Looking Backward and Forward

As we close out 2009, it gives me an opportunity
to look back and also make some acknowledgements.

This last year put us further along a path that began
a few years back.

There is no debate that there were lots of abuses in
the mortgage business. Originators took advantage
of borrowers. Borrowers blindly followed without
questioning where they were headed. Lenders
created these loans knowing that they were not
being looked at closely and passed them along to
investors without caring about the outcome. Investors
sold pieces of these mortgages to other investors,
representing them as solid investments.

Everyone wanted to believe that the loans were good
for the borrowers and good for the investors. Some
deluded themselves into thinking that property values
would never go down. And there was a lot of pain
that will continue for the forseeable future.

The government does not want this to happen again.
So, where previously the pendulum had swung far
in the direction of little scrutiny, now it has swung
in the direction that everything is checked and re-
checked.

In addition, many loan products are no longer avail-
able. For example, stated income loans and loans that
allowed for deferred interest. Equity loans, and interest-
only loans are vastly reduced in availability.

Through the course of 2009, we have seen the intro-
duction of new appraisal ordering systems that remove
direct contact between the originator and the appraiser.
This was done in an effort to keep originators from
exerting undue influence on the appraisers to "hit a
number".

We saw the introduction of new disclosure requirements
that protect the borrower from paying for services
such as the appraisal until they have had an opportunity
to review their truth-in-lending disclosure. And if the
Annual Percentage Rate (APR) changes more than
.125%, you are entitled to a new disclosure and a
mandatory 3-day waiting period before you can proceed
to the next step. This may delay closing transactions
on time.

Coming in 2010, are even more disclosure changes.
You will now see that some fees are set at the beginning
of the disclosure process and cannot be changed, some
fees can be changed based on changes in the market,
and others can be changed but have a cumulative limit
of 10% change. They are also tying these advance
disclosures to your final settlement statement that you
will receive at closing so that the comparisons are
crystal clear.

Be prepared for these changes. Don't think that because
you have experience with buying or refinancing that
you won't have a new learning curve. And be prepared
for possible delays and some confusion. All of these
changes are new to everyone and it will take a little
time to work through all the new requirements.

Acknowledgements:

I want to say "Thank You" to all of you with whom I
worked in this past year.

Being a mortgage professional is how I feed my
family, and I never want to take your confidence in
me and your loyalty for granted.

With that being said, please let me know how I can
improve my service to you. Send any suggestions
to me at doug@dougbrennecke.com.

I want to continue to earn your business.

Have a safe and healthy Happy New Year! I will
talk to you again in 2010.

The Feds Are Running The Show

We are finishing up a trying year in the mortgage
business. After last year's near-death experience
with economic calamity, the federal government
has been doing everything it can to prevent any
chance of a recurrence of the events that led to
the "mortgage meltdown".

Because the government is so involved in the
process, it is important to understand that the
lenders are being handcuffed from making many
of their own decisions about lending programs
and approval criteria.

Let's take a look at what type of lending is
prominent in today's market:

Conforming loans: These are the loans that
are designed for sale to FNMA (Fannie Mae)
and FHLMC (Freddie Mac), and currently have
a maximum loan limit of $417,000. FNMA
and FHLMC are "government sponsored
entities (GSE's)", and the performance of these
corporations are backed by the Federal Govern-
ment.

FNMA and FHLMC have written guidelines
that define what loans they will purchase from
the lenders after the loans are funded and closed.
Traditionally, there is room for interpretation
with these guidelines, and underwriters have
latitude to make loans outside of these guidelines
if there are sufficient "compensating factors" -
reasons why making an exception does not
present a risk. A couple of the most common
compensating factors are a low loan amount in
relation to the value and strong liquid assets
after closing.

High-balance conforming loans: These loans
have come into play when the mortgage melt-
down hit the market hard, and institutional
investors (non-government) refused to buy
loans because the quality had been poorly
represented and they suffered losses.

These high-balance conforming loans are also
eligible for sale to FNMA and FHLMC and
have maximum loan amounts based on the
county in which the property is located. They
are to be underwritten with many of the same
guidelines, although there are more restrictions
in this category, because FNMA and FHLMC
don't want to take higher risks with higher loan
amounts.

FHA Loans: The last bastion to enable the
general public to buy a home with a small down
payment is the FHA program. It allows buyers
to put as little as 3.5% as a down payment, and
liberally allows for gift funds for the down payment
and closing costs, and for family members to
co-mortgage to help in the qualifying process.

There are minimum property requirements that
need to be met, and condominiums require some
additional scrutiny that may make many projects
ineligible, but it fills a need for first-time buyers
that the conventional market is avoiding right now.

It is also a government-backed program. In the
past, conventional loans were available up to 95%
of the value of the home, but these were made with
the support of private mortgage insurance (PMI).
PMI has backed off from insuring loans to those
maximums, again due to the losses that these
companies incurred when the mortgage meltdown
occurred.

VA loans: Another government-backed program,
available to active-duty military and honorably-
discharged veterans. These loans allow for an
eligible borrower to finance up to 100% of the value
of the home.

Guidelines are reasonable, and tend to give the
benefit of any doubt to the veteran, within reason.
They want to help their military members obtain
homes, without making excessively risky loans.

So, the majority of the mortgage market is being
driven by the directives of the federal government
and the financial support of the U. S. taxpayer.

There are lenders that do create loans for their
own lending portfolio, and do not rely on making
the loans for sale to the GSEs. Many of these
lending programs are adjustable-rate loans, because
the lender does not want a fixed rate of return on
their money, when the cost of money is subject to
change.

These portfolio lenders, as they are called, have
put together business plans that have worked
very well for themselves. But, even though they
have a proven track record of their business plan
being successful, there is still pressure from the
government to conform to what the government
wants them to do.

For example, stated-income loans were prominent
when the go-go days in the mortgage business
were happening. These loans did not require proof
of income, and many lenders, investors, and rating
agencies were not especially diligent in controlling
the risks associated with these loans.

Stated-income loans were summarily regarded at
that point as being high-risk and to be avoided at
all times. However, there were still lenders that
had done a good job of controlling the risks by
requiring higher credit scores and strong cash
reserves that had a correlation between the
balances on hand, and the income that was being
represented on the loan application.

These lenders could show statistically that they
had good performance with their business model.
But, despite this fact, bank regulators "strongly
encouraged" them to drop this lending program.
If the bank insisted that they wanted to continue
to serve the market with this lending vehicle, the
regulators informed them that they would continue
to review the bank operations for compliance in
all areas.

Nobody wants the federal regulators to hang
around their business any longer than necessary,
and the bank got the message that they needed to
drop a program that the government deemed to be
high-risk.

You continue to hear a lot in the media from the
politicians that they are doing everything to get
money "from Wall Street to Main Street", and that
they don't understand why the money is not being
lent to borrowers.

It is disingenuous on their part to ignore the role
of their own federal regulators who are looking over
the shoulder of the lenders and making sure that they
don't make any mistakes. When the politicians are
saying that the banks have a green light, and the
regulators are waving the stop sign, the banks pay
attention to the stop sign.

Making loans to good borrowers is easy. Rejecting
loan request to clearly bad borrowers is easy. But
there is a huge number of borrowers in the middle
of that spectrum, and underwriters are gun-shy about
making any decisions for which they may be criticized.

When that happens, they tend to adhere strictly to the
underwriting guidelines and not make any exceptions,
no matter how reasonable the request may be. It is
the safe thing to do, but it does not allow for a big group
in the borrowing population to be served.

Let us hope that as we head into 2010, that there can
be a rejuvenation of institutional investors who are
willing to encourage creativity and reasonable risk in
the creation of mortgage loans. Only the private
market can be counted on to do so. And, the reward
for all of us will be that the taxpayers can be taken
off the hook for the risk associated with almost all the
mortgage loans being created, and that can be shifted
to investors.

Combo Loans Are Available Again

When the mortgage industry was going wild, one
of the most useful tools was the combination
first loan and second loan.

As originators, we could use this combo loan
structure strategically, to help borrowers avoid
jumbo loan pricing, or to avoid private mortgage
insurance.

But when so many loans started to have problems,
the appetite from investors, including Fannie Mae
(FNMA) and Freddie Mac (FHLMC), diminished
for these types of loans.

We saw many loan programs evaporate, including
loans with deferred interest, many interest-only
programs, stated income loans, and the combo
loan products.

After retreating to the old standbys, the 30-year
and 15-year fixed rate loans, lenders have begun
to find acceptance of other lending programs.
These would include adjustable rate loans,
featuring fixed-rate periods of 3-, 5-, 7- and
10-years. We are also seeing some lenders
offering interest-only payment loans again, and
the combo loans.

The big difference in today's market is that
instead of the lenders pushing the envelope to
high loan-to-value ratios, we are seeing that
the combined loans are generally capped at 75%
of the value or sales price. This allows the
lender to keep the risk lower, especially since
the second loan is the most vulnerable to any
decreases in market value.

These programs can still be an effective tool
for a number of situations:

1. Sometimes a borrower is expecting to have
funds available after closing and wants to pay
down their loan balance.

If they get a fixed rate, amortized loan they
are allowed to pay extra toward their principal
balance. But the limitation is that it will not
allow their monthly payment to be recast,
which is often the goal for paying down the
loan balance. It will shorten the term of the
loan, but the payments will remain the same.

If we structure a combo loan between what
can best be described as the permanent loan
and the temporary loan, we can split the
amount that needs to be borrowed. The
advantage is that the borrower can retire the
temporary, second loan, and the first loan
can continue with payments that are appropriate
for that balance.

2. When loan request exceed the conforming
limit of $417,000, or the high-balance conforming
limit of $697,500 (in San Diego County), they
are subject to different terms, interest rates and
fees.

Many times, we can structure the loan request
so that the first loan stays at or below the
$417,000 limit, and combine it with a second loan.
The blended terms can often be more beneficial
than the terms for the high-balance loan up to
$697,500.

Alternatively, if a borrower needs a loan that
commonly falls into the jumbo loan category
(those loans that would be higher than $697,500
in San Diego County), we can structure the first
to fall within the high-balance limit and combine
it with a second loan. Again, the blended terms
may be better than the jumbo offerings.

3. You can have choices regarding the second
loans.

One choice is the fixed-rate, fixed-term second.
These are also called closed-end second loans,
and once they are originated, the payments
are designed to retire the loan over the specified
period of time. There is no flexibility to the
payment plan.

The other choice is the line-of-credit second.
These are commonly called HELOCs for home
equity lines of credit.

These are distinguished by having a maximum
loan amount approved, that may or may not be
drawn fully at time of origination. They feature
a flexible payment system, allowing for interest-
only payments or more. Also, once they are
paid down, they principal can be re-drawn again
within the maximum loan amount. In many
ways, it is like a credit card secured by your
home's equity.

It is always beneficial to have many choices to
help borrowers structure their loan requests,
and the re-introduction of the combo loan
products gives us more tools to work with.

Updates and Trends

Updates:

Every year about this time, we get an update for
the new conforming loan limits.

Conforming loans are those that are eligible to be
sold to FHLMC (Freddie Mac) and FNMA (Fannie
Mae).

For the 5th straight year, the limits are as follows:

Single family home $417,000
2-unit properties $533,850
3-unit properties $645,300
4-unit properties $801,950

As I mentioned in an earlier newsletter, loans above
thsoe loan amounts may also be created and sold to
FNMA and FHLMC under special legislation designed
to stimulate the housing market. The maximum loan
amounts for these loans, commonly called "Conforming-
jumbo" or "High-Balance Conforming" loans, are set
by county.

The High-Balance Conforming loan limits for San Diego
County through 2010 are as follows:

Single family home $697,500
2-unit properties $892,950
3-unit properties $1,079,350
4-unit properties $1,341,350


Trends:

We are getting word that underwriting guidelines
will be tightening further as we head into 2010.

Currently, we can obtain loan approval through an
Automated Underwriting System (AUS) that essentially
gives the OK to the file (subject to verification
of the data submitted) and the lender will create
the loan, knowing that FNMA and FHLMC will purchase
the loan from them.

It is not uncommon for the AUS to approve a loan with
high ratios. When I use the term ratios, I mean the
relationship between the borrower's monthly debts
and their monthly income. The monthly debts will
include the proposed new loan payment, plus property
taxes, plus hazard insurance and a homeowner's
association fee if applicable, and combined with other
monthly debts for installment debts, revolving debts,
student loans, or alimony/child support payments.

The AUS has allowed for qualifying ratios above 50%
of the borrower's gross monthly income, especially
when the borrower has substantial liquid assets that
can be available to the borrower if they have extra-
ordinary expenses in a month.

The new guidelines look like they will provide a "hard
ceiling" of rations not to exceed 45% of the borrower's
gross monthly income. The discretionary judgment to
assess the borrower's overall qualifications appears to
be eliminated in an effort to standardize the approval
process.

On a related topic, we can often solve this problem by
having the borrower pay off some of their debts to get
the ratio below the stipulated guideline. We are now
seeing that some lenders, in conjunction with their
agreements with FNMA and FHLMC, are no longer
allowing the payoff of revolving debt - like credit card
payments - to qualify.

The best strategy would be for the borrower to work
toward paying off their bills, before we have the
opportunity to run their credit report, so that it
is not an issue for an underwriter.


As always, the mortgage business is changing all the
time. If you are considering purchasing a home, or
refinancing in the near future, take the time to get in
touch with me before the need arises so that I have
a better opportunity to help you navigate through the
changing guidelines that we will be facing.

Good News from Congress!

There have been two significant programs in place this
year that have contributed to any housing recovery that
we have been experiencing.

Both had deadlines that threatened to turn their coaches
into pumpkins, unless Congress pushed through legislation
that would allow them to continue.

First, the first-time home buyer tax credit of $8000 was
scheduled to expire as of November 30, 2009. There was
a lot of concern that with the length of time that it was
taking for short sales and foreclosures to work their
way through the system, that a lot of needy buyers would
miss out.

But, the Senate has approved an extension of the tax
credit until April, 2010. It appears that there are no
changes to the requirements to receive the credit, and it
has not yet been signed into law by the President. It
would be highly unlikely that it would not move forward.

Second, over the last couple of yeras we have enjoyed
a lending category commonly known as high-balance
conforming loans. Conforming loans have a maximum of
$417,000. The high-balance conforming loans that are set
by county.

In San Diego County, the high-balance conforming loan
amount on a single-family home is $697,500.

The enabling legislation called for an expiration to this
program as of December 31, 2009.

But, the President signed an extension for the availability
of these higher loan limits that will continue through
December 31, 2010.

This is incredibly helpful in the San Diego market because
it allows properties in the $550,000 to $900,000 range to
obtain more affordable financing that can be purchased by
Freddie Mac and Fannie Mae.

If we had to rely on the traditional market (loans above
$417,000 before the high-balance category was created),
availability of loan products would be impaired and the
interest rates and fees would be higher.


What the government is helping us with on one hand is
being micro-managed and over-regulated on the other.

Soon, I will try to summarize just how we are going to
try to navigate through the HVCC, MDIA, HPM Section 35,
HMDA, Red Flag, RESPA, and the SAFE Act which will
be in effect in 2010.

It is going to create a more complicated process and
create timing considerations that will most likely
lengthen the time it takes to close an escrow.

But, that is for another day!

You Don't Have To Order Vanilla

Ever since the mortgage meltdown, there has been a
trend to go back to the traditional mortgage products
that served the marketplace well for many years.

Loan products that included stated income, negative
amortization, and high-leverage vehicles that asked
the borrower to put little down payment have been
eliminated.

To a large degree, the products that are currently
offered include 30-year and 15-year fixed rate loans
and FHA and VA loans. This is the "vanilla" in the
mortgage world: stable, predictable, no surprises,
nothing exotic.

These are the loans that readily marketable among
lenders and investors. When these loans are packaged
properly and their risk ratings are accurate, they
are sold to FNMA and FHLMC and pooled into mortgage-
backed securities that investors can buy into.

There are some alternatives that lenders are still
offering to the standard menu. These lenders are
often classified as portfolio lenders, because they
tend to keep the new loans in their portfolio instead
of selling them to FNMA and FHLMC or in a mortgage-
backed security.

* There are still adjustable rate loans where
the initial interest rate is fixed for the first
3, 5, 7 or 10 years of the 30-year loan term. These
loans tend to offer lower interest rates in the
beginning, and then provide the lender an opportunity
to adjust the rate to something competitive in the
marketplace at time of adjustment.

The interest rate adjustment is determined by a formula
that includes a market-based index, e.g. LIBOR, Treasury
Bills, or a Cost of Funds index, plus a margin that is
set in your loan contract.

The best use of these loans is to match up the time you
expect to be in the home with the length of time that
the interest rate is fixed. For example, if you had a
5 year time frame in mind to own the home, than a couple
of suitable suggestions would be to look at the 5-year
and 7-year products. It would not make sense to select
the loan where the interest rate adjusts after 3 years
because you may be facing a substantially higher interest
rate at time of adjustment.

* Interest-only payment loans are still available,
but with a twist. No longer will the lenders allow
just the interest to be paid in the first few years of
the loan and then put the borrower into a higher payment
at that point.

The most innovative use of the interest-only payment
loans is one where the term of the loan is 40 years,
the interest-only payment and rate is in effect for
the first 15 years, and then there is an adjustment
to the rate, and the payments are amortized over the
remaining 25 years.

This allows the borrower to do some significant long-
term planning, and reduces the risk to both borrower
and lender with regard to "payment shock" when the
interest only feature no longer continues. Many
borrowers that initiated interest-only payment loans
in 2002-2005 faced hardship when the loans moved
into fully amortized payments.

* There is a loan product that has significant
advantages for borrowers who have healthy cash flow
each month, and who do not spend more than they make.

This loan is a line of credit that is tied to a
checking account and debit card. The idea behind it
is to merge your home loan and banking into a fluid
system that allows you to save on the interest accrual
each month.

Let's take a look at an example: Borrower has a need
for a $500,000 loan on their home. They make $20,000
per month, and have expenses of $12,000. They opt for
this line of credit loan.

In the first month, they deposit their entire check
against the line of credit, dropping the balance to
$480,000. Since interest is calculated daily and
accumulated for posting at the end of 30 days, you
can already see that for that one day, there is a
benefit to the borrower of having interest accrue
on $480,000 instead of $500,000.

During the course of the month, bills and living
expenses need to be paid. The balance will grow
from $480,000 to $492,000. But, the benefit still
is significant. With a traditional loan, the
borrower has 30 days interest accruing on $500,000.
On this loan, interest is accruing based on balances
ranging from $480,000 to $492,000.

Each succeeding month works in a similar fashion,
and the money that the borrower used to have sitting
in a checking or savings account is now working for
them by reducing the amount of interest that is owed
on their home mortgage.

If there ever was a need to cover some bigger expenses
in a given month, the unused portion of the line of
credit is available to be drawn upon. In this example,
you could take the balance up to $500,000 again.


Not all of these products are suitable for every
borrower. There are many instances where the "vanilla"
product is the right one, but for more sophisticated
borrowers, or who have a special need, it's good to
know that there are lenders willing to serve that
market.

I am here to help you get the most suitable loan product
that you can qualify for. Please be sure to get in
touch with me so I can put my resources to work for you.

The State of Jumbo Lending

After the mortgage meltdown, the availability of jumbo
loans has been vastly diminished.

Jumbo loans have traditionally been defined as those
above the FNMA/FHLMC conforming limit of $417,000.

In 2008 and 2009, Congress has allowed for FNMA and
FHLMC to purchase what are defined as "high-balance
conforming loans". The maximum loan amount varies
from county to county, and currently in San Diego
the limit is $697,500 for a single-family home.

Before Congress created this category, loans above
the $417,000 limit were usually funded through lenders
who packaged them into mortgage-backed securities (MBS).
Investors on Wall Street would buy into these pooled
mortgages so that they could obtain a higher rate of
return than Treasury bills, as an example.

One of the biggest problems with the MBS pools was that
investors were told that they were investing in pools of
loans that were underwritten to a high standard. When
the mortgage market began to unravel, the investors
realized that they had actually purchased into pools
that contained lesser quality loans that went into
default at an alarming pace.

Based on that experience, investors through Wall Street
have abandoned their interest in buying into newly
created MBS pools. They suffered losses because they
discovered too late that they could not trust the ratings
that were provided to them as an inducement to purchase
into the MBS pool.

We have had a three-tier lending system in place through
2009:

1. Conforming loans - those sold to FNMA and FHLMC with
a maximum loan limit of $417,000 for a single-family
home.

2. High-balance conforming loans - eligible to be sold to
FNMA and FHLMC up to a maximum of $697,500 for
a single-family home in San Diego.

Currently, Congress has authorized this only through
the end of 2009. If it is to continue into 2010, they
will need to enact legislation for that to happen.

As a reminder, Congress failed to continue it at the
end of 2008, re-enacted it in early 2009, and by the
time we were given the guidelines and authorization
to create these loans again, we had lost about 4-5
months to that process.

3. Jumbo loans - for the most part, those loans above
$697,500. These loans are either created for the
lender's own portfolio, or are sold on the secondary
mortgage market, which is not as active as it once was.

So, where are we headed going into 2010?

First, if you have need for a loan between $417,000 and
$697,500 (in San Diego), you would be wise to push toward
getting it closed in 2009. As of this writing, there is
no guarantee that that category will continue into 2010.
I would find it hard to believe that the government would
let the housing industry flounder while they are still
seeking an economic recovery, but we are talking about
the government here.

Second, recognize that there are fewer lenders than there
was a few years ago. This means that they can dictate
the terms of what will be offered to the public (with
encouragement by the federal regulators). They are
extremely risk-averse right now, and may continue on
this path for the foreseeable future.

The reality is that more than half the mortgages being
made in the US are made by Wells Fargo, JP Morgan/Chase
and Bank of America. Most of these loans are in the
conforming and high-balance conforming categories.

The US government (read: taxpayers) is standing behind
about 85% of the new loans being created in the last
couple of years.

Third, there is a real possibility that we may have
only a two-tier system in 2010. The conforming loans
should continue as we have known them. The high-balance
conforming loans may become a thing of the past. And
the second tier of jumbo loans (which would then be
defined as those above $417,000), would enjoy limited
availability, strict underwriting, and pricing models
that ensure profit to the lenders.

It is never too early to start planning. If you anti-
cipate a need for a loan above $417,000 going into
2010, please contact me and we can strategize about how
to meet your goals.

Closing Costs - An Enduring Topic

Probably the issue that troubles borrowers the most,
and that I receive the most questions about is closing
costs.

In the scope of home transactions that are in the
range of hundreds of thousands of dollars and sometimes
millions of dollars, the closing costs represent a small
percentage.

But, when a borrower looks over their Good Faith Estimate
and sees a long list of fees that accumulate to several
thousand dollars, it's difficult to make sense of what
seems to be repetitive costs.

Let's go through a typical transaction and see where the
money goes, and what services are provided for the fees
being paid.

At the time the offer is accepted, the agents will open
escrow and the title insurance order. These services
would be needed even if there were no new financing
involved, although the title insurance requirement would
be different.

As you begin the loan application process, the first fee
that you encounter is for the credit report. This fee
is paid to a credit reporting agency, and usually costs in
the range of $20.

Next would be the appraisal fee, which is usually paid
for by you at the time it is ordered. This fee is paid
to an appraisal management company who chooses the
appraiser from an approved panel. Typical cost is
$450-$550, depending on the value of the home, and we
usually arrange payment via credit card.

Most originating lenders will have some form of
processing fee. This is paid to the originating
company and is for the work involved in putting
together a file for presentation to the lender's
underwriter. Typical processing fees are in the
$500-$600 range.

Once the file goes to the underwriting group, they
have a fee for the review of the file for approval.
Even if this fee is paid to the originating lender
as a continuation of their process, it is not
uncommon to have two distinct procedures with two
distinct companies involved. This fee is paid to
the underwriting company and is in the range of
$400-$500.

After the file is approved and it is prepared for
closing, the next step is the preparation of loan
documents. This fee may be paid to the lender or
to a contract company for this service. The
typical fee is $250-$300.

Additional fees that come into play include a
flood certification fee of approximately $20
paid to an independent company that looks over
the FEMA flood maps to determine if the property
is required to have flood insurance or not.

Also, there is a tax service fee of approximately
$85 that is designed to do one of two things: If
your loan has an impound account, they supply the
tax bill to the lender for payment. If your loan
does not have an impound account, they monitor your
property so that they can inform the lender if
taxes go unpaid.

If you negotiate an interest rate that involves a
loan origination fee and/or discount fee, these
costs are usually disclosed to you as "points".
One point equals one percent of your loan amount,
so let's say on a loan of $400,000 a point equals
$4000.

There will be a charge, paid to the title insurance
company, for the lender's title insurance. It is
based on the loan amount, and these fees are supposed
to be reguated by the California Insurance Commissioner.

At closing, you will also be requested to deposit
funds if you create an impound account for the payment
of taxes and insurance. You will have pro-rated
interest from the date the loan funds to the first
of the following month to put the loan on a standardized
30-day billing cycle.

You will be asked to prepay your first year's property
insurance premium, and may have a pro-ration of property
taxes depending on whether the seller has already paid
them covering the escrow closing date.

As you assess the closing costs, it is important to
separate them into categories:

Even if there was no new loan: escrow and owner's title
insurance.

Transactional fees that are lender related: processing,
underwriting, document preparation, appraisal, credit,
tax service and flood certification. Negotiated loan
origination and/or discount fees.

Recurring charges: interest on the new loan, pro-rated
taxes, pre-paid property insurance.

Grouping the closing costs in this manner allows you
to make better comparisons between competing lending
companies and loan programs.

Even though the list of closing costs can be rather
imposing, if the lenders were not able to collect
them in their current fashion, they would add the
equivalent to the cost of borrowing in some different
form.

Be wise in shopping for your loan, and make sure to
make valid comparisons among the many choices you
have. As always, contact me for any information that
you may need.

New Appraisal Process Creates New Obstacles

Roger Showley of the San Diego Union-Tribune published
an article in the last week about how the Home Value
Code of Conduct (HVCC) is affecting the real estate
market. Excerpts of his article are in quotes, my
comments are without quote marks.

"New rules governing appraisals, a key step in mortgage
lending, are leading to mistakes, delays, lower home
valuations, higher costs and worse service for would-be
buyers, industry experts say."

A client’s recent appraisal reinforces this point. The
appraiser was not familiar with the area, and he failed
to include a recent sale of an identical home model
in the appraisal. This would have led to a higher
valuation of the property.

"As of May 1, a new “home valuation code of conduct”
generally bars lenders, mortgage brokers and real estate
agents from communicating directly with appraisers and
requires them to work through a middleman."

The regulation was put into place because the regulators
cannot understand how communication between an
appraiser and a lender, mortgage broker or real estate
agent could be anything but a negative influence on
the appraiser.

"Previously, some appraisers had been pressured to verify
a value or face being blackballed from further work by lenders,
brokers and agents. Some analysts believe these ever-increasing
valuations contributed to the real estate bubble and its
subsequent collapse."

Some appraisers were pressured, some were not offered
additional work by lenders. Business is conducted by
parties that can get things done. If you have a service
provider who cannot meet your needs, why would you
hire them? This does not mean that you tell someone
that they have to falsify their product in order to get
more work – that isn’t right. But you seek out service
providers who can help you meet your goals.

The bubble was created because all parties in the process –
borrowers, brokers, agents, lenders, underwriters, investors
and even the easy money policies of the federal government –
all wanted things to move in that direction. Appraisers rely
on historical data, and evidence that the market had topped
out was only available after property values began to drop.

"The new code was worked out last year between New York
Attorney General Andrew Cuomo and mortgage-finance giants
Fannie Mae and Freddie Mac, which applied the rules nationally."

"In a real estate transaction, a buyer makes an offer that is
accepted by the seller, opens escrow and seeks a loan from a
lender or via a mortgage broker. The buyer pays for an appraisal,
costing $400 or more, and the lender uses the results to determine
how much to lend."

"If the appraisal is lower than the sale price, lenders typically
will not fund the difference, and buyers must increase their
down payments or sellers must lower the price to seal the deal."

"Now, buyers and their agents generally are not allowed direct
communication with the appraiser before the appraisal in completed,
and they say they are having trouble fixing mistakes."

"Because appraisers are paid a flat fee for their work, they are
not inclined to make changes, industry observers say. And lenders
do not press appraisers to raise values, remembering the freewheeling
lending of just a few years ago that resulted in millions of foreclosed
properties."

Lenders are very afraid of making any mistakes. They have bank
regulators looking over their shoulder and micro-managing their
lending operations. They are very conservative in their underwriting
so that they have no concerns about the regulators, or their ability
to sell their loans to FNMA and FHLMC. If that means more
paperwork, or answering questions about a file that really doesn’t
move the needle on any risk assessment, or accepting an appraisal
that may not be accurate because it is low, well, that’s just the
way it is going to be in this environment.

"While defenders of the new system say complaints about incompetent
appraisers amount to an “urban myth,” critics say the system could
impede the housing recovery."

"Just as the new code was going into force, some San Diego
neighborhoods were experiencing multiple offers and overbids,
sometimes prompted by low-ball listings posted by lenders hoping
to ignite bidding wars for their foreclosed properties."

"Because appraisers rely on past sales to evaluate present deals,
there is a built-in lag effect in an appreciating market, in which
sales completed several months ago are lower than current prices
being offered. So far this year, MDA DataQuick reports that the
overall San Diego County median has risen from a low of $280,000
in January to $320,000 in July."

"It takes an experienced appraiser to be able to spot a market turn
such as this, one block at a time, experts say. But agents report that
many nonlocal appraisers are submitting inaccurate valuations
because they do not know the territory or understand current pricing
trends."

"The system's new wrinkle is the “appraisal management company,”
sometimes an independent company that contracts with lenders and
sometimes is partly owned by the lender."

"To comply with the new code, lenders now typically hire these
companies to provide appraisals. The companies in turn rely on
thousands of freelance appraisers, chosen at random on a rotating
basis."

We do not “typically” hire these companies, we are required to do
so. So, we put an appraisal request into the company, they reach
into their black box of available appraisers whether they are
qualified for the assignment or not, the appraisal is performed,
and we have to deal with whatever is delivered. It is rare that the
appraisal will be inaccurate on the high side, so the lender is OK
with accepting an inferior product.

"But while the lenders have reportedly increased appraisal fees from
$400 to $500 in the past year, the increase is going to the management
companies, not the appraisers, who often get less than $200 for their
work, disgruntled appraisers say. The theory is that the appraisers
will make up the difference in more assignments now that they do not
have to spend time marketing themselves."

The appraisers are in a tough spot too. Career-oriented, professional
appraisers are being reduced to a commodity. The experience that
they have has been de-valued and they are compensated about half
of what they were previously able to earn for themselves.

"Meanwhile, real estate industry leaders are acting on several fronts.
A bill awaiting Gov. Arnold Schwarzenegger's signature would require
an estimated 150 appraisal management companies doing business in
California to register with the Office of Real Estate Appraisers. Bob
Clark, who runs the office, said the measure would allow his staff to
collect and investigate complaints concerning the state's 16,200 licensed
appraisers. In Congress, two bills would either replace the code or
impose an 18-month moratorium on its implementation. With neither
likely to pass, appraisal industry groups hope to seek modifications."

So the system has developed Appraisal Management Companies, which
in the hopes of consumer protection are no longer consumer-oriented.
And the state wants to regulate the AMC’s and appraisers (read: more
licensing fees to the state) to collect and investigate complaints against
appraisers. The state already has the ability to do that, because appraisers
are licensed currently. But we lose the freedom to conduct business
ethically, and differentiate ourselves with our experience, knowledge,
and professionalism and our abilities to coordinate a team of like-
minded service providers who work for the client: you, the borrower.

Mortgage Lending and Property Flipping

In the go-go days of rapid price appreciation, there
was a big wave buyers who made property purchases,
maybe did some cosmetic improvements, and then offered
the home for sale at a vastly increased price.

This practice became known as "flipping", and there
were even TV programs devoted to the trials and
tribulations of people involved in the practice!

In today's environment, flipping properties by
buying them at close to market values and counting
on the appetite of new buyers to pay higher prices
for the home as waned.

However, those buyers who are always looking for a
fast profit have found another way to put themselves
in that position.

With the rash of homeowners who are in financial
trouble, short sales, foreclosures, and bank-
owned properties, there are a lot of sellers who are
extremely motivated to unload their burden and their
homes at give-away prices.

Buyers are forming syndicates and paying cash for
properties, many times buying in bulk from lenders
who have a portfolio of homes that they want to get
off of their books.

What does this have to do with new mortgage lending?

We are seeing that the federal regulators want to
put some restrictions on flipping properties by putting
more requirements on new loans.

Specifically, FHA currently prohibits insuring a
mortgage on a home owned by the seller for less than
90 days. They are presenting this limitation as a way
to protect the borrower from overpaying for a new home.

But, FHA already has appraisal requirements in place,
that when performed properly, can serve to give the buyer
a fair opinion of the value of the property. It would
make sense to disclose to the buyer the date the property
was purchased by the seller and ascertain their purchase
price. This information, coupled with the appraised
value should give a buyer enough information for them to
make an informed decision as to whether to proceed with
the transaction.

It seems inappropriate to tell a buyer that they cannot
buy a home using FHA financing if the seller has owned
the property for such a short time. There are plenty of
instances where a buyer wants to negotiate a good value
for themselves and chooses not to concern themselves with
the profit a seller is making.

We are also seeing situations on VA (and some FHA)
transactions where the lender will require a second
appraisal to verify value in an effort to control
flipping. In this case, I suppose the theory is that
if the first appraiser was part of an organized group
to participate in fraud, the second appraisal would be
a way to cross-check all the facts. These come into
play when the property has been recently acquired by
the seller.

Mortgage lending in the past was fairly singular in
purpose: lenders used good judgment to provide
financing to qualified buyers to encourage home
ownership.

Now we are seeing that mortgage lending is another
device that the regulatory agencies manipulate to
meet other goals.

This contributes to the frustration that originators
and borrowers are feeling right now. Guideline
changes used to have a linear quality that made some
sense as lenders loosened and tightened their criteria.

Now, guideline changes come into play from many directions,
and they are confusing, hard to interpret, and many
times contradictory. Lenders and originators are
struggling to develop procedures and policies that
adhere to the new regulations and keep us all in
compliance.

In the old days, we used to talk about the modified
"golden rule" of lenders: Those that have the gold
make the rules.

This still holds true, but instead of the lenders
having the gold and making the rules, it is now the
federal government who have taken over that role.

Update On New Government Regulations

A few issues back, I wrote about a new government
regulation called the Mortgage Disclosure Improvement
Act (MDIA). It calls for new procedures to tighten
the Truth In Lending disclosures and provides the
borrower with times to digest the information they
are provided before they can close the transaction.

The regulation takes effect with applications that
are begun on or after July 30, 2009. Our lenders
have provided more detailed procedures that will
offer some clarity to everyone's expectations on
how escrow closings will now be handled.

Here are some of the key provisions of MDIA:

* No fees except a bona fide and reasonable credit
report fee may be collected from the borrower
until the lender has mailed the Initial Disclosure
and three full days have passed. The day the
disclosures are mailed is not counted as day 1.

Key Point:

This will, in most cases, delay the ordering of
the appraisal that a borrower pays for until after
the time requirement has been met.

* The law requires that the lender is responsible for
the disclosures. In those cases where we broker the
loan to the ultimate lender, the time frames will be
determined by the lender's disclosures. In the case
of our creating the loan using our mortgage banking
capabilities, we are the lender for this purpose, and
we control the disclosure timing exclusively.

Key Point:

Real estate agents have recommended for a long time
that potential buyers go through a loan application
and get pre-qualified and pre-approved, before engaging
in a home purchase. Now, more than ever, borrowers
need to heed this advice so that we can be beyond
some of these time limits and move quickly, or plan
on much longer escrows to close their transactions.

* Any time there is a change in loan terms causing the
Annual Percentage Rate (APR) to vary by 1/8% or
greater (up or down) from the previous disclosure,
the lender must re-disclose.

Key Point:

All parties are going to need to work together and
commit to their fee structures for things to go
smoothly. Escrow fees, title insurance and endorse-
ment fees, notary fees, messenger costs, in addition
to the lender fees need to be as precise as possible
to stay close to the 1/8% APR variance. A big
variable that may be difficult to nail down originally
is the pro-rated interest for the portion of the
month in which the loan funds. This figure also gets
calculated into the APR and may trigger additional
disclosures.

* If there is a re-disclosure that is necessary due to
the APR changing by 1/8% or greater, loan documents
cannot be signed until another specific 3 business
days have passed from the borrower's receipt of the
re-disclosure. The term specific business day is
defined as Monday through Saturday, with Sunday and
Federal holidays being excluded.

Key Point:

Most of the regulatory provisions talk about the
Truth In Lending documents being delivered by US
Mail. The presumption is that once mailed, they
are considered received by the borrower three days
after. So if a re-disclosure is required, three
days will pass before "receipt" and another three
days for review of terms will transpire before loan
documents can be signed.

We are seeking clarification to see if e-mail
delivery can be meet the delivery requirements to
shorten the initial 3-day "mailing" period.


All of our lenders are struggling to define procedures
that they can administer to be in compliance. Many of
the terms outlined above only came to us in the last
couple of days.

If you are involved in a new transaction over the next
30 to 60 days, you may find that your transaction will
be a test case to work out all the details.

All of us need to give realistic forecasts to help
our clients develop their expectations. It would not
be surprising to see modifications to these procedures
and all of us having to adapt to unanticipated changes.

Stay tuned...!

Customer Service in Today's Mortgage World

If you have participated in a mortgage transaction
in the last year, you probably found it to be a
frustrating experienced.

I know that those of us with long mortgage careers
have found it to be particularly annoying. In my
32 years of doing home loans, I don't think I have
ever seen the overall service in our industry drop
to this level before.

The mortgage business is not simple. But it can
be made easier to navigate when you get all of the
service providers pulling in the same direction. A
seasoned professional can make it look simple when
they have a team of service-oriented professional
seach doing their job, and being mindful that there
is always a client who has a need that must be met.

Let me go through a typical transaction to give you
an idea of what is going on today.

THE CLIENT: You have a goal or a need. You want to
purchase a home with financing, or want to refinance
your existing loan to take advantage of lower rates,
or availability of equity, or both. You use your
past experience or network of acquaintances to find a
loan originator to help you.

THE LOAN ORIGINATOR: This is my role. I succeed by
cultivating and maintaining a relationship business.
I want to be and need to be responsive to your requests
and questions. I need to have an understanding of what
loan programs are available, what it takes for a client
to qualify for them, and how to adapt your personal
qualifications to the lender's underwriting guidelines.

I need to be able to anticipate any problems, help you
brainstorm solutions, and make appropriate suggestions
as to what I think will be the best solution for you
based on your risk tolerance, time horizons, and quali-
fications.

THE LOAN PROCESSING STAFF: To put a face on it, this
would be my assistant and support staff in our loan office.
She works with me (and several other loan originators) to
facilitate the paperwork for presentation to the lender.

She and I work closely together, sharing information
about your particular circumstances and details about
the proposed lender's guidelines. We each bring to
the other's attention new information that we have
received about loan program changes so that we can
make the most efficient and thorough case for you that
we possibly can.

We are both on the same page about providing the best
possible service that we can to you, the client. Very
rarely is there a customer service breakdown at this
level, and when there is we make sure we correct it
quickly.


THE LENDER: This is where the customer service disconnect
begins. The lenders have been inundated with loan
requests. They have been slow or unable to hire sufficient
qualified staff to move the loan request through the
pipeline efficiently.

Add to this bottleneck the reality that lenders are coming
out of a troubled lending environment. Many bad
loans were created when underwriting was very lax, and
as far as the pendulum had swung toward laxity, it now
has swung the other direction to rigid enforcement of
guidelines. The lenders are very nervous about making
mistakes when approving loans.

We have even had some of our lenders tell us that every
loan needs to be reviewed by a senior underwriter. This
puts the entire pipeline through the eye of a needle!

It also creates the situation where we receive written
loan approval by the underwriter, and make plans with
you to finalize the paperwork that has been requested.
Then, a day or two later, we get an updated approval
that asks for additional paperwork, or expressing a
concern that we were not originally aware of. It is
always troubling to have to ask the client for more
last-minute paperwork, or to back-pedal on what we
thought was a solid loan approval.

Government regulations have not helped either. Since
May, we have had a new appraisal system that was
dictated to us by way of FNMA and FHLMC, the Attorney
General of New York. The lenders have been doing their
best to give us reliable procedures to follow. But they
have bank regulators looking over their shoulders, and
because they are concerned about being compliant, every-
thing has been moving more slowly. And the supportive
team that included competent service-oriented appraisers
has been dismantled and replaced with a panel of
appraisers with various levels of qualifications and who
have no commitment to me to perform with the care that
you deserve.

A big part of my professional approach to creating loans
for you was to have a network of representatives from
my roster of lenders with whom I could discuss your loan
file and make sure that what I was proposing was do-able
with them. This allowed me to get reliable answers at the
inception of the transaction and help you have a clear idea
of what to expect.

In today's environment, even my lender representatives
are gun-shy about offering opinions that won't be countered
when the file reaches the underwriter (or review under-
writer!). The typical answer I get now is "Just submit
the file and the underwriter will tell you if it will
work or not".

Before all of the bad loans came to light, the lenders
were very nurturing of their relationship with us loan
originators. Now that they are buried with business,
extremely conservative, nervous about the regulators,
and unsure of how to comply with the new requirements,
their focus is to have a file that leads them to a defensible
decision, whether that is an approval or adecline. So,
they put much less value on providingservice than they
do on covering their 'bases'.

Doing business in this manner is contrary to how I
have built my business. I don't like not having
answers for my clients, or to feel like we are just
twisting in the wind while we await a decision from
the underwriters.
I do appreciate those of you who have maintained confidence
in my services. I hope you know that I have not changed
my approach to business, but things have radically changed
behind the scenes. I make mistakes, but I do everything
I can to rectify them as quickly as possible, and your
interests are always in the forefront of my mind.

New Government Regulations May Create Delays

Recently, I have written about the new Home
Valuation Code of Conduct (HVCC) that requires
the use of intermediaries to place the appraisal
assignment. The intent was to eliminate any
undue influence by the loan originators when
ordering the appraisal and to insulate the
appraisers from pressure to "hit a number".

As outlined, this new process creates more steps,
less communication, and the potential for an
unpredictable result that may cost the borrower
money with no beneficial outcome.

Once again, we have new government regulations that
will come on line with loan applications received
after July 30, 2009.

This time, it is the Mortgage Disclosures Improvement
Act (MDIA) that is intended to give consumers better
information about fees and the annual percentage rate
(APR), and to build in time for the borrower to digest
the information.

Here are some key points about the MDIA:

1. Truth-in-lending (TIL) disclosures are now required
on any loan that is secured by residential real
estate. This will now include both owner-occupied
and non-owner-occupied propertis of 1-4 family units.
Previously non-owner-occupied properties were exempt.

2. There is a new seven business day waiting period
between the date the initial TIL disclosure is
provided to the consumer and the disbursement of the
loan.

3. There is also a new three business day waiting period
between the date a final/redisclosed TIL is received
by the consumer and the disbursement of the loan.
You may know that this has been a standard requirement
on refinance loans, but this new requirement will now
apply to purchases as well.

4. No fees, other than a bona fide credit report fee can
be charged prior to the initial TIL disclosure being
provided.

5. If there is a material change in the APR (generally
defined as being more than .125% difference), we
must redisclose and start a new three day waiting
period. We are hearing from some lenders that if
fees change by more than $100, they may require a
new disclosure (and trigger a new waiting period).

6. Both the final/redisclosed and initial TIL disclosure
shall contain the following statement: "You are not
required to complete this agreement merely because
you have received these disclosures or signed a loan
application".


No matter how well-intentioned the MDIA is to eliminate
abuses and last-minute imposition of fees when the
borrower feels that they have no choice but to close,
there are going to be new timing requirements for
all parties to deal with.

Borrowers, real estate agents, escrows companies,
sellers, and of course, those of us who deal with the
loan originations will all have to adapt.

Let's take a look at a typical transaction and some
implications.


Borrower applies for a new loan.

Within three days, we must provide the TIL disclosure.
(Even if it were physically possible, the loan cannot
close for another seven days).

We cannot order the appraisal for which the borrower
is to pay for until the TIL is received by the borrower.
(If sent via US mail, the presumption is that they
have received it after three days in the mail).

If there are changes to the fees, or the proposed
interest pro-ration based on the closing date, or if
the interest rate were to change, or if the borrower
selects a different program, we must re-disclose the
new TIL and APR. Escrow cannot close until three
business days have passed after the borrower receives
the re-disclosure forms.


As you can see, transactions may be subject to serial
delays.

It will be important for borrowers to make
commitments to loan programs, interest rate locks,
and closing dates.

All service providers will need to provide fee
quotes that are not subject to change.

Real estate agents will need to counsel their clients
and negotiate with the agents representing the sellers
regarding the traditional 17-day financing contingency
removal clause.

We loan originators will need to be very precise with
our disclosures based on a team effort to get all the
numbers right.

Missing loan lock expiration dates and close of escrow
dates will only create havoc in the transactions.

Giving you advance warning of what to expect is not
designed to scare you, but to prepare you for the
changes that the government is imposing.

Everything that they are regulating is creating
more impediments to the process for all the good
borrowers and reputable lenders. I, for one, would
have preferred that they prosecute the unscrupulous
lenders and allow the quality lenders to provide
quality service to their clients.

The Interest Rate Roller Coaster

If you've been waiting for interest rates to go
lower, you may not want to wait much longer.

As you probably know, interest rates have been
very attractive for several months.

After dropping below 5%, they have predominantly
been in the 4.5% to 4.75% range with a one point
loan origination fee.

Then suddenly last week, interest rates rose
dramatically. Within the course of 1-2 days,
the comfortable range to which we had become
accustomed blew up and started to hover above
5%. That is quite an upward move in only a couple
of days.

Now, by all historical standards 30-year fixed
rates in the 5% range are still very desirable.
But, because there had been such good opportunities
in the sub-5% levels for quite some time, it feels
like something has been lost.

It's always difficult to determine if market moves
like this are a blip on the radar screen, or if in
fact we have reached the bottom and rates are only
moving up from here.

There is little doubt that at least for the time
being, the investors in fixed interest rate issues
like mortgage-backed securities reached a level of
saturation last week.

There is a big concern about long-term inflation,
especially with all the debt that the country is
taking on. One of the strategies for paying back
the debt is to have the Treasury print money, and
that is inflationary.

If investors are going to be paid back with cheaper
dollars in the future, they want a higher rate of
return, so that they have some chance to get repaid
the yield that they were expecting.

There is no shame in obtaining a loan that is hovering
near 5%, but if you have been watching rates in the
4.5% - 4.75% range you may feel that you have missed
an opportunity.

My suggestion would be to assess your options and consider
locking in an interest rate before they have a chance
to go higher. Some lenders will allow a renegotiation
of an interest rate lock-in if rates go lower.

As they say in the medical profession "First, do no
harm." I have seen many borrowers miss out on something
good, hoping for something better.

Don't miss out on the property you want, or a better
interest rate on a refinance in hopes that rates will
drop again to where they were. It may happen, but
the risks are significantly greater if rates continue
to move up.

Call me to discuss your situation and we can strategize
as to the best course of action for you.

FHA And VA Are Back

For the longest time, FHA and VA were not useful
tools in the San Diego market. Sales prices
were too high to allow FHA and VA financing to be
viable alternatives for borrowers.

With the drop in home values, they are back and
many borrowers can now use them as effective tools
to finance their home purchases.

Let's take a look at some of the features and
benefits of these two programs.


VA

These loans are available to eligible veterans.
They require that the veteran obtain a Certificate
of Eligibility from the Veteran's Administration
that shows they have met the minimum service
standards of 181 days of active service and have
not had a dishonorable discharge.

VA loans are available for single veterans, a
veteran and spouse, or two unmarried veterans
buying together. There is no provision for a
veteran/non-veteran loan unless for a married
couple.

VA loan limits currently allow a qulaified veteran
with full eligibility to receive a loan with no
down payment up to a loan amount of $417,000.

At times, and subject to market conditions, VA
loans may exceed $417,000 with some down payment
required. VA guidelines allow for these higher
loan amounts, but the appetite by GNMA (Government
National Mortgage Association) to purchase these
loans is the determining factor for them to be
offered.

VA does require a funding fee from the veteran,
which helps defray some costs of administering the
program. For a first-time user of their eligibility
and with 100% financing, the funding fee is 2.15%
of the loan amount. Instead of the veteran having
to pay this in cash, VA allows for it to be financed
on top of the 100% loan.

For example, a home price of $400,000 would allow
for a no-down VA loan of $400,000 to a veteran with
full eligibility. The final loan amount would be
$408,600 after financing the VA funding fee.

VA does help protect the veteran by limiting some
of the closing costs that they are allowed to pay,
and makes broad allowances for a seller, or other
party, to pay expenses on the veteran's behalf.

VA's goal is to help as many veteran buyers as
possible succeed with home ownership by guaranteeing
the loan for the lender through the VA program.

If you think you are eligible for a VA loan and
want more details, get in touch with me so we can
discuss your individual circumstances.


FHA

FHA loans allow borrowers with good qualifications
purchase homes with a lower down payment than
conventional loans require.

FHA loans are generally available to any qualified
buyer and property, and are not limited like the VA
program is.

The basic FHA program allows a borrower to buy a
home for their residence with as little as 3.5%
down payment.

Similar to VA, there is a requirement for the payment
of Mutual Mortgage Insurance to help cover the costs
of the program. These loans are insured by the FHA
program to the lender.

The cost of the MMI is 1.75% at closing, which can
be financed, and .50% per year. The loan limits are
similar to VA. FHA allows for loans up to $417,000
and at times may exceed that amount if GNMA will
purchase the loans. Availability changes from time
to time.

Let's look at an example of a purchase price of
$400,000. This would require a down payment of
$14,000 (3.5%). The up front mortgage insurance
premium of 1.75% can be financed, bringing the
final loan amount to $392,755.

The mortgage payments will include the principal
and interest payment, an amount for property
taxes, property insurance and the mortgage insurance
premium (which comes to $163.65 in this example).

There are many details in obtaining an FHA loan.
They are in many ways easier to qualify for, but
attention to all the fine points is a must.

If you are hopeful to find a home, and have limited
funds for down payment and closing costs, let's talk
about how FHA might work for you.

The Home Valuation Code of Conduct (HVCC)

In January, I referenced an article by syndicated
columnist Kenneth Harney about the planned
changes to the appraisal process.

On May 1, the changes have gone into effect.

Here is a summary of what we are now facing when
coordinating your appraisal for your home financing.

The HVCC was part of a settlement involving New
York Attorney General Andrew M. Cuomo, and
Freddie Mac (FHLMC) and Fannie Mae (FNMA)and was a
result of an investigation of FHLMC and FNMA for
alleged appraisal overvaluations, and evidence
of illicit pressure on appraisers to "hit the
numbers" needed to close loans.

Appraisers found themselves facing the prospect of
delivering appraisals at predetermined values, or not
being hired again to perform appraisals by unscrupulous
loan originators.

Part of the standards was to create Appraisal Management
Companies (AMC) to insulate the appraiser from any one
having a direct interest in the valuation and the outcome
of the process, including lenders, mortgage brokers, or
real estate agents.

The HVCC will effectively eliminate all of the business
relationships that have developed over years of working
together. Instead, mortgage loan officers, who tradit-
ionally would be the one to make the appraisal assign-
ment, will be forced to shift the assignment to third-
party AMCs.

It actually bans brokers from any involvement in
selecting appraisers, or having conversations with them
that could be construed as trying to influence the value.
Even the innocent practice of asking an appraiser to give
a range of what the raw data indicates before asking the
borrower to pay for a full appraisal will not be allowed.

There are some significant consequences for borrowers
if the HVCC goes forward and is implemented.

* The fee that you pay for the appraisal will actually
be split between the appraisal management company and
the appraiser. A professional appraiser typically
earned about $400 for a single-family (non-custom)
home appraisal. Now, the AMC will receive a good
portion of the fee, and the appraiser will probably
be asked to work for about half of what they earned
before. Or, the AMC will add their fee on top of the
traditional fee and the cost to you, the borrower,
will go up.

* Experienced, career appraisers may be priced out of
the market if they are not willing to work for about
one half of what they normally earned. This will
put many more inexperienced appraisers on the rosters
for the AMCs to select from. Appraisers who are
less experienced may create less reliable valuations.

* The AMC is promoting their value by expediting the
process and offering quick turn-around times. If
Appraiser A does not respond quickly to a request,
they will move down to Appraiser B, and so on until
they find someone who can get the job done within
their time frames. The appraisers who are the busiest,
which may translate to being the most experienced
and in demand, may not get the assignment. The
appraiser waiting for the phone to ring will get
the business.

* The appraiser may be asked to complete their evaluation
more quickly and not have an opportunity to do all of the
research that is warranted to assess the comparable proper-
ties, sales contracts and local market trends. This
will not lead to a better valuation process.

* Professional appraisal groups have argued that the AMCs
place quality last while they press appraisers to finish
the appraisal quickly, many times within 24 to 48 hours
from the time of the assignment. If the appraiser does
not have time to verify the important details of their
assignment, the result will be unreliable.

* Low appraisals will reduce a borrower's ability to
negotiate an acceptable refinance, and force buyers
to come up with larger down payments. It is much less
likely that an appraiser will err on the side of being
too high on a valuation.

The old system worked very well for honest loan originators
and appraisers. If the lender used their quality control
systems to discover a concern over the valuation presented,
they always had the opportunity to request a review
appraisal by someone that they trusted and compare the
results.

This new AMC system puts more barriers in place to have
business conducted with effective communication, and it's
hard to believe that any of us will be happier with less
communication about something as important as your home
financing.

Breaking News! & Differences Between Mortgage Banking and Mortgage Brokerage

First the News!

We finally got word today from one of our lenders
with whom we broker loans that they will start
accepting registrations for the new conforming-
jumbo loan limits to $697,500 in San Diego
beginning April 27.

The conforming limit is currently $417,000.
The Economic Stimulus Act of 2008 allowed FHLMC
and FNMA to purchase loans up to $697,500 in San
Diego. At the end of 2008, that figure was
reduced to $546,250 in San Diego.

The 2009 American Recovery and Reinvestment Act
(ARRA) was passed in February and allowed for
the reinstatement of the higher $697,500 limit
in San Diego. We have been waiting for two months
to see that the guidelines have been finalized
and that lenders would start accepting applications
for the higher limits.

The reason this is a big deal for borrowers is
because the jumbo loans - those above $417,000
traditionally - have not been readily available
and when they have been offered, it has been at
significantly higher rates and fees.

The conforming-jumbo loans at the higher limit
will allow more borrowers to finance at affordable
interest rates, and that is going to help a lot
of people.


MORTGAGE BROKERAGE AND MORTGAGE BANKING


As I work with clients and facilitate their
requests for home loans, there are a couple
of different ways I can represent their interests.

As a mortgage broker, I serve as an advocate for
you, the borrower, with the lender.

I help you complete the mortgage application,
educate you as to available loan programs and
costs, and counsel you on any concerns and
possible solutions that could affect your loan
approval.

The lenders make their loan products available
to us through what they call their wholesale
division. It is called that because they
offer their interest rates and fees at a
"wholesale" price to us and allow us to earn
our compensation for the work we do.

When lenders create loans directly, that is
commonly called their retail operation. The
rates and fees that they charge are competitive
with what we charge as mortgage brokers. They
then pay their staff for the work that they
do for the lenders as employees.

So, you should find that the quotes you receive
from the lenders directly or through mortgage
brokers to be very similar. If that were not
the case, one or the other would not be able to
compete and would cease to be a player in the
mortgage market.

Based on our knowledge, experiences and resources,
we package your loan for presentation to the
lender. We do not have any direct ability to
approve your loan, but we are well-versed in the
guidelines for your loan request and can often
persuasively influence the underwriter to approve
your loan if there are differences of opinion.
The lender will approve the loan, draw the loan
documents, and fund the loan.

If we are unable to gain approval with Lender A,
we can take the same package that we have put
together and submit the request to Lenders B, C,
D, etc. if necessary to work toward approval.

Although it may be maddening at times to have
lenders give us so many different opinions and
viewpoints when it comes to getting your loan
approved, it is also the major advantage that I
have in helping you.

If every lender gave us the same answer at all
times, there would be no need to have multiple
sources with which to place your loan request.
So, having some lenders who will say "yes" when
others say "no" is actually a good thing, and
we do our best to find the "yes" lenders as
early in the process as possible.

If you were to apply through a lender's retail
operation, and they said "no", you would have
to generate a new loan request with another
lender. This would take significantly more time
and effort on your part, since you would have
to regenerate the loan application repetitively.
Also, you may have additional fees for duplicate
appraisals of the home since most retail lenders
do not find another lender's appraisals acceptable.

Being able to assist borrowers as a mortgage broker
is a very valuable resource for you. My experience,
my knowledge, and my ability to match your qualifi-
cations to the available loan products saves you
time and trouble at competitive rates and fees.

In addition to mortgage brokerage, I also have
the resources to offer mortgage banking.

Mortgage banking is distinct from mortgage broker-
age because the banking operation allows me to
have the loan underwritten, loan documents prepared,
and the funding of the loan all under the control
of our company.

In this case, we have a select number of lender
relationships, currently about 5-10, that are known
as correspondent lenders.

This means that our company has developed the trust
and the relationship with these lenders for us
to make the loan decision on behalf of the lender.

We have arranged for lines of credit to create
these loans - these are commonly known as warehouse
lines, because after the loan is funded they are
"warehoused" until the lender for whom we created
the loan purchases the loan from our company.

Being able to offer loans within a correspondent
lending relationship gives me the added ability
to have your file move more efficiently through
the process. I have more access to the underwriter,
the document preparation person and the funder of
the loan to try to facilitate special situations
or timing issues.

In today's lending environment, many companies that
were previously able to offer mortgage banking have
had to give it up because their warehouse lines of
credit have not been renewed. Being able to main-
tain these lines of credit requires frequent re-
qualification, and as the mortgage business hit
so many obstacles in the last couple of years,
a lot of companies could not maintain their quali-
fications.

When you are ready to take action to purchase a
home or refinance existing home loans, be sure to
check in with me. My many resources, access to
competitive lending programs, and my 31 years of
experience can be of tremendous benefit to you.

Rays of Sunshine

Over the past couple of years, we have seen the
housing and mortgage industries going through
some bleak times, after spiraling out of control
for a while.

As we have been slogging through the upheaval
and dealing with the slumping housing market
and more restrictive lending environment, we
have been hopeful that we would see evidence
of improvement.

There are some indications that we may be turning
the corner.

1. Well-maintained and fairly priced homes that
are being offered for sale are moving much more
quickly, and in many cases receiving multiple
offers.

Although the foreclosed properties and short
sales have not been absorbed by the market, there
is some evidence that they are slowing down.

And home buyers seem to have collectively come to
the realization that now is the time to buy.

There are still buyers that want to get the rock-
bottom price and will make as many offers to
distressed sellers as it takes to get the "best
deal". But, many people who want to finally
enter the housing market at these reduced prices
are acting now, and are negotiating fair prices.

This leads me to believe that buyers are thinking
that the bottom (or close to the bottom) has been
reached. And it is this mentality as much as
anything else, that will bring us out of the
slumping home price spiral.

2. Interest rates are staying low. The conforming
loan category, those loans up to $417,000 that
Fannie Mae and Freddie Mac purchase from lenders,
are staying below 5.00% with modest loan fees.

These rates are at levels that have not been seen
for the last 40-50 years. And buyers are recognizing
that borrowing money at these rates is a bargain
not to be overlooked.

We don't know how long they will last, but it is
reasonable to assume that once rates start to go up
again, we may not see these levels for a long time.
With the new government spending programs that have
been enacted in the last 60 days, there is a real
concern for future inflation, and that would mean
higher interest rates will be coming.

3. Any time now, Fannie Mae and Freddie Mac are to
announce the new guidelines and regulations that
will enable them to purchase loans above the $417,000
conforming limit to a new limit of $697,500 in San
Diego County.

This new availability of mortgage money that will be
priced somewhere between the conforming loans and
traditional jumbo loans will add liquidity to the
market.

Even though underwriting standards have tightened
a lot in the last year and a half, they have
stabilized and become more predictable. We have
not been "chasing" guidelines like we were doing
last year, when we could not get files to lenders
quickly enough before they tightened their criteria.

4. FHA and VA lending is becoming more common.

Because conventional loans no longer allow for
minimal down payments of zero or 5% cash, many
borrowers are seeking traditional loans that
allow for these lesser down payments.

FHA loans allow for down payments as low as 3.5%.

VA loans allow for 100% financing, and no down
payment, but does require that the borrower have
earned VA eligibility by their military service.

With home prices experiencing their drop, many
more homes now fit within the FHA and VA loan
limits. Contact me if you are interested in
exploring these options.

5. Jumbo loans (traditionally those above $417,000
but soon those above $697,500) are slowly being
offered again.

The maximum loan amounts and the loan-to-value
ratios are not as aggressive as they once were,
but the lenders are recognizing that there is
a way to make these loans with high quality and
manageable risk.

There has been a void in the market serving this
jumbo category because so many of these loans were
bundled in with the mortgage-backed security pools
that went bad. Investors were very leery of buying
large mortgages that were secured by homes that
were losing value, making their risk even greater.

The fact that lenders are putting their toes in the
water gives further credence to the idea that home
prices are starting to stabilize and maybe move
upward.


If you are interested in buying or refinancing,
take the time to explore your options and develop
a game plan for taking advantage of this convergence
of low home prices and low interest rates.

There are some great opportunities available right
now!

Government To The Rescue

Congress just passed, and the President signed,
a new law titled Making Home Affordable.

According to their web-site, there are two
separate programs. The Home Affordable Refinance
and the Home Affordable Modification. Details
can be found at www.makinghomeaffordable.gov.

Let's take a look at some of the features.

The Home Affordable Refinance will be available
to 4 million to 5 million homewoners who have a
solid payment history on existing mortgages owned
by Fannie Mae (FNMA) or Freddie Mac (FHLMC).

The targeted homeowners normally would be unable
to refinance because their homes have lost value,
and pushing their current loan-to-value above 80
percent.

Under the Home Affordable Refinance program, many
of them will now be able to refinance to take
advantage of today's lower mortgage rates or to
refinance an adjustable-rate mortgage into a more
stable mortgage such as a 30-year fixed rate loan.
Owner's can refinance up to 105% of the new value
of the home.

This program will end in June 2010.

Eligibility requirements include the following:

1. You are the owner and occupant of a one- to
four-unit home.

2. The loan on your property is owned or secured
by FNMA or FHLMC. To see if FNMA owns your loan try http://www.fanniemae.com/homepath/homeaffordable.jhtml
or 1-800-7FANNIE. For FHLMC use 1-800-FREDDIE or
go to https://ww3.freddiemac.com/corporate/.

3. At the time you apply, you are current on your
mortgage and that you have not been more than 30
days late in the last 12 months.

4. You believe that the amount you owe on your first
mortgage is about the same or slightly less than the
current value of your home.

5. You have sufficient income to support the new
mortgage payments.

The refinance improves the long-term affordability or
stability of your loan. The objective of the Home
Affordable refinance is to provide creditworthy
borrowers who have shown a commitment to paying their
mortgage the opportunity to get into a mortgage with
payments that are affordable today and sustainable
for the life of the loan.

You can contact me to see if you are eligible and
about how this program may work for you

The Home Affordable Modification program will help
up to 3 million to 4 million at-risk homeowners
avoid foreclosure by reducing monthly mortgage
payments to no more than 31 percent of the borrower's
gross monthly income.

Banks and other mortgage providers can begin to
modify eligible mortgages immediately under the
modification program so that at-risk borrowers can
better afford their payments.

Eligibility requirements include the following:

1. The mortgage loans must have originated before
January 1, 2009.

2. They must be first lien loans on owner-occupied
properties with unpaid balances up to $729,750 which
may vary by county.

3. The mortgage payment including taxes, insurance,
and homeowners association dues must be more than
31 percent of your gross monthly income.

4. All borrowers must fully document income. This
would include recent pay stubs, most recent tax
returns, allow for the lender to cross-check the IRS
information, and sign an affidavit of financial
hardship.

5. Property owner occupancy will be verified through
the borrower's credit report and other documentation.

6. Modifications can start from now until December 21,
2012. Loans can be modified only once under the
program.

Be prepared to provide paperwork on the gross monthly
income for all borrowers, information about any
second loans on the home, balances and minimum
monthly payments for car loans, personal loans,
student loans and credit cards.

For information on whether your situation is eligible
for the Home Affordable Modification program, you
will need to contact your existing loan servicing
provider. You should be able find the contact
information on your mortgage statement.

Adventures In Mortgage Lending

As we have been working our way through loan
approval guidelines becoming tighter over the
last year or so, we are encountering some
interesting processing situations that can
serve as learning experiences.


Paperwork? More Paperwork?


When I meet with a client initially, I do
my best to ask for as much paperwork to support
their loan application as I can foresee.

In most cases this would include paystubs, W-2
forms for the last two years, bank statements,
brokerage statements and retirement statements,
and in some cases tax returns for the last two
years.

One client I worked with recently very computer
savvy, and did not collect paperwork. He made
it clear that pulling those items together was
a chore for him. But I was able to get the
most recent paystubs and statements to get the
file into the processing queue, and work toward
loan approval for him.

Processing times have lengthened as the lenders'
work loads have increased. We were previously
able to process a loan to completion in about
30 days, but now it takes closer to 45 days or
more to conclude.

The lenders are now expecting the file to be
completely up-to-date when it is ready to close.

This means that even after the loan is approved
that the lender wants the paperwork to be the
most recent possible. The last paystub, the
last bank statement, the last brokerage statement
that was received between the initial application
and closing was required.

My borrower was not pleased with the request. He
had borrowed several times in the past, but was
surprised by how stringent the documentation
requirements had become. And since he was not
the type to keep this kind of paperwork readily
available, it became an issue to get his loan
closed before his rate lock commitment was due to
expire.

THE LESSON: Understand that the lending business is
not as forgiving as it has been in the past. The
lender will want every last piece of paper so that
they don't have to assume anything. If a bank or
brokerage statement has a summary page and followed
by 10 pages of detail, the lenders are asking for all
11 pages.

It helps if we look at as a puzzle. The underwriter
is putting together a lot of pieces to paint the
picture of an approved loan. If there is a piece
missing, or incomplete, it keeps them from putting
the picture together. And, in the end, we need to
get them what they need to finish the picture.


I Didn't Mention It, But That Was Really Important
To Me!


I recently closed a refinance for a client. Through
the process, the borrower actually skips a formal
payment to the old lender or the new lender. But
the interest that was owing for the month in which
it closes is divided between the payoff of the old
loan for a portion of the month, and prepaying the
interest on the new loan to the first of the next
month.

My borrower had refinanced in the past and knew
the mechanics of how this worked. In his previous
transactions, he was able to finance the month's
interest, so he was able to keep the monthly
payment in his checking account.

This time however, he was reaching the maximum
loan in relation to the value of the home. The
loan amount was just sufficient to pay off his
existing loan and cover his closing costs, so
there was no room to finance the month's interest.

As we approached the closing, and again had a
time limit due to the rate lock expiration, we was
asked to deposit the month's interest into the
escrow so that they could close the transaction.

He looked at this as a "last-minute" surprise,
because he had assumed that the loan amount would
work out as it had before, and he could keep the
payment in his pocket.

After we had an opportunity to discuss it, he
understood what had happened and he was able to
pull the funds together and close the transaction.

THE LESSON: There can never be too much communication
about what is important to you. And, don't assume
what has worked before will work again in this
environment.

I prefer to have my clients ask as many questions
as they can early in the process, and I try to
ask probing questions to find out what is important.

It is always an uncomfortable situation to deal with
unexpected developments late in a transaction. Make
a list of mortgage-related questions and make sure
you get satisfactory answers as early as possible.