Underwriting Tightened to Avoid Recurring Problems

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

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

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

That has changed now.

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

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


Employment:

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

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

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

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


Self-Employment:

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

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

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

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


Asset Verification:

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

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

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

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

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

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

There is no substitute for strategic planning in advance.


Credit History:

Credit scores have become the big thing in mortgage
lending.

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

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

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

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

You are probably finding a recurring theme here.

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

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

How to Shop For Your Mortgage Loan-Part 3

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


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

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


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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

Ask lots of questions of your mortgage representative.

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

How to Shop For Your Mortgage Loan-Part 2

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

The beginning topics were:

1. Know Your Outcome.
2. Be Realistic.

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

Now, on to the next topic:

3. Choosing A Lender

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

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

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

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

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

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

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

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

Does the originator:

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

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

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

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

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


4. Deciding on a loan product.

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

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

Factors that affect that availability can include:

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

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

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

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

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


5. Assessing Rates and Costs

The mortgage market is dynamic.

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

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

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

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

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

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

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

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

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

How to Shop For Your Mortgage Loan-Part I

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

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

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

1. Know your outcome.

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

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

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

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

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

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

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

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

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

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

2. Be realistic.

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

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

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

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

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

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

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

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

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

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

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

Breaking the Underwriting Code

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lessons From Tiger Woods and Rocco Mediate

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Shape Of Things To Come?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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