their
top 2 or 3 loan product recommendations.

These recommendations should be based on their
complete understanding of your situation, your
needs, your goals and their interpretation of current
underwriting guidelines.

Have them state their case as to why they think
these are appropriate loan choices for you. Again,
this type of discussion allows you to determine
the quality of the originator. Are they trying to make
the best match for you based on your needs, or
are they just trying to sell you a loan?

If you have 5-10 potential lenders and each of them
offer 2-3 loan program choices to you, you will probably
find that there are at least 3-5 loan programs
that end up receiving high recommendations over and
over. Hopefully, these 3-5 choices will also be ones
that you find acceptable, and you can narrow your
focus to the rates and fees.


5. Assessing Rates and Costs

The mortgage market is dynamic.

It is not uncommon for the 25-30 lenders with whom
I work to offer rates first thing in the morning, and as
the money markets unfold during the day, to make
adjustments up or down to reflect the market activity.

To give yourself, and your loan originator finalists,
the best opportunity to get accurate information you
should get quotes from each of them on the same
day, and hopefully all in the morning or all in the
afternoon.

You should know how long your proposed escrow
period is going to be. If you are purchasing, it will
be stipulated in your purchase contract. If you are
refinancing, it may be based on how long the
lender needs to work their way through your file
after it rises to the top of their incoming business.

Let's say that the escrow period will be 45 days.
You need to ask each of your lenders what the
rate and fee quote would be if you locked that
day for a 45-day period. Rate locks are often
offered for 15-, 30-, 45- and 60-day periods.
You have to compare apples to apples to avoid
misunderstandings and confusion.

Through your initial conversations with the loan
originators, you should have had the opportunity
to explore the comparisons of interest rate quotes
with zero points, 1/2 point, 1 point, and maybe 2
points. Make sure that all of your originators are
quoting based on the same terms.

In addition to the loan origination fees, ask
specifically what other loan-related fees will be
charged by that lender. These may include loan
processing fees, administrative fees, and document
preparation fees.

Other fees that will be part of your closing costs
will include escrow fees, title fees, appraisal and
credit report costs, notary and sign-up fees, and
pro-rations of interest, taxes, and insurance. For the
most part, these costs will be the same no matter
which lender you select. But be clear on all of your
anticipated charges, and make sure to understand
which ones end up with your lender.

You can see that these three steps give you an
opportunity to interview and gather information, with
you circling in on your final choice.

If you are diligent about including all of these
recommendations in your search pattern, I think
that you will discover the right person with whom
to work, and you will give yourself an opportunity
to feel confident that you are make good decisions.

How to Shop For Your Mortgage Loan-Part I

In speaking with clients and potential clients,
I find that borrowers' approaches to researching
their mortgage alternatives range from a well-
directed process to a sincere, but ineffective
procedure.

Some of these borrowers are willing to accept
guidance to help them achieve their goals.
Others forge ahead stubbornly, thinking they
are on the right path, and may reach their goals
less by design than by good fortune.

Please use the following outline as a way to conduct
your mortgage research. Also, please understand
that these steps are fluid in nature, and that you
will pick up important information throughout the
process. Don't think that you have to complete
one step before starting another.

1. Know your outcome.

I often ask my clients, "If things go exactly as you
would like, what would that result look like?"

With all of the details that they have to consider,
they may have never thought about that before.

But, it is important to know what the goals are.
Their outcome that they define can be aided by
answering these types of questions:

How long will you be owning this home? (Their
answers may be influenced by being a first-time
buyer, a move-up buyer, or settling in for the
bulk of their adult lives. Also, how long their
children will be in a particular school district
often helps decide this question. Career plans
come into play as well.)

How long would you anticipate having this mortgage
in place? (This may be a much different question
than the first one. They may need an initial home
loan that gives them immediate benefits but
is not designed for the long-term. They may be
anticipating additional funds that will allow them
to pay down, or pay off, the loan after it is created.)

What is your risk tolerance? (Would you rather
consider loans that will never change, but whose
interest rate and payments may be slightly higher,
or consider loans that provide a lesser element of
stability and that offer lower rates and payments.)

How much of your available funds do you want to
invest? (Some people want to put as much down
payment as possible to keep their loan balance and
payments low. Others want to put little down, keep
their funds more liquid, and leverage off the use
of the lender's funds.)

How much do you want to budget for the housing
expense: mortgage payment, property taxes, insurance
and/or homeowner's fees? (There are many times that
I may be able to obtain loan approval for a higher
monthly payment than the borrower is comfortable with.
I never want to over-obligate my client, and this
question allows us to get the topic on the table so
we can have a frank discussion.)

As you might guess, the client's perfect outcome may
not be compatible with lending guidelines.

But I can tell you from my experience, that it is very
gratifying to hit the client's target! And when we
can't, we both know where the adjustments are being
made and why they are necessary or recommended.

2. Be realistic.

As you talk with the various lenders and gather
information, you are going to be getting some feedback
as to what is possible for your situation.

Your better loan representatives will be able to
discuss lender guidelines and educate you as to what
is approvable in today's market.

In early 2007, we were in an entirely different
lending environment. Loans approaching 100% of the
value of the home, or that allowed for approval
without verification of income or assets, or
certain more exotic loan products were readily
available then. But not now.

If you are hearing of your neighbor's or co-worker's
loan experience, it's important to understand that
each borrower's profile is unique, and it is to be
assessed in light of the lending guidelines at the
time.

Even now, we are experiencing something of a moving
target with regard to guidelines. As investors
have left the market, lenders have had to change
the guidelines for the types of loans that they
will originate.

Sometimes, this happens in the middle of a trans-
action we are processing for a client. We can do
our research, get the loan request started, and
by the time we are ready to submit the loan to the
lender, the guidelines have changed.

If you had decided to apply with a direct lender and
this happened, you would have to start all over
again with a new lender, possibly having to pay
for additional appraisals and credit reports.

If you were with a mortgage broker like me, your
application, appraisal and credit report can be
directed to a different lender with compatible
guidelines to your situation.

It is important to remember that your loan application
is not a redemption coupon, but it is a request
for the lender to consider and hopefully approve.

It is always great when the process goes smoothly and
there are no big surprises. But, be prepared for
some obstacles to surface and work with people that
you know are giving you information that is researched
to the best of their abilities.

To be continued: Choosing a Lender, Deciding on a Loan
Product, and Assessing Rates and Costs.

Breaking the Underwriting Code

The major advantage of being a mortgage broker is
that we have access to many lenders.

In addition to the banks and major mortgage companies,
we also have lenders that serve niches in the market-
place.

For those loans up to $417,000, commonly known as
conforming loans because they conform to guidelines
for purchase by Fannie Mae (FNMA) and Freddie Mac
(FHLMC), there are many lenders who create these
loans because of their marketability.

The Stimulus Act allows for FNMA and FHLMC to temporarily
purchase loans up to $697,500 in San Diego, through the
end of this year. These are commonly called conforming-
jumbos.

Jumbo loans, traditionally those above $417,000 and now
temporarily for those above $697,500, are purchased
through Wall Street by institutional investors.

After the "mortgage meltdown" that began about a year
ago, the jumbo investors left the market. They had
lost confidence in the quality of the loans that were
in their investment pool.

FNMA and FHLMC tightened up their guidelines, but loan
approvals with them are more predictable and the process
is more straight forward.

We are able to submit loan request electronically and
to receive automatic approvals immediately. The lenders
will always verify the figures that we use in the submission
when we submit the physical file, but we can know the list
of conditions for the approval right away.

The key here is that if FNMA and FHLMC are willing to
approve the loan through the electronic system, they are
in essence telling the lender that they will purchase
the loan from them. The lender is willing to make the
loan as approved, because the risk of them creating a
loan that the investor (in this case, FNMA and FHLMC)
will not purchase has been been eliminated.

In the jumbo category, however, what we are encountering
now is some extremely conservative underwriting. Since
there is a less predictable process for when the investor
will commit to purchasing that loan, the lender wants to
leave no doubt that if they create the loan, that they
can sell the loan. Typically, lenders do not want to keep
big loans in their own portfolio because they have rate
risk if interest rates go up.

Many underwriters are in CYA mode. We can call that
"Cover Your Apathy" for our purposes. These underwriters
are more interested in making sure that they create
a bullet-proof file than they are in granting the loan.
They are equally happy to approve or decline a loan, as
long as there is no room for criticism of their decision.

It's almost as if they have forgotten about evaluating the
borrower's qualifications and assessing reasonable
risk. Instead they want to over-document the files and
analyze the numbers in the most conservative way possible.

All of this stems from the lack of investors in the
jumbo market. If there were more investors, and the
market was more liquid, the lenders' underwriters could
make more reasonable judgments knowing that they had a
high probability of selling the loan.

But, just because some of the lenders are in this mode
does not mean that they all are.

I am constantly evaluating the underwriting patterns of
our lenders. I know who is reasonable and who is
squeezing the files real tightly. I know who can work
quickly and who has a backlog that is in front of our
request.

As you make a decision to work with someone to obtain
your mortgage loan, seek professionals who can advise
you about market reality, who help you prioritize what
is important to you, and can educate you so that you
make informed decisions.

Feel free to call me for a recommendation. Don't be
surprised when I recommend Doug Brennecke!

Lessons From Tiger Woods and Rocco Mediate

With the U. S. Open Golf Championship in San Diego
this past week, there were many stories about how
the golf course had been prepared to challenge the
golfers and to identify the champion.

Tiger Woods and Rocco Mediate battled over 91 holes
with Tiger persevering for the Championship. If you
follow sports at all, you now know that he was
competing with a torn ACL in his left knee, and had
two stress fractures in his tibia and played through
the pain to win.

The drama of the golf tournament provides an analogy
to the mortgage business in today's environment.

**The USGA took the Torrey Pines Golf Course from a
forgiving layout that allowed the players to achieve
low scores, and created a new layout that challenged
the players on every decision for every shot on every
hole.

Over the last year in the mortgage business we have
seen the underwriting standards go from a lenient
approach that allowed most borrowers to be approved
on their loan requests, to a restrictive environment
that challenges borrowers and mortgage originators to
strategize every step of the process.

Because the underwriting changes have "toughened up"
the course, borrowers and originators can no longer
only rely on techniques that worked in the past. A
fresh approach to the process is required: doing new
research of underwriting guidelines and changes,
talking with the lenders' representatives and our
peers about what tactics can be successful, and dev-
eloping a new experience base in this new lending
world.

**Rocco Mediate was quoted as saying that there were
many ways to be successful on the golf course. Even
though Tiger Woods was able to hit the ball farther
than Mediate, Rocco was still able to compete by
executing the shots in his arsenal extremely well.

When we consider that the goal for the borrower and the
originator is to have a lender approve the loan request
with acceptable terms and conditions, we must also
realize that there are many ways to accomplish this goal.

As a mortgage broker, we have access to over 50 lenders,
and they each compete in many categories of lending.
Some of these lenders may be more concerned with the
property, others less so. Some lenders may be more
concerned with credit histories, others less so. Some
lenders may be more concerned with the debt-to-income
analysis, others less so. Some lenders may be focusing
on the amount of money borrowers have in checking, savings,
investment and retirement funds, others less so.

A golfer is allowed 14 clubs in their bag to be used as
tools for different situations. An old saying is that if
your only tool is a hammer, you will treat everything like
a nail.

This is always what has differentiated us as mortgage
brokers from direct lenders. When you walk into a bank
branch, as an example, they will have a limited menu
of loan choices and they will try to fit you into one of
their loan products, whether it is the best thing for you
or not. If they are even aware of a better choice for you
that the bank does not offer, it would be the rare case
for them to recommend that you seek the better loan else-
where.

As a broker, we start with understanding your goals, your
risk tolerance, your time horizons, and your priorities.
We serve as an advocate for you to the lenders. Because
we have access to so many more lenders and lending programs
than the direct lender has, we do a better job of finding
custom solutions to fit your needs.

**Tiger Woods is probably the most gifted athlete of our
time when it comes to mental toughness. One of the traits
that is so admirable is that he focuses on what he needs
to do to get the ball into the hole from where the ball
lies, and does not carry a lot of mental baggage about the
quality of the last shot that put him into that position.

He understands that he may hit the "perfect" golf shot,
but the result may not be what he wanted. He can only
try to hit the next "perfect" shot to get him closer to
his goal.

In our business right now, we have to develop that same
mental toughness.

We can develop a game plan based on your priorities and
what is important to you. We can make sure that the lender
we have chosen offers the best program for you, and
research the guidelines to develop a sense of confidence
that your loan request is compatible with what they are
offering. We can strategize about the best way to package
your loan request to show all the favorable reasons why
the lender should approve it for you.

But we can't always know if we are going to get the
"bad bounce". The underwriter may have received a
directive that morning saying that guidelines were
tightening, and it may be something that specifically
applied to your request. All our best efforts to put
together the "perfect" package did not give us the
immediate result we wanted.

That's is where we need to focus on how to get the loan
request from where it now stands to an approved status.
It takes patience, research, knowledge, experience, and
the willingness not to give up when confronted with a
new obstacle that was not able to be anticipated.

When you pick the right person to work with, you know
that they are using their best efforts to help you get
what you want. Obstacles will arise, and it may put
our hearts in our throats, just like Tiger Woods faced
repeatedly.

We are measured by our honesty, integrity, communication
skills and our tenacity to do everything we possibly
can to achieve the final goal for you. We want to put
that Championship trophy on the shelf for you!

The Shape Of Things To Come?

As the ripples continue to extend from the "mortgage
meltdown", lenders, investors, rating agencies and
legislators are all trying to come up with solutions
so that this does not happen again.

The lenders, investors and rating agencies have all
become more conservative as a response to the bad
policies and judgments that had crept into their
systems.

These market forces are part of the ebb and flow of
business markets. When companies suffer losses, they
make changes to get healthy again and improve on their
products for the future.

As their balance sheets improve in the future, we can
fully expect them to become less conservative, but I
think that they have learned their lessons about letting
the pendulum swing too far toward the excesses that
they allowed in the past.

The legislature, however, will put new laws and new
restrictions in place that will not be as elastic. Once
these laws are established, it seems like they will never
be removed, only new layers will be added.

This will make the process more cumbersome, it will
institutionalize oversight that will add new
administrative costs to the process.

I am a firm believer that the bad characters need to
be removed from the system. There were many
mortgage lenders that abused their clients, took
advantage of the clients' lack of knowledge to unjustly
enrich themselves, and cared more about their welfare
that caring about matching suitable products to the
clients' needs.

The best way to get those unscrupulous mortgage
originators out of the business is to avoid them if
possible by doing your homework up front.

If you are in the middle of a transaction, give yourself
an exit strategy if you get bad feelings about how things
are going by having a backup lender in place.

And if you are forced to close your transaction because
of timing circumstances and you were taken advantage
of at the last minute, complain loudly and aggressively
until you get some satisfaction.

With that being said, let's take a look at what the
lawmakers have in mind for the future of the mortgage
business.

Senate Bill 2452, The Homeownership Preservation
and Protection Act, is designed to curb the predatory
lending that occurred with borrowers being placed in
less-favorable or most costly loans than the borrowers
were qualified for, and for fraud-related activity.

A couple of items in this bill may reach much farther
than the original intention.

The bill proposes to eliminate yield-spread premium
on the pricing of loans. You may recall from a few
newsletters ago, that yield spread premium is money
that a lender makes available in exchange for receiving
a higher-than-normal interest rate on a loan.

It is a tool that lenders and mortgage originators use
to offer no-point and no-closing-cost transactions for
borrowers. The borrower makes a choice to accept
slightly higher mortgage payments in exchange for
saving thousands of dollars in costs.

The reason this is proposed in the bill is because
the unscrupulous mortgage originators would charge
loan fees to the borrower, place the borrower in a
higher interest rate loan, and then accept the payment
from the lender for the yield spread premium. The
mortgage originator would make excessive income for
placing the borrower in a less favorable loan.

If the borrower is properly informed and they feel that
the value of the originator's expertise warranted the
income they earned, then that is a market force at
work, and no one is being treated unfairly.

However, if the borrower is in the dark about
competitive interest rates and fees, and they are taken
advantage of, that is a different story.

But, the problem is that the borrower has not done
their homework, researched loan options, and expanded
their search wide enough to know the range of options
that they should expect to hear. If they work with
one person, and don't have their paperwork reviewed by
a trusted advisor before they close, they are opening
up the possibility of being victimized.

The problem is not that yield spread premium could be
used in a loan transaction. And it seems that the
proposed legislation will be more restrictive without
really getting to the root of the problem.

Another provision of this bill are some proposed new
requirements for appraisers.

Part of this "mortgage meltdown" is that there was
conscious, systematic fraud exercised by some very
devious teams of real estate agents, title companies,
lenders, appraisers, notary persons, settlement
agents, buyers and sellers.

Appraisals were inflated to induce lenders to create
loans that were higher than the true value of the
property in some cases. Money was then distributed
to all the team members, and the lenders were stuck
with a property to foreclose upon that wasn't worth
what was owed against it.

The remedy should be to identify those appraisers,
prosecute them when possible, and get them out of
the business by rescinding their licenses otherwise.
There are plenty of laws on the books dealing with
real estate fraud.

The bill wants appraisers provide a bond for a
specified percentage of the appraised value of the
home. If there is an incident where the borrower
suffers a loss due to an inflated appraisal, and
in turn receives a financial settlement from the
lender, the lender can then use the bond that was
provided to offset some of that settlement cost.

What this means is that the appraisers will now have
a new cost of doing business to factor into their
fee structure.

I have been told by one appraiser that this would
double the cost of a residential appraisal, from
approximately $400 to $800 to be able to pay for
this new bond requirement.

So, in order to help protect borrowers from the bad
guys, new legislation will now throw a net over the
entire industry.

It will eliminate useful tools to provide choices to
the borrower, it will create new layers of oversight
and protections, and the costs will pass through to
the consumers.

It will make getting home loans a more ponderous
process (is that possible?) and more expensive.

Despite the best intentions of our lawmakers, we need
the emphasis to be on enforcement of existing statutes
and less on new legislation that throws the baby out
with the bathwater.

Your best protection, as always, is work with reputable
originators. Hold them accountable, make sure you
understand the paperwork, programs and fees, and you
will have as good an experience as possible going through
the mortgage process.

Great News For The Higher Limit Conforming Loans!

There have been some recent positive changes in the
FNMA and FHLMC higher limit conforming loans that
are in effect at least through December 31, 2008.

**The interest rates and fees for the loans between
$417,000 and $697,500 (in San Diego) are now much
closer to the traditional conforming rates and fees.

**There now is an option to refinance and take cashout
to a maximum of $100,000 (based on loan-to-value
guidelines). Initially, they would not allow this or
even allow the payoff of a second loan through a
refinance on this program.

**Loans can now go to 80% of the value of the property
in certain circumstances. At the beginning, 75% was
the maximum.

You may recall that when the Economic Stimulus Bill
first became law, FNMA and FHLMC had the ability to
purchase loans above the standard $417,000 limit for
a single-family property.

The maximum that went into effect was now $729,750,
based on a county's median home price. In San Diego,
the computation created a limit of $697,500.

The initial guidelines were very conservative. Since
FNMA and FHLMC were now taking on the risk of higher
loan amounts that the private sector used to absorb,
there was a reluctance to open the floodgates.

They have had a couple of months now to assess how well
their guidelines were working. I think it was fair to
say that because their guidelines were so restrictive
that they did not receive as many new loans as they
may have been anticipating.

There is no question that this element of the Stimulus
Bill failed to produce much stimulus.

With these new changes, however, many borrowers are now
going to get the opportunity to purchase homes with
significantly lower interest rates and fees.

Many borrowers are going to be able to refinance from
an adjustable rate loan to a fixed rate loan and have
predictable payments going forward.

Many borrowers will be able to refinance their loans
which were fixed for the first 3 or 5 years and not
have to face the resets of those loans to possible
higher interest rates or have them become adjustable
rates.

Many borrowers will now have a chance to improve the
terms of their loans, which started as jumbo loans,
by refinancing them to terms that are very close to the
traditional conforming rates and fees.

Now is the time to put a strategy in place. If you, (or
anyone you know), has a loan below $697,500 in San Diego,
investigate your possibilities. Rates may be attractive
enough right now to want to take action.

If rates are not quite where they need to be right now,
we can agree on a game plan going forward.

Remember, all we can count on right now is that these
temporary conforming limits will be in place through
the end of the year. There are no guarantees (or even
any indications at this time) that this time limit will
be extended.

We are finally getting to see some of the possibilities
promised by the Stimulus Bill. Don't procrastinate and
miss out on any opportunities that this may present.

The Top Four Factors In The Mortgage Process

In a survey conducted with mortgage borrowers, there were
four factors that were determined as the most important.

In order of importance, they were:

1. Communication
2. Integrity
3. A Smooth and Complete Process
4. Competitive Products and Rates

Let's take a look at each of these and how they fit
together to help you have the best possible experience
in obtaining your new home loan.


COMMUNICATION
It has often been said that most people can deal with
what needs to be done, if they are only told what the
rules are.

In the mortgage lending field, it is so important to know
what to expect, how the process works and the details of
the specific proposals that you are asked to consider.

Your mortgage originator should be able to tell you
the steps and timing of their application process. From the
initial interview or submission of the loan application,
you should understand the time line for obtaining the
credit report, appraisal, escrow and title paperwork,
verifications of income and asset and for the submission
of the loan file for approval.

From there, you should know the turn-around time on a
submitted file in the lender's underwriting process. If
the file has been put together well and is complete, there
should not be many conditions to be satisfied on the loan
approval prior to the lender preparing the final loan documents.

Once the loan documents are signed and returned
to the lender, you will need to know how long it takes for
the lender to do their final quality control and to authorize
the funding of the loan to complete the transaction.

In addition to these procedural and timing expectations, your
mortgage originator should also be able to explain how their
process ties together with the escrow company, the title
company, your home inspector and termite clearance, and the
appraiser.

They also need to be mindful of the specifics of your contract,
so that they can meet any deadlines that have been agreed
upon by you and the seller. In California, there is a common
clause in the contract that calls for the buyer to
remove their financing contingency within 17 days of the
seller's acceptance. It is imperative that you have a
mortgage originator who gets the paperwork started quickly,
who puts a quality loan package together and gets a loan
approval that has few conditions.

When you are asked to remove your financing contingency and
put your earnest money deposit at risk, you want to be as
sure as you possibly can that there is not something to
prevent you from obtaining your home loan.

And, of course, you need a mortgage originator who can
listen, who can understand what is important to you, who
understands your risk tolerances and time horizons, so that
the loan programs that are presented to you are suitable
matches for your qualifications and needs.

It takes an experienced professional to present options to
you that are clear and thorough. You want someone who can
speak in language that you understand and makes sure that
you are comfortable with the final recommendations. You
will also want to have someone who can point out the positives
of various loan programs, and any negatives as well, so that
you can make an informed decision.


INTEGRITY

There are so many opportunities in the mortgage industry
for a person of low integrity to make a handsome living
and not serve their clients well.

As we saw, above, a person who wants to distort some
timelines, some facts, some attributes of loan programs - and
we haven't yet talked about rates and fees - to draw a
borrower to them has plenty of chances.

The best advice I can give is modeled after Ronald Reagan's
statement of "Trust, but verify".

If a mortgage originator makes representations, find out
how you can get some additional information to support the
statements. You can request a copy of the credit report,
a confirmation from an escrow officer or appraiser that
things were done in the timely manner promised, or a copy
of the final loan approval that outlines all of the conditions
of the loan approval. There are ways that you
can be more assured that your loan request is on track to
be completed as proposed and in the time frame that you
expect.

In my opinion, integrity and communciation go hand-in-hand.
If you have your mortgage originator go through the steps
of the application process and the escrow process and the
details of the various mortgage programs, you will get an
excellent idea of the integrity of the person with whom
you are dealing.

If the mortgage originator is unskilled, they may honestly
answer "I don't know, but I will find out". If they try
to bluff their way through an answer, you will probably be
able to detect irregularities in what they have said, and
that may point to an integrity issue.

If you are trying to understand details and you keep getting
vague answers in return, that may also point to an integrity
issue. It may be an unwillingness to give you the correct
information that is not favorable to their outcome.

If you find that a particular loan program is being touted
that does not seem to be suitable to you, you need to
understand whether that is the only solution that they have.
If there are additional choices, the presentation of an
unsuitable product may point to an integrity issue.

In my opinion, the more transparent the mortgage originator
is regarding how the process works, how the programs work,
how much you are paying in fees and who receives those, and
the willingness to admit if you have better choices else-
where goes a long way to proving their integrity.

Be sure to ask around about the person you are working with,
or to ask for referrals and testimonials from happy clients
and real estate agents. A person who has been originating
loans for a long time, and who has happy repeat and referral
clients says a lot about them being a "straight shooter".


A SMOOTH AND COMPLETE PROCESS

We've already alluded to this, especially in the Communication
section, but a skilled mortgage originator knows how to put a
package together and how to anticipate foreseeable problems.

It all starts with the loan application and collection of
supporting paperwork. I still prefer to interview my clients
whenever possible, and meeting them in person is the best
way to get things started.

In an efficient one hour meeting we can go through the data
gathering and really probe as to what is important to my client.
Knowing this information allows me to brainstorm
solutions to their individual situation and to strategize
about making their home ownership dreams come true.

I have developed systems that allow me to make a comprehen-
sive request for supporting paperwork that fits their
profile. It could be paystubs, W-2 forms, tax returns,
bank statements, brokerage statements, retirement account
information, divorce or bankruptcy paperwork, or explanatory
letters regarding special situations. Getting all of this
information up-front, rather than going back repeatedly to
the borrower for yet another piece of paper, is integral
to a smooth process.

There are situations that arise that are not foreseeable,
and we all need to make allowances for that possibility.
This has been even more true in the last year as the
mortgage industry tries to get back to more conservative
underwriting of loan files. However, there are many
obstacles that need to be recognized and discussed and
strategized over.

A smooth process is also a result of knowledge, experience,
skill, communication and integrity.


COMPETITIVE PRODUCTS AND RATES

Interestingly, this is not at the top of the list.

I think it is interesting because so many borrowers call
up for information and the only thing that they are interested
in is "What are your rates?"

Accepting a direct answer to that question is naive on the
borrower's part. There are so many factors that go into
determining the right program for a borrower, and the
interest rate and fees to be quoted, that the information
provided is not appropriate or possibly a deliberate lie.

In order to do a good job for our clients, and to treat
them properly, we need to remember an old adage: Prescription
without diagnosis is malpractice. Simply put, if we don't
ask the proper questions and just offer a "one size fits all"
solution, we are not doing the best thing for our clients.

We should know if the new property is going to be their
home and how long they intend to own it.

Are they salaried or self-employed?

Do they qualify by proving all of their income, or do we need
to consider stated-income alternatives?

What are the credit scores?
What is the purchase price, how much down payment, and is any
of it coming from a gift?

In addition to the new housing debts, how much do they owe in
other obligations?

These are some of the questions that are important to know
the answers to so that a proper loan program and accurate
interest rate and fee quote can be presented.

I know that I have lost the opportunity to help a lot of borrowers
because when they shop rates and fees only, the
person that tells them the lowest numbers will get the
opportunity to do the business.

The mortgage originators who deliberately deceive a borrower
to get the loan application process started with them know
that there will be a point where the borrower will continue
with them despite what the final terms are. And the final
terms are almost never the low quoted rates produced at the
beginning.

The pain of starting a new application process with someone
new and the time that it takes will jeopardize most purchase
transactions. And the deceptive originators know this. And
the borrowers usually fold. And the borrowers develop the
thought that all mortgage originators are the same, so what
difference does it make?

Nothing could be further from the truth.

The survey answers provide a solid basis for anyone shopping
for a new home loan.

The progams and rates need to be competitive, but they will
rarely be the lowest. Getting the lowest rates is more good
fortune that by scientific design.

If the process is not smooth and complete, it will leave you
with a bad feeling- possibly forever.

If you are working with someone without integrity, there is
no basis for anything else working well.

And if communication is poor or non-existent, you can expect
nothing but problems in all areas of the transaction.

Getting a home loan is a big decision. You have a lot to
lose if you don't try to maximize these four factors when
you decide with whom you want to work.

YSP - Why Is it Important In The Mortgage Process?

YSP is an abbreviation for Yield Spread Premium. Like most
"verbal shorthand" that is industry shop talk, it's not immediately
obvious what is stands for, or why you would care.

Let me take a moment to set a foundation regarding mortgage
rate and fee pricing.

Lenders will typically offer interest rates that cover a range of
roughly one to two percent. For example, in today's market,
lenders may have quotes in 1/8% increments from 5.5% to
7.25%.

So, if lenders are offering 5.5% and 7.25% loans, why would
anyone ever take a 7.25% interest rate?

Lenders (and investors) want to achieve a particular yield or
rate of return on putting their money to work. In order to
achieve this yield they may charge loan points with the lower
interest rates (discount points) or credit loan points with the
higher interest rates (rebate or yield spread premium). As
a reminder, one loan point equals one percent of the loan
amount paid as a fee.

Here's an easy way to think of this: If the lender get something
of lesser value (a lower interest rate) they will charge fees to
increase the value. If the lender gets something of higher value
(a higher interest rate) they give something back to create a yield
equivalency.

A rough rule of thumb for a 30-year fixed rate loan is that a
1/8% change in interest rate corresponds to a 1/2 point change
in loan fee. So if you want an interest rate that is 1/4% lower,
it would cost you approximately one point in loan fee. This
gets a little distorted as you move away from the center range,
like a bell curve.

If the borrower accepts a higher interest rate, there could
be surplus YSP over and above the origination fee that could
be applied toward the borrower's closing costs.

This would be the major reason why someone would take a
higher-than-normal interest rate - to have the lender pay most
or all of their other closing costs.

The most common use of yield spread premium as a loan
pricing tool is to offer borrowers a "no-point" loan. If we
assume that the typical loan origination fee is approximately
one point, then the borrower would accept an interest rate
about 1/4% higher in order to have the lender pay the origination
fee. The other choice would be to accept a lower interest rate
and then the borrower would pay the origination fee as part of
their closing costs.

As a result of the "subprime crisis" mortgage meltdown, there
is a lot of discussion about the abuses of the yield spread
premium in the mortgage community, and how borrowers have
been taken advantage of by greedy mortgage originators. The
most common discussion point is that borrowers were put
into loans at higher interest rates than those for which they
qualified.

A borrower could have been victimized if they were poorly
counseled, lied to, or failed to shop around to know what was
available in the market. Their loan could have been created
at an interest rate that paid a yield spread premium to the
originator and the borrower may have paid loan points as
well.

If the compensation received by the originator was
excessive for the service they provided, then the borrower
did pay too much (in interest rate and/or fees) for their loan.
This would be especially true if the borrower did not under-
stand how much they were paying, or did not shop around
enough to understand what the prevailing interest rates
were.

The responsible use of yield spread premium is to clearly
disclose options to the borrower, and to have the compen-
sation received by the originator be fair in the marketplace
for the service provided.

There are proposals coming from government to eliminate
YSP's because some originators have been unfairly enriched
by using them. But if these proposals succeed, then borrowers
will not be able to negotiate "no point" or "no closing cost" loans.

This would create an increased burden on a borrower who
is strapped for cash to pay these fees, or who is refinancing
a loan that is at the maximum loan in relation to the value of
the property who cannot increase the loan amount to cover
the fees.

The more loan programs and tools that we have to create
customized solutions for a borrower is a good thing. It is
our responsibility at originators and the borrower's respons-
ibility as consumers to have all the important facts, all the
costs, the risk tolerances, time horizons, goals and priorities
identified and discussed as we work together.

Closing Costs -Fair or Excessive?

You are ready to buy your home. You've saved for the
down payment and you know that you have to have some
money left over for reserves. You also know that there
will be some costs for various services to support your
transaction.

Then you are presented with a long list of fees and
charges. You don't know if they are necessary. You don't
know if they are reasonable. They are confusing and
mysterious and unclear.

Even after you are able to determine that the charges
are acceptable, you still want to be as sure as possible
that you won't be presented with additional charges just
prior to close of escrow.

The best way to assure yourself of this is to work with
someone you trust. You should actively seek referrals from
others who have gone through the mortgage process recently
and from your real estate agent.

Despite the press coverage of the unhealthy relationships
between unethical real estate agents and unscrupulous mort-
gage originators, the vast majority of real estate agents
are interested only in successful closings with the buyer
being well-served with honest dealings, competitive loan
terms and no-nonsense communication.

The professional real estate agents will know the mortgage
originators who are able to deliver quality service.

When you interview your prospective mortgage originator,
prepare some tough, direct questions for them. Assess
how they answer the question. If they are evasive, you may
find that you have someone who is unknowledgeable or
worse, someone who is deceptive.

You should be looking for someone who is transparent
about the process and who isn't defensive or evasive.
Clear communication should be an item high on your list.

The lenders are required to send you a "Good Faith Estimate"
of closing costs shortly after you submit a loan application.

It will include charges that are called recurring closing costs
that will include pro-rated interest on the new loan, pro-rated
property taxes, property insurance costs and the premium
for private mortgage insurance if required. If you have an
impound account for collection of taxes and insurance as
part of the monthly payments, your initial deposit to create
that account will also be shown.

A list of transactional costs, or non-recurring closing costs
will include loan points for discount and origination, escrow
fees, title charges, appraisal fee, credit report cost, loan
processing fees, underwriting charges, document prep-
aration fees, bank wire charges, courier fees, a charge
for notary/document sign-up and a few others.

When you receive this Good Faith Estimate, you should
review it right away. If you have questions or concerns,
contact your mortgage originator. They should be able to
answer your questions about the lender-related charges
at least. If they are experienced, they should be able to
give you a good overview of all the items on the Estimate,
the services that are being provided and an explanation
as to why they are necessary. Or, they should be able to
direct you to the appropriate escrow and title persons to
speak for their portion of the charges.

Once you have a clear idea of what to expect, let your
mortgage originator know that you expect to be informed
about any significant changes to the Estimate as soon
as they know. You can determine for your own purposes
what is significant, but make it clear to them what your
expectations are.

The escrow company will be pulling together figures from
all of the service providers as they approach the closing
date. You will be presented with a "Borrower's Estimated
Closing Statement" so that you know how much money
you need to bring in to close the transaction. Your escrow
officer can also tell you if the charges that are presented
are common for most lenders.

You will want to compare this to your Good Faith Estimate
to see how close the numbers are. If there are new line
items or if significant changes are now appearing, you will
want to contact your mortgage originator for explanation.

There are times when unforeseeable events occur that
affect closing costs. Contact your real estate agent as well
to determine that the new item was truly warranted
and unexpected. If it was foreseeable, or if the estimates
are not close, hold your mortgage originator accountable.

After all, they are the ones that deal with this every day and
they should be giving you a fair estimate at the beginning.

You do not want to have a request for additional money
to close presented to you just prior to your close of escrow.

If you follow this plan, you should be able to feel confident
that you have done everything you can to be prepared for
the closing. You will have a good idea of what to expect,
have a plan for being kept informed, been clear with your
originator that you will not tolerate significant inaccuracies,
and have found someone that you are comfortable with.