Because of the problems that contributed to the "sub-prime" crisis
and have a large number of borrowers facing default and foreclosure,
the House passed bill 3915 in an effort to limit abuses and bad
business practices in the mortgage industry.
The proposed legislation would include:
- Require a nationwide licensing system for mortgage
brokers and bank loan officers called the Nationwide
Mortgage Licensing System and Registry.
- Ban lenders from making loans that borrowers don't have
the ability to repay.
- Prohibit lenders from steering homeowners into refinanced
mortgages that don't provide benefit to the borrower, or
into mortgages that are at a higher rate than what the
borrower truly qualifies for.
- Prohibit the financing of points and fees and practices
like balloon payments that increase the risk of foreclosure.
(See MY COMMENTS below regarding these items).
The proposal is designed to prevent a recurrence of granting
loans to prospective borrowers with poor credit at low initial
interest rates that would reset to higher, unaffordable rates and
payments in the near future.
Opponents to the bill are concerned that congressional intrusion
could make things worse. They reasoned that the bill could make
it harder for borrowers to reset at higher interest rates, and make
the default problem deeper and more severe than it needs to be.
"Congress does two things very well: one is nothing and two is
overreact," said Rep. Tom Price, R-Ga. "While we have had a
period here where some credit, some loans, were unwisely given,
but allowing individuals, allowing Americans to purchase homes
and realize their American dream is a good thing."
Republicans voiced displeasure with the concept of lenders being
responsible for knowing whether borrowers can actually pay back
the loan. "This kind of murky language would invite litigation from
every borrower who misses a payment," said Rep. Ed Royce, R-CA.
The bill will go to the Senate, where a similar bill has been stalled
for weeks.
White House comment indicated that they were concerned that
the bill as drafted would unduly restrict access to credit for potential
homebuyers and reduce refinancing opportunities.
MY COMMENTS:
Requiring a nationwide licensing system for mortgage brokers
and bank loan officers may not be the best solution. In California,
we are licensed through the California Department of Real Estate,
and there are many safeguards for consumers to check for
complaints filed against their mortgage broker. It would seem
that each state could do a more effective job of legislating their
mortgage process and protecting their constituents.
Banning lenders from making loans that borrowers don't have the
ability to repay, although well-meaning, is probably impossible
to determine. Whenever I encounter a borrower that does not
meet the published lending guidelines, one of the first questions
that I ask is how they plan to make things work for themselves.
I may find that they have support of family members, roommates,
funds coming from an unseasoned, but still reliable source, or
plans to take on a second job to make it all work. Do they have
the ability to repay? On paper, I probably couldn't prove it to the
lender's satisfaction, but the borrower is confident it will all work
out. They are probably as well qualified as most borrowers who
are one layoff away from a catastrophic financial circumstance.
Prohibiting lenders from steering homeowners into refinanced
mortgages that don't provide benefit to the borrower, or into
mortgages that are at a higher rate than what the borrower
truly qualifies for may be difficult to determine in some cases.
There are many situations where a borrower will accept a higher
interest rate if they can benefit from lower payments. Or will
opt for higher payments to shorten the time they will have the
loan. Are higher interest rates or higher payments working
against the best interests of the borrower? The key would be
that the borrower is making an informed decision and under-
stands the tradeoffs they are making. And I think that is what
the legislation is trying to arrive at: give the borrowers enough
information to understand their benefits, their costs, and their
alternatives. With education, borrowers will make a decision
that serves their interests, and not allow a mortgage person to
make a sale of a loan product that earns themselves a fee, but
hurts the borrower.
Prohibiting the financing of points and fees and practices like
balloon payments that increase the risk of foreclosure is a mixed
bag. I can tell you from experience that if borrowers were not
allowed to finance points and fees, that it would severely limit
their opportunity to refinance. As an example, most borrowers
would prefer to pay an extra $35 per month by financing their
fees than they would to come up with $5000 in closing costs.
Most borrowers do not have $5000 set aside for this purpose
and it would stop them from moving forward. Balloon payments
are not a good thing for a borrower. It is too risky for the borrower
to be put in a position that as of a certain date they will be forced
to pay the loan in full and that there will be acceptable financing
available to help them accomplish that. It is too risky for the
borrower to be put in that position.
It is probably good that Congress is trying to find acceptable
solutions. But, in their interest to protect consumers, they may
be creating unintended problems and obstacles that will keep
the mortgage industry from meeting the needs of borrowers.
Wednesday, November 21, 2007
Wednesday, November 7, 2007
It's A Great Time For A Mortgage Loan-As published in Barron's
I was interviewed and included in an article by Mike Hogan
that appeared October 15, 2007 in Barron's. Here is the
text of the article:
Things are so, so bad that some wag has created the Mortgage Lender Implode-O-Meter to count lender defunctions. What a great time to borrow or refinance.
Widespread pain in real estate makes for one of those classic situations where cash is king -- or, in this case, a decent down payment and credit score, at least, gets you into the castle. Its dark humor aside, the Implode-O-Meter lists survivors and dishes daily updates on this turbulent market for the benefit of borrowers and investors alike.
Not every lender’s business was built on subprime loans. Alt-A or “low-doc/no-doc” loans are just a narrow slice of the portfolios of deep-pocket institutions like CitiMortgage, Wells Fargo, Wachovia and Washington Mutual. They still have to keep the lights on, offsetting losses to subprime defaults with loans to qualified borrowers.
“If you fit the Fannie or Freddie guidelines, they’d love to make you a loan,” says Doug Brennecke, a mortgage broker with San Diego’s Mike Dunn & Associates. “Conforming loans are very available with rates and fees in the low-to-moderate end of the spectrum.”
“Guidelines” refer to standards lenders must follow before Fannie Mae or Freddie Mac will buy conforming loans within the $417,000 legal limit. Already-low rates on most conforming loans have been trending lower since the subprime meltdown began, reports Brennecke. And while rates and other terms are incredibly variable, you can drill down on offerings in your town at HSH Associates, a nationwide database updated daily. Likewise, Bankrate.com’s encyclopedic data bank shows a nationwide average of the benchmark 30-year fixed-rate falling from 6.30% in July to 6.05% in early October.
Chase Mortgage increased its loan originations 41% in the second quarter, reports spokesman Thomas Kelly, including subprime and jumbo loans that can’t be layed off on Freddie or Fannie. Qualifications are stricter and prices higher than for conforming loans. But Chase views the current market distress as an opportunity to increase market share, explains Kelly, and is willing to carry the paper until investors warm up to mortgage-backed securities again.
Plummeting home sales have resulted in a stunning lack of demand. The 21.5% year-to-year decline reported by the National Association of Realtors in September is only the latest in a long string of sales declines. In response, Countrywide Home Loans, the nation’s largest mortgage lender, is sending 7,000 home loan consultants to open houses and real estate sales offices nationwide, looking for borrowers. Having lost $595 million to defaults during the first half of the year, Countrywide also has mobilized an army of home retention specialists to help delinquent borrowers keep their homes. The lender claims to have saved 40,000 mortgages from foreclosure so far this year, including 17,000 through mortgage rate modification.
Other forms of outreach include Bank of America’s No Fee Mortgage Plus, which subsidizes loan origination, title and a dozen other closing costs. BofA claims it can save a borrower $3,000 or more on a $200,000 home loan. These costs vary widely by state, but a recent Bankrate.com survey found a national median of $2,692.
There are many such offers, but they bear close scrutiny. It’s common practice to simply offset some of these saving with a higher interest rate. You should be able to suss out real loan costs through careful examination of the preliminary Truth-in-Lending statement. The Federal Trade Commission also is a wellspring of tips, definitions and other consumer protection information.
Although lending standards have tightened considerably, lenders are still more flexible than they were before the subprime craze took them afield, says Brennecke, who has 30 years matching borrowers and lenders. All loans are individual negotiations but, generally, lenders look for borrowers with steady employment, a debt-to-income ratio of about 40%, a 640 or better FICO credit score, and a 10-to-20% downpayment.
The more cash down or lower loan-to-home value when refinancing, the higher your FICO score, the better your bargaining position. myFICO offers two FICO reports a year for $90. It also sponsors a free ballpark estimator on Bankrate.com. Alternately, everyone is entitled to one free credit report a year from all three credit bureaus via AnnualCreditReport.com.
Despite gory headlines, real estate pain is very localized. Most defaults are found in Nevada, Colorado, California, Arizona and Florida, states that were the loci of speculation, notes RealtyTrac. After roughly doubling in 5 years, the national median price of an existing home is virtually unchanged from a year ago -- $224,500 in NAR’s most recent survey.
Unless you foresee prices crashing permanently in your town, now might be a good time to lock in a low cost on your real estate investment.
that appeared October 15, 2007 in Barron's. Here is the
text of the article:
Things are so, so bad that some wag has created the Mortgage Lender Implode-O-Meter to count lender defunctions. What a great time to borrow or refinance.
Widespread pain in real estate makes for one of those classic situations where cash is king -- or, in this case, a decent down payment and credit score, at least, gets you into the castle. Its dark humor aside, the Implode-O-Meter lists survivors and dishes daily updates on this turbulent market for the benefit of borrowers and investors alike.
Not every lender’s business was built on subprime loans. Alt-A or “low-doc/no-doc” loans are just a narrow slice of the portfolios of deep-pocket institutions like CitiMortgage, Wells Fargo, Wachovia and Washington Mutual. They still have to keep the lights on, offsetting losses to subprime defaults with loans to qualified borrowers.
“If you fit the Fannie or Freddie guidelines, they’d love to make you a loan,” says Doug Brennecke, a mortgage broker with San Diego’s Mike Dunn & Associates. “Conforming loans are very available with rates and fees in the low-to-moderate end of the spectrum.”
“Guidelines” refer to standards lenders must follow before Fannie Mae or Freddie Mac will buy conforming loans within the $417,000 legal limit. Already-low rates on most conforming loans have been trending lower since the subprime meltdown began, reports Brennecke. And while rates and other terms are incredibly variable, you can drill down on offerings in your town at HSH Associates, a nationwide database updated daily. Likewise, Bankrate.com’s encyclopedic data bank shows a nationwide average of the benchmark 30-year fixed-rate falling from 6.30% in July to 6.05% in early October.
Chase Mortgage increased its loan originations 41% in the second quarter, reports spokesman Thomas Kelly, including subprime and jumbo loans that can’t be layed off on Freddie or Fannie. Qualifications are stricter and prices higher than for conforming loans. But Chase views the current market distress as an opportunity to increase market share, explains Kelly, and is willing to carry the paper until investors warm up to mortgage-backed securities again.
Plummeting home sales have resulted in a stunning lack of demand. The 21.5% year-to-year decline reported by the National Association of Realtors in September is only the latest in a long string of sales declines. In response, Countrywide Home Loans, the nation’s largest mortgage lender, is sending 7,000 home loan consultants to open houses and real estate sales offices nationwide, looking for borrowers. Having lost $595 million to defaults during the first half of the year, Countrywide also has mobilized an army of home retention specialists to help delinquent borrowers keep their homes. The lender claims to have saved 40,000 mortgages from foreclosure so far this year, including 17,000 through mortgage rate modification.
Other forms of outreach include Bank of America’s No Fee Mortgage Plus, which subsidizes loan origination, title and a dozen other closing costs. BofA claims it can save a borrower $3,000 or more on a $200,000 home loan. These costs vary widely by state, but a recent Bankrate.com survey found a national median of $2,692.
There are many such offers, but they bear close scrutiny. It’s common practice to simply offset some of these saving with a higher interest rate. You should be able to suss out real loan costs through careful examination of the preliminary Truth-in-Lending statement. The Federal Trade Commission also is a wellspring of tips, definitions and other consumer protection information.
Although lending standards have tightened considerably, lenders are still more flexible than they were before the subprime craze took them afield, says Brennecke, who has 30 years matching borrowers and lenders. All loans are individual negotiations but, generally, lenders look for borrowers with steady employment, a debt-to-income ratio of about 40%, a 640 or better FICO credit score, and a 10-to-20% downpayment.
The more cash down or lower loan-to-home value when refinancing, the higher your FICO score, the better your bargaining position. myFICO offers two FICO reports a year for $90. It also sponsors a free ballpark estimator on Bankrate.com. Alternately, everyone is entitled to one free credit report a year from all three credit bureaus via AnnualCreditReport.com.
Despite gory headlines, real estate pain is very localized. Most defaults are found in Nevada, Colorado, California, Arizona and Florida, states that were the loci of speculation, notes RealtyTrac. After roughly doubling in 5 years, the national median price of an existing home is virtually unchanged from a year ago -- $224,500 in NAR’s most recent survey.
Unless you foresee prices crashing permanently in your town, now might be a good time to lock in a low cost on your real estate investment.
Wednesday, October 24, 2007
Some Effects of the Southern California Wildfires on Mortgage Lending
The fires that have been raging through San Diego County have
had immediate consequences to hundreds of thousands of
people. From evacuations, to property damage, to complete
loss of homes, and blessedly, only a few fatalities so far, we
all probably have been directly affected or know a family member
or friend who has been affected.
I sincerely hope that you have been spared from severe
consequences from these fires.
There are some procedures that you can expect to encounter
if you are in the midst of a transaction right now. Each lender
will ascertain their own approach to risk assessment, but these
would be fairly standard:
APPRAISAL UPDATES: If the lender has already received an
appraisal of the home and has based their approval on the
condition that was in effect at the time of the inspection, you
can expect that they will not move forward on the closing of
your loan without requiring the appraisal to make an updated
inspection of the property.
This inspection (with new photos) is designed to show that
the home is still standing, that there has not been any damage
to it, and that all the factors that went into the original valuation
of the property are still valid.
Availability of services such as gas and electric, sewer, and
water will be necessary. Any health or safety concerns will
need to be addressed and found acceptable.
This will obviously create some additional timing concerns, and
the lender is now free to make a new decision based on the new
facts as disclosed by the appraiser.
INSURANCE UPDATES: The insurance companies will also be
important players in the closing process. With substantial
losses anticipated with existing policies, you may find that the
insurance company that you were planning on using does not
have an interest in extending new policies in the area.
You may need to find a new insurance company to consider
your request. Also, you may find that the cost of the insurance
is now higher because of the higher risk associated with
insurance coverage in these impacted areas.
TIMING CONSIDERATIONS: Everyone's schedules have
been disrupted this week. Businesses have been closed,
employees have been taking care of their immediate
personal issues, Government offices have been closed as
well.
You may be eager to move on with your plans and finalize
your transaction.
But we have seen disruptions with the County Recorder's
Office being closed, so that transactions cannot be finalized.
Lenders have been closed, or short-staffed, so that their
normal work flow is much slower than usual. Loans are
moving through the pipeline with more scrutiny. This
all contributes to new conditions to be satisfied (such as
the appraisal and insurance discussed above), additional
review of new material, and fundings being scheduled
when offices and staff support warrants them.
To summarize, be prepared for delays and some confusion.
Do not expect things to go as smoothly as they normally
do.
Understand too, that the person you are dealing with, who
you may think is contributing to making your life more
difficult, may be going through their own personal issues
with disruptions, losses, or family problems.
We are truly all in this together right now. Search for the
people that can help you reach your goal and who can
demonstrate that they are working as hard as they can
to help you through a difficult time.
had immediate consequences to hundreds of thousands of
people. From evacuations, to property damage, to complete
loss of homes, and blessedly, only a few fatalities so far, we
all probably have been directly affected or know a family member
or friend who has been affected.
I sincerely hope that you have been spared from severe
consequences from these fires.
There are some procedures that you can expect to encounter
if you are in the midst of a transaction right now. Each lender
will ascertain their own approach to risk assessment, but these
would be fairly standard:
APPRAISAL UPDATES: If the lender has already received an
appraisal of the home and has based their approval on the
condition that was in effect at the time of the inspection, you
can expect that they will not move forward on the closing of
your loan without requiring the appraisal to make an updated
inspection of the property.
This inspection (with new photos) is designed to show that
the home is still standing, that there has not been any damage
to it, and that all the factors that went into the original valuation
of the property are still valid.
Availability of services such as gas and electric, sewer, and
water will be necessary. Any health or safety concerns will
need to be addressed and found acceptable.
This will obviously create some additional timing concerns, and
the lender is now free to make a new decision based on the new
facts as disclosed by the appraiser.
INSURANCE UPDATES: The insurance companies will also be
important players in the closing process. With substantial
losses anticipated with existing policies, you may find that the
insurance company that you were planning on using does not
have an interest in extending new policies in the area.
You may need to find a new insurance company to consider
your request. Also, you may find that the cost of the insurance
is now higher because of the higher risk associated with
insurance coverage in these impacted areas.
TIMING CONSIDERATIONS: Everyone's schedules have
been disrupted this week. Businesses have been closed,
employees have been taking care of their immediate
personal issues, Government offices have been closed as
well.
You may be eager to move on with your plans and finalize
your transaction.
But we have seen disruptions with the County Recorder's
Office being closed, so that transactions cannot be finalized.
Lenders have been closed, or short-staffed, so that their
normal work flow is much slower than usual. Loans are
moving through the pipeline with more scrutiny. This
all contributes to new conditions to be satisfied (such as
the appraisal and insurance discussed above), additional
review of new material, and fundings being scheduled
when offices and staff support warrants them.
To summarize, be prepared for delays and some confusion.
Do not expect things to go as smoothly as they normally
do.
Understand too, that the person you are dealing with, who
you may think is contributing to making your life more
difficult, may be going through their own personal issues
with disruptions, losses, or family problems.
We are truly all in this together right now. Search for the
people that can help you reach your goal and who can
demonstrate that they are working as hard as they can
to help you through a difficult time.
Wednesday, October 10, 2007
Some Normalcy Is Returning to the Mortgage Market
Whenever we go through these wild gyrations in the market,
the correction to the problem is usually a very conservative
reaction, many times overly conservative.
In the last eight weeks, as the sub-prime mortgage market
created doubt among the investors that the quality of the
loan products was as good as they were led to believe, the
investors also pulled out of the jumbo loan market (those
loans over $417,000).
The absence of liquidity rippled through, from the investors
to the lenders to the cutbacks in lending programs to fewer
opportunities for borrowers to get the loan that they needed.
We are now seeing that after this reaction, that the lenders
are now resuming some loan categories and products that
have been missing for the last two months.
Specifically, there has been a resumption of the stated income
jumbo loan products. These allow borrowers to represent their
incomes without having to provide documentation as proof.
The guidelines have not snapped back to where they were
before the meltdown, but they are moving in the right direction
to benefit borrowers.
At first, the lenders dropped these loans to only 80% of the
home value, but would allow a second loan of 10% so that a
buyer could still purchase a home with only 10% cash down
payment.
Now there are jumbo lenders who will do a stated income
loan up to 95% of the value. The qualifications are somewhat
more stringent than they were before, but at least the program
is now available, which will help many borrowers.
There are also proposals in Congress to expand both the
conforming limits substantially beyond the $417,000 limit and
to the FHA program. In the San Diego area, the $417,000
limit has not served the high-priced areas very well, and FHA
has been essentially dormant for much of the county for quite
some time.
If these changes go through, we will see many more opportunities
for borrowers to obtain favorable financing with the support of
the FHLMC, FNMA and FHA programs.
Keep in mind that our far-reaching lending resources can help
you find solutions to your mortgage needs that many other
lenders cannot provide.
the correction to the problem is usually a very conservative
reaction, many times overly conservative.
In the last eight weeks, as the sub-prime mortgage market
created doubt among the investors that the quality of the
loan products was as good as they were led to believe, the
investors also pulled out of the jumbo loan market (those
loans over $417,000).
The absence of liquidity rippled through, from the investors
to the lenders to the cutbacks in lending programs to fewer
opportunities for borrowers to get the loan that they needed.
We are now seeing that after this reaction, that the lenders
are now resuming some loan categories and products that
have been missing for the last two months.
Specifically, there has been a resumption of the stated income
jumbo loan products. These allow borrowers to represent their
incomes without having to provide documentation as proof.
The guidelines have not snapped back to where they were
before the meltdown, but they are moving in the right direction
to benefit borrowers.
At first, the lenders dropped these loans to only 80% of the
home value, but would allow a second loan of 10% so that a
buyer could still purchase a home with only 10% cash down
payment.
Now there are jumbo lenders who will do a stated income
loan up to 95% of the value. The qualifications are somewhat
more stringent than they were before, but at least the program
is now available, which will help many borrowers.
There are also proposals in Congress to expand both the
conforming limits substantially beyond the $417,000 limit and
to the FHA program. In the San Diego area, the $417,000
limit has not served the high-priced areas very well, and FHA
has been essentially dormant for much of the county for quite
some time.
If these changes go through, we will see many more opportunities
for borrowers to obtain favorable financing with the support of
the FHLMC, FNMA and FHA programs.
Keep in mind that our far-reaching lending resources can help
you find solutions to your mortgage needs that many other
lenders cannot provide.
Wednesday, September 26, 2007
The Hybrid Adjustable Rate Mortgage - A Useful Tool
The hybrid ARMS - those are the loans that fix the interest
rates for an initial period of time and then turn into adjustable
rate loans for the remainder of the term - have been versatile
loan products to help clients save money.
When I discuss loan programs with clients, I usually will
give them an idea of their choices by showing them a
spectrum of typical mortgage products.
These include the following:
30-year fixed rate loan - most stable, highest rate
15-year fixed rate loan - retires loan quicker, higher payments
10-year hybrid ARM - targeted to cover a period of ownership
7-year hybrid ARM - targeted to cover a period of ownership
5-year hybrid ARM - targeted to cover a period of ownership
3-year hybrid ARM - targeted to cover a period of ownership
1 year adjustable rate loan - useful for short-term strategies
Semi-annual adjustable rate loan - useful for short-term strategies
Monthly adjustable rate loan - lowest payments, allows for
negative amortization
Some clients will prefer the 30-year fixed rate loan because they
will be guaranteed that there will be no surprises in that loan. If
they can afford the payments today, they should be able to
continue to afford the payments in the future.
The 15-year fixed rate loan has appeal to those clients who want
to have their loan paid in full, usually to coincide with a retirement
strategy. The interest rate on the 15-year loan is generally a little
less than the rate offered on a 30-year loan.
The 1-year and semi-annual adjustable rate loans are usually of
interest to borrowers who have a very short term strategy in owning
the home. They enjoy the benefit of the lower interest rate that
the adjustable rate loan offers initially, and plan to dispose of the
property before the loan has an opportunity to adjust to any large
degree. Because these loans offer interest rate caps per adjustment
period, they can forecast what their worst-case scenario would be in
the near future.
The monthly adjustable rate loan is also known as the deferred
interest option loan, or the negative amortization loan. This program
allows a borrower to make a minimum payment that is actually less
than the interest owing at the time. If the borrower pays the
minimum payment, the unpaid interest gets added to the principal
balance of the loan and the loan gets larger each month. This loan
can be the right mortgage vehicle in certain circumstances, but
the client deserves to fully understand how this loan works so that
there are no surprises. In a future issue, I will feature this loan.
The 10-year, 7-year, 5-year and 3-year hybrid ARM loans serve a
very useful purpose for a majority of borrowers. The longer that a
lender is asked to guarantee an interest rate, the rate is usually
higher. So, a 30-year loan carries a higher interest rate than a
15-year loan, which in turn is higher than the 10-year hybrid
ARM, the 7-year hybrid ARM, the 5-year hybrid ARM, and the
3-year hybrid ARM.
The key to a suitable recommendation for a client is to determine
how long they intend to own the home. If they intend to own the
home for 5 years, it would not be wise to recommend the 3-year
hybrid ARM, because they would face an adjustment to the
interest rate before they planned on moving. In this case the 5-year,
7-year, or 10-year hybrid ARMS would be worthy of consideration
to protect the borrower with a guaranteed interest rate for the
period of time they intend to own the home, and to give them
additional protection in the event that their time frame slipped
from their initial plan.
The hybrids function like this:
The term of the loan is typically 30 years, with the initial interest
rate guaranteed for a specified period of time - 10, 7, 5 or 3 years.
When the loan reaches the end of that guaranteed period of time -
let's use the 5 -year as our example - the loan ceases its fixed rate
period and turns into an annual adjustable rate loan. So, beginning
after the 60th month, the new interest rate is calculated by using an
index that is specified in the loan documents and determining the
index value at that point in time, and adding to it a "margin" that is
also specified in the loan documents that can best be thought of
as the lender's profit margin.
Many of these loans use the 1-year LIBOR index and have a margin
of say, 2.75%. Using today's rates as an example, a borrower could
expect their new interest rate to be 4.893% for the LIBOR value plus
2.75% margin, giving the borrower a new rate of 7.643% for the next
year. The payments would be calculated on the remaining balance
at the end of the 5 years over a 25-year period (the remaining term
of the loan) at an interest rate of 7.643%.
At the end of that year, the lender would do a new calculation using
the same formula but setting the payments over a 24-year period.
There are additional features of these loans to be considered. Many
programs will allow for interest-only payments which allows the
borrower to make the lowest possible payment and it keeps their
principal balance on the loan level. Many lenders will also allow
for slightly lower interest rates or fees if the borrower will accept a
prepayment fee for the first year or 3 years.
Since these loans have been introduced, many borrowers have
chosen them as their preferred mortgage product. As always,
make sure that the details and the answers to your "What if..."
questions are fully explained to you so that you can make an
informed decision.
rates for an initial period of time and then turn into adjustable
rate loans for the remainder of the term - have been versatile
loan products to help clients save money.
When I discuss loan programs with clients, I usually will
give them an idea of their choices by showing them a
spectrum of typical mortgage products.
These include the following:
30-year fixed rate loan - most stable, highest rate
15-year fixed rate loan - retires loan quicker, higher payments
10-year hybrid ARM - targeted to cover a period of ownership
7-year hybrid ARM - targeted to cover a period of ownership
5-year hybrid ARM - targeted to cover a period of ownership
3-year hybrid ARM - targeted to cover a period of ownership
1 year adjustable rate loan - useful for short-term strategies
Semi-annual adjustable rate loan - useful for short-term strategies
Monthly adjustable rate loan - lowest payments, allows for
negative amortization
Some clients will prefer the 30-year fixed rate loan because they
will be guaranteed that there will be no surprises in that loan. If
they can afford the payments today, they should be able to
continue to afford the payments in the future.
The 15-year fixed rate loan has appeal to those clients who want
to have their loan paid in full, usually to coincide with a retirement
strategy. The interest rate on the 15-year loan is generally a little
less than the rate offered on a 30-year loan.
The 1-year and semi-annual adjustable rate loans are usually of
interest to borrowers who have a very short term strategy in owning
the home. They enjoy the benefit of the lower interest rate that
the adjustable rate loan offers initially, and plan to dispose of the
property before the loan has an opportunity to adjust to any large
degree. Because these loans offer interest rate caps per adjustment
period, they can forecast what their worst-case scenario would be in
the near future.
The monthly adjustable rate loan is also known as the deferred
interest option loan, or the negative amortization loan. This program
allows a borrower to make a minimum payment that is actually less
than the interest owing at the time. If the borrower pays the
minimum payment, the unpaid interest gets added to the principal
balance of the loan and the loan gets larger each month. This loan
can be the right mortgage vehicle in certain circumstances, but
the client deserves to fully understand how this loan works so that
there are no surprises. In a future issue, I will feature this loan.
The 10-year, 7-year, 5-year and 3-year hybrid ARM loans serve a
very useful purpose for a majority of borrowers. The longer that a
lender is asked to guarantee an interest rate, the rate is usually
higher. So, a 30-year loan carries a higher interest rate than a
15-year loan, which in turn is higher than the 10-year hybrid
ARM, the 7-year hybrid ARM, the 5-year hybrid ARM, and the
3-year hybrid ARM.
The key to a suitable recommendation for a client is to determine
how long they intend to own the home. If they intend to own the
home for 5 years, it would not be wise to recommend the 3-year
hybrid ARM, because they would face an adjustment to the
interest rate before they planned on moving. In this case the 5-year,
7-year, or 10-year hybrid ARMS would be worthy of consideration
to protect the borrower with a guaranteed interest rate for the
period of time they intend to own the home, and to give them
additional protection in the event that their time frame slipped
from their initial plan.
The hybrids function like this:
The term of the loan is typically 30 years, with the initial interest
rate guaranteed for a specified period of time - 10, 7, 5 or 3 years.
When the loan reaches the end of that guaranteed period of time -
let's use the 5 -year as our example - the loan ceases its fixed rate
period and turns into an annual adjustable rate loan. So, beginning
after the 60th month, the new interest rate is calculated by using an
index that is specified in the loan documents and determining the
index value at that point in time, and adding to it a "margin" that is
also specified in the loan documents that can best be thought of
as the lender's profit margin.
Many of these loans use the 1-year LIBOR index and have a margin
of say, 2.75%. Using today's rates as an example, a borrower could
expect their new interest rate to be 4.893% for the LIBOR value plus
2.75% margin, giving the borrower a new rate of 7.643% for the next
year. The payments would be calculated on the remaining balance
at the end of the 5 years over a 25-year period (the remaining term
of the loan) at an interest rate of 7.643%.
At the end of that year, the lender would do a new calculation using
the same formula but setting the payments over a 24-year period.
There are additional features of these loans to be considered. Many
programs will allow for interest-only payments which allows the
borrower to make the lowest possible payment and it keeps their
principal balance on the loan level. Many lenders will also allow
for slightly lower interest rates or fees if the borrower will accept a
prepayment fee for the first year or 3 years.
Since these loans have been introduced, many borrowers have
chosen them as their preferred mortgage product. As always,
make sure that the details and the answers to your "What if..."
questions are fully explained to you so that you can make an
informed decision.
Wednesday, September 12, 2007
Learning From Others-A Cautionary Tale
Over this last weekend, I did a fund-raising charity ride for the
benefit of United Cerebral Palsy in San Diego. At dinner on
Saturday I was talking with another rider and when she
found out that I was a mortgage broker, she asked me a
number of questions and I learned about her current predicament.
She had worked through another mortgage originator previously.
She has had her existing loan for about a year and a half. She
discovered, too late, that it was one that allowed for deferred
interest or "negative amortization". This loan was a refinance
due to a divorce situation, so she pulled cash out of the prop-
erty to pay off her former spouse.
At that time, she financed 90% of the value of the home, and
she was qualified based on the "stated income" program.
She had a strong credit history and credit score, but limited
savings or retirement funds, so she needed every advantage
to qualify for the new loan and keep her condominium for
herself and her two children.
And, in the "Add Insult to Injury" Department, she also has
a prepayment penalty on the loan that was not made clear
to her.
She could be the Poster Girl for the current excesses that
have taken place in liberal underwriting and approvals, and
also how misplaced trust in financial advisors can create
bigger problems.
Let's look closely at some of these details.
First, she was emotionally attached to wanting to keep her
condominium for comfort and security and that framed her
decision-making at every turn. She never seriously considered
selling the home and splitting the proceeds with her former
spouse because she didn't want to rent or downsize to a
smaller place.
Second, the low payments that the deferred interest option
loan offered were very attractive to her, and were affordable.
Although she seemed to recall having some of the conse-
quences of that loan explained to her, she never thoroughly
understood how it worked.
When she got the loan, the amount of interest deferral was
modest, but as interest rates have increased over the last
year and a half, she is looking at her loan balance increasing
significantly each month.
The loan allows for the principal balance to increase no higher
than 110% of the original loan amount. When the loan began
the projection was that it would not happen for many years,
but with the higher interest deferral she may be facing signi-
ficantly higher payments within the next year.
Third, she obtained her loan, and bought out her ex-husband
near the top of the real estate market. Property values have
dropped, and combined with her loan balance increasing, her
equity is being squeezed very close to nothing.
Fourth, by relying on the "stated income" qualifying feature,
she allowed herself to be put into a situation that could become
increasingly unaffordable. I did not get all the details of what
she really made versus what was represented on her loan
submission, but she may have been optimistic about having
additional income that did not come to fruition.
Lastly, the prepayment penalty handcuffs her to the existing
loan unless she wants to pay thousands of dollars to get out
of it. Of course, she does not have the equity in the property
or the cash in reserves to absorb this kind of expense.
What can we learn from her ordeal?
A. Seek out many solutions to the problem and don't rule out
any of them until you have a chance to assess the merits
of all of them.
There is a saying that when your only tool is a hammer,
you treat everything like a nail. But be cautious that the
person from whom you are seeking advice is helping you
brainstorm solutions to your problem and not just promoting
their product.
In too many cases, if you speak with a real estate agent,
they will want you to list the house with them. If you speak
with a mortgage originator, they want to sell you a new loan.
But there are quality professionals in both industries that will
give you honest advice and resources to explore to make sure
that you are well-cared for.
B. Thoroughly understand why the proposal that is being
offered is good for you, and take the time to understand the
details.
I know that the mortgage business can be confusing, and some
originators are not that great on explaining the features without
using verbal shorthand, but you have to insist that they keep
explaining it until you understand it properly. If they are unable
to communicate to you effectively, you should find someone
who can. The consequences of misunderstandings or failure
to disclose pertinent terms to you are just too expensive in
both dollars and emotional distress.
C. Forecast what the "worst-case scenario" is, especially if
you are considering an adjustable rate loan. We can make
projections based on reasonable assumptions but insist on
knowing how the loan performs if everything goes crazy.
That is the only way that you can satisfy yourself that you
have a plan that can work for you no matter what.
I know that I keep repeating this, but it is important that you
find the right people to counsel you, and who are truly looking
out for you best interests.
If she comes to me to help brainstorm a solution to her
problem, I will do my best to help her, irrespective of whether
it creates a new loan for me or not.
When you come to me for help, advice, or mortgage services
you can be confident that I will do the same for you.
benefit of United Cerebral Palsy in San Diego. At dinner on
Saturday I was talking with another rider and when she
found out that I was a mortgage broker, she asked me a
number of questions and I learned about her current predicament.
She had worked through another mortgage originator previously.
She has had her existing loan for about a year and a half. She
discovered, too late, that it was one that allowed for deferred
interest or "negative amortization". This loan was a refinance
due to a divorce situation, so she pulled cash out of the prop-
erty to pay off her former spouse.
At that time, she financed 90% of the value of the home, and
she was qualified based on the "stated income" program.
She had a strong credit history and credit score, but limited
savings or retirement funds, so she needed every advantage
to qualify for the new loan and keep her condominium for
herself and her two children.
And, in the "Add Insult to Injury" Department, she also has
a prepayment penalty on the loan that was not made clear
to her.
She could be the Poster Girl for the current excesses that
have taken place in liberal underwriting and approvals, and
also how misplaced trust in financial advisors can create
bigger problems.
Let's look closely at some of these details.
First, she was emotionally attached to wanting to keep her
condominium for comfort and security and that framed her
decision-making at every turn. She never seriously considered
selling the home and splitting the proceeds with her former
spouse because she didn't want to rent or downsize to a
smaller place.
Second, the low payments that the deferred interest option
loan offered were very attractive to her, and were affordable.
Although she seemed to recall having some of the conse-
quences of that loan explained to her, she never thoroughly
understood how it worked.
When she got the loan, the amount of interest deferral was
modest, but as interest rates have increased over the last
year and a half, she is looking at her loan balance increasing
significantly each month.
The loan allows for the principal balance to increase no higher
than 110% of the original loan amount. When the loan began
the projection was that it would not happen for many years,
but with the higher interest deferral she may be facing signi-
ficantly higher payments within the next year.
Third, she obtained her loan, and bought out her ex-husband
near the top of the real estate market. Property values have
dropped, and combined with her loan balance increasing, her
equity is being squeezed very close to nothing.
Fourth, by relying on the "stated income" qualifying feature,
she allowed herself to be put into a situation that could become
increasingly unaffordable. I did not get all the details of what
she really made versus what was represented on her loan
submission, but she may have been optimistic about having
additional income that did not come to fruition.
Lastly, the prepayment penalty handcuffs her to the existing
loan unless she wants to pay thousands of dollars to get out
of it. Of course, she does not have the equity in the property
or the cash in reserves to absorb this kind of expense.
What can we learn from her ordeal?
A. Seek out many solutions to the problem and don't rule out
any of them until you have a chance to assess the merits
of all of them.
There is a saying that when your only tool is a hammer,
you treat everything like a nail. But be cautious that the
person from whom you are seeking advice is helping you
brainstorm solutions to your problem and not just promoting
their product.
In too many cases, if you speak with a real estate agent,
they will want you to list the house with them. If you speak
with a mortgage originator, they want to sell you a new loan.
But there are quality professionals in both industries that will
give you honest advice and resources to explore to make sure
that you are well-cared for.
B. Thoroughly understand why the proposal that is being
offered is good for you, and take the time to understand the
details.
I know that the mortgage business can be confusing, and some
originators are not that great on explaining the features without
using verbal shorthand, but you have to insist that they keep
explaining it until you understand it properly. If they are unable
to communicate to you effectively, you should find someone
who can. The consequences of misunderstandings or failure
to disclose pertinent terms to you are just too expensive in
both dollars and emotional distress.
C. Forecast what the "worst-case scenario" is, especially if
you are considering an adjustable rate loan. We can make
projections based on reasonable assumptions but insist on
knowing how the loan performs if everything goes crazy.
That is the only way that you can satisfy yourself that you
have a plan that can work for you no matter what.
I know that I keep repeating this, but it is important that you
find the right people to counsel you, and who are truly looking
out for you best interests.
If she comes to me to help brainstorm a solution to her
problem, I will do my best to help her, irrespective of whether
it creates a new loan for me or not.
When you come to me for help, advice, or mortgage services
you can be confident that I will do the same for you.
Thursday, August 30, 2007
Borrowers Should Not Be Abandoned
Over-Reaction by Investors and Lenders-
They Need to Allow for a "Soft Landing"
The news about the mortgage defaults and foreclosures is in
all the media, several times a week. Statistics show that the
rate of defaults is much higher than they have been over the
last few years.
When the real estate market peaks and property values
start to decline even a little bit, the mistakes that the lenders
have made with aggressive lending practices start to be
revealed.
This is what we have been seeing, starting with the what has
become to be called the "sub-prime" crisis. The underwriting
of these loans was very aggressive, allowing cumulative loans
up to 100% of the value of the home, allowing below-average
credit scores, little insistence on documenting the income
for qualifying and not caring if there was much in the way of
cash reserves for the borrower.
As a result, these high-risk loans are having trouble performing
by having payments being made on time. This makes the
investors nervous, and there are monetary losses up and down
the line when the money doesn't arrive as planned.
Now the investors, and by extension the lenders, have with-
drawn many lending programs and over-reacted to the situation.
Just a few months ago, they saw reasonable risk associated
with certain credit profiles and they were willing to make those
loans. In today's environment, these same credit profiles are
representing unacceptable risk at any price.
So, the pendulum has swung from being very permissive to
very restrictive in such a short period of time that borrowers
are finding themselves without many acceptable choices
for restructuring their debt.
The borrowers need to have some confidence that the rug
has not been pulled out from under them. For their well-
being, a reasonable plan would have been for the investors/
lenders to slowly pull back from their most risky lending
profiles and continue to accept reasonable risk. This would
have allowed borrowers to still have an opportunity to
restructure their debt, albeit with fewer choices and possibly
somewhat higher rates and fees. But at least they could
pursue options.
Instead, the investors/lenders have lost all confidence in their
ability to assess mortgage risk. They do not know where the
line is where clients will still invest in their mortgage-backed
security pools, so they have decided to withdraw to a large
degree from offering loan programs that rely on funding through
Wall Street.
It will take some time for these investors/lenders to slowly
introduce different degrees of risk in their mortgage offerings
from the very conservative posture they are now taking. They
will have to discover where the clients' appetite is for any new
mortgage offering. They know that there will be a market among
the borrowing public because they are effectively creating pent-up
demand by withdrawing programs from the market.
I have always tried my best to fully inform my clients of how
their particular loan works, what the moving parts are in their
home mortgage, where they have stability in the loan and where
there are risks of which they need to be aware. My clients and
myself discussed exit strategies and time horizons to do forward
planning for restructuring their loans if necessary.
What is happening now is that the assumptions we made about
mortgage products continuing to be available as they had been
are proving to be troublesome. The wholesale changes we have
seen - the over-reaction and severe cutbacks in lending programs -
will create a default problem for borrowers that will be much deeper
than it needs to be.
The lending community needs to recognize that there are many
borrowers who want to improve their mortgage situation, especially
those who are facing resets of their interest rates and payments
who opted for loans with rates that were fixed for 3 or 5 years. Many
of these borrowers have good credit scores, sufficient equity in their
homes, solid employment, income and cash reserves.
These borrowers deserve to have their needs met by a responsive
lending market. They are currently the proverbial baby being thrown
out with the bath water.
While it is unfortunate that there are borrowers who will face
foreclosure because they borrowed more than they could ultimately
afford (for many reasons), that does not mean that the vast majority
of borrowers need to be under-served with reasonable lending
alternatives.
If you, or anyone you know, needs to investigate their options for
a new mortgage, have them call me. I still have access to
lending choices that may provide a solution.
They Need to Allow for a "Soft Landing"
The news about the mortgage defaults and foreclosures is in
all the media, several times a week. Statistics show that the
rate of defaults is much higher than they have been over the
last few years.
When the real estate market peaks and property values
start to decline even a little bit, the mistakes that the lenders
have made with aggressive lending practices start to be
revealed.
This is what we have been seeing, starting with the what has
become to be called the "sub-prime" crisis. The underwriting
of these loans was very aggressive, allowing cumulative loans
up to 100% of the value of the home, allowing below-average
credit scores, little insistence on documenting the income
for qualifying and not caring if there was much in the way of
cash reserves for the borrower.
As a result, these high-risk loans are having trouble performing
by having payments being made on time. This makes the
investors nervous, and there are monetary losses up and down
the line when the money doesn't arrive as planned.
Now the investors, and by extension the lenders, have with-
drawn many lending programs and over-reacted to the situation.
Just a few months ago, they saw reasonable risk associated
with certain credit profiles and they were willing to make those
loans. In today's environment, these same credit profiles are
representing unacceptable risk at any price.
So, the pendulum has swung from being very permissive to
very restrictive in such a short period of time that borrowers
are finding themselves without many acceptable choices
for restructuring their debt.
The borrowers need to have some confidence that the rug
has not been pulled out from under them. For their well-
being, a reasonable plan would have been for the investors/
lenders to slowly pull back from their most risky lending
profiles and continue to accept reasonable risk. This would
have allowed borrowers to still have an opportunity to
restructure their debt, albeit with fewer choices and possibly
somewhat higher rates and fees. But at least they could
pursue options.
Instead, the investors/lenders have lost all confidence in their
ability to assess mortgage risk. They do not know where the
line is where clients will still invest in their mortgage-backed
security pools, so they have decided to withdraw to a large
degree from offering loan programs that rely on funding through
Wall Street.
It will take some time for these investors/lenders to slowly
introduce different degrees of risk in their mortgage offerings
from the very conservative posture they are now taking. They
will have to discover where the clients' appetite is for any new
mortgage offering. They know that there will be a market among
the borrowing public because they are effectively creating pent-up
demand by withdrawing programs from the market.
I have always tried my best to fully inform my clients of how
their particular loan works, what the moving parts are in their
home mortgage, where they have stability in the loan and where
there are risks of which they need to be aware. My clients and
myself discussed exit strategies and time horizons to do forward
planning for restructuring their loans if necessary.
What is happening now is that the assumptions we made about
mortgage products continuing to be available as they had been
are proving to be troublesome. The wholesale changes we have
seen - the over-reaction and severe cutbacks in lending programs -
will create a default problem for borrowers that will be much deeper
than it needs to be.
The lending community needs to recognize that there are many
borrowers who want to improve their mortgage situation, especially
those who are facing resets of their interest rates and payments
who opted for loans with rates that were fixed for 3 or 5 years. Many
of these borrowers have good credit scores, sufficient equity in their
homes, solid employment, income and cash reserves.
These borrowers deserve to have their needs met by a responsive
lending market. They are currently the proverbial baby being thrown
out with the bath water.
While it is unfortunate that there are borrowers who will face
foreclosure because they borrowed more than they could ultimately
afford (for many reasons), that does not mean that the vast majority
of borrowers need to be under-served with reasonable lending
alternatives.
If you, or anyone you know, needs to investigate their options for
a new mortgage, have them call me. I still have access to
lending choices that may provide a solution.
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