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.
Wednesday, June 16, 2010
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.
Subscribe to:
Posts (Atom)