Mortgages: August 2008 Archives

People always assume they'll be able to refinance later. Even most of my articles have it as an implicit assumption.

But what if you can't refinance later?

There are situations where it happens. Many situations, as millions of people are finding out now. Roughly 2% of the new search engine hits I'm getting this past month or so are from people who are looking to refinance into anothernegative amortization loan. Anyone who hasn't been living in a cave knows that's not going to happen, as Wall Street has finally figured out that they're not good investments. But people don't pay attention to most real estate problems until they're smacked in the face with a cold haddock. With a half million dollar investment on the line, this is roughly equivalent to pigs following a swineherd to the slaughterhouse, but people still do it.

It is one thing for an investor who can afford to lose the entire investment to make a bet on the future of the market. If they win, they win. If they lose, the investment may be gone but they've still got a place to sleep for the night. It was a calculated risk where the dice came up snake eyes. Never any fun to have happen, but survivable. Furthermore, in order to be able to win, it must be possible for you lose.

It is something entirely different to counsel someone to make a bet they cannot afford to lose. If the consequences of a losing bet include homelessness, bankruptcy and might as well be permanent damage to your credit rating which makes it impossible to get started again, that's a different category of bet.

Real Estate loans, done wrong, are a "bet the family future" type bet - on something that nobody involved in the decision making process can control. Not the consumer, not the loan officer, and definitely not the real estate agent who says, "I know someone who can do the loan, and the Payments will be affordable.

There are several things that can prevent someone from successfully refinancing. Some of them may be somewhat under consumer control; most of them are not. These include:

Time in line of work: You can change employers and not fall afoul of this, but changing from employee to self-employed (or vice versa) can mean you don't qualify.

Documentation of income can mess you up more than anything else, often for the same reason that time in line of work does. You were getting a regular paycheck and a W-2, now you've gone to self employed, the clients have been a little slow in paying, and you've been very certain to take all of the legal deductions on your tax form. Good for your tax bill, not so hot for your ability to qualify for a loan, particularly if you've had to put more than usual on credit. Once again, the interest expense for business items may be deductible, but it can also put a huge crimp in your debt to income ratio.

Changing from owner occupied to investment property can sink you, particularly with a loan to value ratio over 80 percent. Your employer says you can keep your job, but you've got to move to Timbuktu, which means you can't live here any more.

Loan guidelines change over time. This one has been a killer problem for a lot of folks of late, as guidelines have tightened more in the last few months than they loosened in the previous ten years. No more stated income, no more 100% conventional financing, no more 95% conventional financing, as neither PMI companies nor second mortgage lenders will touch it right now. The only way to go above 90% loan to value is FHA, VA, or seller carryback, and even that last may not be acceptable to some lenders, and when you refinance most carryback sellers expect to be paid in full. Even the down payment assistance programs are essentially dead (They officially die September 30th). Even if you are one of the folks who still theoretically have significant equity, you may not be able to refinance into something sustainable.

Then there are market problems. If the property has lost value from when you bought, you may owe more than the property is worth. More than a year ago, I wrote about what a pain it is to refinance when you're upside down, as well as the fact that it's not likely to be an improvement over what you've already got.

I wrote Losing Property Value with Highly Leveraged Properties in March 2006 (updated just a few months ago), when people were still in denial about the problem, or thinking it was somebody else's problem. But the problem is always a possibility, and it's no respecter of anyone's stress level. Life is what happens while you're making other plans.

With this in mind, at least for your own principal residence, you want to have a sustainable, fully amortized loan in place, with a fixed period of at least five years. Actually, I'd be more comfortable with shorter fixed periods now that the air is out of the market. Even if we do lose a little bit more, which I don't think we will here locally, by the time three years are up, values are very likely to be at least 20% higher - and you will have paid down the loan by several thousand dollars. But most people who chose shorter fixed period loans, or Option ARMS (which have no fixed period at all) was the low initial payment allowed them to appear to qualify for the loan for a more expensive property than they could really afford. This is precisely the reverse of how it needs to be done: Figure your purchase price budget using an available thirty year fixed rate loan, and then if you want a loan with a shorter fixed period in order to save interest and closing costs, you still want to stay within the same purchase budget, not choose a loan because that's the only way you can afford the payments on this property that's way beyond your budget. Lest you now have figured it out yet, that's a recipe for personal disaster of a sort that takes many years to recover from, and some people never do recover from it.

For this reason, having an unsustainable loan, where the payments are going to adjust to something you cannot afford later, can change the answer to "Is it a good idea to refinance?" from "No - the available tradeoffs between rate and cost don't save me any money (or don't save enough)" to "Yes - I need to move to a more sustainable loan, and if I don't do it now, I may not be able to qualify later." If the market value of the property may be ripe for deflation, if your employment or income may become unstable or undocumentable, if your payments are predictably going to adjust to something unaffordable within two to three years - in all of those situations I have advised people that refinancing may not put them into what appears to be a better situation now, but if they wait, their current loan is going to become unaffordable and there is a serious chance they will not be able to qualify for another loan when it does. Sometimes the situation can be as simple as loan guidelines are likely to tighten up later - I predicted the demise of 100% conventional financing as a consequence of market deflation over three years ago. Being temporarily "upside down" on your mortgage or having insufficient equity to refinance well under current guidelines is not a big deal if your loan is a fixed rate fully amortized loan, or even a medium term hybrid ARM. The loan is in place, on terms that you can handle. You keep on making those payments, your lender is happy, your pocketbook can handle it, your loan balance decreases, and prices will come back - sooner than a lot of people think, in the current media hullabaloo. In a year, or two, or three, you'll have equity, be able to sell for a profit, your job or income will be stable and documentable again, and the rough patch will be behind you. It's what happens when you need to refinance now and can't that gets folks into trouble.

Caveat Emptor

Article UPDATED here

All too often, these days, I have to tell desperate people who've found me on the internet some bad news.

Nobody can match the rates they've got at a price worth doing.

This is just a sample of what I've seen:

I bought a house in DELETED in Aug 04. It was my first house, and I was pumped about it. Now, it's become a liability. I want to leave soon, and pursue an (advanced degree). I've been extensively preparing for my (test), and I expect to qualify for some 'almost top-tier' schools out east. So what do I do with my house? Bad market = hard for me to sell.

I am looking to rent my house out. The largest hurdle comes from the fact that DELETED has very low rents, and very high housing prices. To give you an idea, a typical 4-plex has a yearly NOI of around 5% of the total property cost. Yeah, a 5% return. My mortgage (I'll detail it later) costs $1500/month (PITI). Market rent is about $1k-$1200/mo. I looked at other mortgages, but it seems to me that most brokers are a waste of oxygen. You say what you need, and then they offer you a loan that makes them the most commission. I had a few people try to talk me into a Neg AM/option ARM loan. I did some math... Total waste of money. What I need is something to lower my payment while I hedge my position.

Rents are increasing, and I believe that the market will be less of a buyers market in a few years. I am working with a mentor and put together a Lease to Own deal, which may solve my issues, but I would like a Plan B.

My house is worth no less than $268k (zillow estimate, I think it's low. $275k would be better) I owe ~$253k

I have an 80/20. The 80 is 5.125% interest only for 5 years, then goes ARM on me. The 20 is a HELOC currently at 10.125%. My FICO is between 750-775. The property is located at DELETED. It is a normal detached house. This would only be a refinance for a few years, until I can sell the property in a better market, but if a locked option presents itself, I would continue to rent that place forever! I don't need any cash out money, but I will take any available, because I am getting around 10% return on my Funds.

This guy has a 5.125% interest only loan. When I originally wrote this article in February 2007, I could just barely do that with one lender for something north of four points, and could not do 5.00 at all. Even if adding roughly $15,000 to his loan amount was worth keeping the same interest rate a little longer, just the fact of adding $15,000 to his loan is going to raise his payments. At this update, I don't know of any lenders offering the rate at all.

In this case, like so many, there literally was and is no loan I can do for this person that's worth the cost of doing it. I could cut his payment for a while with a negative amortization loan, but only at the cost of raising his real interest rate about 3%, which means it's really costing him about $6000 per year extra, while sticking him with a prepayment penalty in the area of $8,000. A classic case of pay me now, keep paying me, and pay me later, too. Well, I couldn't do that to anyone, much less someone wearing the uniform in times of war, as this man is. Even if this guy had been in California, I would have told him the same thing I did: There's no loan out there that will help him in the classical sense of the word help. What he needs is cash flow and time. A negative amortization loan would provide that, but at a much higher cost later - too steep for me to believe it's worth paying. A lower interest rate or longer amortization or even interest only might help some people, but none of those options make sense for someone who has already got 5.125% interest only. I could have tied 5.125 by adding over four points plus closing costs to his loan, but I don't need to consult my rate sheets or get out the calculator to know that adding $15,000 to break even on the interest rate is not going to really help him.

Now, this is not to say that refinancing into a higher rate is never justified. If it was going to do something he needed it to do and it makes sense in other ways, yes, I can see it. For instance, if he was going bankrupt due to some bills, but consolidation would prevent that from happening, it might be the lesser of two evils. But that doesn't appear to be the case.

Now when his loan hits its first adjustment, chances are pretty much 100% that I'll be able to do something worth the cost of doing it. Until then, however (or rates drop enough), the fact is he's better off sticking with what he's got right now. But that adjustment would be to roughly 7.25% if it happened right now. Whatever it is, the way that rate adjustments work is underlying index plus a set margin, determined by your contract. Lenders think of hybrid ARMs as teaser rates; they're always offering rates less than the index plus the margin to start with. Which is one reason to be careful with hybrid ARMs. I love them, I do them for myself; but they will go up when they adjust if you keep them that long.

This man is only one of millions out there in similar situations. I can't speak to his specifics, but there were lots of people who bought with loans such that they could only afford the payment interest only or worse. The fact of the matter is that they were poorly advised, or not advised at all if they kept everything quiet and never told the person who might have warned them. They probably should not have bought the property they did, but somebody talked them into it. In most cases, it was someone with a fiduciary responsibility to them who should have known better.

I don't have a problem with interest only loans as purchase money. I do have a problem with negative amortization loans as purchase money for a primary residence. Interest only, though, can be okay if they can afford the fully amortized payment but choose not to. For instance, this gentleman could have afforded more, but was getting a better return on his money elsewhere. Sophisticated user and all that. He knew the risks going in, and chose to take them. For those who were advised of the risks and chose to take them, that's what risk means and why you get the payoff for taking it when you win - because sometimes you lose.

However fantastic an investment real estate is, it is not a risk free investment, and sometimes the bet does go sour. Members of the real estate profession were doing all they could to push rapidly appreciating prices, and members of the loan profession were doing everything in their power to aid and abet. Both groups were pushing past results to illustrate future performance, and I saw or heard the phrase, "nobody loses money on real estate," so often and in so many places I even stopped getting angry at it for a while (You can't stay angry all the time). Both groups were pushing people into bigger and bigger loans for bigger and bigger properties, and more and stronger bidding wars, and rationalizing it on any basis that happened to be convenient and hadn't been debunked in the client's presence within the last fifteen minutes.

Once again, I'm embarrassed by members of my professions, and not just for their self-avaricious advice to the unwary, but also for their limited understanding of economics and markets. Trusted professionals are supposed to know better. People with fiduciary relationships are supposed to know better. People earning thousands of dollars more for their "expertise" per transaction should definitely know better.

So what do you do if your payment goes up, and the best rates available to you don't help the situation enough?

Sell for what you can get.

Right now, this is a really rotten thing. Many markets are in the tank completely. If you don't need to sell, you shouldn't be in the market when there's thirty sellers per buyer. That being said, if you can't make the payment, selling is the least bad alternative available to you. Even a short sale is not as bad as being foreclosed upon, and if you don't make the payments somehow, foreclosure is going to happen. It's only a question of when. You want to have sold before that happens.

There are a very few exceptions. But pretending that you are one of them when you're not is a good way to take a very bad situation and make it worse. The first rule of getting out of holes is to stop digging, and denial digs deeper than anything else.

Please, if you're in such a hole, don't keep digging. Or at least start digging out rather than deeper.

Caveat Emptor

Original article here

from an email:

I had a mortgage refinance done in 2001. The loan officer did not show up for the closing and I never received a good faith estimate before closing only word of mouth figures. At closing the "fees" were outrageous so I advised the closing attorney for the title co. that I was not comfortable with the terms and I did not want to go through with the refi. He insisted that I sign the paperwork and was adamant that I have a three day right of rescission. I was given a small check at closing which was never cashed. I thought about it and exercised my right of rescission on the same day of the closing and the lender received the rescission form on the third day. I have proof it was received. I even sent the normal payment to my current mortgage company who returned my payment. Then lender funded the loan the very next day and I have been in a battle with them ever since. They have constantly told me they were going to correct the problem to wait and it is now 2008. I never received a normal request for payment only late notices every now and then in which I repeatedly faxed the rescission form over and over again. They held an illegal lien recording for 4 years and my credit was ruined. They tried to foreclose twice in 2003 and 2004 which was unsuccessful. They claimed they never received proof that I rescinded the loan. They even sent me proof that they paid my old mortgage co (date stamp of clearing on the third day), and the check was drawn on the title co. Now they are suing me for the money paid out to my prior mortgage company saying that I owe them money. The suit was filed 4.9 years after the original refi date. They finally cancel the mortgage recording 9 months prior to filing the suit in which I was never made aware of until the suit. I went to the court house to get the proof myself. They now acknowledge that I did rescind the loan but they made a mistake. A 4+ year mistake!!!!!

Do they have a right to anything due to the rescission law. The form that I sign says that nothing should have been done prior to three days and if so there was 20 days to correct not 4+ years!!! And they are suing me!! Please any advise you can give would be helpful

First, most important piece of advice: Get a lawyer. Now. I'm not a lawyer, and even if I was, I wouldn't know law and precedent in your state (which isn't mine, because California's an Escrow and Title state).

When you have chosen a lawyer, ask them about grounds for you to sue the mortgage company and whether they'll work on contingency if you can't afford their regular rates.

Talk to your lawyer about getting whatever agency handles mortgage licensing in your state involved. Write a formal complaint letter, send it return receipt requested. That way they can't sweep it under the rug. Also talk to your state legislator if you have to, to motivate that agency to move.

Sad to say, this is likely very much a case of big trying to push little around because big has the resources to fight and little doesn't. You might want to talk to your lawyer about equalizing that, because big means they also have more to lose. Ask your attorney if it's a good idea to approach a reporter for your local paper. Be careful and listen to your lawyer on what to say and what not to say if you do. One slip in this regard can make things even uglier than they started out. It may be a better idea to let the lawyer do the talking here.

Find out if these malefactors been reporting late payments and non-payment to the credit bureaus, in which case you may also have a tort for that. When they have no legal basis to demand payment in the first place, it's defamatory to claim the payment you didn't owe was not made in accordance with the non-existent contract.

What they did was reprehensible in all respects, but more common than just about anyone wants to admit.

Every loan has this same "Moment of Truth" when the final documents are presented. For some loan practitioners, the truth was told before that, but for many others, it wasn't. It has to do with the timeline involved. They make a promise to get you to sign up now, and most people are shopping multiple lenders, so they tell whatever story they think is sexy enough to get you to sign up with them, knowing that most people won't sign up for a backup loan. Thirty or forty-five days from now, when they actually deliver the loan contract, they're the only ones with a loan ready to go, so your choice is limited to sign that paperwork or don't. At sign up, you have the power and they don't, so they say whatever is necessary to get you to sign up with them, because at loan delivery, they have the power and you don't. Once you have committed to that loan provider, you have essentially signed yourself over into their power, and if they don't deliver the loan they quoted to get you to sign up, there are essentially no bad consequences for them. They still get paid when you sign those papers. Over fifty percent of all borrowers literally never notice the differences, and of those who do, eight to nine out of ten will cave in and sign anyway. Upshot: No matter how bad they lied back on day one, there's still a ninety percent plus chance of getting paid. By contrast, if they don't tell a story that's sexy enough to get you to sign up for their loan, there's a zero percent chance of them getting paid. That's why lenders lie, and no legislation and no regulations currently under consideration will change any of this - all it will change is precisely what they have to do in order to get away with it, which is why you should Ask the hard questions of every single prospective loan provider.

You took the time to read the documents carefully, and that's very good. You'd be amazed how many people don't. However, you've got to stick to your guns and refuse to sign. If you had some legal mandate to sign, there would be no point to the right of rescission. What that lawyer was thinking was that if you signed, he got paid, whereas if you didn't sign, he didn't. Disgusting, but probably within whatever code of ethics was theoretically guiding him, as he probably considered the lender to be his client, and not you. I would have told him, "Not going to happen," as I walked out the door. All too often, people want to avoid confrontation and certain personality types can be counted upon to take advantage of it.

That the lender funded the loan the next day is not illegal, as far as I'm aware. Failing to rescind the loan when you rescinded, and to rewind it to the situation beforehand, however, is a hard violation of RESPA, which is federal law, and almost certainly state law and regulations as well. This can lose them their ability to do loans at all in your state, and possibly in any state. This is why nobody actually funds refinances where right of rescission is applicable until right of rescission has expired, because doing that is costly, and what happens if your prior lender refuses to reinstate their loan? After all, they got their money, and having done so, are under no obligation I'm aware of to reinstate the loan contract that has now come to a satisfactory conclusion. I actually don't know what happens in such a situation, but the best guess I can make is that the new lender has to carry the loan on the previous terms and can't charge any fees for the loan, either. Basically, the worst of all possible situations for them.

None of this is going to be easy. It's pretty stressful, and likely to be costly, but the alternative to fighting this battle is worse. Furthermore, if you persevere and do everything right, you could find yourself ending up in a situation that's much better than the one you're in right now, or even the situation that you started in. They don't have a valid lien, the previous lien was paid off, and they have behaved very badly in ways that are potentially legally actionable. Strict liability might apply to their failure to rescind properly when you did rescind in a timely fashion. Of course, they did willfully violate the law in gross violation of due diligence, so strict liability probably isn't necessary to winning such a case. Once again, though, I'm not a lawyer, only a layperson who's learned enough to be dangerous to anyone who pays attention to me instead of a licensed professional. Consult a lawyer licensed in your state for information you can count on.

Caveat Emptor

Somebody recently asked me about a deferred payment mortgage for a purchase. The long and the short of the story is that they don't have any cash to put down, and they can't qualify for the payments under any kind of reasonable debt to income ratio.

A couple of years ago, in the era of Make Believe Loans, we could have gotten this person a loan. It wouldn't have been the smartest thing in the world, but we could have done it.

Even then, however we would have to have dealt with calculating debt to income ratio, as well as the fact that purchase money loans evaluate the property on a lower of cost or market basis, where the appraisal is the "market" and the official purchase price is "cost." Since it's the lesser of the two values that is used, there is never equity at purchase in excess of whatever down payment you make, at least as far as the lender is concerned.

A paper fixed rate loans use the fixed rate of the loan for calculating front end ratio. They are permitted to use a higher rate than actual, but not a lower one. If your rate is 6%, and they use 6.25% because the rate isn't actually locked on a $300,000 thirty year fixed rate loan, the number they will use is $1847.16. This is not an arbitrary number; it's the most important measurement of whether or not you can afford the loan. The front end ratio, which is the loan payment itself, is not generally a deal breaker if it's too high, but the back end ratio, which is the loan combined with taxes, insurance, homeowner's association, and all your other monthly debt service, is. Those other numbers are all fixed based upon your situation. You owe what you owe, property taxes are what they are, and you only make what you make - or actually, as far as the lender is concerned you make what you can prove you make. I've spoken against overstating your income from the very first on this site.

When you move to A paper ARMs, the allowable back debt to income ratio actually goes down, usually to 38% from 45%. Not only that, but the rate used to compute the payments is usually much higher than actual. The calculations require the use of, not the initial rate on the note, but the final, fully indexed rate on the note. They use current rate for the underlying index the ARM is based upon, plus the rate margin. Say the initial loan rate is 5.25% but the underlying index is at 4.75% plus a margin of 2.25%, they will use 7% for the purposes of determining whether or not you actually qualify for the loan. In the $300,000 example above, this means they'll use $1995.91, even though the actual rate and payment is lower - and due to lower maximum debt to income ratio, the ceiling on what you can afford at a given income level will be lower. Depending upon the lender, they may even add a bit of a margin to that qualifying rate. This makes it significantly harder to qualify for an A paper hybrid ARM than a fixed rate loan, even though the rates and payments are lower, and is certainly one reason why there aren't more of these loans out there. Nonetheless, this procedure they use for qualification does mean that someone who manages to qualify should be able to afford whatever the payment eventually adjusts to.

One of the reasons subprime loans got so popular was that they stopped using this method of determining whether an applicant qualified for the loan. The subprime lenders started qualifying applicants based strictly upon the minimum initial payment, despite the fact that they knew good and well that the payment was going to adjust upwards at a known time. Even if the initial payment was "interest only" or negative amortization. They just assumed that the people would get raises, be able to refinance with increased equity, or just be able to lift themselves up by their own bootstraps, or something else equally hope based. Three strong verses of "Kumbaya" would have been about as intelligent, but it worked so long as Wile E. Coyote didn't look down. It shouldn't be a surprise to anyone that this is one of the reasons why subprime crashed so hard, especially in conjunction with stated income loans. Because this made it absurdly easy to qualify for a loan, especially a larger loan than people could really afford, subprime loans were ridiculously popular for a while, even among people who should have been able to qualify for A paper had they limited their budget to what they could afford. When the adjustments hit, it was predictable as gravity that those folks who qualified subprime couldn't make their payments. When the market values stopped rising so quickly that they supported serial refinancing, it didn't take very long for large scale problems to emerge. In the overall scheme of things, subprime loan qualification was good for real estate agents who wanted easy commission checks, irresponsible loan officers, and people with the sense to cash out of the market while things were still going crazy. For the people who applied for subprime loans, not so much.

You should want to qualify with the toughest standards you can meet, preferably A paper full documentation, and even the A paper ARM standards if you can, but this concept was a little bit difficult to get across to the people who already had their hearts set on a property that was way too expensive for them, especially when everyone else is encouraging the speculative atmosphere. It got to the point where newspapers were running articles on "What's a fair margin over index for negative amortization loans," when the correct response would have been, "RUN AWAY."

The whole situation is enough to make you understand exactly how many people outsmarted themselves in pretty much the same wise as the people pictured in this clip:

Unlike the fictional characters portrayed, however, the consequences for borrowers who get in too deep does not end when the director yells, "Cut!" You might want to bear this in mind when figuring out exactly how much loan you can really qualify for. Even the subprime lenders who survived have now figured it out, proving that even the silliest English Knight ("Ca-niggit") can learn when the pain gets bad enough.

Caveat Emptor

Article UPDATED here

The short answer is because they will lose the business.

But they still want it. It's not like they're paid by the hour. If they don't take a loan all the way to funding and recording, they don't paid. If they actually tell you the whole truth - that there's no way in the universe that the loan they originally told you about isn't going to happen - then what do you think most people are going to do? That's right - forget the whole thing or go looking for someone else to do that loan.

So what they do is pretend everything is going along smoothly. They pretend this right up until the moment they hand you the final loan paperwork. In the meantime, ignorance is bliss, as in your ignorance of the truth means that they don't have to worry about you taking the loan elsewhere. Because they're still pretending they can deliver the loan that you thought you were getting, most people will have no desire to shop other loans. Signing up for a back up loan is probably the best performing and cheapest policy of insurance you will ever get, but most people won't do it.

With this in mind, many loan providers have stopped limiting themselves to loans that can actually be delivered at any price. During my short period at The Company Which Shall Remain Nameless, there was quite a bit of discussion about how low of a rate companies could get away with advertising - including things like putting up illegal advertisements when state regulators (Monday through Friday, 9 to 5) wouldn't be on the job, and replacing it with legal ads before they returned on Monday. In the meantime, of course, people would be calling the office looking for that loan that didn't exist, and they would be signing these people up. The laws about rate advertisements are remarkably weak and trivial to violate in spirit, but that's not enough for a lot of companies. You want an eye-opener about how far it's legal to lowball a mortgage quote, click that link.

So they talk about a thirty year fixed rate loan at 5% to get you to sign up. Maybe they even put it on an MLDS (California) or Good Faith Estimate (the other 49 states), with a so-called Truth In Lending Advisory. None of it means anything if the lender doesn't want it to. Nor will the proposed regulatory amendments stop this practice. They'll just issue amended paperwork later, at final signing.

What happens when you get to final signing? They've got some other loan ready to go. Nor do they bring the differences to your attention. If you don't notice, they've got a funded loan they just got paid for without any unpleasantness. Most people don't know what to look for at loan closing to make certain what was delivered was what they originally talked about. If you notice later, it's almost always too late to change your mind. If you do notice at time of signing, they can point out that this loan is ready to go - all you have to do is sign to be done with it. If you don't sign, you're back to square one, with many possible negative consequences for not signing. In the case of a purchase, with a deposit at stake, I'll bet $100 sight unseen that the people will sign whatever loan they're presented in order to not lose that house and not lose the deposit. Even in the case of a refinance, too many people have already spent the money for this month's payment. You never really skip a payment, but that doesn't stop many lenders from promising that you will. It does, after all, increase the probability they'll be paid for a loan.

Lenders deal with this elementary fact of life every day. They talk about whatever they talk about to get you to sign up first, then thirty days down the line, it's perfectly legal for them to deliver something else. A good loan officer doesn't do this. I'm not going to say I've never had a loan go south on me, but I always tell people why that loan is not deliverable despite what I previously thought, and tell them about the new loan within no more than seven days of initial sign-up. In all but the craziest refinance booms, that's plenty of time to get the loan submitted for lender feedback and a loan commitment from the underwriter. I don't like getting anything but routine "prior to funding" conditions on my loan commitments, but even if I do get such a condition, I should know whether it can be met immediately (It can, in the vast majority of cases). Lenders almost always know when you initially sign up what loan you will really qualify for, and what it's really going to cost, but most people won't ask the questions necessary to nail down a mortgage quote to something real, and the lender certainly won't volunteer the information, as their probability of getting paid depends upon getting people to sign up. In turn, getting people to sign up hinges upon them pretending to have a better loan than the other lenders pretend they have. The similarities to a singles bar (or internet dating) are pretty close. Most folks are telling the story that they think will get them what they want, regardless of whether it has any connection to reality or not. You want to be able to separate out the real from the unreal, because no matter how attractive the unreal stuff seems, you're not going to be getting it.

Caveat Emptor

The answer isn't quite "Their lips were moving,"

There are some lenders who make a habit of quoting real loans at real costs that they have reason to believe they can deliver. With probably a much larger number, however, the rule of thumb is that they will tell you whatever it takes to get you to sign up with them, regardless of whether it's true or not. This is fueled by perception of cost and cognitive dissonance. When you're initially shopping a loan, you have very little commitment to the idea. If the prospective lender can imply that the costs will be cheaper than it actually will be, it's easier to generate the business. As you go through the process of getting the loan - loan application, appraisal, etcetera - your degree of "buy in" increases, to the point where about eighty five percent of everyone who finds out they were lowballed at sign up will still sign the final paperwork for the loan. Furthermore, the paperwork is complex enough that over half of those who were lowballed literally never figure it out.

This creates a bizarre set of incentives. Why should lenders tell you the truth at sign up and risk you walking away leaving them with nothing? Especially when half the people never figure out they were lowballed and eighty five percent of those who do will sign the final paperwork anyway. For those keeping score at home, this means above a ninety percent probability that the lowballer will get paid for a completed loan, versus a very high probability that your prospective customers will go with someone else who pretends to have a better loan if this lender tells the truth. Furthermore, they'll quite likely pull your business away from a competing loan that would have been better in the final analysis, but the loan officer there was honest and told you the truth about the loan they could do - the rate and costs. Note that this doesn't mean you'll actually pay less - the real costs are still there, and you'll still pay them. Nonetheless, the whole lowballing scenario is a win for most lenders and loan officers, because even if the client does figure it out and gets angry, the odds are overwhelming that they get paid for a loan, as opposed to not getting paid for a loan. For consumers, the only thing signing up with a lowballer does for you is allow you to fool yourself. Since this makes a huge difference as to which loan (or loans) are the best ones to apply for, but can lead to paying thousands to tens of thousands of dollars in unknown and undisclosed costs that can mean it wasn't really worthwhile to get that loan at all, to soaking up so much money on a purchase that you don't have the down payment you were expecting, to even forcing you to beg money at the last minute from friends and relatives in order not to lose your Good Faith Deposit (along with the property you thought you were buying).

If all of these issues sound like an interesting and exciting challenge to you, you should probably stop reading right now. The rest of the article will be a waste of your time. For those of us who like to have real estate transactions flow easily and in a predictable and stress-free manner, however, avoiding these issues is worth learning what you need to know and planning ahead. But most lowballing lenders won't suddenly become paragons of virtue simply because you ask them to. You need to force them to be honest.

There are two basic components to this strategy. The first is to remove the ability of the lender to pretend charges don't exist by not talking about them. People rant and rail at "junk fees", but the cold hard truth is that most so-called "junk fees" are not junk fees at all, but legitimate costs of the loan that the lender simply declined to tell you about, lest you take yourself to another lender. This is quite legal, by the way. One of my first articles explained the Good Faith Estimate and the lowballing games that can be played, quite legally. The most recent update of that article is Good Faith Estimate. The equivalent article on California's MLDS is on my professional site. Require them to fill out every line on either form with an actual number of dollars - no PFC, POC, or anything else. If the number is zero, say it's zero. This gives you a real idea of what all the charges should be.

There is a better, simpler, alternative, that's far simpler for most folks: Force the lenders to quote a loan type, the rate, and the total costs of doing that loan - including all third party fees - and guarantee that total, in writing. Note that this doesn't include the money needed to set up any Impound account and it also doesn't include prepaid interest, both of which are money that most people prefer to roll into their mortgage balance if they can, but are not costs because they are your money that goes to pay for things you would have to pay for anyway - property taxes, homeowner's insurance, the interest on that monthly payment that you never actually skip. It's still a better idea to come up with the money for these "prepaids" out of pocket if you can.

But if lenders guarantee their quote in writing, this removes the incentive to low-ball. You're only paying $X, end of discussion. Any money over that that the loan costs comes out of their pocket - dollar for dollar. So anything extra they try to gouge you for comes straight back to you from them. Yes, you need loan type and the rate to be part of that guarantee, because there is always a tradeoff between rate and cost on loans, and if you lock down the cost, they boost your interest rate by one or more steps to pay the difference. Lenders don't like making these guarantees, and not just because some folks won't qualify, but because it removes their ability to lowball you. But if they're talking about a loan that they really have, and can really deliver to you on the terms they're talking about, they should be willing to make such a guarantee. If they won't, there is a reason, and it tells you all that you need to know about their truthfulness.

Another one of my early articles covers the Questions You Should Ask Prospective Loan Providers (link is the most recent update). Print it out, take it with you when loan shopping. Make copies and record the answers from each prospective lender if you want. Each and every single question on that list will save you from problems most people don't know or don't ask about. If a prospective lender starts hedging too much, you know there's an issue. Terminate the interview, and find a different lender.

It's very easy for mortgage lenders to sell you upon the benefits of a much better loan than they have any ability to or intent of delivering to you, and to do so legally. You can take steps to defend against such, or you can be one of the victims. It is overwhelmingly likely that a guaranteed quote is real and deliverable, while a quote that isn't guaranteed will be far more expensive in actuality despite a lower quote, because a non-guaranteed quote is literally so much hot air. By themselves, the standard forms you get at loan sign up are worthless. But the fact is that any kind of competent loan officer should have a pretty good idea what is and is not deliverable, while consumers have no such reliable pipeline of information. Requiring a good guarantee puts the responsibility for paying any increases where it belongs: On the lender and loan officer, who have the necessary information to quote loans that are really available and deliverable to someone in your circumstances, but usually find it to their advantage to quote significantly less than the actual costs in order to get you to sign up with them.

Caveat Emptor