The Challenge of Condos

In the mortgage lending world, condominiums
are considered differently by the lenders than
are single-family detached homes (SFDs).

Because single-family detached homes have
an element of autonomy for the owner, and
because condominiums require collective
accounting and decision making, SFDs are
considered less risky than condominiums.

Through statistical experience, the lenders know
that the introduction of common ownership that
is essential to the condominium project, creates
additional risks.

There are at least 4 major concerns of lenders
that can create insurmountable obstacles to
helping a borrower obtain a loan in a particular
condominium project.

1. Percentage of owner-occupants in the project.

A typical guideline from FNMA and FHLMC is that
the project must have at least 51% of the units
occupied by owners. This 51% can include second
homes, but cannot include tenant-occupied or rental
units. Lenders know that if a project is predominately
renters that the pride of ownership in the project is
diminished.

Very early in the application process it is important
that we contact the Homeowners Association (HOA)
management company to find out what the owner-
occupancy percentage is.

We often find that the HOA canagement company
only derives their statistics by matching the mailing
addresses to the property addresses. If someone
has their mail sent to their office, or to a post office
mailbox, the HOA management company will not
make the leap of judgment that the unit is occupied
by an owner.

Similarly, when the mailing address is a distinctly
different street address than the subject unit, they
will not survey the owners to find out if they owner
rents the property, or if it is held as a second home.

So, the information that we receive from the HOA
management company is likely inaccurate, but does
not present a problem unless the percentage of
units with matching mailing and property addresses
is very close to the 51% level. In that case, the
lack of interest in the managment company to
be more accurate could be costly to the buyer or
homeowner interested in refinancing.

In fairness to the HOA management company, they
do not feel that this is part of the service that they
are obligated to provide to their unit owners. The
unit owners would be well-served to insist that this
attention to detail be included in their contract with
the HOA management company.

2. Percentage of unit owners who are delinquent in
their HOA fees.

Lenders have also proven statistically that if there
is a significant number of unit owners who are delin-
quent in paying their HOA fees that there will not
be enough money for the payment of ongoing bills
and to replenish reserves for capital replacement
and improvements.

The guideline figure has been that no more than
15% of the unit owners can be more than 30 days
behind in the HOA fees.

Not surprisingly, the HOA management company
does a much better job of tracking the receipt of
the HOA fees and can give us this figure with
more accuracy.

A large number of delinquent homeowners means
that there is an increased likelihood of special
assessments being necessary.

And the lenders know that if everyone in the project
is asked to come up with several thousand dollars
each, that it creates financial strain on all the home-
owners. This jeopardizes the financial strength of
the entire project.

3. Lawsuits involving the condominium project.

The biggest concern of the lender is that there are
lawsuits involving construction defects in the condo-
minium project. They defeat the loan request,
almost without exception.

It is almost a certainty that within the statute of
limitations, currently 4 years I believe, that the
HOA will file suit against the developer. Although
there may not be large construction issues that
require litigation, if the HOA fails to take that
step, they could be accused of not fulfilling their
fiduciary responsibilities to the homeowners.

Consequently, a construction defect lawsuit is
almost a given within that timeframe.

Other lawsuits, which may include "slip and fall"
or nuisance suits, may be able to be overlooked
by the lender if they are limited in scope and don't
involve the unit that they are being asked to lend
on.

4. Saturation or concentration by the lender or
investor.

Many lenders, and FHLMC and FNMA, may have
a limit to the number of units that they are willing
to lend on in a condominium project. They call
this 'saturation' or 'concentration'.

They do not want to have a lot of eggs in one
basket. If there are big problems in a particular
condominium project, they want to make sure
that they are sharing the risk with other lenders
and that they don't take all the losses themselves.

Sometimes this can be a very difficult statistic
to ascertain at the beginning of the process. There
are times that despite our best efforts to find out
early on if there is the potential for exceeding the
lender or investor limit, the answer comes to us
after the loan has been submitted to the lender for
approval. And then we have to find another lender
late in the process.

All condos are not created equal. The lenders want
to make a good decision on the loan request, and
even though it seems like they may be overly
conservative at times, their interests are compatible
with the buyer's interests.

Given all the facts, most buyers would probably
prefer to live in a condominium project that enjoys
the pride of ownership of a majority of owner-
occupants, and that these owners pay their bills
responsibly to keep the financial condiiton of the
association strong, and where there are not issues
regarding the quality of construction of the units
and common areas.

If you are buying, or own a condominium, these
factors are important in obtaining new financing
and need to be thoroughly researched early in
the process.

FHA Mortgage Insurance Changes Coming

In the last couple of weeks, Congress has passed
HR 5981. This bill gives FHA the ability to adjust
its annual mortgage insurance premiums (MIP).
The target for the new changes is September 7,
2010.

Currently, FHA MIP is comprised of two com-
ponents, part of which is an upfront MIP that
costs 2.25% of the loan amount. Most borrowers
choose to add this upfront MIP to their base loan,
rather than come up with thousands in cash at closing.

The other portion of the MIP is the monthly
portion. It currently costs .50% to .55% per
year, payable in monthly installments.

These mortgage insurance premiums are
required on all FHA loans, with few exceptions.
It is the way that the FHA program accrues
the funds necessary to pay for the losses
incurred under the FHA program. When a
loan goes into default, FHA has to pay a claim
to the lender for their losses.

It will probably not be a surprise to learn that
the losses experienced by the FHA-insured
loans are higher than the money coming in to
pay the claims. Recalculating the way that
mortgage insurance is collected has become
necessary to keep the FHA program afloat.

So, HR 5981 is planning to adjust its MIP
premiums as follows:

The upfront MIP will drop from 2.25% to
1.00% of the loan amount. This fee will still
be allowed to be financed on top of the base
loan amount.

The monthly premium will now increase based
on an annual calculation of .85% to .90% per
year. The expected additional funds to be
received for the FHA insurance fund is calcu-
lated to be $300 million per month.

The effect of this will be to make qualifying for
the new FHA loan more difficult.

On a loan amount of $300,000, the expected
increase in monthly premium will be approxi-
mately $87.00 per month. Based on an interest
rate of 4.5%, this means that a borrower may
qualify for $17,000 less in loan amount.

As the housing market continues to struggle
to gain some stability, we continue to seek ways
to help borrowers qualify for their home loans.

Although this allows FHA an opportunity to get
more healthy, and to make the quality of their
insured loans less risky (because the borrowers
need to be stronger to qualify for the same
loan amounts as before), it does come at a price.

Fewer borrowers will be able to qualify, many
of which are first-time buyers. The first-time
buyers are the fuel that allow existing homeowners
to move up in purchase price and generate growth
in the real estate sector.

Be sure to consult with an experienced professional
(like me) to explore options in qualifying for your
next home loan.

Rates Are Staying Low - Don't Miss Out

At the end of March, the Federal Reserve followed
through on its promise to stop buying mortgage-
backed securities.

At the time, I was of the opinion that rates would
go up. My reasoning was that when private
investors - institutional investors, pension funds -
were asked to fill the gap from the Fed leaving
the market that they would insist on higher
rates of return that what the government was
willing to accept.

Prior to the end of March, the Fed was creating
and controlling a closed system:

They were keeping rates low to allow for as much
recovery as possible.

So that lenders who created these low interest
rate loans did not have to deal with the risk
that these loans would become money losers in
the future, they enabled FNMA and FHLMC to
purchase these loans. FHA and VA have also
expanded their programs,, and those loans are
generally sold to GNMA (Government National
Mortgage Association). FNMA, FHLMC, & GNMA
are all government-related and sponsored entities.

FNMA, FHLMC, and GNMA all bundle pools of
mortgages into mortgage-backed-securities (MBS)
and sell them. The Federal Reserve was the primary
purchaser of these MBS issues earlier in the year.

Once they pulled out of the market, I thought that
the private investors would insist on higher yields
to be interested in buying these MBS issues. If that
were true, interest rates would go up.

But that has not happened. Rates are at historical
lows right now.

What has developed is that the Fed has continued
to keep rates low, as evidenced by Treasury issues:
T-bills, Treasury Notes and Treasury bonds. These
investments are desirable because they carry low
risk since they are backed by the U. S. Government.

Even though MBS issues are higher risk than Treasury
issues, they are not significantly more risky in this
environment. Because loan underwriting has tightened
so stringently, the new loans created over the last 1 1/2
to 2 years are nowhere near as risky as the ones that
were created in the "anything goes" era.

So the choices for an investor to keep their risk low
is to either invest in Treasury issues where the rates
are really low, or to accept a higher rate of return
by investing in MBS issues that are better quality
than they were a few years ago.

It works out well for borrowers and for the mortgage
business that rates are staying low. I'm glad that
things have not worked out as I predicted.

The reality is that instead of investors dictating the
interest rates under which they would purchase
MBS issues - driving up rates - the government is
dictating the rates at which mortgages are offered
and telling the investors to make a choice: buy
really low, really safe Treasury issues or obtain a
higher rate of return with MBS issues where the
risk has been minimized with tighter underwriting
guidelines.

We never know how long these dynamics will continue.
Make sure that you take advantage of these rates
while they are low. Converting adjustable rates to
fixed rates would probably be a good long-term move
right now. Contact me and we can work through the
details.

Knowledge is Power (and can save you misery!)

Last week, I was reminded once again how important
it is for clients to know the features of the home loans
that they receive.

I had helped a client about 6 years ago with a new
loan. These were people I had known and helped
many times for the last 28 years. They were
important friends and clients for me.

The loan I had done for them was a 30-year fixed
rate loan with a rate of 6.875%. About a year later,
that lender came to my client and offered them a
modification of the loan which reduced the interest
rate.

As part of this modification, the lender changed the
loan from a 30-year fixed rate to a 5-year balloon
payment loan. This means that at the end of the
five year period that the entire loan balance is due,
and that the client either needs to pay it in full
from their cash assets, or arrange for another
loan to refinance it.

My borrower is self-employed and their financial
statements did not support a refinance at this
time. Of course, since underwriting has changed
so much in the last three years, this borrower
could have obtained a loan previously, but not
in this environment.

Things were looking bleak for helping them save
their home. If they did not arrive at a solution,
the lender would be in a position to foreclose on
them for non-payment of the balloon payment
loan.

As part of my consultation with them, since I
could not help with a new loan, I offered to
review their loan documents to see what was
possible.

The silver lining was that they did receive an
offer from the existing lender for another
modification. There was a number of stipulations
for qualifying for this. They included that the
home had to be their primary residence (it was),
they could not have been late on any payment
in the last 12 months by more than 30 days
(they were not late) and that their could not
be any secondary financing on the home (they
had a line of credit).

There was a footnote to this last condition. It
said that it would not apply if their first loan
modification documents did not also stipulate
those terms.

So, we went through their stack of loan papers.
Most of you know how daunting that can be
for anyone who is not used to that confusing
paperwork. The good thing is that my client
had all of those papers in an easily-accessible
place.

I found the original note and an addendum to
the note. I found the clauses that spelled out
the conditions that had to be in place for a
future modification. These closely paralleled
the letter that they had received.

The good news was that the note did not say
that they could not have secondary financing.
The clause in the letter that we thought would
defeat their opportunity to modify the loan did
not exist in the note.

I made sure that the borrower had the important
pages and clauses well-marked for when he
would have his discussion with the lenders'
representative. They agreed that they would
call me after they had discussed it the lender.

The next day I got the call. They said that they
were OK'd for new modification and that they
were offered a rate of 4.75%. I told them to
move quickly to get the terms finalized.

But, the call to the lender was not that smooth.
When they called, the lender's representative
said that they did not qualify because they had
secondary financing on the home. Because we
had taken the time to familiarize ourselves with
the terms of the loan, the borrower knew what
to do next.

He insisted that the representative look at his
note from the modification. It took a few minutes
but the representative located a copy and they
went through it together. The representative
was able to agree that the borrower was correct
and that they were eligible for the modification.

It was really gratifying to help them find a
solution. I was happy to help my friends by
educating them and giving them the ammunition
to get what they deserved.

I want to leave you with a couple of important
thoughts.

1. You need to know what you are getting when
you obtain your loan. My friends did not
realize that the modification that provided
the low interest rate from 5 years ago also
included a balloon payment clause. This could
have been catastrophic for them.

2. If you are not working with someone who has
earned your trust, you have to educate yourself
and be smarter than the people you are dealing
with. The lender representative could have put
my friends in a terrible position by not researching
things properly. If they had accepted the first "no"
they could have been on a path leading to fore-
closure.

3. Surround yourself with people you can trust.
I have built my career over the last 33 years by
listening to my clients, educating them, and telling
them the truth. It works for me and it works for
my clients.

Are We Experiencing a Summer Thaw?

Over the past year or so, I have been giving you
updates on how stringent the underwriting process
has been.

The lenders have been squeezing the approvals
really tight, making sure that all the paperwork
is thorough and complete, and that there are
virtually no unanswered questions in their file.

They want to make sure that their decision will
not be questioned or criticized by anyone who
reviews their work, or by an investor who may
purchase the loan.

This has created an environment of low risk
tolerance. When in doubt, they are more inclined
to ask for more paperwork, or just to say no to
the request. It is the safest thing for them to do,
even though they may be turning down loans
that traditionally present reasonable risk.

There have some recent transactions that have
given us some hope that there may be a little
bit of thawing in the hardline responses that we
have been getting.

Not all of our lenders have been giving us the
same interpretation of standard FNMA and
FHLMC underwriting guidelines. This is a good
thing, because if we got the same answer from
all of our lenders all the time, we would not have
choices as to how to solve your problems.

Some of the areas that we are seeing some
loosening of guideline interpretations include:

A. Borrowers who own more than 4 financed
properties. The strict FNMA/FHLMC guide-
line is that they won't purchase loans if the
borrower is above this limit. Therefore, the
lenders won't create these loans if they can't
sell them to the agencies.

But we have found several lenders will exceed
this limit, and be willing to lend to borrowers
who have as many as 10 financed properties.

What this implies is that there has been an
expansion of investors into the mortgage-
backed security (MBS) market after the Federal
Reserve began backing away from the MBS
market at the end of March.

This return of private investors (non-govern-
mental) into the market is a big plus for all of
us. It introduces more liquidity into the market
for lenders to create loans and sell them. It
also introduces more alternatives to the lending
guidelines for us to place loans for our borrowers.

B. We are also seeing that some of the adjustable
rate loans being created are being a little more
liberal in their underwriting guidelines. Many
times these loans are underwritten for the lender's
portfolio without having specific investors to sell
them to. The lenders are more likely to keep these
loans because they know that the interest rates
will rise when interest rates in general go up again.

Because the lender only has their own internal
risk tolerance to meet, they are more inclined to
make reasonable assessments for borrower's
qualifications. They do not have to meet another
lending criteria that may be more restrictive in
order to sell the loan.

If private investors are starting to return to
the marketplace, competition will start to work
in the borrower's favor. If one investor will
be able to purchase loans and be profitable with
some element of relaxed underwriting standards,
others will enter the market to compete for that
business. From that we will either see lower
rates and fees or more aggressive underwriting,
both of which would be good for borrowers.

Although these two scenarios are not conclusive
proof that the pendulum is swinging away from
conservative underwriting standards, it does
give us some hope that some sense of reasonable-
ness will start returning to loan approvals.

If you have a situation that you need a solution
to, please contact me. There is a better chance
now that we may be able to find a lender to
consider your request.

Consumer Protection = Consumer Injury ?

The Mortgage Disclosure Improvment Act (MDIA)
that went into effect in July, 2009 was intended to
give consumers protection against new mortgage
terms being disclosed just prior to the closing of the
transaction.

The intent is good. There had been too many "bait
and switch" strategies perpetrated on borrowers by
unscrupulous mortgage originators.

Originators would encourage a loan application for
terms that were often too good to be true. The
borrowers would invest time, money, and faith into
the promise they were given. Just prior to the closing,
the bad guys would deliver the real terms to the
borrower in the form of loan documents.

The borrower, justifiably upset, disappointed and
feeling victimized, had a choice. They could either
swallow hard and accept the onerous terms or they
could cancel the loan, try to pursue another lender,
but risk losing the home because they couldn't
close within the escrow period.

Many borrowers chose to close the transaction, but
were not happy with the choice they were presented.

As part of the financial reforms instituted after the
mortgage meltdown, the MDIA prohibited quick
closings after new terms were presented that
differed very much from the initial Truth-In-
Lending (TIL) disclosures that the borrower received
at loan application.

The MDIA stipulated that before a borrower can
be charged any fees other than for a credit report,
they have to receive their inital Good Faith Estimate
(GFE) and TIL. Only after acknowledging receipt
of these disclosures, or after 3 business day from
them being sent, can a borrower be charged fees
for expenses such as the appraisal.

This allows a borrower to get a good sense of the
terms before committing funds to that particular
loan proposal.

Another part of MDIA is that an escrow cannot
close until 7 days after the GFE and TIL are pro-
vided to the borrower. Although it was unlikely
that escrow companies, lenders and title companies
could pull things together this quickly very often,
it no longer is a possibility.

Where the consumer protection intentions of the
MDIA fall short is with this next provision:

If new terms are proposed that vary more than
.125% from the Annual Percentage Rate (APR)
of the initial TIL, the borrower cannot close
earlier than three business days after receiving
the new disclosure.

This requirement is in effect whether the new
APR is higher or lower than the initial TIL.
So, a borrower cannot proceed without waiting
even if the terms are more beneficial for them.

Prior to the MDIA, we could still work to get
the borrower lower interest rates or fees very
close to the settlement date, get documents
drawn and signed, and fund the loan. With
everyone pulling together, this could all have
happened in a couple of days.

Now borrowers are being put into a position
of accepting terms that are higher so that a
change does not trigger the mandatory waiting
period and risk their settlement date, or work
toward more favorable loan terms and hope that
their seller will allow the escrow to be extended
and close after the contract date.

It is almost the opposite of the situation that
the MDIA was trying to prevent. To save
borrowers from facing higher rates and fees
being presented at the last minute and forced
to accept them or lose the home, now they may
be faced with accepting higher rates and fees
that were presented to them at inception and
forced to accept them or lose the home.

With the establishment of rigid rules, the
consumer may not be having the best opportunity
to receive the best terms possible.

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.