I like to read and learn, but don't seem to get an
opportunity to finish as many books as I would
like.
Looking around my office, there are probably
20-30 books that I want to read and other things
have jumped in the way.
Here are a couple of titles that I have read recently:
The Trick to Money Is Having Some by Stuart Wilde.
I found this book to be very liberating, despite its
puzzling title.
I think it is almost universally true that most people
would like to have more money. But, despite all the
opportunities that we have in this country to succeed
economically, many of us have fallen in the trap of
thinking that we cannot do it.
Wilde helps outline how to acquire an "abundance
mentality" and to visualize success occurring for
yourself. And to understand that many of the
limitations that you face are self-imposed.
He espouses acquiring more money in a balanced
way - he does not want it to be an all-consuming
desire. He does want you to focus on making
money as a way to measure your contribution
and value to others, and not just accept praise
and meaningless titles instead.
There were a few concepts that I would not
accept without question, but it didn't diminish
my enjoyment of the book or acceptance of
those ideas that I think have validity.
I would certainly recommend this book as a
vehicle to help you get a better idea of how
you can expand your thoughts to bring more
money into your life with integrity.
The Big Short, Inside the Doomsday Machine,
by Michael Lewis.
I wrote about this earlier in the year, but it is
worth mentioning again.
If you want to have a better understanding
of how the mortgage market collapsed several
years ago, Lewis' book helps explain the mechanics
behind it, and some of the major players who
participated.
Even being in the business for over 33 years, I
learned a lot about what happened with the
lenders, the investors, the bond traders, and the
manipulations that occurred.
I learned more how credit default swaps and
collateralized debt obligations worked. How
loans were packaged into tranches and received
ratings that were more optimistic than they
should have been.
It is well-written, and the story is told through
several major characters that allow the details
of complex transactions to flow through the
narrative.
It is a good read if you have an interest in how
we got in this situation.
Blindside, by Michael Lewis.
I like Michael Lewis, and have probably read
about 7 of his books.
There is a good chance that you saw the movie
starring Sandra Bullock. As good as that movie
was, I think the book was better. (I am probably
prejudiced toward books because they supply
such a richness of detail that the movie can't go
into).
In case you don't know the story, it centers
around Michael Oher, deprived of a normal
upbringing, encountering continual challenges,
and who tries to hide from everyone.
The thing is, he is huge, and despite his size,
he is incredibly athletic and agile. He really
can't hide.
He doesn't do well in school, doesn't communicate
well (or at all), sleeps wherever he can, eats what
he can and drifts through his days.
The Twohey family makes a decision to help him.
And beyond that, they demonstrate the depth of
their faith by bringing him into their home and
treating him like a son.
There is no question in my mind that they did this
out of the goodness of their hearts, but there was
an element of their generosity that paid off for their
school and their college alma mater. Michael Oher
was a tremendous left tackle in football and helped
his teams succeed and has become an NFL player
with the Baltimore Ravens.
It is a very uplifting story, and appeals to that part
of all of us who know we could do more to help
others in need.
The E-Myth Revisited by Michael Gerber.
This has been on my list for a long time, and I am
almost finished reading it.
It is a fascinating dissection of how small businesses
work - or don't work!
Most small businesses start because someone is
good at doing something. They understand that
there is an opportunity to make more of that talent
for themselves, instead of working for someone
else.
But just because someone is a good Technician
does not mean that they know how to run a
successful business. Gerber points out that two
other parts of their personality - the Entrepreneur
and the Manager - have to have their say in making
the business work.
It is that blending of the three facets of the person-
ality that has to come together in balance for the
business to succeed.
Gerber elaborates that the small business owner
has to get themselves out of the business. They
cannot continue to have everything revolve
around their efforts. They need to delegate, they
need to hire others, they need to put systems
in place and they need to think of their business
as an asset they are building for future sale.
I think it is important to learn from others, and
reading is one of the best ways to do that. We
cannot experience everything first-hand ourselves,
nor would we want to. I would much rather learn
from someone else's mistake than make the mistake
myself!
Please e-mail me back if you have some books
on your reading list that you have enjoyed or found
meaningful. I'd be interested in expanding my
book list!
Wednesday, December 15, 2010
Thursday, December 2, 2010
Plan Ahead - Avoid Disappointment
There are times when a real estate agent or a
borrower is in the middle of a transaction that
starts to unravel.
When it involves financing, I frequently get a
call to see if I can come up with a solution to
the problem that they are encountering.
Today I heard from a real estate agent who
described the following situation:
Purchase price was $2.0 million. The buyer
was putting $1.4 million as their down payment,
and wanted a new loan of $600,000. The
escrow was scheduled to close tomorrow, and
they just discovered that the lender they were
working with was only going to approve the
new loan at $500,000.
From what the agent was able to relate to me,
it apparently was because the borrower's debt-
to-income ratio was higher than the allowable
guidelines. The debt-to-income ratio is the
percentage of the borrower's monthly income
that is obligated by the new mortgage payment,
property taxes, insurance, and all other monthly
debts for things like car loans, personal loans, and
extended credit card payments.
As silly as it sounds, the lender put very little weight
on the fact that the borrower was putting 70% of
the purchase price as down payment, and only
wanted a loan of 30% of the value. Also, the agent
mentioned that the new house payments were
less than what the borrower was currently paying
in rent.
From a risk assessment standpoint, the lender
was in a very good position. They were asked to
make a very safe loan in relation to the value of
the property, the borrower had a credit history
that showed they could handle even higher
monthly obligations that what was proposed,
and they even had cash reserves beyond the
$1.4 million in down payment.
Many times we find that the underwriters get
paralyzed by the guidelines. There is a tendency
for them to be so absorbed in the details that
they no longer look at the big picture. And
their decisions don't seem to make much sense.
The agent was disappointed that such a solid
transaction was being disrupted at the last
minute.
In our discussion, I offered a couple of ideas
that I thought would allow him to keep his
transaction together with the existing lender.
Even though it was in my best interest to
get the opportunity to work with this client,
it was in the client's best interest to try to
keep the transaction together with the
existing lender and close quickly if possible.
Of course, I also offered to review a copy of
the clients loan package to see if I could place
the loan with one of my sources who could
meet the loan request of $600,000. I will
see if I can help them when I get the oppor-
tunity to look over their financial condition.
There is a lesson here for all prospective
purchasers.
Please get your paperwork into your lender
even before you go into contract on a property.
No matter how solid your loan request may
seem, (and I can't think of one more solid
than this one that the agent was asking me
about), things have changed in the lending
world.
Don't assume that everything will go well, and
give yourself the advantage of having your
loan pre-qualified or pre-approved before
negotiating on the home.
It is such an emotional upheaval to miss the
closing date after having your moving plans
all in place, and after the anticipation of getting
into your new home.
Plan ahead so that your transaction is not
delayed at the last minute.
borrower is in the middle of a transaction that
starts to unravel.
When it involves financing, I frequently get a
call to see if I can come up with a solution to
the problem that they are encountering.
Today I heard from a real estate agent who
described the following situation:
Purchase price was $2.0 million. The buyer
was putting $1.4 million as their down payment,
and wanted a new loan of $600,000. The
escrow was scheduled to close tomorrow, and
they just discovered that the lender they were
working with was only going to approve the
new loan at $500,000.
From what the agent was able to relate to me,
it apparently was because the borrower's debt-
to-income ratio was higher than the allowable
guidelines. The debt-to-income ratio is the
percentage of the borrower's monthly income
that is obligated by the new mortgage payment,
property taxes, insurance, and all other monthly
debts for things like car loans, personal loans, and
extended credit card payments.
As silly as it sounds, the lender put very little weight
on the fact that the borrower was putting 70% of
the purchase price as down payment, and only
wanted a loan of 30% of the value. Also, the agent
mentioned that the new house payments were
less than what the borrower was currently paying
in rent.
From a risk assessment standpoint, the lender
was in a very good position. They were asked to
make a very safe loan in relation to the value of
the property, the borrower had a credit history
that showed they could handle even higher
monthly obligations that what was proposed,
and they even had cash reserves beyond the
$1.4 million in down payment.
Many times we find that the underwriters get
paralyzed by the guidelines. There is a tendency
for them to be so absorbed in the details that
they no longer look at the big picture. And
their decisions don't seem to make much sense.
The agent was disappointed that such a solid
transaction was being disrupted at the last
minute.
In our discussion, I offered a couple of ideas
that I thought would allow him to keep his
transaction together with the existing lender.
Even though it was in my best interest to
get the opportunity to work with this client,
it was in the client's best interest to try to
keep the transaction together with the
existing lender and close quickly if possible.
Of course, I also offered to review a copy of
the clients loan package to see if I could place
the loan with one of my sources who could
meet the loan request of $600,000. I will
see if I can help them when I get the oppor-
tunity to look over their financial condition.
There is a lesson here for all prospective
purchasers.
Please get your paperwork into your lender
even before you go into contract on a property.
No matter how solid your loan request may
seem, (and I can't think of one more solid
than this one that the agent was asking me
about), things have changed in the lending
world.
Don't assume that everything will go well, and
give yourself the advantage of having your
loan pre-qualified or pre-approved before
negotiating on the home.
It is such an emotional upheaval to miss the
closing date after having your moving plans
all in place, and after the anticipation of getting
into your new home.
Plan ahead so that your transaction is not
delayed at the last minute.
Wednesday, November 17, 2010
Credit Scores To Be Revised Amid Soaring Mortgage Defaults
This is a reprint of an article by Kenneth Harney,
a columnist for the Washington Post Writers Group.
***
With foreclosures soaring - and some homeowners
with unblemished payment histories walking away
from their houses with no advance warning - the
two major producers of credit scores have begun
changing how they evaluate consumer risks of
default. The revisions could touch you the next
time you apply for a loan.
In late October, both FICO score developer Fair
Isaac and VantageScore Solutions, a joint venture
by the three national credit bureaus and marketer
of competing VantageScore, outlined modifications
they are making to handle the vast credit disrup-
tions caused by the housing bust, the recession,
high unemployment and behavioral changes.
Overall, credit industry experts agree, consumer
creditworthiness has deteriorated in the United
States since 2006 - especially among what used
to be considered the credit elite, people with the
highest scores.
For example, a study this year by VantageScore
found that the probability of serious delinquency
- defined as nonpayment for 90 days or more -
had increased by 417 percent among "super-
prime" borrowers between June 2007 and June
2009. Default risk during the same period rose
by 406 percent for the second-highest rated
category of "prime" consumers and nearly
doubled for those at the "near prime" scoring
level.
The driving force, said Sarah Davies, Vantage-
Score's senior vice president for analytics and
research, is the "significant change in consumer
credit repayment behavior" that began during
the housing bust and recession.
Not only are borrowers who previously were
rated outstanding credit risks far more likely
to default today, she said, but many home-
owners are defying longstanding credit industry
assumptions by going delinquent on their first
mortgage payments while simultaneously
continuing to pay their credit card balances
and second mortgages on time. Strategic
defaults - walkaways - by high score borrowers
also have been an unexpected and shocking
development, she said.
To adjust its statistical models to these new
realities, VantageScore says it conducted
extensive research on 45 million active credit
files obtained from the databases of its joint
venture partners, Equifax, Experian and
TransUnion.
The research examined the same files - with
personal identifiers removed - during set
time periods between 2006 and 2009 in order
to capture emerging behavioral patterns
associated with defaults on various types of
credit accounts.
The resulting VantageScore 2.0, which is
expected to be rolled out nationwide to lenders
in January, focuses in on the subtle warning
signs of credit stress that might have been
missed earlier - and penalizes or rewards
consumers with higher or lower risk scores
than they would have received before.
Joanne Gaskin, director of mortgage scoring
solutions for Fair Isaac, said her company's
new FICO 8 Mortgage Score is based on
similarly exhaustive research into consumer
credit-behavior changes over the past four
years. When used by a lender to rate the risk
of new applicants or existing mortgage customers,
Gaskin says the Mortgage Score is likely to be
anywhere from 15 percent to 25 percent more
accurate in detecting signs of future default,
compared with the standard FICO model.
Though she would not discuss proprietary
details about the early warning signs that the
new score monitors, Gaskin said they include
broad patterns such as the following: A borrower
with a current 720 FICO score might have average
balances on a first mortgage, home equity lines
and other accounts that are higher than norms
pinpointed by the revised scoring software. A 720
FICO is considered a good score by most mortgage
lenders - often qualifying for favorable rates and
terms.
However, the same applicant might rate just a
680 FICO or lower if the lender used the new
Mortgage Score. The lender would then have a
choice: reject the applicant, quote a higher interest
rate on the mortgage or require a larger down
payment.
Gaskin said the reverse could also occur: The FICO
8 Mortgage Score could come in higher than the
standard FICO - indicating lower risk for the future -
in situations in which formerly troubled borrowers
manage to put themselves back on a healthier credit
track.
Experts in the credit industry say the new scoring
efforts by Fair Isaac and VantageScore should prove
to be a net positive for the housing and the mortgage
industries if they can do what they claim: spot subtle
risk patterns and nascent hints of improvement.
But as a mortgage applicant you should know that
your next score might not look anything like the
score you thought you had. You might end up
getting a better deal - or worse - when lenders
quote you rates and terms.
a columnist for the Washington Post Writers Group.
***
With foreclosures soaring - and some homeowners
with unblemished payment histories walking away
from their houses with no advance warning - the
two major producers of credit scores have begun
changing how they evaluate consumer risks of
default. The revisions could touch you the next
time you apply for a loan.
In late October, both FICO score developer Fair
Isaac and VantageScore Solutions, a joint venture
by the three national credit bureaus and marketer
of competing VantageScore, outlined modifications
they are making to handle the vast credit disrup-
tions caused by the housing bust, the recession,
high unemployment and behavioral changes.
Overall, credit industry experts agree, consumer
creditworthiness has deteriorated in the United
States since 2006 - especially among what used
to be considered the credit elite, people with the
highest scores.
For example, a study this year by VantageScore
found that the probability of serious delinquency
- defined as nonpayment for 90 days or more -
had increased by 417 percent among "super-
prime" borrowers between June 2007 and June
2009. Default risk during the same period rose
by 406 percent for the second-highest rated
category of "prime" consumers and nearly
doubled for those at the "near prime" scoring
level.
The driving force, said Sarah Davies, Vantage-
Score's senior vice president for analytics and
research, is the "significant change in consumer
credit repayment behavior" that began during
the housing bust and recession.
Not only are borrowers who previously were
rated outstanding credit risks far more likely
to default today, she said, but many home-
owners are defying longstanding credit industry
assumptions by going delinquent on their first
mortgage payments while simultaneously
continuing to pay their credit card balances
and second mortgages on time. Strategic
defaults - walkaways - by high score borrowers
also have been an unexpected and shocking
development, she said.
To adjust its statistical models to these new
realities, VantageScore says it conducted
extensive research on 45 million active credit
files obtained from the databases of its joint
venture partners, Equifax, Experian and
TransUnion.
The research examined the same files - with
personal identifiers removed - during set
time periods between 2006 and 2009 in order
to capture emerging behavioral patterns
associated with defaults on various types of
credit accounts.
The resulting VantageScore 2.0, which is
expected to be rolled out nationwide to lenders
in January, focuses in on the subtle warning
signs of credit stress that might have been
missed earlier - and penalizes or rewards
consumers with higher or lower risk scores
than they would have received before.
Joanne Gaskin, director of mortgage scoring
solutions for Fair Isaac, said her company's
new FICO 8 Mortgage Score is based on
similarly exhaustive research into consumer
credit-behavior changes over the past four
years. When used by a lender to rate the risk
of new applicants or existing mortgage customers,
Gaskin says the Mortgage Score is likely to be
anywhere from 15 percent to 25 percent more
accurate in detecting signs of future default,
compared with the standard FICO model.
Though she would not discuss proprietary
details about the early warning signs that the
new score monitors, Gaskin said they include
broad patterns such as the following: A borrower
with a current 720 FICO score might have average
balances on a first mortgage, home equity lines
and other accounts that are higher than norms
pinpointed by the revised scoring software. A 720
FICO is considered a good score by most mortgage
lenders - often qualifying for favorable rates and
terms.
However, the same applicant might rate just a
680 FICO or lower if the lender used the new
Mortgage Score. The lender would then have a
choice: reject the applicant, quote a higher interest
rate on the mortgage or require a larger down
payment.
Gaskin said the reverse could also occur: The FICO
8 Mortgage Score could come in higher than the
standard FICO - indicating lower risk for the future -
in situations in which formerly troubled borrowers
manage to put themselves back on a healthier credit
track.
Experts in the credit industry say the new scoring
efforts by Fair Isaac and VantageScore should prove
to be a net positive for the housing and the mortgage
industries if they can do what they claim: spot subtle
risk patterns and nascent hints of improvement.
But as a mortgage applicant you should know that
your next score might not look anything like the
score you thought you had. You might end up
getting a better deal - or worse - when lenders
quote you rates and terms.
Wednesday, November 3, 2010
Glossary of Common Mortgage Terms
When you do research for a new home loan, it is not
uncommon to hear industry "shorthand" being used.
You may not always choose to have the person
explain the terms for fear of looking uninformed.
Here are some common acronyms and terms that
may help you better understand what you are
hearing.
APR The Annual Percentage Rate gives the
borrower a basis for comparing competing
interest rate and fee quotes by taking into
account the effect of the finance charges
expressed as an effective interest rate.
AUS An Automated Underwriting System is a
web-based program available to mortgage
lenders. With proper data input, it renders
an underwriting decision based on the
compatibility of the loan request to FNMA
and FHLMC guidelines.
CLTV Combined Loan to Value ratio is the
comparison of the loan amounts on the
first loan plus the second loan in relation to
the value of the home. For example, a first
loan amount of $300,000 combined with a
second loan amount of $100,000 on a
property valued at $500,000 represents a
CLTV of 80%.
FHA The Federal Housing Administration is part
of the Department of Housing and Urban
Development. FHA provides a system for
insurance of loans with lesser down payments.
FHLMC Known as "Freddie Mac", the Federal Home
Loan Mortgage Corporation was created in
1970 as a Government Sponsored Enterprise
to purchase loans from lenders and provide
liquidity to the mortgage market.
FICO FICO stands for Fair Isaac Corporation and
Scores has become the generic label applied to
credit scoring models. Through proprietary
modeling, each of the three repositories -
Experian, TransUnion and Equifax - produce
scores ranging from 300 to 850. Higher
scores are designed to be predictive of
more credit-worthy borrowers.
FNMA Known as "Fannie Mae", the Federal National
Mortgage Association was created in 1938 as
a Government Sponsored Enterprise to
purchase loans from lenders and provide
liquidity to the mortgage market.
GFE The Good Faith Estimate is a required
disclosure from lenders to the borrower, and
is to be provided within 3 business days from
receipt of a loan application. It's purpose is
to provide an estimate of fees and costs in
obtaining the home loan.
LTV Loan to Value ratio is the comparison of the
loan amount on the first loan in relation to the
value of the home. For example, a loan
amount of $400,000 on a property valued at
$500,000 represents an LTV of 80%.
Points A point equals 1 percent of the loan amount.
For example, on a loan amount of $200,000,
one point equals $2,000. When interest rates
are quoted there is often an origination fee
disclosed based on a certain number of points.
Pricing Refers to a combination of interest rate and
origination fee quoted on your transaction.
For example, you may hear pricing models
such as 4.5% with a loan fee of 1 point (see
above) or 4.75% with a loan fee of zero points.
TIL The Truth-In-Lending disclosure is designed
to show the borrower an effective interest
rate based on the combination of interest rate
and finance charges. The most significant part
of the disclosure is the Annual Percentate Rate.
VA The Home Loan Guaranty division of the
Department of Veterans Affairs guarantees
home loans to lenders for loans made to eligible
veterans. Loans made under this program often
allow the veteran to purchase a home with no
down payment.
uncommon to hear industry "shorthand" being used.
You may not always choose to have the person
explain the terms for fear of looking uninformed.
Here are some common acronyms and terms that
may help you better understand what you are
hearing.
APR The Annual Percentage Rate gives the
borrower a basis for comparing competing
interest rate and fee quotes by taking into
account the effect of the finance charges
expressed as an effective interest rate.
AUS An Automated Underwriting System is a
web-based program available to mortgage
lenders. With proper data input, it renders
an underwriting decision based on the
compatibility of the loan request to FNMA
and FHLMC guidelines.
CLTV Combined Loan to Value ratio is the
comparison of the loan amounts on the
first loan plus the second loan in relation to
the value of the home. For example, a first
loan amount of $300,000 combined with a
second loan amount of $100,000 on a
property valued at $500,000 represents a
CLTV of 80%.
FHA The Federal Housing Administration is part
of the Department of Housing and Urban
Development. FHA provides a system for
insurance of loans with lesser down payments.
FHLMC Known as "Freddie Mac", the Federal Home
Loan Mortgage Corporation was created in
1970 as a Government Sponsored Enterprise
to purchase loans from lenders and provide
liquidity to the mortgage market.
FICO FICO stands for Fair Isaac Corporation and
Scores has become the generic label applied to
credit scoring models. Through proprietary
modeling, each of the three repositories -
Experian, TransUnion and Equifax - produce
scores ranging from 300 to 850. Higher
scores are designed to be predictive of
more credit-worthy borrowers.
FNMA Known as "Fannie Mae", the Federal National
Mortgage Association was created in 1938 as
a Government Sponsored Enterprise to
purchase loans from lenders and provide
liquidity to the mortgage market.
GFE The Good Faith Estimate is a required
disclosure from lenders to the borrower, and
is to be provided within 3 business days from
receipt of a loan application. It's purpose is
to provide an estimate of fees and costs in
obtaining the home loan.
LTV Loan to Value ratio is the comparison of the
loan amount on the first loan in relation to the
value of the home. For example, a loan
amount of $400,000 on a property valued at
$500,000 represents an LTV of 80%.
Points A point equals 1 percent of the loan amount.
For example, on a loan amount of $200,000,
one point equals $2,000. When interest rates
are quoted there is often an origination fee
disclosed based on a certain number of points.
Pricing Refers to a combination of interest rate and
origination fee quoted on your transaction.
For example, you may hear pricing models
such as 4.5% with a loan fee of 1 point (see
above) or 4.75% with a loan fee of zero points.
TIL The Truth-In-Lending disclosure is designed
to show the borrower an effective interest
rate based on the combination of interest rate
and finance charges. The most significant part
of the disclosure is the Annual Percentate Rate.
VA The Home Loan Guaranty division of the
Department of Veterans Affairs guarantees
home loans to lenders for loans made to eligible
veterans. Loans made under this program often
allow the veteran to purchase a home with no
down payment.
Wednesday, October 20, 2010
Subordination Requests for Existing Lines of Credit
With interest rates so low right now, there has been
a wave of refinances. There are tremendous savings
for borrowers to reduce their interest rates on their
home loans.
A large percentage of borrowers have both a first
loan and a second loan on their homes. Many times
the second loan is the popular Home Equity Line of
Credit (HELOC) which borrowers like to have
available to use in case of emergencies, or if an
opportunity presents itself.
When a borrower requests a refinance, and if there
is a second loan on the property, we need to make
sure that the borrower understands their options.
Assuming that the property value supports the
loan request the borrower may elect to:
A. Payoff the first loan and the second loan and
close the HELOC.
B. Payoff the first loan and the second loan and
retain the availability of the HELOC.
C. Payoff the first loan and retain the balance and
availability of the HELOC.
Each of these choices involve some different
considerations. Let's recap what needs to be done
to meet these different outcomes.
It is helpful to think of the loans on the property
as being rungs on a ladder. The existing first
loan is the top rung, the existing second loan is
the next in line.
When we refinance, the new loan that is being
created is designed to be the new first loan.
In scenario A, above, the new loan pays off
the existing first loan and existing second loan,
removing those rungs from the ladder and the
new loan becomes the top rung.
In scenario B, the new loan pays off the existing
first loan and pays the existing second loan to
a zero balance, but does not close out the HELOC.
In scenario C, the new loan pays off the existing
first loan and does not pay to zero or close out
the existing HELOC.
In scenarios B and C, the existing first loan is
gone, removing the top rung of the ladder.
However, whether the balance is zero or not,
the existing HELOC is now the top rung of the
ladder and the new loan is in the second position.
But wait, the new loan is supposed to be in first
position. What can be done?
This is where the process of subordination comes
into play. In this case, subordination refers to
the situation where the existing second lender
agrees to move their loan back down to a secondary
position to the new first loan that is being created.
As a practical matter, the new first lender will
have guidelines and requirements that not only
stipulate the percentage of value that the first loan
can be (loan-to-value ratio or LTV), but will also
have requirements for the percentage of value
that the combination of the new first loan and
existing HELOC can be (combined loan-to-value
ratio or CLTV).
Additionally, the existing HELOC lender will also
have CLTV guidelines and requirements. As a
general rule, they do not want to be in a largely
riskier position when approving the subordination
request.
Let's take a look at a couple of examples.
Property value $500,000.
Existing first loan $300,000. (LTV = 60%)
Existing second loan $100,000. (CLTV = 80%)
New loan request of $300,000 to replace the
existing first loan. (LTV = 60%)
In this case, the existing HELOC lender is in a
reasonably secure position, with their exposure
to risk at the 80% level. Under the new loan
request, they are being asked to consider keeping
their exposure to risk at the 80% level. There is
a good likelihood that they would approve the
subordination request without modifying the
amount of the HELOC.
Property value $500,000.
Existing first loan $300,000 (LTV = 60%)
Existing second loan $100,000 (CLTV = 80%)
New loan request of $400,000 to payoff first
loan and pay HELOC to zero. Wants to retain
availability of the HELOC going forward.
In this case the new LTV would be 80%. The
request to the existing lender to subordinate
their HELOC would put their exposure to risk
at 100% ($400,000 first loan and $100,000
available on the HELOC). It is highly unlikely
that the lender would approve this subordination
request and would probably insist that the
HELOC be closed out, since the lender will not
want to increase their risk exposure to that
level.
Subordination requests are useful tools to help
a borrower meet their financial planning goals.
But it takes proper research to make sure that
we can navigate through the guidelines of both
the new first lender and the existing HELOC
lender.
Also, borrowers need to be patient as well. We
are finding that the HELOC lenders are taking
as much as 30-45 days to process these requests.
This can affect the ability to meet interest rate
lock expiration dates, or become more costly to
the borrower if rate lock extension fees are
necessary.
Make sure that your goals are well-defined as
you beginn this process to that a strategic plan
is developed to avoid any pitfalls through the
process.
a wave of refinances. There are tremendous savings
for borrowers to reduce their interest rates on their
home loans.
A large percentage of borrowers have both a first
loan and a second loan on their homes. Many times
the second loan is the popular Home Equity Line of
Credit (HELOC) which borrowers like to have
available to use in case of emergencies, or if an
opportunity presents itself.
When a borrower requests a refinance, and if there
is a second loan on the property, we need to make
sure that the borrower understands their options.
Assuming that the property value supports the
loan request the borrower may elect to:
A. Payoff the first loan and the second loan and
close the HELOC.
B. Payoff the first loan and the second loan and
retain the availability of the HELOC.
C. Payoff the first loan and retain the balance and
availability of the HELOC.
Each of these choices involve some different
considerations. Let's recap what needs to be done
to meet these different outcomes.
It is helpful to think of the loans on the property
as being rungs on a ladder. The existing first
loan is the top rung, the existing second loan is
the next in line.
When we refinance, the new loan that is being
created is designed to be the new first loan.
In scenario A, above, the new loan pays off
the existing first loan and existing second loan,
removing those rungs from the ladder and the
new loan becomes the top rung.
In scenario B, the new loan pays off the existing
first loan and pays the existing second loan to
a zero balance, but does not close out the HELOC.
In scenario C, the new loan pays off the existing
first loan and does not pay to zero or close out
the existing HELOC.
In scenarios B and C, the existing first loan is
gone, removing the top rung of the ladder.
However, whether the balance is zero or not,
the existing HELOC is now the top rung of the
ladder and the new loan is in the second position.
But wait, the new loan is supposed to be in first
position. What can be done?
This is where the process of subordination comes
into play. In this case, subordination refers to
the situation where the existing second lender
agrees to move their loan back down to a secondary
position to the new first loan that is being created.
As a practical matter, the new first lender will
have guidelines and requirements that not only
stipulate the percentage of value that the first loan
can be (loan-to-value ratio or LTV), but will also
have requirements for the percentage of value
that the combination of the new first loan and
existing HELOC can be (combined loan-to-value
ratio or CLTV).
Additionally, the existing HELOC lender will also
have CLTV guidelines and requirements. As a
general rule, they do not want to be in a largely
riskier position when approving the subordination
request.
Let's take a look at a couple of examples.
Property value $500,000.
Existing first loan $300,000. (LTV = 60%)
Existing second loan $100,000. (CLTV = 80%)
New loan request of $300,000 to replace the
existing first loan. (LTV = 60%)
In this case, the existing HELOC lender is in a
reasonably secure position, with their exposure
to risk at the 80% level. Under the new loan
request, they are being asked to consider keeping
their exposure to risk at the 80% level. There is
a good likelihood that they would approve the
subordination request without modifying the
amount of the HELOC.
Property value $500,000.
Existing first loan $300,000 (LTV = 60%)
Existing second loan $100,000 (CLTV = 80%)
New loan request of $400,000 to payoff first
loan and pay HELOC to zero. Wants to retain
availability of the HELOC going forward.
In this case the new LTV would be 80%. The
request to the existing lender to subordinate
their HELOC would put their exposure to risk
at 100% ($400,000 first loan and $100,000
available on the HELOC). It is highly unlikely
that the lender would approve this subordination
request and would probably insist that the
HELOC be closed out, since the lender will not
want to increase their risk exposure to that
level.
Subordination requests are useful tools to help
a borrower meet their financial planning goals.
But it takes proper research to make sure that
we can navigate through the guidelines of both
the new first lender and the existing HELOC
lender.
Also, borrowers need to be patient as well. We
are finding that the HELOC lenders are taking
as much as 30-45 days to process these requests.
This can affect the ability to meet interest rate
lock expiration dates, or become more costly to
the borrower if rate lock extension fees are
necessary.
Make sure that your goals are well-defined as
you beginn this process to that a strategic plan
is developed to avoid any pitfalls through the
process.
Wednesday, October 6, 2010
Meeting the Client's Needs
I recently had a couple of reminders about how
important it is to meet our clients' needs.
Those of us in the service business need to remember
that it is the clients' perspectives that are most
important, not necessarily our point of view.
The first reminder came the last time I was getting
my hair cut. I overheard the receptionist talking
with one of the stylists in the shop.
The receptionist was the one who made the
reminder calls for the appointments the day
before they were scheduled. Since she was
making calls for all the stylists, she had
thirty to fifty calls to make each day.
In order to get through the calls, she found it
useful to leave them as quickly as possible.
One of the customers had said to her that it was
difficult to understand her message because she
spoke so fast, and that the customer had to replay
it a couple of times to make sure of what was
being communciated.
After relating what the customer had said to her,
the receptionist said to the stylist (as if she was
talking to the customer): "You try making more
than thirty calls, and see how fast you leave the
messages".
What struck me about this brief conversation was
that the purpose of the call had been overlooked.
Although the receptionist was being efficient, the
purpose of the reminder call was to be caring and
welcoming to the customer. And if there was a
reason why the appointment couldn't be kept, to
open the lines of communication so that the stylist
didn't have an open appointment time.
Even though it may have been the receptionist's
thirtieth call, it was the first one received by that
customer. In an effort to get her task completed
as quickly as possible, the receptionist lost sight
of the fact that the customer was somewhat incon-
venienced by having to replay the message several
times.
It was a great reminder for me to constantly
recommit to serving my clients. Every one who
calls me for information, for rates or to help them
solve a problem deserves for me to treat them like
it is my first call of the day.
They are calling me to help them meet their goals,
for their reasons. I owe it to them to be patient,
considerate and thorough.
The second reminder came tonight. My wife Sheri
and I went to see Van Morrison in concert at the
Civic Theater in San Diego. It was the first time he
had performed in San Diego in 37 years!
He performed for about 90 minutes and I thought
he put on a great show. Even though he is 65 years
old, he brought energy, professionalism, and a
virtuosity to his concert.
I know that not all of my readers will know his
music, but at his age, how many times do you think
he has sang "Gloria", "Brown Eyed Girl", "Moon-
dance" and his other hits? Thousands, I am sure.
What struck me, was that even though these songs
have been sung by him an untold number of times,
this was my first opportunity to hear him live. And he
delivered a high-quality performance that respected
those in attendance and brought credit to his pro-
fessional reputation.
I suppose he could have just "mailed it in". But
that would serve no one. The audience would have
been justifiably disappointed and felt cheated.
Van Morrison would have diminished his reputation
as a performer by delivering a sub-par effort.
The lesson I took away from this was that I need
to always remind myself that my customer may
only have one encounter with me. I need to respect
their concerns and deliver the highest quality
service that I can in that encounter.
They may ask me to be part of their team of trusted
advisors for a period of time to help them meet their
goals. They are inviting me into their financial lives,
asking for my assistance, and paying me for my
services.
My clients deserve nothing less than my best effort
when we work together. And I can thank the salon
receptionist and a professional entertainer for the
reminders.
important it is to meet our clients' needs.
Those of us in the service business need to remember
that it is the clients' perspectives that are most
important, not necessarily our point of view.
The first reminder came the last time I was getting
my hair cut. I overheard the receptionist talking
with one of the stylists in the shop.
The receptionist was the one who made the
reminder calls for the appointments the day
before they were scheduled. Since she was
making calls for all the stylists, she had
thirty to fifty calls to make each day.
In order to get through the calls, she found it
useful to leave them as quickly as possible.
One of the customers had said to her that it was
difficult to understand her message because she
spoke so fast, and that the customer had to replay
it a couple of times to make sure of what was
being communciated.
After relating what the customer had said to her,
the receptionist said to the stylist (as if she was
talking to the customer): "You try making more
than thirty calls, and see how fast you leave the
messages".
What struck me about this brief conversation was
that the purpose of the call had been overlooked.
Although the receptionist was being efficient, the
purpose of the reminder call was to be caring and
welcoming to the customer. And if there was a
reason why the appointment couldn't be kept, to
open the lines of communication so that the stylist
didn't have an open appointment time.
Even though it may have been the receptionist's
thirtieth call, it was the first one received by that
customer. In an effort to get her task completed
as quickly as possible, the receptionist lost sight
of the fact that the customer was somewhat incon-
venienced by having to replay the message several
times.
It was a great reminder for me to constantly
recommit to serving my clients. Every one who
calls me for information, for rates or to help them
solve a problem deserves for me to treat them like
it is my first call of the day.
They are calling me to help them meet their goals,
for their reasons. I owe it to them to be patient,
considerate and thorough.
The second reminder came tonight. My wife Sheri
and I went to see Van Morrison in concert at the
Civic Theater in San Diego. It was the first time he
had performed in San Diego in 37 years!
He performed for about 90 minutes and I thought
he put on a great show. Even though he is 65 years
old, he brought energy, professionalism, and a
virtuosity to his concert.
I know that not all of my readers will know his
music, but at his age, how many times do you think
he has sang "Gloria", "Brown Eyed Girl", "Moon-
dance" and his other hits? Thousands, I am sure.
What struck me, was that even though these songs
have been sung by him an untold number of times,
this was my first opportunity to hear him live. And he
delivered a high-quality performance that respected
those in attendance and brought credit to his pro-
fessional reputation.
I suppose he could have just "mailed it in". But
that would serve no one. The audience would have
been justifiably disappointed and felt cheated.
Van Morrison would have diminished his reputation
as a performer by delivering a sub-par effort.
The lesson I took away from this was that I need
to always remind myself that my customer may
only have one encounter with me. I need to respect
their concerns and deliver the highest quality
service that I can in that encounter.
They may ask me to be part of their team of trusted
advisors for a period of time to help them meet their
goals. They are inviting me into their financial lives,
asking for my assistance, and paying me for my
services.
My clients deserve nothing less than my best effort
when we work together. And I can thank the salon
receptionist and a professional entertainer for the
reminders.
Wednesday, September 22, 2010
Lower Interest Rates Deliver Powerful Savings
When we go through a period of lower interest rates
as we are now doing, borrowers are always looking
for the benefits that may come with refinancing.
There are several ways that you can compare
the numbers to see if the savings that you may
experience meet your goals.
Let's take a look at a couple of examples from
recent discussions with clients:
Borrower currently has a loan that started at
$535,000 at an interest rate of 5.0%. Payments
are $2,872, balance is $525,000 and the borrower
has made 16 payments.
The quotes at the time were for a new 30-year
fixed rate loan at 4.5%. The loan fee was zero
points, (one point equals 1% of the loan amount)
and transactional costs would be about $3500.
If we compare costs to interest rate savings the
recovery period is fairly short. $3500 is .667%
of the loan amount ($3500/$525,000). The
interest savings per year is .50% (5.0% - 4.5%).
So it would only take about 16 months to
break even and start saving money (.667 divided
by .50 is 1 1/3 years, i.e. 16 months).
If we make comparisons of the monthly payments
it works out like this: $2872 current payment to
$2660 new payment is $212 per month savings.
$3500 in costs divided by $212 is about 16.5
months. Once again, a fairly quick recovery of
costs.
And if you are committed to staying in the home,
comparing the costs over the remaining life of
the loans provides another measure of the
benefits of considering the refinance.
There are 344 payments remaining on the existing
loan (360 scheduled payments minus the 16 already
made). 344 payments at $2872 per month means
that you would pay $987,968 over the remainder
of the loan term.
On the new loan, you would have 360 payments
at $2660 per month for a total outgo of $957,600
over the 30 years.
So, would it be worth it to spend $3500 to save
$30,368 with a new refinance? Many borrowers
who are committed to a long-term strategy
choose to go this direction.
I had a discussion with a different borrower. He
was definitely committed to a long-term strategy
and wanted to see how much he could save by
obtaining a lower interest rate and shortening
the term of his loan from 30 years to 15 years.
His existing loan had a balance of $408,000,
interest rate of 5.0%, payments of $2238 and
had 341 installments left.
The new proposal was for $408,000 with an
interest rate of 4.25%, with a one-point loan
fee and $3500 in costs. The new 15-year
payment would be $3069 per month.
The interest rate comparison works out like
this: $7580 in fees ($4080 + $3500) is about
1.86% of the loan amount ($7580 divided by
$408,000). The interest rate difference is
.75% (5.0% minus 4.25%). It would take about
2.5 years to recover the costs with interest
savings (1.86 divided by .75). Not a particulary
great recovery period.
It would not make sense to compare monthly
payments, because we are not comparing
"apples to apples". The monthly payment
on the 15-year loan is much higher to retire
the principal balance over the shorter period
of time.
There are 341 payments remaining on the
existing loan. At $2238 per month the total
outgo will be $763,158.
On the new loan there will be 180 payments
at $3069 for a total of $552,420.
This borrower was definite in his decision.
It was very much worth $7580 to save
$210,738!
It is important to understand whether your
goals are short-term or long-term, and then
to analyze your choices from several different
approaches. More often than not, the answer
becomes fairly obvious what will work best
for you.
As always, let me know how I can help you
with exploring your options.
as we are now doing, borrowers are always looking
for the benefits that may come with refinancing.
There are several ways that you can compare
the numbers to see if the savings that you may
experience meet your goals.
Let's take a look at a couple of examples from
recent discussions with clients:
Borrower currently has a loan that started at
$535,000 at an interest rate of 5.0%. Payments
are $2,872, balance is $525,000 and the borrower
has made 16 payments.
The quotes at the time were for a new 30-year
fixed rate loan at 4.5%. The loan fee was zero
points, (one point equals 1% of the loan amount)
and transactional costs would be about $3500.
If we compare costs to interest rate savings the
recovery period is fairly short. $3500 is .667%
of the loan amount ($3500/$525,000). The
interest savings per year is .50% (5.0% - 4.5%).
So it would only take about 16 months to
break even and start saving money (.667 divided
by .50 is 1 1/3 years, i.e. 16 months).
If we make comparisons of the monthly payments
it works out like this: $2872 current payment to
$2660 new payment is $212 per month savings.
$3500 in costs divided by $212 is about 16.5
months. Once again, a fairly quick recovery of
costs.
And if you are committed to staying in the home,
comparing the costs over the remaining life of
the loans provides another measure of the
benefits of considering the refinance.
There are 344 payments remaining on the existing
loan (360 scheduled payments minus the 16 already
made). 344 payments at $2872 per month means
that you would pay $987,968 over the remainder
of the loan term.
On the new loan, you would have 360 payments
at $2660 per month for a total outgo of $957,600
over the 30 years.
So, would it be worth it to spend $3500 to save
$30,368 with a new refinance? Many borrowers
who are committed to a long-term strategy
choose to go this direction.
I had a discussion with a different borrower. He
was definitely committed to a long-term strategy
and wanted to see how much he could save by
obtaining a lower interest rate and shortening
the term of his loan from 30 years to 15 years.
His existing loan had a balance of $408,000,
interest rate of 5.0%, payments of $2238 and
had 341 installments left.
The new proposal was for $408,000 with an
interest rate of 4.25%, with a one-point loan
fee and $3500 in costs. The new 15-year
payment would be $3069 per month.
The interest rate comparison works out like
this: $7580 in fees ($4080 + $3500) is about
1.86% of the loan amount ($7580 divided by
$408,000). The interest rate difference is
.75% (5.0% minus 4.25%). It would take about
2.5 years to recover the costs with interest
savings (1.86 divided by .75). Not a particulary
great recovery period.
It would not make sense to compare monthly
payments, because we are not comparing
"apples to apples". The monthly payment
on the 15-year loan is much higher to retire
the principal balance over the shorter period
of time.
There are 341 payments remaining on the
existing loan. At $2238 per month the total
outgo will be $763,158.
On the new loan there will be 180 payments
at $3069 for a total of $552,420.
This borrower was definite in his decision.
It was very much worth $7580 to save
$210,738!
It is important to understand whether your
goals are short-term or long-term, and then
to analyze your choices from several different
approaches. More often than not, the answer
becomes fairly obvious what will work best
for you.
As always, let me know how I can help you
with exploring your options.
Wednesday, September 8, 2010
The Challenge of Condos
In the mortgage lending world, condominiums
are considered differently by the lenders than
are single-family detached homes (SFDs).
Because single-family detached homes have
an element of autonomy for the owner, and
because condominiums require collective
accounting and decision making, SFDs are
considered less risky than condominiums.
Through statistical experience, the lenders know
that the introduction of common ownership that
is essential to the condominium project, creates
additional risks.
There are at least 4 major concerns of lenders
that can create insurmountable obstacles to
helping a borrower obtain a loan in a particular
condominium project.
1. Percentage of owner-occupants in the project.
A typical guideline from FNMA and FHLMC is that
the project must have at least 51% of the units
occupied by owners. This 51% can include second
homes, but cannot include tenant-occupied or rental
units. Lenders know that if a project is predominately
renters that the pride of ownership in the project is
diminished.
Very early in the application process it is important
that we contact the Homeowners Association (HOA)
management company to find out what the owner-
occupancy percentage is.
We often find that the HOA canagement company
only derives their statistics by matching the mailing
addresses to the property addresses. If someone
has their mail sent to their office, or to a post office
mailbox, the HOA management company will not
make the leap of judgment that the unit is occupied
by an owner.
Similarly, when the mailing address is a distinctly
different street address than the subject unit, they
will not survey the owners to find out if they owner
rents the property, or if it is held as a second home.
So, the information that we receive from the HOA
management company is likely inaccurate, but does
not present a problem unless the percentage of
units with matching mailing and property addresses
is very close to the 51% level. In that case, the
lack of interest in the managment company to
be more accurate could be costly to the buyer or
homeowner interested in refinancing.
In fairness to the HOA management company, they
do not feel that this is part of the service that they
are obligated to provide to their unit owners. The
unit owners would be well-served to insist that this
attention to detail be included in their contract with
the HOA management company.
2. Percentage of unit owners who are delinquent in
their HOA fees.
Lenders have also proven statistically that if there
is a significant number of unit owners who are delin-
quent in paying their HOA fees that there will not
be enough money for the payment of ongoing bills
and to replenish reserves for capital replacement
and improvements.
The guideline figure has been that no more than
15% of the unit owners can be more than 30 days
behind in the HOA fees.
Not surprisingly, the HOA management company
does a much better job of tracking the receipt of
the HOA fees and can give us this figure with
more accuracy.
A large number of delinquent homeowners means
that there is an increased likelihood of special
assessments being necessary.
And the lenders know that if everyone in the project
is asked to come up with several thousand dollars
each, that it creates financial strain on all the home-
owners. This jeopardizes the financial strength of
the entire project.
3. Lawsuits involving the condominium project.
The biggest concern of the lender is that there are
lawsuits involving construction defects in the condo-
minium project. They defeat the loan request,
almost without exception.
It is almost a certainty that within the statute of
limitations, currently 4 years I believe, that the
HOA will file suit against the developer. Although
there may not be large construction issues that
require litigation, if the HOA fails to take that
step, they could be accused of not fulfilling their
fiduciary responsibilities to the homeowners.
Consequently, a construction defect lawsuit is
almost a given within that timeframe.
Other lawsuits, which may include "slip and fall"
or nuisance suits, may be able to be overlooked
by the lender if they are limited in scope and don't
involve the unit that they are being asked to lend
on.
4. Saturation or concentration by the lender or
investor.
Many lenders, and FHLMC and FNMA, may have
a limit to the number of units that they are willing
to lend on in a condominium project. They call
this 'saturation' or 'concentration'.
They do not want to have a lot of eggs in one
basket. If there are big problems in a particular
condominium project, they want to make sure
that they are sharing the risk with other lenders
and that they don't take all the losses themselves.
Sometimes this can be a very difficult statistic
to ascertain at the beginning of the process. There
are times that despite our best efforts to find out
early on if there is the potential for exceeding the
lender or investor limit, the answer comes to us
after the loan has been submitted to the lender for
approval. And then we have to find another lender
late in the process.
All condos are not created equal. The lenders want
to make a good decision on the loan request, and
even though it seems like they may be overly
conservative at times, their interests are compatible
with the buyer's interests.
Given all the facts, most buyers would probably
prefer to live in a condominium project that enjoys
the pride of ownership of a majority of owner-
occupants, and that these owners pay their bills
responsibly to keep the financial condiiton of the
association strong, and where there are not issues
regarding the quality of construction of the units
and common areas.
If you are buying, or own a condominium, these
factors are important in obtaining new financing
and need to be thoroughly researched early in
the process.
are considered differently by the lenders than
are single-family detached homes (SFDs).
Because single-family detached homes have
an element of autonomy for the owner, and
because condominiums require collective
accounting and decision making, SFDs are
considered less risky than condominiums.
Through statistical experience, the lenders know
that the introduction of common ownership that
is essential to the condominium project, creates
additional risks.
There are at least 4 major concerns of lenders
that can create insurmountable obstacles to
helping a borrower obtain a loan in a particular
condominium project.
1. Percentage of owner-occupants in the project.
A typical guideline from FNMA and FHLMC is that
the project must have at least 51% of the units
occupied by owners. This 51% can include second
homes, but cannot include tenant-occupied or rental
units. Lenders know that if a project is predominately
renters that the pride of ownership in the project is
diminished.
Very early in the application process it is important
that we contact the Homeowners Association (HOA)
management company to find out what the owner-
occupancy percentage is.
We often find that the HOA canagement company
only derives their statistics by matching the mailing
addresses to the property addresses. If someone
has their mail sent to their office, or to a post office
mailbox, the HOA management company will not
make the leap of judgment that the unit is occupied
by an owner.
Similarly, when the mailing address is a distinctly
different street address than the subject unit, they
will not survey the owners to find out if they owner
rents the property, or if it is held as a second home.
So, the information that we receive from the HOA
management company is likely inaccurate, but does
not present a problem unless the percentage of
units with matching mailing and property addresses
is very close to the 51% level. In that case, the
lack of interest in the managment company to
be more accurate could be costly to the buyer or
homeowner interested in refinancing.
In fairness to the HOA management company, they
do not feel that this is part of the service that they
are obligated to provide to their unit owners. The
unit owners would be well-served to insist that this
attention to detail be included in their contract with
the HOA management company.
2. Percentage of unit owners who are delinquent in
their HOA fees.
Lenders have also proven statistically that if there
is a significant number of unit owners who are delin-
quent in paying their HOA fees that there will not
be enough money for the payment of ongoing bills
and to replenish reserves for capital replacement
and improvements.
The guideline figure has been that no more than
15% of the unit owners can be more than 30 days
behind in the HOA fees.
Not surprisingly, the HOA management company
does a much better job of tracking the receipt of
the HOA fees and can give us this figure with
more accuracy.
A large number of delinquent homeowners means
that there is an increased likelihood of special
assessments being necessary.
And the lenders know that if everyone in the project
is asked to come up with several thousand dollars
each, that it creates financial strain on all the home-
owners. This jeopardizes the financial strength of
the entire project.
3. Lawsuits involving the condominium project.
The biggest concern of the lender is that there are
lawsuits involving construction defects in the condo-
minium project. They defeat the loan request,
almost without exception.
It is almost a certainty that within the statute of
limitations, currently 4 years I believe, that the
HOA will file suit against the developer. Although
there may not be large construction issues that
require litigation, if the HOA fails to take that
step, they could be accused of not fulfilling their
fiduciary responsibilities to the homeowners.
Consequently, a construction defect lawsuit is
almost a given within that timeframe.
Other lawsuits, which may include "slip and fall"
or nuisance suits, may be able to be overlooked
by the lender if they are limited in scope and don't
involve the unit that they are being asked to lend
on.
4. Saturation or concentration by the lender or
investor.
Many lenders, and FHLMC and FNMA, may have
a limit to the number of units that they are willing
to lend on in a condominium project. They call
this 'saturation' or 'concentration'.
They do not want to have a lot of eggs in one
basket. If there are big problems in a particular
condominium project, they want to make sure
that they are sharing the risk with other lenders
and that they don't take all the losses themselves.
Sometimes this can be a very difficult statistic
to ascertain at the beginning of the process. There
are times that despite our best efforts to find out
early on if there is the potential for exceeding the
lender or investor limit, the answer comes to us
after the loan has been submitted to the lender for
approval. And then we have to find another lender
late in the process.
All condos are not created equal. The lenders want
to make a good decision on the loan request, and
even though it seems like they may be overly
conservative at times, their interests are compatible
with the buyer's interests.
Given all the facts, most buyers would probably
prefer to live in a condominium project that enjoys
the pride of ownership of a majority of owner-
occupants, and that these owners pay their bills
responsibly to keep the financial condiiton of the
association strong, and where there are not issues
regarding the quality of construction of the units
and common areas.
If you are buying, or own a condominium, these
factors are important in obtaining new financing
and need to be thoroughly researched early in
the process.
Wednesday, August 11, 2010
FHA Mortgage Insurance Changes Coming
In the last couple of weeks, Congress has passed
HR 5981. This bill gives FHA the ability to adjust
its annual mortgage insurance premiums (MIP).
The target for the new changes is September 7,
2010.
Currently, FHA MIP is comprised of two com-
ponents, part of which is an upfront MIP that
costs 2.25% of the loan amount. Most borrowers
choose to add this upfront MIP to their base loan,
rather than come up with thousands in cash at closing.
The other portion of the MIP is the monthly
portion. It currently costs .50% to .55% per
year, payable in monthly installments.
These mortgage insurance premiums are
required on all FHA loans, with few exceptions.
It is the way that the FHA program accrues
the funds necessary to pay for the losses
incurred under the FHA program. When a
loan goes into default, FHA has to pay a claim
to the lender for their losses.
It will probably not be a surprise to learn that
the losses experienced by the FHA-insured
loans are higher than the money coming in to
pay the claims. Recalculating the way that
mortgage insurance is collected has become
necessary to keep the FHA program afloat.
So, HR 5981 is planning to adjust its MIP
premiums as follows:
The upfront MIP will drop from 2.25% to
1.00% of the loan amount. This fee will still
be allowed to be financed on top of the base
loan amount.
The monthly premium will now increase based
on an annual calculation of .85% to .90% per
year. The expected additional funds to be
received for the FHA insurance fund is calcu-
lated to be $300 million per month.
The effect of this will be to make qualifying for
the new FHA loan more difficult.
On a loan amount of $300,000, the expected
increase in monthly premium will be approxi-
mately $87.00 per month. Based on an interest
rate of 4.5%, this means that a borrower may
qualify for $17,000 less in loan amount.
As the housing market continues to struggle
to gain some stability, we continue to seek ways
to help borrowers qualify for their home loans.
Although this allows FHA an opportunity to get
more healthy, and to make the quality of their
insured loans less risky (because the borrowers
need to be stronger to qualify for the same
loan amounts as before), it does come at a price.
Fewer borrowers will be able to qualify, many
of which are first-time buyers. The first-time
buyers are the fuel that allow existing homeowners
to move up in purchase price and generate growth
in the real estate sector.
Be sure to consult with an experienced professional
(like me) to explore options in qualifying for your
next home loan.
HR 5981. This bill gives FHA the ability to adjust
its annual mortgage insurance premiums (MIP).
The target for the new changes is September 7,
2010.
Currently, FHA MIP is comprised of two com-
ponents, part of which is an upfront MIP that
costs 2.25% of the loan amount. Most borrowers
choose to add this upfront MIP to their base loan,
rather than come up with thousands in cash at closing.
The other portion of the MIP is the monthly
portion. It currently costs .50% to .55% per
year, payable in monthly installments.
These mortgage insurance premiums are
required on all FHA loans, with few exceptions.
It is the way that the FHA program accrues
the funds necessary to pay for the losses
incurred under the FHA program. When a
loan goes into default, FHA has to pay a claim
to the lender for their losses.
It will probably not be a surprise to learn that
the losses experienced by the FHA-insured
loans are higher than the money coming in to
pay the claims. Recalculating the way that
mortgage insurance is collected has become
necessary to keep the FHA program afloat.
So, HR 5981 is planning to adjust its MIP
premiums as follows:
The upfront MIP will drop from 2.25% to
1.00% of the loan amount. This fee will still
be allowed to be financed on top of the base
loan amount.
The monthly premium will now increase based
on an annual calculation of .85% to .90% per
year. The expected additional funds to be
received for the FHA insurance fund is calcu-
lated to be $300 million per month.
The effect of this will be to make qualifying for
the new FHA loan more difficult.
On a loan amount of $300,000, the expected
increase in monthly premium will be approxi-
mately $87.00 per month. Based on an interest
rate of 4.5%, this means that a borrower may
qualify for $17,000 less in loan amount.
As the housing market continues to struggle
to gain some stability, we continue to seek ways
to help borrowers qualify for their home loans.
Although this allows FHA an opportunity to get
more healthy, and to make the quality of their
insured loans less risky (because the borrowers
need to be stronger to qualify for the same
loan amounts as before), it does come at a price.
Fewer borrowers will be able to qualify, many
of which are first-time buyers. The first-time
buyers are the fuel that allow existing homeowners
to move up in purchase price and generate growth
in the real estate sector.
Be sure to consult with an experienced professional
(like me) to explore options in qualifying for your
next home loan.
Wednesday, July 28, 2010
Rates Are Staying Low - Don't Miss Out
At the end of March, the Federal Reserve followed
through on its promise to stop buying mortgage-
backed securities.
At the time, I was of the opinion that rates would
go up. My reasoning was that when private
investors - institutional investors, pension funds -
were asked to fill the gap from the Fed leaving
the market that they would insist on higher
rates of return that what the government was
willing to accept.
Prior to the end of March, the Fed was creating
and controlling a closed system:
They were keeping rates low to allow for as much
recovery as possible.
So that lenders who created these low interest
rate loans did not have to deal with the risk
that these loans would become money losers in
the future, they enabled FNMA and FHLMC to
purchase these loans. FHA and VA have also
expanded their programs,, and those loans are
generally sold to GNMA (Government National
Mortgage Association). FNMA, FHLMC, & GNMA
are all government-related and sponsored entities.
FNMA, FHLMC, and GNMA all bundle pools of
mortgages into mortgage-backed-securities (MBS)
and sell them. The Federal Reserve was the primary
purchaser of these MBS issues earlier in the year.
Once they pulled out of the market, I thought that
the private investors would insist on higher yields
to be interested in buying these MBS issues. If that
were true, interest rates would go up.
But that has not happened. Rates are at historical
lows right now.
What has developed is that the Fed has continued
to keep rates low, as evidenced by Treasury issues:
T-bills, Treasury Notes and Treasury bonds. These
investments are desirable because they carry low
risk since they are backed by the U. S. Government.
Even though MBS issues are higher risk than Treasury
issues, they are not significantly more risky in this
environment. Because loan underwriting has tightened
so stringently, the new loans created over the last 1 1/2
to 2 years are nowhere near as risky as the ones that
were created in the "anything goes" era.
So the choices for an investor to keep their risk low
is to either invest in Treasury issues where the rates
are really low, or to accept a higher rate of return
by investing in MBS issues that are better quality
than they were a few years ago.
It works out well for borrowers and for the mortgage
business that rates are staying low. I'm glad that
things have not worked out as I predicted.
The reality is that instead of investors dictating the
interest rates under which they would purchase
MBS issues - driving up rates - the government is
dictating the rates at which mortgages are offered
and telling the investors to make a choice: buy
really low, really safe Treasury issues or obtain a
higher rate of return with MBS issues where the
risk has been minimized with tighter underwriting
guidelines.
We never know how long these dynamics will continue.
Make sure that you take advantage of these rates
while they are low. Converting adjustable rates to
fixed rates would probably be a good long-term move
right now. Contact me and we can work through the
details.
through on its promise to stop buying mortgage-
backed securities.
At the time, I was of the opinion that rates would
go up. My reasoning was that when private
investors - institutional investors, pension funds -
were asked to fill the gap from the Fed leaving
the market that they would insist on higher
rates of return that what the government was
willing to accept.
Prior to the end of March, the Fed was creating
and controlling a closed system:
They were keeping rates low to allow for as much
recovery as possible.
So that lenders who created these low interest
rate loans did not have to deal with the risk
that these loans would become money losers in
the future, they enabled FNMA and FHLMC to
purchase these loans. FHA and VA have also
expanded their programs,, and those loans are
generally sold to GNMA (Government National
Mortgage Association). FNMA, FHLMC, & GNMA
are all government-related and sponsored entities.
FNMA, FHLMC, and GNMA all bundle pools of
mortgages into mortgage-backed-securities (MBS)
and sell them. The Federal Reserve was the primary
purchaser of these MBS issues earlier in the year.
Once they pulled out of the market, I thought that
the private investors would insist on higher yields
to be interested in buying these MBS issues. If that
were true, interest rates would go up.
But that has not happened. Rates are at historical
lows right now.
What has developed is that the Fed has continued
to keep rates low, as evidenced by Treasury issues:
T-bills, Treasury Notes and Treasury bonds. These
investments are desirable because they carry low
risk since they are backed by the U. S. Government.
Even though MBS issues are higher risk than Treasury
issues, they are not significantly more risky in this
environment. Because loan underwriting has tightened
so stringently, the new loans created over the last 1 1/2
to 2 years are nowhere near as risky as the ones that
were created in the "anything goes" era.
So the choices for an investor to keep their risk low
is to either invest in Treasury issues where the rates
are really low, or to accept a higher rate of return
by investing in MBS issues that are better quality
than they were a few years ago.
It works out well for borrowers and for the mortgage
business that rates are staying low. I'm glad that
things have not worked out as I predicted.
The reality is that instead of investors dictating the
interest rates under which they would purchase
MBS issues - driving up rates - the government is
dictating the rates at which mortgages are offered
and telling the investors to make a choice: buy
really low, really safe Treasury issues or obtain a
higher rate of return with MBS issues where the
risk has been minimized with tighter underwriting
guidelines.
We never know how long these dynamics will continue.
Make sure that you take advantage of these rates
while they are low. Converting adjustable rates to
fixed rates would probably be a good long-term move
right now. Contact me and we can work through the
details.
Wednesday, July 14, 2010
Knowledge is Power (and can save you misery!)
Last week, I was reminded once again how important
it is for clients to know the features of the home loans
that they receive.
I had helped a client about 6 years ago with a new
loan. These were people I had known and helped
many times for the last 28 years. They were
important friends and clients for me.
The loan I had done for them was a 30-year fixed
rate loan with a rate of 6.875%. About a year later,
that lender came to my client and offered them a
modification of the loan which reduced the interest
rate.
As part of this modification, the lender changed the
loan from a 30-year fixed rate to a 5-year balloon
payment loan. This means that at the end of the
five year period that the entire loan balance is due,
and that the client either needs to pay it in full
from their cash assets, or arrange for another
loan to refinance it.
My borrower is self-employed and their financial
statements did not support a refinance at this
time. Of course, since underwriting has changed
so much in the last three years, this borrower
could have obtained a loan previously, but not
in this environment.
Things were looking bleak for helping them save
their home. If they did not arrive at a solution,
the lender would be in a position to foreclose on
them for non-payment of the balloon payment
loan.
As part of my consultation with them, since I
could not help with a new loan, I offered to
review their loan documents to see what was
possible.
The silver lining was that they did receive an
offer from the existing lender for another
modification. There was a number of stipulations
for qualifying for this. They included that the
home had to be their primary residence (it was),
they could not have been late on any payment
in the last 12 months by more than 30 days
(they were not late) and that their could not
be any secondary financing on the home (they
had a line of credit).
There was a footnote to this last condition. It
said that it would not apply if their first loan
modification documents did not also stipulate
those terms.
So, we went through their stack of loan papers.
Most of you know how daunting that can be
for anyone who is not used to that confusing
paperwork. The good thing is that my client
had all of those papers in an easily-accessible
place.
I found the original note and an addendum to
the note. I found the clauses that spelled out
the conditions that had to be in place for a
future modification. These closely paralleled
the letter that they had received.
The good news was that the note did not say
that they could not have secondary financing.
The clause in the letter that we thought would
defeat their opportunity to modify the loan did
not exist in the note.
I made sure that the borrower had the important
pages and clauses well-marked for when he
would have his discussion with the lenders'
representative. They agreed that they would
call me after they had discussed it the lender.
The next day I got the call. They said that they
were OK'd for new modification and that they
were offered a rate of 4.75%. I told them to
move quickly to get the terms finalized.
But, the call to the lender was not that smooth.
When they called, the lender's representative
said that they did not qualify because they had
secondary financing on the home. Because we
had taken the time to familiarize ourselves with
the terms of the loan, the borrower knew what
to do next.
He insisted that the representative look at his
note from the modification. It took a few minutes
but the representative located a copy and they
went through it together. The representative
was able to agree that the borrower was correct
and that they were eligible for the modification.
It was really gratifying to help them find a
solution. I was happy to help my friends by
educating them and giving them the ammunition
to get what they deserved.
I want to leave you with a couple of important
thoughts.
1. You need to know what you are getting when
you obtain your loan. My friends did not
realize that the modification that provided
the low interest rate from 5 years ago also
included a balloon payment clause. This could
have been catastrophic for them.
2. If you are not working with someone who has
earned your trust, you have to educate yourself
and be smarter than the people you are dealing
with. The lender representative could have put
my friends in a terrible position by not researching
things properly. If they had accepted the first "no"
they could have been on a path leading to fore-
closure.
3. Surround yourself with people you can trust.
I have built my career over the last 33 years by
listening to my clients, educating them, and telling
them the truth. It works for me and it works for
my clients.
it is for clients to know the features of the home loans
that they receive.
I had helped a client about 6 years ago with a new
loan. These were people I had known and helped
many times for the last 28 years. They were
important friends and clients for me.
The loan I had done for them was a 30-year fixed
rate loan with a rate of 6.875%. About a year later,
that lender came to my client and offered them a
modification of the loan which reduced the interest
rate.
As part of this modification, the lender changed the
loan from a 30-year fixed rate to a 5-year balloon
payment loan. This means that at the end of the
five year period that the entire loan balance is due,
and that the client either needs to pay it in full
from their cash assets, or arrange for another
loan to refinance it.
My borrower is self-employed and their financial
statements did not support a refinance at this
time. Of course, since underwriting has changed
so much in the last three years, this borrower
could have obtained a loan previously, but not
in this environment.
Things were looking bleak for helping them save
their home. If they did not arrive at a solution,
the lender would be in a position to foreclose on
them for non-payment of the balloon payment
loan.
As part of my consultation with them, since I
could not help with a new loan, I offered to
review their loan documents to see what was
possible.
The silver lining was that they did receive an
offer from the existing lender for another
modification. There was a number of stipulations
for qualifying for this. They included that the
home had to be their primary residence (it was),
they could not have been late on any payment
in the last 12 months by more than 30 days
(they were not late) and that their could not
be any secondary financing on the home (they
had a line of credit).
There was a footnote to this last condition. It
said that it would not apply if their first loan
modification documents did not also stipulate
those terms.
So, we went through their stack of loan papers.
Most of you know how daunting that can be
for anyone who is not used to that confusing
paperwork. The good thing is that my client
had all of those papers in an easily-accessible
place.
I found the original note and an addendum to
the note. I found the clauses that spelled out
the conditions that had to be in place for a
future modification. These closely paralleled
the letter that they had received.
The good news was that the note did not say
that they could not have secondary financing.
The clause in the letter that we thought would
defeat their opportunity to modify the loan did
not exist in the note.
I made sure that the borrower had the important
pages and clauses well-marked for when he
would have his discussion with the lenders'
representative. They agreed that they would
call me after they had discussed it the lender.
The next day I got the call. They said that they
were OK'd for new modification and that they
were offered a rate of 4.75%. I told them to
move quickly to get the terms finalized.
But, the call to the lender was not that smooth.
When they called, the lender's representative
said that they did not qualify because they had
secondary financing on the home. Because we
had taken the time to familiarize ourselves with
the terms of the loan, the borrower knew what
to do next.
He insisted that the representative look at his
note from the modification. It took a few minutes
but the representative located a copy and they
went through it together. The representative
was able to agree that the borrower was correct
and that they were eligible for the modification.
It was really gratifying to help them find a
solution. I was happy to help my friends by
educating them and giving them the ammunition
to get what they deserved.
I want to leave you with a couple of important
thoughts.
1. You need to know what you are getting when
you obtain your loan. My friends did not
realize that the modification that provided
the low interest rate from 5 years ago also
included a balloon payment clause. This could
have been catastrophic for them.
2. If you are not working with someone who has
earned your trust, you have to educate yourself
and be smarter than the people you are dealing
with. The lender representative could have put
my friends in a terrible position by not researching
things properly. If they had accepted the first "no"
they could have been on a path leading to fore-
closure.
3. Surround yourself with people you can trust.
I have built my career over the last 33 years by
listening to my clients, educating them, and telling
them the truth. It works for me and it works for
my clients.
Wednesday, June 16, 2010
Are We Experiencing a Summer Thaw?
Over the past year or so, I have been giving you
updates on how stringent the underwriting process
has been.
The lenders have been squeezing the approvals
really tight, making sure that all the paperwork
is thorough and complete, and that there are
virtually no unanswered questions in their file.
They want to make sure that their decision will
not be questioned or criticized by anyone who
reviews their work, or by an investor who may
purchase the loan.
This has created an environment of low risk
tolerance. When in doubt, they are more inclined
to ask for more paperwork, or just to say no to
the request. It is the safest thing for them to do,
even though they may be turning down loans
that traditionally present reasonable risk.
There have some recent transactions that have
given us some hope that there may be a little
bit of thawing in the hardline responses that we
have been getting.
Not all of our lenders have been giving us the
same interpretation of standard FNMA and
FHLMC underwriting guidelines. This is a good
thing, because if we got the same answer from
all of our lenders all the time, we would not have
choices as to how to solve your problems.
Some of the areas that we are seeing some
loosening of guideline interpretations include:
A. Borrowers who own more than 4 financed
properties. The strict FNMA/FHLMC guide-
line is that they won't purchase loans if the
borrower is above this limit. Therefore, the
lenders won't create these loans if they can't
sell them to the agencies.
But we have found several lenders will exceed
this limit, and be willing to lend to borrowers
who have as many as 10 financed properties.
What this implies is that there has been an
expansion of investors into the mortgage-
backed security (MBS) market after the Federal
Reserve began backing away from the MBS
market at the end of March.
This return of private investors (non-govern-
mental) into the market is a big plus for all of
us. It introduces more liquidity into the market
for lenders to create loans and sell them. It
also introduces more alternatives to the lending
guidelines for us to place loans for our borrowers.
B. We are also seeing that some of the adjustable
rate loans being created are being a little more
liberal in their underwriting guidelines. Many
times these loans are underwritten for the lender's
portfolio without having specific investors to sell
them to. The lenders are more likely to keep these
loans because they know that the interest rates
will rise when interest rates in general go up again.
Because the lender only has their own internal
risk tolerance to meet, they are more inclined to
make reasonable assessments for borrower's
qualifications. They do not have to meet another
lending criteria that may be more restrictive in
order to sell the loan.
If private investors are starting to return to
the marketplace, competition will start to work
in the borrower's favor. If one investor will
be able to purchase loans and be profitable with
some element of relaxed underwriting standards,
others will enter the market to compete for that
business. From that we will either see lower
rates and fees or more aggressive underwriting,
both of which would be good for borrowers.
Although these two scenarios are not conclusive
proof that the pendulum is swinging away from
conservative underwriting standards, it does
give us some hope that some sense of reasonable-
ness will start returning to loan approvals.
If you have a situation that you need a solution
to, please contact me. There is a better chance
now that we may be able to find a lender to
consider your request.
updates on how stringent the underwriting process
has been.
The lenders have been squeezing the approvals
really tight, making sure that all the paperwork
is thorough and complete, and that there are
virtually no unanswered questions in their file.
They want to make sure that their decision will
not be questioned or criticized by anyone who
reviews their work, or by an investor who may
purchase the loan.
This has created an environment of low risk
tolerance. When in doubt, they are more inclined
to ask for more paperwork, or just to say no to
the request. It is the safest thing for them to do,
even though they may be turning down loans
that traditionally present reasonable risk.
There have some recent transactions that have
given us some hope that there may be a little
bit of thawing in the hardline responses that we
have been getting.
Not all of our lenders have been giving us the
same interpretation of standard FNMA and
FHLMC underwriting guidelines. This is a good
thing, because if we got the same answer from
all of our lenders all the time, we would not have
choices as to how to solve your problems.
Some of the areas that we are seeing some
loosening of guideline interpretations include:
A. Borrowers who own more than 4 financed
properties. The strict FNMA/FHLMC guide-
line is that they won't purchase loans if the
borrower is above this limit. Therefore, the
lenders won't create these loans if they can't
sell them to the agencies.
But we have found several lenders will exceed
this limit, and be willing to lend to borrowers
who have as many as 10 financed properties.
What this implies is that there has been an
expansion of investors into the mortgage-
backed security (MBS) market after the Federal
Reserve began backing away from the MBS
market at the end of March.
This return of private investors (non-govern-
mental) into the market is a big plus for all of
us. It introduces more liquidity into the market
for lenders to create loans and sell them. It
also introduces more alternatives to the lending
guidelines for us to place loans for our borrowers.
B. We are also seeing that some of the adjustable
rate loans being created are being a little more
liberal in their underwriting guidelines. Many
times these loans are underwritten for the lender's
portfolio without having specific investors to sell
them to. The lenders are more likely to keep these
loans because they know that the interest rates
will rise when interest rates in general go up again.
Because the lender only has their own internal
risk tolerance to meet, they are more inclined to
make reasonable assessments for borrower's
qualifications. They do not have to meet another
lending criteria that may be more restrictive in
order to sell the loan.
If private investors are starting to return to
the marketplace, competition will start to work
in the borrower's favor. If one investor will
be able to purchase loans and be profitable with
some element of relaxed underwriting standards,
others will enter the market to compete for that
business. From that we will either see lower
rates and fees or more aggressive underwriting,
both of which would be good for borrowers.
Although these two scenarios are not conclusive
proof that the pendulum is swinging away from
conservative underwriting standards, it does
give us some hope that some sense of reasonable-
ness will start returning to loan approvals.
If you have a situation that you need a solution
to, please contact me. There is a better chance
now that we may be able to find a lender to
consider your request.
Wednesday, June 2, 2010
Consumer Protection = Consumer Injury ?
The Mortgage Disclosure Improvment Act (MDIA)
that went into effect in July, 2009 was intended to
give consumers protection against new mortgage
terms being disclosed just prior to the closing of the
transaction.
The intent is good. There had been too many "bait
and switch" strategies perpetrated on borrowers by
unscrupulous mortgage originators.
Originators would encourage a loan application for
terms that were often too good to be true. The
borrowers would invest time, money, and faith into
the promise they were given. Just prior to the closing,
the bad guys would deliver the real terms to the
borrower in the form of loan documents.
The borrower, justifiably upset, disappointed and
feeling victimized, had a choice. They could either
swallow hard and accept the onerous terms or they
could cancel the loan, try to pursue another lender,
but risk losing the home because they couldn't
close within the escrow period.
Many borrowers chose to close the transaction, but
were not happy with the choice they were presented.
As part of the financial reforms instituted after the
mortgage meltdown, the MDIA prohibited quick
closings after new terms were presented that
differed very much from the initial Truth-In-
Lending (TIL) disclosures that the borrower received
at loan application.
The MDIA stipulated that before a borrower can
be charged any fees other than for a credit report,
they have to receive their inital Good Faith Estimate
(GFE) and TIL. Only after acknowledging receipt
of these disclosures, or after 3 business day from
them being sent, can a borrower be charged fees
for expenses such as the appraisal.
This allows a borrower to get a good sense of the
terms before committing funds to that particular
loan proposal.
Another part of MDIA is that an escrow cannot
close until 7 days after the GFE and TIL are pro-
vided to the borrower. Although it was unlikely
that escrow companies, lenders and title companies
could pull things together this quickly very often,
it no longer is a possibility.
Where the consumer protection intentions of the
MDIA fall short is with this next provision:
If new terms are proposed that vary more than
.125% from the Annual Percentage Rate (APR)
of the initial TIL, the borrower cannot close
earlier than three business days after receiving
the new disclosure.
This requirement is in effect whether the new
APR is higher or lower than the initial TIL.
So, a borrower cannot proceed without waiting
even if the terms are more beneficial for them.
Prior to the MDIA, we could still work to get
the borrower lower interest rates or fees very
close to the settlement date, get documents
drawn and signed, and fund the loan. With
everyone pulling together, this could all have
happened in a couple of days.
Now borrowers are being put into a position
of accepting terms that are higher so that a
change does not trigger the mandatory waiting
period and risk their settlement date, or work
toward more favorable loan terms and hope that
their seller will allow the escrow to be extended
and close after the contract date.
It is almost the opposite of the situation that
the MDIA was trying to prevent. To save
borrowers from facing higher rates and fees
being presented at the last minute and forced
to accept them or lose the home, now they may
be faced with accepting higher rates and fees
that were presented to them at inception and
forced to accept them or lose the home.
With the establishment of rigid rules, the
consumer may not be having the best opportunity
to receive the best terms possible.
that went into effect in July, 2009 was intended to
give consumers protection against new mortgage
terms being disclosed just prior to the closing of the
transaction.
The intent is good. There had been too many "bait
and switch" strategies perpetrated on borrowers by
unscrupulous mortgage originators.
Originators would encourage a loan application for
terms that were often too good to be true. The
borrowers would invest time, money, and faith into
the promise they were given. Just prior to the closing,
the bad guys would deliver the real terms to the
borrower in the form of loan documents.
The borrower, justifiably upset, disappointed and
feeling victimized, had a choice. They could either
swallow hard and accept the onerous terms or they
could cancel the loan, try to pursue another lender,
but risk losing the home because they couldn't
close within the escrow period.
Many borrowers chose to close the transaction, but
were not happy with the choice they were presented.
As part of the financial reforms instituted after the
mortgage meltdown, the MDIA prohibited quick
closings after new terms were presented that
differed very much from the initial Truth-In-
Lending (TIL) disclosures that the borrower received
at loan application.
The MDIA stipulated that before a borrower can
be charged any fees other than for a credit report,
they have to receive their inital Good Faith Estimate
(GFE) and TIL. Only after acknowledging receipt
of these disclosures, or after 3 business day from
them being sent, can a borrower be charged fees
for expenses such as the appraisal.
This allows a borrower to get a good sense of the
terms before committing funds to that particular
loan proposal.
Another part of MDIA is that an escrow cannot
close until 7 days after the GFE and TIL are pro-
vided to the borrower. Although it was unlikely
that escrow companies, lenders and title companies
could pull things together this quickly very often,
it no longer is a possibility.
Where the consumer protection intentions of the
MDIA fall short is with this next provision:
If new terms are proposed that vary more than
.125% from the Annual Percentage Rate (APR)
of the initial TIL, the borrower cannot close
earlier than three business days after receiving
the new disclosure.
This requirement is in effect whether the new
APR is higher or lower than the initial TIL.
So, a borrower cannot proceed without waiting
even if the terms are more beneficial for them.
Prior to the MDIA, we could still work to get
the borrower lower interest rates or fees very
close to the settlement date, get documents
drawn and signed, and fund the loan. With
everyone pulling together, this could all have
happened in a couple of days.
Now borrowers are being put into a position
of accepting terms that are higher so that a
change does not trigger the mandatory waiting
period and risk their settlement date, or work
toward more favorable loan terms and hope that
their seller will allow the escrow to be extended
and close after the contract date.
It is almost the opposite of the situation that
the MDIA was trying to prevent. To save
borrowers from facing higher rates and fees
being presented at the last minute and forced
to accept them or lose the home, now they may
be faced with accepting higher rates and fees
that were presented to them at inception and
forced to accept them or lose the home.
With the establishment of rigid rules, the
consumer may not be having the best opportunity
to receive the best terms possible.
Wednesday, May 19, 2010
Can You Stop Yourself?
This is a reprint of an article by Kenneth Harney
of the Washington Post, a syndicated columnist
who often writes about real estate and financing
issues.
If you're thinking about applying for a home mort-
gage later this spring, here's some important news:
Beginning June 1, your lender is likely to order a
second full credit screening immediately before
closing.
The last-minute credit report will be designed to
find out whether you've obtained -- or even
shopped for -- new debt between the date of your
loan application and the closing. If you've made
applications for credit of any type -- for furnish-
ings and appliances for the new house, a car,
landscaping, home equity line, new credit card,
you name it -- the closing could be put on hold
pending additional research by the lender.
If you've actually taken out new loans that are
sizable enough to affect the debt-to-income
ratio calculations used in your original mortgage
approval, the whole deal could fall through. The
added debt load could render you ineligible for
the mortgage because you suddenly appear
unable to handle the payments without a strain
on your household budget.
The June 1 changes are part of a new effort by
mortgage giant Fannie Mae to cut down on
slipshod underwriting by lenders and frauds by
borrowers. Fannie's so-called "loan quality
initiative" will require lenders not only to pull
two credit reports for each mortgage transaction
but to perform additional verifications of borrower
occupancy plans for the property, Social Security
numbers and Individual Taxpayer Identification
Numbers, among other changes.
"There's an almost irresistible urge" for many
mortgage borrowers, said Don Unger, CEO of
Advantage Credit Inc. of Evergreen, Colo. "The
lender says, 'OK, you're approved for the loan,'
and you immediately think about shopping for
all the things you need for the house. You go to
Home Depot" or other major retailers "and you
put in an application."
In the past, that might not have raised an eyebrow
-- or even been detected. But under the new double-
check policy, when the Home Depot application shows
up as a "hard" or borrowerinitiated inquiry on a credit
report, said Unger, the lender "is going to have to
contact" the merchant and determine whether credit
was extended, in what amount, and how this might
affect the applicant's home financing transaction.
Marc Savitt, president of the National Association of
Independent Housing Professionals and a mortgage
broker in Martinsburg, W.Va., said it's not an uncom-
mon scenario. "Most often the new debt involves
furniture or other goods for the house," said Savitt.
"However, we have seen debt for new cars and other
major purchases."
Terry Clemans, executive director of the National
Credit Reporting Association, recalls one case where
homebuyers "went out and gorged on $40,000 worth
of new furniture and all types of stuff" following their
loan approval -- involving monthly payments far
beyond what they could possibly afford. Under the
new policy, they'd likely be shot down before closing.
Fannie Mae spokesperson Janis Smith said that lenders
"will have to look for things like new credit accounts,
increased credit lines, increased balances on existing
accounts, undisclosed or newly recorded liens, second
mortgages -- anything that may have changed since
initial application that might impact a borrower's debt-
to-income ratio."
As a practical matter, some lenders are likely to ask
their credit reporting vendors to perform the actual
investigations when new debts or inquiries pop up
on borrowers' files. Fannie Mae's instructions say that
"lenders must determine that all debts of the borrower
incurred or closed up to and concurrent with the
closing" are considered in the final loan analysis.
Unger, however, said all this may not be as straight-
forward as it sounds. For example, if the credit report
is pulled immediately before closing to comply with
the "up to and concurrent" requirement, there may
not be sufficient time to check out inquiries -- especi-
ally those where no actual drawdown of debt has been
reported to the national credit bureaus. He also
questioned whether entire loan packages might need
to be re-underwritten -- a timeconsuming process --
based on credit data discovered at the 11th hour.
In that event, poof goes your closing.
How should homebuyers and refinancers prepare
for the new credit check procedures?
Lenders and credit reporting company executives
say everybody needs to follow just one basic rule:
Abstinence. Between your application for a mortgage
and the date of closing -- which might be a span of
45 days to 60 days or more -- resist the irresistible.
Don't apply for new credit unless you discuss it in
advance with your lender and you get a green light.
of the Washington Post, a syndicated columnist
who often writes about real estate and financing
issues.
If you're thinking about applying for a home mort-
gage later this spring, here's some important news:
Beginning June 1, your lender is likely to order a
second full credit screening immediately before
closing.
The last-minute credit report will be designed to
find out whether you've obtained -- or even
shopped for -- new debt between the date of your
loan application and the closing. If you've made
applications for credit of any type -- for furnish-
ings and appliances for the new house, a car,
landscaping, home equity line, new credit card,
you name it -- the closing could be put on hold
pending additional research by the lender.
If you've actually taken out new loans that are
sizable enough to affect the debt-to-income
ratio calculations used in your original mortgage
approval, the whole deal could fall through. The
added debt load could render you ineligible for
the mortgage because you suddenly appear
unable to handle the payments without a strain
on your household budget.
The June 1 changes are part of a new effort by
mortgage giant Fannie Mae to cut down on
slipshod underwriting by lenders and frauds by
borrowers. Fannie's so-called "loan quality
initiative" will require lenders not only to pull
two credit reports for each mortgage transaction
but to perform additional verifications of borrower
occupancy plans for the property, Social Security
numbers and Individual Taxpayer Identification
Numbers, among other changes.
"There's an almost irresistible urge" for many
mortgage borrowers, said Don Unger, CEO of
Advantage Credit Inc. of Evergreen, Colo. "The
lender says, 'OK, you're approved for the loan,'
and you immediately think about shopping for
all the things you need for the house. You go to
Home Depot" or other major retailers "and you
put in an application."
In the past, that might not have raised an eyebrow
-- or even been detected. But under the new double-
check policy, when the Home Depot application shows
up as a "hard" or borrowerinitiated inquiry on a credit
report, said Unger, the lender "is going to have to
contact" the merchant and determine whether credit
was extended, in what amount, and how this might
affect the applicant's home financing transaction.
Marc Savitt, president of the National Association of
Independent Housing Professionals and a mortgage
broker in Martinsburg, W.Va., said it's not an uncom-
mon scenario. "Most often the new debt involves
furniture or other goods for the house," said Savitt.
"However, we have seen debt for new cars and other
major purchases."
Terry Clemans, executive director of the National
Credit Reporting Association, recalls one case where
homebuyers "went out and gorged on $40,000 worth
of new furniture and all types of stuff" following their
loan approval -- involving monthly payments far
beyond what they could possibly afford. Under the
new policy, they'd likely be shot down before closing.
Fannie Mae spokesperson Janis Smith said that lenders
"will have to look for things like new credit accounts,
increased credit lines, increased balances on existing
accounts, undisclosed or newly recorded liens, second
mortgages -- anything that may have changed since
initial application that might impact a borrower's debt-
to-income ratio."
As a practical matter, some lenders are likely to ask
their credit reporting vendors to perform the actual
investigations when new debts or inquiries pop up
on borrowers' files. Fannie Mae's instructions say that
"lenders must determine that all debts of the borrower
incurred or closed up to and concurrent with the
closing" are considered in the final loan analysis.
Unger, however, said all this may not be as straight-
forward as it sounds. For example, if the credit report
is pulled immediately before closing to comply with
the "up to and concurrent" requirement, there may
not be sufficient time to check out inquiries -- especi-
ally those where no actual drawdown of debt has been
reported to the national credit bureaus. He also
questioned whether entire loan packages might need
to be re-underwritten -- a timeconsuming process --
based on credit data discovered at the 11th hour.
In that event, poof goes your closing.
How should homebuyers and refinancers prepare
for the new credit check procedures?
Lenders and credit reporting company executives
say everybody needs to follow just one basic rule:
Abstinence. Between your application for a mortgage
and the date of closing -- which might be a span of
45 days to 60 days or more -- resist the irresistible.
Don't apply for new credit unless you discuss it in
advance with your lender and you get a green light.
Wednesday, April 21, 2010
The Paper Chase
Years ago, there was a lot of buzz about the future
of mortgage lending, and how we were going to see
the day when we would be doing paperless loan
files.
Ha!
Even when the loans were being created with
very little documentation, paper files still existed
but they were very skinny.
Now that the emphasis is on creating loans using
what we call full documentation, the files are huge.
We have to be careful in the office that the forklifts
moving files around don't bump into each other!
The files now need to document everything. This is
a list of the typical paperwork required by lenders.
Full Federal tax returns for at least two years.
If you have a corporation, two full years of the
Federal returns as well.
Bank statements for 3 months that include all
numbered pages (even if the pages are blank!)
Copies of drivers licenses, passports or social
security cards.
Retirement statements (don't forget all the
numbered pages).
Complete divorce settlement agreements.
Trust documents.
Proof that the earnest money check has cleared.
Paystubs for the last 30 days and W-2 forms
for the last two years.
In addition to the paperwork that the borrower
needs to provide, the disclosure requirements
are also paper-intensive:
The Good Faith Estimate that is required within
3 days of application for a particular property
used to be 1 page. Now it is 4 pages.
The Truth-In-Lending statement is still 2 pages,
also due within 3 days of application.
Now we have a form that the borrower needs to
sign acknowledging that they received the forms
and want to continue with the loan request.
If there are any significant changes to loan amount,
loan program, appraised value, or the terms moving
from float status to lock status, we need to send all
these disclosures again for each change to provide
up-to-date information to the borrower. This is
another 7-10 pages of paperwork for each updated
disclosure.
When the lender gets your loan file, guess what?
They have to issue similar disclosures from within
3 days from when they received the file. If they
make any significant changes, they have to issue
revised disclosures also.
The 5 page loan application form and preliminary
authorizations and representations total another
16 pages. These allow us to order the credit, inform
the client that they deserve a copy of the appraisal,
tell them who is responsible for dealing with fair
lending issues, etc.
Then we get to the offer to purchase which has
ballooned to about 20 pages with all of the real
estate contract provisions.
Escrow instructions and the preliminary title report
are also received and help pad the file.
In short, it has become an incredibly paper-intensive
proposition. And on top of that, much of the process
has become serial in nature. The file needs to go
through a step before it can move to the next step,
and so on.
With the increased scrutiny of every piece of paper,
it is taking a lot of time to get a loan through the
system. It is frustrating, because the underwriters
have become like CSI investigators, chasing down
every discrepancy until we can document it to their
satisfaction. And they are not easily satisfied.
The message I would like to leave you with is this:
Be prepared to produce a lot of paperwork to help
us prove your qualifications to the underwriter.
Be prepared to document and loose ends that are
part of our presentation to the lender.
Don't expect that things will move through quickly.
The underwriters are being judged on the quality
of their files, and for them that means that it is
thoroughly documented and that there is no oppor-
tunity for anyone to criticize their decision or the
paperwork that supports it. "Good enough" is not
a standard that they will accept.
I do my best to help you understand what to expect
and to quote time frames that are as accurate and
achievable as possible. Even then, I still get surprised
from time to time with the requests that the under-
writers make to feel comfortable with the file. But,
I will always try to communicate what is going on,
even though I can't control all elements of the process.
of mortgage lending, and how we were going to see
the day when we would be doing paperless loan
files.
Ha!
Even when the loans were being created with
very little documentation, paper files still existed
but they were very skinny.
Now that the emphasis is on creating loans using
what we call full documentation, the files are huge.
We have to be careful in the office that the forklifts
moving files around don't bump into each other!
The files now need to document everything. This is
a list of the typical paperwork required by lenders.
Full Federal tax returns for at least two years.
If you have a corporation, two full years of the
Federal returns as well.
Bank statements for 3 months that include all
numbered pages (even if the pages are blank!)
Copies of drivers licenses, passports or social
security cards.
Retirement statements (don't forget all the
numbered pages).
Complete divorce settlement agreements.
Trust documents.
Proof that the earnest money check has cleared.
Paystubs for the last 30 days and W-2 forms
for the last two years.
In addition to the paperwork that the borrower
needs to provide, the disclosure requirements
are also paper-intensive:
The Good Faith Estimate that is required within
3 days of application for a particular property
used to be 1 page. Now it is 4 pages.
The Truth-In-Lending statement is still 2 pages,
also due within 3 days of application.
Now we have a form that the borrower needs to
sign acknowledging that they received the forms
and want to continue with the loan request.
If there are any significant changes to loan amount,
loan program, appraised value, or the terms moving
from float status to lock status, we need to send all
these disclosures again for each change to provide
up-to-date information to the borrower. This is
another 7-10 pages of paperwork for each updated
disclosure.
When the lender gets your loan file, guess what?
They have to issue similar disclosures from within
3 days from when they received the file. If they
make any significant changes, they have to issue
revised disclosures also.
The 5 page loan application form and preliminary
authorizations and representations total another
16 pages. These allow us to order the credit, inform
the client that they deserve a copy of the appraisal,
tell them who is responsible for dealing with fair
lending issues, etc.
Then we get to the offer to purchase which has
ballooned to about 20 pages with all of the real
estate contract provisions.
Escrow instructions and the preliminary title report
are also received and help pad the file.
In short, it has become an incredibly paper-intensive
proposition. And on top of that, much of the process
has become serial in nature. The file needs to go
through a step before it can move to the next step,
and so on.
With the increased scrutiny of every piece of paper,
it is taking a lot of time to get a loan through the
system. It is frustrating, because the underwriters
have become like CSI investigators, chasing down
every discrepancy until we can document it to their
satisfaction. And they are not easily satisfied.
The message I would like to leave you with is this:
Be prepared to produce a lot of paperwork to help
us prove your qualifications to the underwriter.
Be prepared to document and loose ends that are
part of our presentation to the lender.
Don't expect that things will move through quickly.
The underwriters are being judged on the quality
of their files, and for them that means that it is
thoroughly documented and that there is no oppor-
tunity for anyone to criticize their decision or the
paperwork that supports it. "Good enough" is not
a standard that they will accept.
I do my best to help you understand what to expect
and to quote time frames that are as accurate and
achievable as possible. Even then, I still get surprised
from time to time with the requests that the under-
writers make to feel comfortable with the file. But,
I will always try to communicate what is going on,
even though I can't control all elements of the process.
Wednesday, April 7, 2010
The 17-Day Test
In California, the standard real estate purchase
contract includes a paragraph that deals with the
buyer's requirement to remove their financing
contingency.
For the most part, the agents, seller, and buyer
are eager to get the transaction moving forward
and to feel comfortable that the transaction will
be successful.
As such, most of the purchase contracts that I
see accept the standard verbiage that calls for
the buyer to remove their financing contingency
within 17 days of acceptance of the contract.
This is 17 calendar days, and the intent is that
the buyer feels comfortable at this point to put
their deposit money at risk to be released to the
seller because they will no longer invoke the
claim that they cannot obtain financing to complete
the purchase.
In advising my borrowers, I don't feel that they
should put their money at risk until they have
written approval from the lender, with any
conditions clearly spelled out, and that the
appraisal has been completed and reviewed by
the lender.
The big problem is that in that 17 day period, we
are going to lose from 4-6 days for weekends and
maybe more if we have any holidays that are to
be observed.
This leaves us 10-13 working days to get the
application, all disclosures issued/reviewed/
returned, put together a complete credit package,
get the appraisal performed, submit the file to the
lender and have it go through the underwriting
process.
In the past, this was difficult but achievable. The
disclosure requirements and underwriting standards
were significantly less stringent at that time. This
is not to say that the way mortgages were done then
is better than now. Only that it was easier to move
a file through the system then.
In today's world, it takes longer than the 17 days to
provide some certainty to my borrower so that they
feel secure in removing their financing contingency.
It is still a worthy goal, but a sense of reality and
cooperation needs to be present so that expectations
are reasonable and that the transaction is not threat-
ened by missing a date that is called for in the contract.
All parties need to understand that things have
changed. As much as I would like the process to be
as fluid and loose as it once was, it is no longer the
case.
We, as lenders, are now required to provide more
stringent disclosures. Once the borrower receives
them, we have to wait 3 business days before pre-
suming that they find the proposed terms acceptable.
At that point, we can request payment for the
appraisal, and get it ordered. Once the loan is
locked, we have to provide new disclosures, and
the borrower has a new 3 days to review and
accept those terms. During the process, if there
are any changes that change the annual percentage
rate on the loan request by more than 1/8%, we
have to issue another new disclosure. The borrower
has another 3 days to find these terms acceptable.
You can see how the time line can get stretched out.
Of course, if the borrower finds all the disclosures
acceptable and return their acknowledgements
promptly, we don't have to wait the full three days
for all of these events.
But once the lender gets the submission package,
they are not glancing at it and rubber stamping
an approval. They are going through everything
with the proverbial fine-toothed comb.
The lenders want to make "perfect" loans. And
that means that all the paperwork has to be very
thorough. If a form is missing a signature, they
will want it corrected. If a figure in one part of the
file is inconsistent with another part of the file, it
will have to be reconciled and corrected. If escrow
information differs from title information, which may
differ from information in the borrower's file, it will
have to be corrected.
All of this is intended to inform you that you need
to be prepared for a more onerous process than
what you may be used to.
We can continue to have a goal of getting what the
borrower needs finished by the 17-day deadline.
But, if it does not happen, it does not mean that it
is necessarily anyone's fault, or that someone
"dropped the ball", or that someone is inattentive.
It merely means that there may just be too much
to be done in that time frame, and that all parties
can still work together to let the sellers and buyers
feel comfortable that their transaction has a good
chance for success.
contract includes a paragraph that deals with the
buyer's requirement to remove their financing
contingency.
For the most part, the agents, seller, and buyer
are eager to get the transaction moving forward
and to feel comfortable that the transaction will
be successful.
As such, most of the purchase contracts that I
see accept the standard verbiage that calls for
the buyer to remove their financing contingency
within 17 days of acceptance of the contract.
This is 17 calendar days, and the intent is that
the buyer feels comfortable at this point to put
their deposit money at risk to be released to the
seller because they will no longer invoke the
claim that they cannot obtain financing to complete
the purchase.
In advising my borrowers, I don't feel that they
should put their money at risk until they have
written approval from the lender, with any
conditions clearly spelled out, and that the
appraisal has been completed and reviewed by
the lender.
The big problem is that in that 17 day period, we
are going to lose from 4-6 days for weekends and
maybe more if we have any holidays that are to
be observed.
This leaves us 10-13 working days to get the
application, all disclosures issued/reviewed/
returned, put together a complete credit package,
get the appraisal performed, submit the file to the
lender and have it go through the underwriting
process.
In the past, this was difficult but achievable. The
disclosure requirements and underwriting standards
were significantly less stringent at that time. This
is not to say that the way mortgages were done then
is better than now. Only that it was easier to move
a file through the system then.
In today's world, it takes longer than the 17 days to
provide some certainty to my borrower so that they
feel secure in removing their financing contingency.
It is still a worthy goal, but a sense of reality and
cooperation needs to be present so that expectations
are reasonable and that the transaction is not threat-
ened by missing a date that is called for in the contract.
All parties need to understand that things have
changed. As much as I would like the process to be
as fluid and loose as it once was, it is no longer the
case.
We, as lenders, are now required to provide more
stringent disclosures. Once the borrower receives
them, we have to wait 3 business days before pre-
suming that they find the proposed terms acceptable.
At that point, we can request payment for the
appraisal, and get it ordered. Once the loan is
locked, we have to provide new disclosures, and
the borrower has a new 3 days to review and
accept those terms. During the process, if there
are any changes that change the annual percentage
rate on the loan request by more than 1/8%, we
have to issue another new disclosure. The borrower
has another 3 days to find these terms acceptable.
You can see how the time line can get stretched out.
Of course, if the borrower finds all the disclosures
acceptable and return their acknowledgements
promptly, we don't have to wait the full three days
for all of these events.
But once the lender gets the submission package,
they are not glancing at it and rubber stamping
an approval. They are going through everything
with the proverbial fine-toothed comb.
The lenders want to make "perfect" loans. And
that means that all the paperwork has to be very
thorough. If a form is missing a signature, they
will want it corrected. If a figure in one part of the
file is inconsistent with another part of the file, it
will have to be reconciled and corrected. If escrow
information differs from title information, which may
differ from information in the borrower's file, it will
have to be corrected.
All of this is intended to inform you that you need
to be prepared for a more onerous process than
what you may be used to.
We can continue to have a goal of getting what the
borrower needs finished by the 17-day deadline.
But, if it does not happen, it does not mean that it
is necessarily anyone's fault, or that someone
"dropped the ball", or that someone is inattentive.
It merely means that there may just be too much
to be done in that time frame, and that all parties
can still work together to let the sellers and buyers
feel comfortable that their transaction has a good
chance for success.
Wednesday, March 24, 2010
The Big Short by Michael Lewis
I just finished reading The Big Short, Inside the
Doomsday Machine, by Michael Lewis. It's an
intriguing story about how the whole subprime
mortgage crisis developed, and who some of the
players were who actually could see ahead to
the ugly crash.
Michael Lewis is also the author of The Blind Side,
on which the movie that earned Sandra Bullock
an Academy Award is based. He does a great job
of involving you with the major players and telling
the story through them.
The Big Short refers to a position in the stock
market where investors bet against the success
of a company, or a segment of the market and
in this case the investors bet against the success
of subprime mortgage bonds.
While the mortgage industry was behaving as
if property values would always go up, and that
borrowers could always refinance their loans
when they became intolerable, Lewis shows us
some of the people who were on the other side
of that bet.
Lewis is able to take some technical and arcane
information and explain it in terms that anyone
with an interest can decipher.
He takes the reader through some of the basics
of the subprime lending world, where loan orig-
inators marketed the loans to the consumers.
These loans in turn were taken by the lender
and put into subprime mortgage bonds and sold
to investors through Wall Street.
The bond traders on Wall Street then "sliced and
diced" these mortgage bonds into layers called
tranches, and rating agencies like Moody's and
Standard and Poors were supposed to use their
analytical prowess to properly assess the risk and
grade them accordingly.
The Wall Street firms then created new investment
instruments called Collateralized Debt Obligations
(CDO's), which gave them further opportunities to
sell positions in the same underlying bonds and
actual mortages. Some of these Wall Street firms
included Lehman Bros., Bear Stearns, Merrill
Lynch, Goldman Sachs, Deutsche Bank and
Morgan Stanley.
The investors who were betting against the success
of the subprime bonds, who wanted to be short in
the market, needed a way to make this work. They
needed a way to insure their position and were able
to buy Credit Default Swaps (CDS's) to do so. AIG
was the major player who provided this insurance.
I'm sure that I do not have a comprehensive under-
standing of how all of these pieces fit together. But
it finally became clear to me how it all started to
unfold.
The Greenspan era with the Federal Reserve was
notorious for providing a lot of liquidity at very
attractive terms. It provided the fuel and the
insatiable appetite for the subprime binge.
This incredible supply of liquidity meant that the
Wall Street firms needed to find a market that
could put that money to work. Mortgage-backed
securities (MBS's) traditionally filled some of that
market, because they were usually filled by first
trust deeds that conformed to well-understood
and conservative underwriting standards.
But these types of loans could not longer satisfy
the investment beast. It wanted to be fed, and
instead of holding firm to MBS product that
were filled with conservative first trust deeds,
it was willing to accept, at first, wilder versions
of first trust deeds. These became known in
the market as Alt-A loans, and they usually
commanded a slightly higher rate to compensate
for the risk.
Once the standards started slipping, it wasn't
incredibly long before investors were willing
to accept MBS product that were filled with
interest-only first loans, or stated-income and
no-doc loans, or negative amortization loans,
or stated-income and no-doc negative amort-
ization loans. Investors also rationalized that
the loans with teaser rates for the first two
years and then adjust to a higher rate would
be a good thing too.
And since these still didn't satisfy the demand,
investors were willing to buy MBS product
that included second loans. These second loans
could be fixed-rate or HELOCs (home equity
line of credit loans). A prudent investor may
want to limit their exposure to 80% of value,
but since property values were always going to
go up (right?), they thought: let's create second
loans that go all the way to 100% of the value,
let's do them on a no-doc basis, and to make
things easier, let the interest accumulate on
these without requiring payments.
The rating agencies did not do a good job at all
of assessing the risk in these MBS pools. Investors
were duped into thinking that they were buying
AAA rated bonds when in fact they were buying
into something of substantially higher risk of BBB
quality.
Inside the Wall Street firms, there may have been
only a handful of people that truly understood
what was being created, marketed and sold. Also,
there was a very limited understanding of how
highly leveraged this business had become. There
was one trader at Morgan Stanley that had
accumulated $16 billion of subprime positions
that were poised to go to zero when the eventual
crash came. As Lewis tells it, management at
Morgan Stanley had no clue as to the financial
risk that the company was in because of this one
trader.
We all know that the crash came. And with it
came the demise of Bear Stearns, Lehman Brothers,
and Merrill Lynch's absorption by Bank of America.
AIG received a massive bailout from the Federal
Reserve to stay solvent. Morgan Stanley and Gold-
man Sachs were tanking also, and the government
stepped in to prevent a total collapse.
Amazingly, almost everyone who was integral in
this house of cards was paid handsomely through
the process. People were richly rewarded for doing
the wrong things. And no one really cared who
was going to end up the big loser as long as they
got their piece of the action along the way.
If you want to see the process from the inside,
and maybe answer some questions for yourself
as to how we got into this mess, I highly recommend
reading The Big Short.
Doomsday Machine, by Michael Lewis. It's an
intriguing story about how the whole subprime
mortgage crisis developed, and who some of the
players were who actually could see ahead to
the ugly crash.
Michael Lewis is also the author of The Blind Side,
on which the movie that earned Sandra Bullock
an Academy Award is based. He does a great job
of involving you with the major players and telling
the story through them.
The Big Short refers to a position in the stock
market where investors bet against the success
of a company, or a segment of the market and
in this case the investors bet against the success
of subprime mortgage bonds.
While the mortgage industry was behaving as
if property values would always go up, and that
borrowers could always refinance their loans
when they became intolerable, Lewis shows us
some of the people who were on the other side
of that bet.
Lewis is able to take some technical and arcane
information and explain it in terms that anyone
with an interest can decipher.
He takes the reader through some of the basics
of the subprime lending world, where loan orig-
inators marketed the loans to the consumers.
These loans in turn were taken by the lender
and put into subprime mortgage bonds and sold
to investors through Wall Street.
The bond traders on Wall Street then "sliced and
diced" these mortgage bonds into layers called
tranches, and rating agencies like Moody's and
Standard and Poors were supposed to use their
analytical prowess to properly assess the risk and
grade them accordingly.
The Wall Street firms then created new investment
instruments called Collateralized Debt Obligations
(CDO's), which gave them further opportunities to
sell positions in the same underlying bonds and
actual mortages. Some of these Wall Street firms
included Lehman Bros., Bear Stearns, Merrill
Lynch, Goldman Sachs, Deutsche Bank and
Morgan Stanley.
The investors who were betting against the success
of the subprime bonds, who wanted to be short in
the market, needed a way to make this work. They
needed a way to insure their position and were able
to buy Credit Default Swaps (CDS's) to do so. AIG
was the major player who provided this insurance.
I'm sure that I do not have a comprehensive under-
standing of how all of these pieces fit together. But
it finally became clear to me how it all started to
unfold.
The Greenspan era with the Federal Reserve was
notorious for providing a lot of liquidity at very
attractive terms. It provided the fuel and the
insatiable appetite for the subprime binge.
This incredible supply of liquidity meant that the
Wall Street firms needed to find a market that
could put that money to work. Mortgage-backed
securities (MBS's) traditionally filled some of that
market, because they were usually filled by first
trust deeds that conformed to well-understood
and conservative underwriting standards.
But these types of loans could not longer satisfy
the investment beast. It wanted to be fed, and
instead of holding firm to MBS product that
were filled with conservative first trust deeds,
it was willing to accept, at first, wilder versions
of first trust deeds. These became known in
the market as Alt-A loans, and they usually
commanded a slightly higher rate to compensate
for the risk.
Once the standards started slipping, it wasn't
incredibly long before investors were willing
to accept MBS product that were filled with
interest-only first loans, or stated-income and
no-doc loans, or negative amortization loans,
or stated-income and no-doc negative amort-
ization loans. Investors also rationalized that
the loans with teaser rates for the first two
years and then adjust to a higher rate would
be a good thing too.
And since these still didn't satisfy the demand,
investors were willing to buy MBS product
that included second loans. These second loans
could be fixed-rate or HELOCs (home equity
line of credit loans). A prudent investor may
want to limit their exposure to 80% of value,
but since property values were always going to
go up (right?), they thought: let's create second
loans that go all the way to 100% of the value,
let's do them on a no-doc basis, and to make
things easier, let the interest accumulate on
these without requiring payments.
The rating agencies did not do a good job at all
of assessing the risk in these MBS pools. Investors
were duped into thinking that they were buying
AAA rated bonds when in fact they were buying
into something of substantially higher risk of BBB
quality.
Inside the Wall Street firms, there may have been
only a handful of people that truly understood
what was being created, marketed and sold. Also,
there was a very limited understanding of how
highly leveraged this business had become. There
was one trader at Morgan Stanley that had
accumulated $16 billion of subprime positions
that were poised to go to zero when the eventual
crash came. As Lewis tells it, management at
Morgan Stanley had no clue as to the financial
risk that the company was in because of this one
trader.
We all know that the crash came. And with it
came the demise of Bear Stearns, Lehman Brothers,
and Merrill Lynch's absorption by Bank of America.
AIG received a massive bailout from the Federal
Reserve to stay solvent. Morgan Stanley and Gold-
man Sachs were tanking also, and the government
stepped in to prevent a total collapse.
Amazingly, almost everyone who was integral in
this house of cards was paid handsomely through
the process. People were richly rewarded for doing
the wrong things. And no one really cared who
was going to end up the big loser as long as they
got their piece of the action along the way.
If you want to see the process from the inside,
and maybe answer some questions for yourself
as to how we got into this mess, I highly recommend
reading The Big Short.
Wednesday, March 10, 2010
The Power of the Prequal
You've found a house that you want to buy.
You've checked other homes, you are confident
in the purchase price.
You are ready to write the offer with your real
estate agent.
The last time you needed a home loan, you
had little difficulty getting qualified and things
went smoothly.
All systems GO!
Hit the brakes, turbo! Things have changed
and the financing may not be as easy as it was
the last time.
All professional real estate agents want you
to go through the process of applying for a loan
and getting prequalified for the likely financing
you will need.
It makes every part of the process smoother.
You have an excellent idea of the proper price
range to be looking.
You have an idea of any obstacles that you may
be facing in this new lending environment.
The agent doesn't waste time and resources
showing you properties that are out of your
price range.
You don't fall in love with a home that you can't
afford.
The escrow period is significantly shortened if
we work together to get your paperwork in
order as you are looking at homes, rather than
starting from scratch from day one of the
escrow period.
When your offer is presented, it is strengthened
by an accompany letter from a reputable lending
source (me!) that you have done your homework and
that you are prequalified for the financing.
Admittedly, there are many borrowers who find
out that they are not quite prepared to buy at
the time they want.
But finding that out before they spend hours
looking at homes and getting emotionally attached
is a good thing.
Sure, it can be disappointing. But if you are
committed to buying at a future point, you can
develop a game plan to solidify your career, boost
your earnings, clean up some credit flaws, save
more money, etc.
So if you want to put yourself in the best possible
position in your next home purchase, it would be
wise to follow these steps:
1. Contact your preferred lender (me!) to get
your paperwork started. This will include a
written loan application, supporting paperwork
to verify income, assets, employment, debts.
It will also allow me to run your credit report
to make sure that all is well, or to see if we have
a project on our hands.
2. Narrow your choices for the type of financing
vehicle you prefer. In today's world, the choices
have been simplified. Low-doc, no-doc, interest-
only, exotic adjustable rate loans, and deferred-
interest loans have essentially disappeared.
The dominant choices are conventional fixed-
rate, FHA, VA, and some milder forms of adjust-
able rate loans.
3. In addition to me using my 33 years of exper-
ience to ascertain your qualifications, we can
also obtain a decision from an automated under-
writing system (AUS) that conforms to FNMA,
FHLMC, FHA and VA guidelines. This system
is based on data input, so the key is to know
what we can verify so that we get a decision that
is supportable.
4. At this point we can issue a letter that makes
note that we have received and reviewed your
loan application, we have run your credit report
and found it acceptable, and that we have verified
your income, assets and debts. We can also
indicate that we have a written loan approval
from the AUS that supports a specific sales price
and loan amount.
5. As you find the home that fits within the
qualifying criteria, we just need to make sure that
the property will also be acceptable. Special care
should be taken if you are looking at condominiums,
or if you are looking at home that may require
some repair or remedy of deferred maintenance.
The agent representing the property and the agent
representing you as a buyer will be pleased that
one of the major hurdles - obtaining the financing
to purchase the home - has been diligently assessed
and that the surprises can be kept to a minimum.
Some borrowers dread the process of the loan
application, but the reality is that it most probably
will need to be done sooner or later. 'Sooner' makes
the most sense to minimize transactional trauma,
while 'later' backloads all the pressure when emotions
are running high and deadlines are looming.
Let's work together, plan ahead and make the process
as smooth as possible.
You've checked other homes, you are confident
in the purchase price.
You are ready to write the offer with your real
estate agent.
The last time you needed a home loan, you
had little difficulty getting qualified and things
went smoothly.
All systems GO!
Hit the brakes, turbo! Things have changed
and the financing may not be as easy as it was
the last time.
All professional real estate agents want you
to go through the process of applying for a loan
and getting prequalified for the likely financing
you will need.
It makes every part of the process smoother.
You have an excellent idea of the proper price
range to be looking.
You have an idea of any obstacles that you may
be facing in this new lending environment.
The agent doesn't waste time and resources
showing you properties that are out of your
price range.
You don't fall in love with a home that you can't
afford.
The escrow period is significantly shortened if
we work together to get your paperwork in
order as you are looking at homes, rather than
starting from scratch from day one of the
escrow period.
When your offer is presented, it is strengthened
by an accompany letter from a reputable lending
source (me!) that you have done your homework and
that you are prequalified for the financing.
Admittedly, there are many borrowers who find
out that they are not quite prepared to buy at
the time they want.
But finding that out before they spend hours
looking at homes and getting emotionally attached
is a good thing.
Sure, it can be disappointing. But if you are
committed to buying at a future point, you can
develop a game plan to solidify your career, boost
your earnings, clean up some credit flaws, save
more money, etc.
So if you want to put yourself in the best possible
position in your next home purchase, it would be
wise to follow these steps:
1. Contact your preferred lender (me!) to get
your paperwork started. This will include a
written loan application, supporting paperwork
to verify income, assets, employment, debts.
It will also allow me to run your credit report
to make sure that all is well, or to see if we have
a project on our hands.
2. Narrow your choices for the type of financing
vehicle you prefer. In today's world, the choices
have been simplified. Low-doc, no-doc, interest-
only, exotic adjustable rate loans, and deferred-
interest loans have essentially disappeared.
The dominant choices are conventional fixed-
rate, FHA, VA, and some milder forms of adjust-
able rate loans.
3. In addition to me using my 33 years of exper-
ience to ascertain your qualifications, we can
also obtain a decision from an automated under-
writing system (AUS) that conforms to FNMA,
FHLMC, FHA and VA guidelines. This system
is based on data input, so the key is to know
what we can verify so that we get a decision that
is supportable.
4. At this point we can issue a letter that makes
note that we have received and reviewed your
loan application, we have run your credit report
and found it acceptable, and that we have verified
your income, assets and debts. We can also
indicate that we have a written loan approval
from the AUS that supports a specific sales price
and loan amount.
5. As you find the home that fits within the
qualifying criteria, we just need to make sure that
the property will also be acceptable. Special care
should be taken if you are looking at condominiums,
or if you are looking at home that may require
some repair or remedy of deferred maintenance.
The agent representing the property and the agent
representing you as a buyer will be pleased that
one of the major hurdles - obtaining the financing
to purchase the home - has been diligently assessed
and that the surprises can be kept to a minimum.
Some borrowers dread the process of the loan
application, but the reality is that it most probably
will need to be done sooner or later. 'Sooner' makes
the most sense to minimize transactional trauma,
while 'later' backloads all the pressure when emotions
are running high and deadlines are looming.
Let's work together, plan ahead and make the process
as smooth as possible.
Wednesday, February 24, 2010
Which Condos Earn The Gold Medal?
Have you been watching the Winter Olympics?
The results of some of the sports are clear cut -
the fastest time wins the medal like in bobsled,
alpine skiing, speed skating.
Other sports, however, are judged and the
results may be more subjective - ice skating,
ski jumping, and the wild snowboarding trick
events.
Condo approvals by lenders tend to be more
subjective with room for some interpretation
for conventional loans.
When lenders are asked to lend on a condo-
minium unit, part of their decision is based on
the creditworthiness of the borrower.
Beyond that, however, they are also concerned
about the health of the condominium project.
There are guidelines that are published by
FNMA and FHLMC that stipulate what they
require for a lender to sell loans to them. Most
lenders will adhere to those guidelines (or even
be more strict) so that they have the ability to
get the loan off of their books and have FNMA
and FHLMC take the interest rate risk in the
future.
A couple of the basic guidelines deal with the
occupancy of the units and how well the unit
owners are paying their homeowner's association
dues.
Guidelines typically call for at least 51% of the
units in the condominium project to be occupied
by owners as their primary or secondary homes.
If a borrower is seeking a loan with less than 20%
cash down payment, those loans require private
mortgage insurance. The mortgage insurance
companies may require owner occupancy closer
to 70% of the project.
There are some good reasons for these rules.
If a project is predominantly a rental complex,
the pride of ownership tends to be diminished.
Instead of the majority of occupants taking
responsibility for the care, maintenance and
appearance of the buildings, off-site landlords
tend to be less hands-on and the project
becomes less desirable.
Another guideline that is getting a lot of
scrutiny is the percentage of units where the
homeowner's association dues are delinquent.
Lenders are looking more favorably on projects
where there percentage of delinquent units is
less than 15%.
A homeowner that does not have the ability to
stay current on their HOA fees is an early
warning that they may be facing serious
delinquency on their mortgage. This may lead
to defaults and foreclosures which does not help
property values in the condo project.
Also, delinquent HOA fees means that the
homeowner's association has less money to run
the day-to-day operations of the project and
less money to out into the reserve fund for
big-ticket expenditures in the future (re-roofing,
re-paving, extensive pool repairs, etc.). This
may lead to special assessments to the unit
owners which puts a strain on their financial
capacity.
Lender are sometims vilified about being too
strict with their lending criteria. But as we
have seen over the past five years, when
lenders are very lenient they are enabling
homeowners to get into troublesome situations.
When the lenders exert more scrutiny, they
are also helping borrowers avoid condo projects
that may not be as healthy as everyone would
like. Borrowers implicitly are looking for "experts"
to help them make judicious decisions. The lender's
condo criteria can be considered as helpful in this
case.
If borrowers really thought things through, would
they want to be investing their money to live in a
predominantly rental project where a fair number
of their neighbors were struggling to meet their
financial commitment to the community of unit
owners?
I think many would seek ownership in a different
project, even if the lender did not impose their
requirements on the loan approval.
Knowing the guidelines before falling in love with
a condo can keep the disappointment to a minimum.
The results of some of the sports are clear cut -
the fastest time wins the medal like in bobsled,
alpine skiing, speed skating.
Other sports, however, are judged and the
results may be more subjective - ice skating,
ski jumping, and the wild snowboarding trick
events.
Condo approvals by lenders tend to be more
subjective with room for some interpretation
for conventional loans.
When lenders are asked to lend on a condo-
minium unit, part of their decision is based on
the creditworthiness of the borrower.
Beyond that, however, they are also concerned
about the health of the condominium project.
There are guidelines that are published by
FNMA and FHLMC that stipulate what they
require for a lender to sell loans to them. Most
lenders will adhere to those guidelines (or even
be more strict) so that they have the ability to
get the loan off of their books and have FNMA
and FHLMC take the interest rate risk in the
future.
A couple of the basic guidelines deal with the
occupancy of the units and how well the unit
owners are paying their homeowner's association
dues.
Guidelines typically call for at least 51% of the
units in the condominium project to be occupied
by owners as their primary or secondary homes.
If a borrower is seeking a loan with less than 20%
cash down payment, those loans require private
mortgage insurance. The mortgage insurance
companies may require owner occupancy closer
to 70% of the project.
There are some good reasons for these rules.
If a project is predominantly a rental complex,
the pride of ownership tends to be diminished.
Instead of the majority of occupants taking
responsibility for the care, maintenance and
appearance of the buildings, off-site landlords
tend to be less hands-on and the project
becomes less desirable.
Another guideline that is getting a lot of
scrutiny is the percentage of units where the
homeowner's association dues are delinquent.
Lenders are looking more favorably on projects
where there percentage of delinquent units is
less than 15%.
A homeowner that does not have the ability to
stay current on their HOA fees is an early
warning that they may be facing serious
delinquency on their mortgage. This may lead
to defaults and foreclosures which does not help
property values in the condo project.
Also, delinquent HOA fees means that the
homeowner's association has less money to run
the day-to-day operations of the project and
less money to out into the reserve fund for
big-ticket expenditures in the future (re-roofing,
re-paving, extensive pool repairs, etc.). This
may lead to special assessments to the unit
owners which puts a strain on their financial
capacity.
Lender are sometims vilified about being too
strict with their lending criteria. But as we
have seen over the past five years, when
lenders are very lenient they are enabling
homeowners to get into troublesome situations.
When the lenders exert more scrutiny, they
are also helping borrowers avoid condo projects
that may not be as healthy as everyone would
like. Borrowers implicitly are looking for "experts"
to help them make judicious decisions. The lender's
condo criteria can be considered as helpful in this
case.
If borrowers really thought things through, would
they want to be investing their money to live in a
predominantly rental project where a fair number
of their neighbors were struggling to meet their
financial commitment to the community of unit
owners?
I think many would seek ownership in a different
project, even if the lender did not impose their
requirements on the loan approval.
Knowing the guidelines before falling in love with
a condo can keep the disappointment to a minimum.
Wednesday, February 10, 2010
And The Winner Is . . .
1977 was a big year for me. Not only did I get
married to the to the lovely woman with whom
I'm still married, but I also started my mortgage
origination career.
So, going on 33 years now, I've been able to
thrive and survive through low interest rates,
high interest rates, ebbing business cycles and
expanding business cycles.
I can credit my sustained career as a mortgage
originator to a few basic principles that have
carried me through:
1. I've learned to listen to my clients and to
my referring sources about what they are
trying to accomplish.
2. I educate them as to how to get from Point
A to Point B to accomplish their goals, and
3. And, I learned the hard way, especially
early in my career, not to lie to my clients.
There were times in the beginning that I
fudged the truth and it always backfired on
me.
Now I do my best to be patient, answer all
questions to the best of my ability, and to be
as transparent as possible about what is going
on.
With all of this in mind, I am please to announce
that I have been selected as one of the 2010
Five Star Best-in-Client-Satisfaction Mortgage
Professionals.
This award is a result of a survey by San Diego
Magazine in which researchers asked 21,000
San Diego County area residents and 780 real
estate agents to identify exceptional mortgage
professionals in the County.
The respondents were asked to evaluate only
those mortgage professionals they knew through
personal experience in two categories of performance:
overall satisfaction and whether they would highly
recommend them to a friend.
The March 2010 issue of San Diego Magazine will
have a list of the award winners.
I am hopeful that if you were one of the people
surveyed that you, too, would be able to say that
you are satisfied with my approach to the mortgage
business, my ability to communicate, and my
perseverence in working through any obstacles
that may be encountered.
And, I hope that I could earn your enthusiastic
recommendation to your friends.
If you, or someone you know, is looking for a
mortgage professional that will listen to what is
important to you, will educate you and communicate
to you what needs to be done, and who will tell you
the truth, then I am the one you are looking for.
married to the to the lovely woman with whom
I'm still married, but I also started my mortgage
origination career.
So, going on 33 years now, I've been able to
thrive and survive through low interest rates,
high interest rates, ebbing business cycles and
expanding business cycles.
I can credit my sustained career as a mortgage
originator to a few basic principles that have
carried me through:
1. I've learned to listen to my clients and to
my referring sources about what they are
trying to accomplish.
2. I educate them as to how to get from Point
A to Point B to accomplish their goals, and
3. And, I learned the hard way, especially
early in my career, not to lie to my clients.
There were times in the beginning that I
fudged the truth and it always backfired on
me.
Now I do my best to be patient, answer all
questions to the best of my ability, and to be
as transparent as possible about what is going
on.
With all of this in mind, I am please to announce
that I have been selected as one of the 2010
Five Star Best-in-Client-Satisfaction Mortgage
Professionals.
This award is a result of a survey by San Diego
Magazine in which researchers asked 21,000
San Diego County area residents and 780 real
estate agents to identify exceptional mortgage
professionals in the County.
The respondents were asked to evaluate only
those mortgage professionals they knew through
personal experience in two categories of performance:
overall satisfaction and whether they would highly
recommend them to a friend.
The March 2010 issue of San Diego Magazine will
have a list of the award winners.
I am hopeful that if you were one of the people
surveyed that you, too, would be able to say that
you are satisfied with my approach to the mortgage
business, my ability to communicate, and my
perseverence in working through any obstacles
that may be encountered.
And, I hope that I could earn your enthusiastic
recommendation to your friends.
If you, or someone you know, is looking for a
mortgage professional that will listen to what is
important to you, will educate you and communicate
to you what needs to be done, and who will tell you
the truth, then I am the one you are looking for.
Wednesday, January 27, 2010
FHA Planning on Tighter Requirements
FHA has been an increasingly popular program in
the last few years. Especially here in San Diego
County, where FHA previously was not a very
relevant program, the higher loan limits has made
it the most popular for first-time home buyers.
But there is a price for such success. Some industry
estimates are that about 30% of all mortgages last
year were FHA-insured. This increase in lending
volume has put some strains on the FHA system.
A borrower who obtains an FHA loan is required to
pay mutual mortgage insurance (MMI) into the fund
that creates reserves against losses in the FHA
program. This MMI comes in two parts: an up-front
mortgage insurance premium (MIP) that is most often
financed on top of the base loan amount, and a monthly
MMI premium.
Because of the higher volume of FHA loans, and the
emphasis on helping first-time buyers and those with
lesser credit scores, there has been more late payments,
defaults, and foreclosures in the program. As a result,
the reserves have fallen below what is required for the
FHA program.
The new changes are designed to increase revenue to
the reserves, to decrease some of the risk from the
more marginal qualifiers, and for borrowers to rely
less on contributions from the sellers in buying their
homes.
The following changes will be effective with case
numbers that are issued on or after April 5, 2010.
This means that a borrower will need to be under
contract on their home by about April 1 to beat
the deadline for these changes.
First, the MIP has been 1.75% of the loan amount.
After the changes take place, this will go to 2.25%
of the loan amount. On a $300,000 loan, this will
add an additional $1,500 to the amount financed
and increase the monthly payment by about $10
per month.
Second, if a borrower has a credit score of 580 or
less, they no longer will be able to purchase with
the minimum down payment of 3.5% of the purchase
price. Those borrowers will now have to have 10%
down payment, and get a loan of 90% of the value.
Third, in the past sellers could negotiate to pay as
much as 6% of the sales price of the home toward
the buyer's closing costs. FHA will now limit that
contribution to only 3%. Part of the reason for this
change was because FHA was discovering that
sellers were inflating the sales price to cover the
larger contributions, and FHA was insuring loans
even higher than the 96.5% that the program
allowed.
All in all, it will be somewhat more expensive for
a borrower to obtain an FHA loan. It will still be
a viable program for borrowers with small down
payments and who need some forgiveness on their
credit scores.
The important thing is to know what changes are
coming so that you are not surprised when you are
ready to enter into your contract.
the last few years. Especially here in San Diego
County, where FHA previously was not a very
relevant program, the higher loan limits has made
it the most popular for first-time home buyers.
But there is a price for such success. Some industry
estimates are that about 30% of all mortgages last
year were FHA-insured. This increase in lending
volume has put some strains on the FHA system.
A borrower who obtains an FHA loan is required to
pay mutual mortgage insurance (MMI) into the fund
that creates reserves against losses in the FHA
program. This MMI comes in two parts: an up-front
mortgage insurance premium (MIP) that is most often
financed on top of the base loan amount, and a monthly
MMI premium.
Because of the higher volume of FHA loans, and the
emphasis on helping first-time buyers and those with
lesser credit scores, there has been more late payments,
defaults, and foreclosures in the program. As a result,
the reserves have fallen below what is required for the
FHA program.
The new changes are designed to increase revenue to
the reserves, to decrease some of the risk from the
more marginal qualifiers, and for borrowers to rely
less on contributions from the sellers in buying their
homes.
The following changes will be effective with case
numbers that are issued on or after April 5, 2010.
This means that a borrower will need to be under
contract on their home by about April 1 to beat
the deadline for these changes.
First, the MIP has been 1.75% of the loan amount.
After the changes take place, this will go to 2.25%
of the loan amount. On a $300,000 loan, this will
add an additional $1,500 to the amount financed
and increase the monthly payment by about $10
per month.
Second, if a borrower has a credit score of 580 or
less, they no longer will be able to purchase with
the minimum down payment of 3.5% of the purchase
price. Those borrowers will now have to have 10%
down payment, and get a loan of 90% of the value.
Third, in the past sellers could negotiate to pay as
much as 6% of the sales price of the home toward
the buyer's closing costs. FHA will now limit that
contribution to only 3%. Part of the reason for this
change was because FHA was discovering that
sellers were inflating the sales price to cover the
larger contributions, and FHA was insuring loans
even higher than the 96.5% that the program
allowed.
All in all, it will be somewhat more expensive for
a borrower to obtain an FHA loan. It will still be
a viable program for borrowers with small down
payments and who need some forgiveness on their
credit scores.
The important thing is to know what changes are
coming so that you are not surprised when you are
ready to enter into your contract.
Wednesday, January 13, 2010
Forecasting Interest Rates
Interest rates have been staying low for quite a while
now. It's always difficult to try to predict rates, but
there seems to be a consensus building that may give
us some idea when rates may make an upward move
that will stay in place for some time.
To generalize, fixed rates on conforming loans - those
that get sold to FNMA and FHLMC with loan amounts
up to $417,000 - have been in the 4.75% to 5.25%
range for quite some time.
These rates have sustained because the Federal
Reserve is trying to spur a housing recovery by
keeping interest rates low.
In turn, lenders are willing to make long-terms loans
at these loan rates, because they have no intention
of keeping these loans on their books and carrying
the interest rate risk that goes with it. They know
that they have a ready buyer for these loans through
FNMA and FHLMC.
It is one of the main reasons why lenders are under-
writing the loans so stringently. They have to make
sure that the loan they are making is one that FNMA
and FHLMC will purchase from them. Strict adherence
to Fannie and Freddie's guidelines is vital so that the
lender does not have to keep the loan on their books,
and suffer the risk of that low-interest rate loan being
a money loser in the future when rates go up.
FNMA and FHLMC have been allotted more than
$400 billion to guarantee their recovery. But an
announcement was made on Christmas Eve, without
any fanfare, that they were given an unlimited financial
lifeline and removed the requirements to shrink
their holdings by 10% per year. Currently they are
instrumental in about 75% of mortgages made, and
their holdings amount to about $770 billion.
Additionally, there are loans that are created by lenders
that get bundled into pools of mortgages and then sold
to investors through a vehicle known as a Mortgage-
Backed Security (MBS). FNMA and FHLMC also put
together MBS pools to reduce their holdings.
Traditionally, these pools of mortgages have been sold
through Wall Street to investors, pension plans, etc.
But when the performance of mortgages began it's
decline a couple of years ago, the Wall Street investor
market dried up.
They suffered unexpected losses because the quality
of the loans in their MBS investments were not as good
as they were represented to be. Once burned, twice
shy. The investors have not rushed back into the
market to buy these new MBS issues.
To keep fluidity in the market, the Federal Reserve
has been purchasing MBS issues, since non-govern-
ment investors have been dormant.
So, the Federal Reserve is keeping rates low to stim-
ulate the economy. The interest rates are not market
driven, so investors are not excited about them unless
they can move the loans to someone else to absorb
the risk. The only players for buying these loans are
FNMA and FHLMC (Government-sponsored entities)
and the Federal Reserve buying MBS issues. It's a
giant circle, and the free market never touches it.
Now here is the indicator that rates may start to go
up: Federal Reserve policy makers are expressing
a desire to pull back on purchasing MBS issues when
they see some recovery in the economy. If this
happens, to attract investors other than the government
(since they are backing away) interest rates would
have to go higher.
When you start to hear the news reports that the
economy is recovering and that the Federal Reserve
is reducing their investment in MBS issues, be prepared
to expect higher interest rates. Some commentators
are thinking they could go up 1 to 2% from the low
rates that we have enjoyed.
now. It's always difficult to try to predict rates, but
there seems to be a consensus building that may give
us some idea when rates may make an upward move
that will stay in place for some time.
To generalize, fixed rates on conforming loans - those
that get sold to FNMA and FHLMC with loan amounts
up to $417,000 - have been in the 4.75% to 5.25%
range for quite some time.
These rates have sustained because the Federal
Reserve is trying to spur a housing recovery by
keeping interest rates low.
In turn, lenders are willing to make long-terms loans
at these loan rates, because they have no intention
of keeping these loans on their books and carrying
the interest rate risk that goes with it. They know
that they have a ready buyer for these loans through
FNMA and FHLMC.
It is one of the main reasons why lenders are under-
writing the loans so stringently. They have to make
sure that the loan they are making is one that FNMA
and FHLMC will purchase from them. Strict adherence
to Fannie and Freddie's guidelines is vital so that the
lender does not have to keep the loan on their books,
and suffer the risk of that low-interest rate loan being
a money loser in the future when rates go up.
FNMA and FHLMC have been allotted more than
$400 billion to guarantee their recovery. But an
announcement was made on Christmas Eve, without
any fanfare, that they were given an unlimited financial
lifeline and removed the requirements to shrink
their holdings by 10% per year. Currently they are
instrumental in about 75% of mortgages made, and
their holdings amount to about $770 billion.
Additionally, there are loans that are created by lenders
that get bundled into pools of mortgages and then sold
to investors through a vehicle known as a Mortgage-
Backed Security (MBS). FNMA and FHLMC also put
together MBS pools to reduce their holdings.
Traditionally, these pools of mortgages have been sold
through Wall Street to investors, pension plans, etc.
But when the performance of mortgages began it's
decline a couple of years ago, the Wall Street investor
market dried up.
They suffered unexpected losses because the quality
of the loans in their MBS investments were not as good
as they were represented to be. Once burned, twice
shy. The investors have not rushed back into the
market to buy these new MBS issues.
To keep fluidity in the market, the Federal Reserve
has been purchasing MBS issues, since non-govern-
ment investors have been dormant.
So, the Federal Reserve is keeping rates low to stim-
ulate the economy. The interest rates are not market
driven, so investors are not excited about them unless
they can move the loans to someone else to absorb
the risk. The only players for buying these loans are
FNMA and FHLMC (Government-sponsored entities)
and the Federal Reserve buying MBS issues. It's a
giant circle, and the free market never touches it.
Now here is the indicator that rates may start to go
up: Federal Reserve policy makers are expressing
a desire to pull back on purchasing MBS issues when
they see some recovery in the economy. If this
happens, to attract investors other than the government
(since they are backing away) interest rates would
have to go higher.
When you start to hear the news reports that the
economy is recovering and that the Federal Reserve
is reducing their investment in MBS issues, be prepared
to expect higher interest rates. Some commentators
are thinking they could go up 1 to 2% from the low
rates that we have enjoyed.
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