It's Like Herding Cats-Your Closing
Costs Go Many Different Directions

Through the course of your purchase or refinance transaction
there are many companies that perform services essential to
the timely and successful closing.

When you review your good faith estimate at the beginning of
the transaction, or your closing statement from the escrow
company at the conclusion of it, you will see fees being
disbursed to many different service providers. You may also
wonder who they are and what did they do to earn their fee.

Let's work our way through a typical escrow closing (or settle-
ment) statement, and describe the services that were paid for.

APPRAISAL FEE: This goes to the individual appraiser or
the appraisal company that was hired to value the home. Their
job is to ascertain the market value by comparing the home to
be appraised with recently closed escrows on homes that are
most similar.

TAX SERVICE: This fee goes to a company that provides one
of two services to the lender. If you have an impound account
where your taxes are collected monthly with your payment, the
tax service company provides copies of the tax bills each year
to the lender for payment. If you do not have an impound
account, they monitor your property's records so that they can
inform the lender is the taxes are going unpaid. The lender
wants this information because unpaid property taxes can
supersede their lien interest on the property and potentially
wipe out their loan in a tax-sale auction.

FLOOD CERTIFICATION FEE: This fee goes to a company
that reviews the latest maps issued by the Federal Government
that determine where the flood zones are. If your property falls
within a flood zone, there is a separate requirement for you to
purchase Federal flood insurance.

WIRE FEE: When your loan is funded by the lender, the most
widely accepted way to get the funds to escrow is by using
the Federal Reserve wire system. There is a cost that you
end up paying, but it is small compared to relying on the
issuance of a cashier's check. If the check were to create
even a one-day delay, your daily interest cost would be higher
than the wire fee.

PROCESSING FEE: At our mortgage brokerage, there is
a fee that we collect for the processing of your loan. It is a
standard fee that is designed to cover administrative costs in
connection with your loan request.

SETTLEMENT/CLOSING/ESCROW FEE: The escrow company
is responsible for pulling together the various components of
the transaction so that it closes successfully. These would
include the lender, title company, insurance agent, real estate
agents, notary services, homeowner's associations, and of
course the clients. This fee goes to them for their work.

TITLE INSURANCE: You provide a policy of title insurance for
the benefit of the lender to insure them that they have the first
lien on the property. (Or second lien, if that was what they
intended to provide). The lender's lien on the property will
always be behind unpaid property taxes and there may be some
exclusions that run with the property that the lender will have to
find acceptable. There may be special endorsements that are
charged separately in connection with the title insurance.

LOAN SIGNING/NOTARY FEE: In recent years, there has
developed a growing group of independent contractors who
specialize in signing up the clients with their loan documents.
Many times they will either meet the client at the escrow
company, or may travel to the homes or businesses of the
clients to administer the sign-up and notarize their signatures.

DOCUMENT DOWNLOAD: Until recently, the lender would
charge for the creation of the loan documents and they would
send them by messenger to the escrow company to coordinate
the signing. Now that electronic transmission is more readily
accepted, the escrow companies are imposing a modest
charge for paper/toner/time to create the documents.

MESSENGER SERVICES: There is usually a messenger
charge to return the signed loan documents back to the lender.
Since time is of the essence and it is important to be able to
track the documents, messenger service is the best way to
accomplish the return of the documents.

LOAN TIE-IN FEE: This fee is charged by the title company
for receiving the wired loan proceeds and to be the "deep-
pockets" company to be accountable for the funds. Since
escrow companies are not required to have substantial
financial reserves, there is a reluctance to send hundreds
of thousands or millions of dollars to them. Title companies,
on the other hand, have strong financial backing and are
insured by the state. This fee covers some administrative
costs.

LOAN ORIGINATION FEE: Many times we create the new
home loan so that it is priced as a "zero-point" transaction.
That means that the lender will pay us for our service of
originating the loan. Sometimes, the borrower would like to
receive a lower interest rate and is willing to pay the loan
origination fee and receive the benefit of the lower rate over
the life of the loan.

This covers most of the standard fees that are charged in
connection with a new loan on a property.

There has been some attempts to "bundle" the services and
fees to create some economies for the borrower. Title
companies have begun to offer a consolidated price for the
title insurance when using their escrow services. Some
lenders will collect for the appraisal fee and pay it to their
appraiser without it being delineated separately.

But, as you can see, there are a number of different companies
that have each developed their own special area of expertise.
They are necessary service providers to the successful closing
of the transaction and each earn a fee for their service.

Appraisals Are Lower-More Lender Scrutiny

Appraisals Are Reflecting Lower Values
in the Market-And Being Scrutinized More
Closely

Over the past year, property values have stopped their upward
trend, stabilized in some areas, and have experienced a drop
in values in other areas.

It's the appraiser's assignment to ascertain a fair market value
for the subject property. They need to draw upon available data
from closed escrows and current homes listed for sale to help
them reach their conclusions.

The governing idea at work is that if a willing buyer has the
choice to buy any of the properties available and make a comp-
arison as to features and amenities, how much will they pay
for the subject property.

When the appraiser receives their assignment, they need to
perform an inspection of the property. In fact, the final valuation
they give is based on the property condition as of the date of
inspection.

When a client meets the appraiser at the property, they are
often surprised at how little time the appraiser spends at the
home. An experienced appraiser can take the measurements,
make note of the amenities, features and upgrades in the
home and finalize the room count very quickly.

The biggest part of the appraiser's job is to find homes that
have closed escrow or that are currently on the market that
are in close proximity to the subject property and that are
the most similar to the home to be appraised.

The appraiser will then do an analysis of those homes that
they have selected as being the best comparable sales or
"comps", and make dollar adjustments to make the comp
more like the subject property. For example, if the comp
has a superior view to the subject, the appraiser will subtract
their estimate of the value of the difference of that view from
the comp's value.

After making these kind of comparisons on a long list of
features of the homes, the appraiser arrives at an adjusted
value of the comp. They will perform this type of analysis on
3-6 closed sales and current listings to arrived at a reconciled
value of the subject property. It is not an arithmetic average,
but rather a reasoned sense of the value of the subject property
from the conclusions drawn from the analysis of the comparable
properties.

In today's market the closed sales, which may be up to about
6 months old, probably would lead to higher valuations. But,
the appraiser has to consider properties that are currently
listed for sale, and these comps are tending to lead to lower
property valuations.

Even after we arrange for an independent appraiser to perform
the appraisal, the lender is very interested in making sure that
the best possible data has been used to determine value, and
that the dollar adjustments made to come to the final conclusion
are reasonable and valid.

In the event the borrower doesn't make the payments as required,
the lender's final security for making sure that they can recover
the amount of the loan is their ability to force the sale of the
property. If the property value has been inflated, and the lender
does not perform due diligence to make sure that the valuation
is solid, they risk over-lending on a property and not being able
to protect their interests.

Because there has been a reaction from the lenders to tighten
their approval process and not be as lenient as they were 6-12
months ago, we are seeing that there is much more scrutiny
from the lenders in reviewing the appraisals.

It's important to understand that while these new guideline
changes are taking place, and appraisals are getting a closer
look, that the loan request now has more quality control checks
than it did in the past.

At times, this can create last-minute difficulties if a serious
difference of opinion develops between the appraiser and the
person reviewing their work. It may result in delays while the
differences are worked out, or a lesser loan amount being
approved, or the inability to work with that lender on that
property at that time.

I always try to ascertain the underwriting patterns of the lenders
with whom I place loan requests, and if there are changes
occurring that will affect my client. I always do my best to help
the client have a reasonable sense of what to expect on their
transaction.

Foreclosure Epidemic-Bad As It Seems?

Is The "Foreclosure Epidemic" as Bad as It Seems?

I'm sure that you have heard that foreclosures have increased.
The national and local media publicize the statistics that defaults
are up from last year on a month-to-month comparison.

The primary segment of the mortgage business that has exper-
ienced the biggest problem is the "sub-prime" loans.

When you consider the spectrum of lending, the most qualified
borrowers who seek mainstream lending products are classified
in the "A" category.

Qualified borrowers who seek less mainstream products, or who
need to obtain loans that allow them to borrow as much as 95%
to 100% of the purchase price are commonly classified in the"A-"
category.

When you categorize borrowers who have diminished credit
scores, who need loans approaching 100% of the purchase
price, and who may have difficulty documenting their income
and assets, they fall into the "B" and "C" classifications.
This is the category that is commonly called "sub-prime".

Over the past few years, the lenders and investors who purchase
loans have been much more liberal in their willingness to approve
loans in the "sub-prime" group. They were willing to accept
lower credit scores than normal; they were willing to accept
borrowers who merely stated their income without asking the
borrowers to prove it; they were willing to accept borrowers who
did not have much in the way of provable assets for downpayment,
closing costs, and cash reserves.

The media and legislators are making headlines out of the fact
that foreclosures have increased. There are some calls for more
legislation to protect borrowers from potentially losing their homes.
They suggest that all the defaults may be a result of
predatory mortgage practices and bad faith on the part of the
lenders to put people in this position.

The fact that lenders have been more permissive in the approval
process in the recent past has been a very good thing for many
people.

The appreciation of home values can be directly tied to the fact
that more borrowers had been able to qualify and that increased
demand kept prices high. The slowdown in property appreciation
and lenders tightening their underwriting practices have been
occurring at the same time.

The bigger point that I want to make is that there are many
people who want the American Dream of home ownership. If
we adhered to the old paradigm of loan approvals, we would
expect every loan to be fully documented, for borrowers to
have 20% cash down payment, and to have strong credit
histories with only the occasional blemish on their credit reports.

This old underwriting standard would eliminate many borrowers
from ever having a chance at home ownership. Because the
lending industry was creative in the development of new mort-
gage products and felt comfortable to be more liberal in their
qualifying (especially when they thought that property values
were increasing), many people were able to move from being
renters to homeowners.

Once they became homeowners, they have an opportunity for
any appreciation in property values to start adding to their
equity and to their net worth. They are no longer on the outside
looking in.

One statistic I heard recently was that about 13% of the sub-
prime borrowers were facing default and foreclosure. As bad
as that is for those borrowers, it still means that 87% of these
"lesser" qualified borrowers were still maintaining their payments
and still having the opportunity to build equity over time.

Now, please don't misunderstand me. I do not want to see
anyone lose their home to foreclosure. I especially feel bad for
borrowers who were not well-advised by their loan originator as
to potential risks for certain loan products that may not have
been a suitable fit for them. (You know that I have railed against
those less-than-scrupulous lenders who see borrowers
as dollar signs, and not as real people that deserve respect and
suitable advice.)

I don't think, however, that the system is broken when a certain
percentage of homeowners don't succeed in keeping their homes.
I don't think there is any benefit for legislators to create more laws
to protect against this spike in the number of foreclosures. Market
forces will be able to adapt to this much more efficiently and effectively.

Lenders will cut back on their approval process (like they are
now doing). They will insist on higher credit scores. They
will insist on the borrowers proving their income and their
assets to show that they providing accurate information for the
lender to make their decision. There will be fewer "unqualified"
borrowers obtaining home loans and once these new standards
are in place, there will be fewer foreclosures going forward.

I think it is important for us to realize that more people have
benefited from the opportunity to buy homes, to provide a more
stable home environment for their families, to realize the benefits
of the tax law for interest and property tax payments
(instead of paying rent and buying the landlord's property for
the landlord's benefit) and to have the pride of ownership that
comes with all of that.

The pendulum swung too far to the side of laxity in under-
writing and is now correcting itself by adhering to stricter
standards. The system works, despite some rough patches
at times.

PMI Making A Comeback

PMI-Private Mortgage Insurance-is making
a comeback

In the mortgage lending business, a loan that is 80% of the value
of the home is considered to be a normal risk for the lender and
is considered to be the industry standard.

If a borrower needs financing that is more than 80% of the value
of the home (loan-to-value, LTV), that would represent a higher
risk to the lender and would be considered if the borrower has
better qualifications and if the lender were to receive higher than
normal rates and fees to compensate themselves for the higher
risk, or if that higher risk could be passed along to another party.

Private Mortgage Insurance (PMI) was developed in an effort to
give the lenders a feeling of comfort that they were not taking an
undue risk, and still provide a means for borrowers to obtain
home financing without needing 20% down payment.

PMI provides insurance to the lender in the case of a default in
payments by the borrower which would result in a monetary
loss to the lender. The borrower will be the one who pays the
cost of the policy and the premiums are usually collected with
each monthly payment from the borrower.

Let's take a look at an example. Let's say that the borrower is
buying a home valued at $500,000. They are able to provide a
down payment of $50,000 and they have additional funds for their
closing costs and cash reserves after closing. They need to
finance $450,000 which is a 90% LTV.

In the past few years the most popular way to put his
transaction together was to create a first loan of $400,000
(80% LTV) and couple it with a second loan of $50,000 for a
combined LTV of 90%. This was preferred because the first
loan was at the industry standard of 80%, so it was acceptable
risk to the lender and did not require PMI and was offered at
competitive interest rates and fees. The second loan of the
additional 10% was where the lender was experiencing the
additional risk. Rates and fees were higher only on this portion
of the financing to reflect that higher risk to the lender. Also,
the mortgage market was eager to create these second loans
because investors could receive higher rates, property values
were increasing and mortgage defaults were not common.

I'm sure that you have been hearing and reading that more
recently property values have leveled off and diminished in some
areas, and that mortgage defaults have increased. This has led
to less willingness of the lenders to create these second loans,
especially where the combined LTV was at 100%. As the
availability of these second loans is diminishing, we are seeing
that lenders are more willing to create one loan and to reduce
their risk by using PMI again.

The way the transaction would be put together using PMI is by
the lender creating a loan of $450,000 (90% LTV). The interest
rate on the loan itself would be at competitive rates and fees,
but the borrower would be required to qualify for and provide a
PMI policy to the lender. The PMI company would charge a
premium based on the LTV, whether the loan is fixed-rate or
adjustable-rate, whether the borrower qualified by providing
full documentation or was using stated income. The cost of
this policy could be in the range of $200-$300 per month.

But, it is a lot less expensive than trying to save another
$50,000 and missing out on home ownership in the meantime.

PMI is currently tax-deductible for borrowers whose adjusted
gross income (AGI) is $100,000 or less, is partially deductible
for AGI between $100,000-$109,000, and loses its deductibility
for AGI above $109,000.

Some lenders may offer to charge a higher rate on the loan, and
to have the mortgage insurance paid by them. This will then
show as interest being paid by the borrower, not insurance
premium, and will increase the chances of tax deductibility
without concern over the AGI limitations.

As always, there are many nuances to be explored to make sure
that you are being well-served by the mortgage recommendation.
Be sure that you are getting complete information to make an
informed decision.

Understanding the Basics

Mortgage Basics-The Four C's of Underwriting
Your Loan Request

Many borrowers find the loan process bewildering and confusing. It doesn't help when those of us who are in the business use verbal shorthand and jargon that separates you from understanding what is going on and what your loan product will do for you.

The creation of your loan, and its approval are variations of four basic moving parts. I learned them as the Four C's: Cash, Credit, Capacity, and Collateral. When lenders design programs and
establish the pricing of the loan (interest rate plus loan fees), they are assessing the layers of risk associated with each of these categories.

Let's take a look at each of them.

Cash: The lender wants to know that you have enough money to provide for your down payment for the purchase of the home, that you can pay for your closing costs, and that have some level of cash reserves after the closing. They also want to know the source of those funds, so if money suddenly appears in your accounts just before closing they will be concerned that the new money is also borrowed. If you are refinancing, they will want to see that your closing costs and reserves are covered.

Credit: Until the advent and acceptance of credit scoring, the lender would review the credit report and make an assessment as to the paying habits, the types of credit the borrower had (mortgage, auto loans, credit cards, student loans, finance companies, charge-offs, collections), and whether they were prudent users or abusers of credit. It was a combination of objective and subjective analysis, and was more art than science.

The credit scoring systems now take all of these factors into account in a "black box" analysis and produce a score. Because each of the three credit repositories use proprietary systems, they don't publish exactly how their scores are produced. http://www.myfico.com/ is one site that will allow you to subscribe and do "what if?" scenarios if you are interested in pursuing a program to improve your credit score.

Capacity: This refers to your ability to pay the monthly payments. The two primary areas of interest are employment stability and that your income is sufficient to support the proposed new mortgage debt, taxes and insurance, homeowner's association fees, and all your consumer credit obligations. As a general rule, lenders are looking for continuous employment in the same job or line of work of at least two years. Also, they like to see that the sum of those monthly obligations listed above fit within about 40% of your gross monthly income if you are salaried or a wage-earner.

If you are self-employed or earn commissions the lenders will do their analysis based on your gross income less business expenses. This calculation gives them an idea of what your personal income is, and it puts you on an equal footing with the salaried person and wage-earner.

Collateral: A real estate loan is secured by a piece of property. The lender ultimately wants to have their loan secured so that if you don't make your payments, they have the ability to recover the unpaid balance of the loan through a foreclosure proceeding. This is why the lenders require an appraisal of the home, so that they can feel comfortable that their loan is well-secured. Lending guidelines change and risk assessments differ when the property is owner-occupied or a rental, if it is a detached home, a condominium, or if it is in a planned-unit development.


When you add in the variables of documenting the loan fully with paystubs, W-2 forms and tax returns, or if you are requesting a loan using the "stated income" option, where the lender makes their decision based on the reasonableness of the income presented without verifying it, or if you are pursuing a 'no-doc' loan, where the lender is making their judgment solely on the appraisal and credit history and scores, you can see that there are a myriad of possibilities and categories for a loan request to fit within.

When you are shopping for a mortgage, and the representative gives you a quote without exploring these variables with you, the information you are receiving is meaningless. Know with whom you are working and that they are taking care to provide you with accurate information so that you are not encouraged to begin the process with false expectations and to be presented with the real terms at a later date.

Approvals Are Getting Tougher

Plan Ahead For Your Mortgage Needs-
Lenders are Tightening Up on Approvals

You have probably been aware over the last few months that many lenders who specialized in the sub-prime lending markets (loans made to borrowers or on properties that present more risk to the lender, also known as "B" and "C" lending) experienced sizable losses and were forced to close their doors.

Many times, these sub-prime lending operations were owned by larger financial companies, and the losses rippled through to the more profitable lending operations. Whenever lenders go through this part of the business cycle, they analyze what contributed to the losses and seek to make corrections.

As such, the lenders that are continuing in the sub-prime markets are restricting the scope of the lending programs from what they were even three to six months ago. They seek to limit their risk by not granting loans to as large a percentage of the value of the home as they did before. For example, where they would make a loan to 100% of value, they are not limiting the loan to no higher than 95% of value.

They can also limit their risk by requiring higher credit scores than they used to. It has not been uncommon to see programs that used to require a score as low as 620 now have a higher threshold at 640 or 660.

The underwriting guidelines have also been tightened in some cases by requiring more in the way of cash reserves after closing than they previously required. In the past, some programs wanted to see that the borrower had 2 months of mortgage payments in their bank accounts at the conclusion of the transaction. Now we are seeing requirements up to 6 months of mortgage payments.

In some cases, the lenders combine these changes to really restrict their risk. Whereas six months ago, we may have been able to get 100% financing with a 620 credit score and 2 months of mortgage payment reserves, the conservative lender may limit the loan to 95%, demand a score of 660, and require cash reserves of 4 months of mortgage payments.

As you can see, this would put a borrower who purchased under the more liberal terms a year or so ago, who was planning on refinancing into more favorable interest rates or payments, in a serious bind. The exit strategy that they had carefully crafted was removed by the changes in the guidelines as a result of the losses that the lenders had experienced.

Even though these examples were primarily dealing with the sub-prime lenders, the fact is that the prime lenders ("A" lending) also are going through tightening so that they don't start experiencing losses in the same way that the sub-prime lenders did.

The ways that "A" lenders have been attempting to reduce their risk include the increase of the minimum credit score threshold, and not being as aggressive on the percentage of loan in relation to the value of the home.

On refinances, they are also limiting the amount of cash that a borrower can receive through the transaction, and being less generous on loans on investment properties and condominiums. These categories - cash out, investment properties, and condominiums - all represent additional layers of risk to a lender and they are doing their best not to accept a lot of exposure to these risks.

The important point that I want to impart to you with this edition of my newsletter is that you should not think that everything is business as usual. Many times borrowers will wait until the last minute thinking that there have not been any changes, and that the application process will go as smoothly as it has in the past, or that the loan programs will continue without limits to their availability.

If you, or someone you know, has a loan that is scheduled for an interest rate or payment reset soon, let's have a conversation right away to make sure that we can do the best possible job of getting things taken care of.

This is truly one of those times that it is better to act sooner than later.

Restoring Your Credit

Credit Restoration May Help Improve Your
Credit Scores-And Save You Money

If you have negative information showing on your credit report, you should develop a plan for getting any erroneous information rectified, and possibly begin a campaign to minimize the effect of the negative items that are properly reported.

As I'm sure you know, mortgage lending has fully adopted the credit scoring models to establish levels of risk on their loans, in addition to considering the property, employment and income, assets and debt levels. A high score allows a borrower to obtain the best terms, lower scores increase the cost to the borrower.

Anything you can do to increase your scores can help you save on fees and interest charges.

First, if you find erroneous information on your credit report, it is in your best interests to get it corrected. This may involve writing to the three credit repositories: Equifax, Experian and TransUnion (E,E,T) and working toward having the information corrected at the source where it is disseminated.

If the item that is in error is the result of a creditor's report to the repositories, you will be more effective by writing directly to the creditor and having them amend their records. That way, each time your credit record is submitted to E,E,T, it will be correct from the source of the information. Hopefully, you have maintained your records so that you can document your position and be able to prove your case that your payment record was better than reported.

You can also choose to embark on a campaign to use the Fair Credit Reporting Act (FCRA) to your benefit. This is the approach that commercial Credit Restoration companies use. Be aware that there is a distinction between Credit Restoration companies and debt management/negotiation companies.

The FCRA provides for the consumer to question any unverifiable, inaccurate or erroneous information reported on their credit file with E,E,T. Once the credit bureaus are notified of a disputed item on a consumer's report, they have 30 days to affirm the item in question with the creditor. If the creditor cannot verify the information within that time period, the credit item must be corrected or deleted from the consumer's credit file.

As you can see, once negative items are removed from your credit report, you credit score can increase and you will begin to be eligible for the benefits that higher credit scores can produce.

If you have the time, patience and organization to administer a do-it-yourself campaign, or if you choose to hire a credit restoration company, you should see significant results within 90 days. Even if the creditor affirms the information that was reported, you still have the ability to file another dispute and have the repository and creditor repeat the process. If the creditor fails to verify the information within 30 days, the item should be deleted.

If you choose to hire a credit restoration company, expect to be quoted a fee up to approximately $400. A higher fee does not necessarily mean that you will receive better service or better results. Also, be cautious about companies that charge monthly fees because they may be motivated to drag out the process to earn higher fees. Be diligent in your research so that you feel comfortable with the stability, experience, efficiency, cost for the service and the testimonials from their past clients.

The best strategy for high credit scores is to develop a strong credit history over time by making all your payments on time, staying within your credit limits and using your credit responsibly. But, if you have some items that are reported as less than perfect, using credit restoration techniques, or hiring a credit restoration company may be a good approach for you.