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.

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.