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I recently closed a mortgage loan. The loan officer told me there would be no prepayment penalty. When the documents came there was none and the loan funded and closed.

Two weeks later I got an e-mail stating some documents had been missed and we need to sign and return them. They contained a new TIL, prepayment rider and addendum.

The original TIL states there is no prepayment penalty. I have not signed these and the lender is telling me I have to because of the compliance agreement.

Is this true?


Talk about scummy behavior!

I wouldn't sign the new documents. As a matter of fact, talk to your state's department of real estate about this behavior immediately. I hope that whoever is responsible for this loses their license to do loans in your state. You also will want to consult an attorney, as a precaution. A lender attempting to modify the contract after funding requires your consent. This strikes me as a a good candidate for fraud, depending upon the particulars of the contracts. Explain to them that you would not have signed the documents had this been presented as a condition of your loan funding, and so to attempt to alter the contract ex post facto (after the fact) is, in some cases, grounds for a prosecution based upon fraud.

That contract is a two-sided document, freely agreed to as it originally was by both parties. The fact that the loan funded is evidence of this. I have never heard of needing to sign a pre-payment agreement as a compliance procedure after the fact - except to comply with getting that lender paid more, via the secondary market. A pre-payment penalty adds anywhere from 3 percent of the loan amount up to almost ten percent to the price the lender will receive when they sell your loan, and they probably figured, "Why not try for the extra?" Or they may have intended this from the beginning, giving you a great quote to lure you in, figuring to make their margin with the pre-payment penalty they were hiding. It's amazing and disgusting how often people will sign such documents. Unlikely as this is, if it did happen, boy could you have gotten a great loan out of it.

If lenders could require this sort of thing, they could unilaterally change the agreement any way they want to after funding. So what if you signed a thirty year fixed rate loan at 5.5 percent and paid three points to get it? You new rate is eight percent, "for compliance"! According to everything I know about contract law - which is limited, because I'm not an attorney and you should talk to one - they have no legal grounds to demand this of you.

At the very least, it would be the case that signing these documents is what starts the clock on the the three day right of rescission. That the lender funded the loan before then is evidence of a severe error on their part, and when you rescinded, they would have to restore you to the situation as it existed prior to you signing the original documents. There are also legal issues with the fact that they're trying to alter the Truth In Lending form. Since the beginning of 2010, changing the APR less than seven days before signing final loan documents is an offense against federal lending law. If you get a sharp enough attorney and help from your state's regulators, it's very likely that you might get yourself some really significant loan concessions, or possibly even a settlement from the lender.

Every state's laws are different, so you need to talk to your state's department of real estate, and I do strongly recommend consulting an attorney before you draw any lines in the sand, but this is my best understanding of the situation.

Caveat Emptor

Original article here

This sentence is a textbook illustration of the most effective way to lie. Tell the truth, but not all of it. Not that I'm trying to coach habitual liars, but I am going to deconstruct this astoundingly dishonest claim that I keep encountering. It's mostly used by less ethical loan officers trying to persuade someone not to shop around.

At the bottom-most level, all mortgage money does come from basically the same place. It's all investors looking for a return on their money in a historically well secured market where they are somewhat protected from taking a loss. It is the ugly surprise that this security isn't perfect that has a lot of investors in panic meltdown mode after they took it for granted for years, and now they are refusing every loan that's not essentially perfect because of the rude awakening.

What happens to it after that, and whose hands it goes through, matters a lot. Just like saying all water comes from the ocean doesn't mean it's all drinkable, just because all mortgage money comes from investors doesn't mean it's all equal. The lender and loan officer make a huge difference.

Consumers cannot, in broad, go directly to mortgage investors and request a loan. Most of the investors wouldn't know how to do loans if it bit them. They don't have the actuaries, the underwriters, the tools, and the networks to get the best value for their money. That's where the lenders come in.

I'm not going to get into all the details of CMOs and MBSes- Collateralized Mortgage Obligations and Mortgage Backed Securities - how they are sold, how to price them, yada yada yada. It's something I am not involved in, and I don't need to know as much as I do. Even when I was financial planner, the nuts and bolts just aren't that important to most investment portfolios. Two important things to note: The higher the interest rate of a loan, the better the price the lender will get from the investors, and the lower the rate, the lower the price. The higher the default and loss rates is expected to be, the lower the price, and the lower the default and loss rates are expected to be, the higher the price. Default and loss rates translate to "How tough are the underwriting standards?" As with all other things economic, it's a trade off. Low interest rates at a lender usually means very tough underwriting, and fewer people qualify. High interest rates means relatively easy underwriting, and more people qualify. However the former means that there will be a lower default rate, while the latter translates into a higher default rate. In the end, the price they get for their loan packages will be comparable as higher rate translates into more money when the lender sells the loan but higher default means less.

What you really going on here is that the banks - the lenders - are the middlemen putting investors and consumers together. For this, they get paid. They get paid enough to pay for all those fancy offices and the executives' salaries and everything else the bank might have. Mortgage lending is big business. Lest it sound like I'm saying the fact they get paid is a bad thing, it's not. It makes the market far more efficient, as most individual investors can't afford an entire mortgage all at once, and individual borrowers would have a daunting problem in finding investors willing to lend money at a decent rate in their situation.

Each individual lender tries to hit a certain market segment. It works like branding in the consumer world, in that there are clients they are aiming at, and ones who are incidental to their business. Lending is a risk-based business, and the higher the risk to the lender, the higher the rate. What will happen the vast majority of the time with the vast majority of lenders is that they will sell the loans, whether or not they retain servicing rights. In other words, just because you have a loan with bank A doesn't mean they'll keep it. It is very rare for a lender to keep the loan. Even if they retain servicing (for which they get paid - and they're not even risking any money!), so that you keep sending that lender your payment, they don't hold the actual loan. Some lenders are interested in A paper, whether conforming with Fannie Mae and Freddie Mac, or nonconforming but to essentially the same standards. These loans are fairly uniform and highly commoditized, but lenders put their own stamps on them. One bank might have incredibly tight standards, but offer lower rates. They will have a record of fewer defaults, practically zero losses, and get a better price on their loan packages in the bond market. Another bank might be somewhat looser in their standards, and so not do as well on selling the loans. Those lenders will charge a higher price for their loans, in the form of interest rate, in order to compensate.

This phenomenon expands out progressively farther in the A minus, Alt A, and sub-prime lending worlds. A paper has noticeable differences between lenders, while the further down the loan quality ladder you go, the more differentiation you get between lenders. Almost all of them have their own niche, or niches, that they will underwrite to, trying for a mix of rates to borrower and underwriting standards for approval that results in fewer of their loans defaulting, and thus the ability to command a premium price in the bond market over and above what mostly equivalent lenders will give.

Below sub-prime is hard money. It's called hard money because before they fund your loan, they are recruiting individual lenders and syndicates who will hold your loan for as long as you have it. This is why hard money is typically multiple points up front, interest rates of thirteen percent and up, and three year hard prepayment penalties, as well as only going to about sixty-five or seventy percent of the property value at most. Without the institutional lenders, every loan would be hard money.

No lender has the capability of running programs that are good fits for everyone. Some of them have a few dozen, some have only ten or twelve. This sounds like a lot, but it isn't. Every single loan type is a different program. Just to cover the most standard loan types for their market is usually between twenty and thirty different programs. Back when I originally wrote this, I could point to lenders with twenty-five or more different Option ARM programs. They're gone now (quite predictably) but they sure looked like they were doing well for a while on the surface.

This is where brokers and correspondents come in. There's an old saying about how "If the only tool you have is a hammer, pretty soon all the problems start looking like nails." You walk into a direct lender's office, and they has a couple dozen programs focused on one segment of the market. You're not an ideal fit for any of their loan programs, but so long as you can qualify for any of them, they are going to keep your business rather than refer you to someone else. They're hammering nails, never mind that your problem is a threaded bolt. They get you pounded into the board. Yes, you get a loan, but you could qualify for a better one if you wandered into a different lender's office.

Brokers and correspondents have lenders wandering into their offices. Lenders who will give the brokers better deals than they give their own loan officers, because they're not paying for the broker's expenses, and the broker knows better than to be a captive audience. The fact is that brokers are usually capable of getting a deal that's enough better that they can pay their expenses and salaries, still have profit left over, and nonetheless offer the client a deal enough better than the lender's own branches as to be worth the trip. Brokers also shop multiple lenders, looking for a better fit. If you're a top of the line A paper borrower, someone that any major bank has a good program for, the broker can still get you a better loan, but maybe only by as little as an eighth to a quarter of a point. On a $300,000 loan, that's $375 to $750 in cost at the same rate for the exact same loan. If you're in a marginal A paper situation, the difference made is liable to be that you qualify A paper with a broker who knows where to shop, where you'd likely have to go sub-prime, with inferior options and a prepayment penalty, by walking into a bank office. You get into sub-prime situations, and I have seen pricing spreads of two and a half percent on the interest rate between the best lender for a given loan, and the rest of the pack. The fact that most subprime lenders are gone and the ones remaining have radically changed their business model only accentuates this. You can physically go to twenty or fifty different banks, fill out an application and furnish paperwork in each - or you can go to a broker.

(Correspondent lenders are brokers with one difference: They initially fund the loan before selling it to the lenders whose standards they met. The loan is still written to the real lender's standard, underwritten by their underwriters, etcetera)

The point is that no lender is both offering low rates and loose underwriting. As everything else having to do with money, it's always a trade off. The lenders charge higher interest rates, they get a better price for their loans. The lenders underwrite to tougher standards so they will have fewer defaults, and practically zero losses, they get a better price for their loans. The lenders need a certain margin to keep their owners happy, and a certain margin to keep investors happy, and neither one of those in the business of giving away money for less than it is worth.

The ideal thing for a given borrower is not an easy loan. Unless you're so high up on the ladder of borrowers (credit score, equity in the property, lots of documented income) that you'll qualify for anything easily. The ideal loan, where you get the best trade-off of rate and cost, is to find the loan where you just barely scrape through the underwriting process. With average loan amounts in California being about $400,000 now, chances are that any extra time and effort you spend will be handsomely rewarded when you compute the hourly costs and payoffs.

So you see the partial truth of the title statement, and the utter falsehood. All mortgage money pretty much does start out in the same place, if you want to look at it that way: the pool of investors looking to loan money. Nonetheless, what happens to it after that, before it gets to the consumer, renders the statement "All mortgage money comes from the same place" incredibly dishonest.

Caveat Emptor

Original here


A while ago, I got a call from a hard money lender, asking what I could to to "rescue" one of his clients by refinancing. He was being about as altruistic as a drowning man. What he really wanted was for me to get someone else (i.e. another lender) to voluntarily hold the bag on his money losing loan.

Unfortunately, this guy already had a Notice of Default filed on that loan. When it comes to new loans, subprime lenders would formerly sign off on 30, 60, and 90 day lates - but drop a notice of default on the property and even during the Era of Make Believe Loans the worst subprime lenders wouldn't touch it any more. Had he just held off on the Notice of Default - or even called me earlier, I could have taken care of it. Nonetheless, I have a method of dealing with even Notices of Default - "hard money" lenders. Unfortunately, the one undeniable requirement for hard money lenders "rescuing" someone in this situation currently is a Loan to Value Ratio below 70 percent. The current lender had a loan amount about $350,000, and represented it to me as a $550,000 plus property. Therefore, initial indications were that it could be worked with, and we set up a meeting with the owners.

At that meeting, I found out the address and characteristics of that property. That wasn't a $500,000 property. In fact, it might have been worth $370,000, absolute maximum, in the market at that time. Three words about the likelihood of any new loan: Absolutely none whatsoever. A paper, Alt A and A minus are certainly not going to touch that loan - even if the Default were to suddenly vanish, the effects on the credit score would have driven the borrowers below their minimums. Even with the ability to document enough income, subprime isn't going to touch a defaulting borrower at 95 percent loan to value ratio in the current market - and that's without rolling one penny of costs or penalty into the new loan. That leaves only other hard money lenders, and if there's one great constant about hard money, it's that they absolutely will not go over 75% loan to value ratio, ever. In fact, their limits are usually 65 to 70.

These folks could not refinance with any lender out there. They can't afford their mortgage - no way. Even had they protested to the contrary (they didn't), they wouldn't have been in foreclosure if they could have come up with the money. Unless they've got a wealthy relative who will save them, they're going to lose the property, and if they had that kind of benefactor, why hasn't he appeared before now? The only mystery about the entire situation is the precise mechanism whereby they're going to lose the property, and precisely how badly they will be hurt.

Now from some of the code phrases that the hard money lender they're already with dropped, I am pretty sure he knows this - he's just hoping for another sucker to volunteer to take his loss by refinancing his loan out. Well, I'm not going to knowingly commit that sort of blunder. Nobody sane is. Do you think even the stupidest brokers haven't figured out they're going to be liable for bad loans by now?

HVCC and other disastrous regulation imposed from without (I'm looking at you, Barney Frank) made market recovery much more difficult.

But when I asked him about waiting, he represented that "I need my money now." Well, that's fine and that is his right. However, if he needs it now, he's not going to get all of it. What he was really trying to do of course, is build a path of least resistance where I hose myself, the new lender, and the owner so that he can walk away with every penny that's technically "his." Like any sane loan officer, I'm going to decline to do that - the money I might make no in no way compensates for what's going to happen later. Questions of ethics and whether the loan should have been made in the first place aside, he willingly undertook that risk when he made that loan, and he was richly rewarded for doing so by an interest rate well into double digits. Even the stock market doesn't return that kind of money over time, and it definitely doesn't do so without risk. But evidently nobody covered that with him in "Loan sharking 101."

So when I did the logical thing and started talking to the owners about minimizing damage, he freaked out. He said I'd lured him there "under false pretenses," and that was before I had said one word about short sales. Nothing could be further from the truth; he was the one who led me to believe the situation was other than it was, and everything I had said was explicitly predicated upon the representations he made to me over the phone. But he saw his carefully constructed scenario collapsing in front of his eyes, and he didn't want to accept that collapse. Unfortunately, the consumers involved were Spanish speakers, and he spoke much better Spanish than I do. I've written about sharks marketing to a given ethnic group in the past, and this appears to be a prime example. He hustled them out of the room, no doubt intending to look for some other sucker. Unfortunately for him but fortunately for everyone else, the loan officers who were willing to do that in my area have long since been forced out of business, and even the ones who may have gotten away with it in the past are not eager to take new chances in this environment, and I think that's a very good thing.

For several years, the real estate and loan market was not much short of an ATM feeding cash out as quickly as it could. That has now changed. Instead of way too loose, loan standards have become way too tight as investors in full panic mode abandon all but the most perfect of borrowers. Many people who became used to the way the market was working in the last few years still don't understand that it has changed, why it has changed, and why it's not going back to the way things were the last several years. They're still in denial that, having bought all the rope necessary to hang themselves, they're now struggling with that rope around their necks some distance above the ground. It doesn't much matter if that distance is half an inch or several miles - they're in just as much trouble in either case.

The sooner you get out of denial and accept the damage that has already been done, the sooner you will be able to limit future damage - and the damage does keep getting worse, There are alternatives that don't hurt as bad as foreclosure. Furthermore, there are those out there who will claim they can perform miracles, but they are almost always setting you up for a scam.

Here's the bottom line: If you don't make enough money to make your payments and pay your real cost of interest, the best thing that can be said for you is that you're circling the drain. But if you'll make up your mind to get it over with, and deal with the situation based upon the facts, you'll come out with less long term damage. Not to mention more life still in front of you than would be the case otherwise. There really aren't any good reasons not to get past an unsustainable situation as fast as you can.

Caveat Emptor

Original Article here


With the state of financial education in this country, many people shop for loans by payment, figuring the lowest payment is the best loan. As counter-evidence to that idea, let us consider the negative amortization loan. I've seen them with minimum payments computed based upon a nominal rate of zero point five percent on forty year amortization. This gives a minimum payment of $1150 for a $500,000 loan - but the actual rate on that loan is eight point two percent, meaning if you were just going to pay the interest, that would be $3417 per month. If you made that $1150 minimum payment, you'd owe over $2200 more next month - and you'd be paying interest on that added principal as well. By comparison, principal and interest on a six percent thirty year fixed rate jumbo loan is only $2998 - and there's no prepayment penalty either.

Don't get distracted by payment. Look at the real cost of the money - what you're paying now in interest, versus what any new loan will cost, plus what you'll be paying in interest on it. You do have to be able to make the payment, but once that's covered, look at the real cost of any new loan, both in up-front costs and in interest paid per month. Those are the important numbers.

Let's suppose you were one of those folks who had to settle for a subprime loan a couple of years ago. You had something bad happen, but now you're past it. You've been diligent and careful with your credit these last couple years, so you're now able to qualify "A paper". On the other hand, your current loan has now adjusted to nine percent, and your prepayment penalty has expired, while there are now thirty year fixed rate loans in the sub- five percent range. When I originally wrote this I could have moved you or anyone else able to qualify A paper into a thirty year fixed rate loan at about 6% for literally zero cost, meaning there is no possible (financial) reason not to do such refinance as long as it lowered your rate even slightly. (These days, thanks to Congress trying to "protect" consumers, zero cost loans may still be here, but we can't call them that.)

The only real question in such a situation is this: "Is it worth the extra money it takes to get a better rate?", because there is always a tradeoff between rate and cost. For instance, to look at the differences for someone who currently has a $300,000 loan, when I originally wrote this two of the choices were six percent for zero cost or five point five for about half a point. Both are thirty year fixed rate loans.

The six percent loan has a balance of $300,000, same as your old balance, and payments of $1798.65. The five point five percent loan carries an initial balance of $304,325, and payments of $1727.90. Lest you not understand, that 5.5% loan cost you $4325 to get done, as opposed to literally zero for the six percent loan. This isn't a matter of "keep searching for the provider who gives you the lower rate for the same cost", as this tradeoff is built into the entire financial structure. Some providers may have higher or lower tradeoffs, but the concept of the tradeoff isn't changing for anything less than a complete and radical rebuild of the financial markets. Not. Gonna. Happen. You can find different costs for the same rate, but the difference between a low cost provider and a high cost provider usually isn't going to be more than two points on the cost.

However, for spending that money all in a lump sum, you get a lowered cost of interest. You save $105.19 that first month in interest, and this number actually increases slowly for the first few years of the loan. In month 21, you've theoretically broken even, even though your loan balance is still almost $3600 higher, you've gotten the extra money you've paid to get the lower rate back. However, because you still owe $3600 more, if you refinance at this point, you're still going to end up behind as that $3600 you still owe translates to $216 per year at 6%, assuming that's the interest rate on your next loan. Maybe you sold the property and bought something else, maybe you refinanced for cash out. In either case. you owe $3600 more than you would have, which means you're paying interest on it when you get your next loan. But something like thirty percent of all borrowers have sold or refinanced by this point, and when they do, those benefits you paid for stop. Nor do you get any of the money you paid in the first place back.

It isn't until you've kept the loan 124 months - over ten years into the loan - before you are unambiguously better off with the lower rate but more expensive loan. That's how long it takes until the balances are even on the two loans. Of course, by then you have saved about $13,000 in interest - if you actually keep the loan that long. Less than one borrower in 200 does.

Real break-even is likely to be somewhere in year four in this case. After three years, you've saved about $3800 in interest, and if your balance is still that almost much higher with the expensive loan than the cheap one, we're getting to the point where time value of money will keep things in favor of the more expensive upfront costs. Of course, last time I checked Statistical Abstract, decidedly less than half of all borrowers kept their new loans this long. Something to think about, because you don't get the money you spent to get the loan in the first place back. By the end of year four, assuming we keep the loan that long, we've saved $5000 in interest, while the balance is only $2600 higher for the 5.5% loan than for the 6% loan. Even without time value of money and with a ten percent assumed rate of return, that's additional twenty years before the costs of the higher balance catches up with the benefits you've already gotten through lower interest. Considering time value of money, it's really never going to catch up.

So when you're looking at refinancing, don't just consider rate and payment. Consider what it's going to cost you in order to get that new loan, and remember what the costs are of doing nothing (i.e. you've already paid the upfront costs of doing nothing). Many people refinance every two years, spending much more than $3400 every time they do, because they'll spend two or three points to get the lowest rate. This, as you can see now, is a recipe for disaster.

Caveat Emptor

Original article here

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