Mortgages: November 2008 Archives

You would think these nitwits would learn. You would think they'd all be out of the business. Sadly, that is not the case.

It started innocently enough. It always starts innocently.

This was an email I got today (specifics redacted).

Hi Dan, I came across your blog looking for information on what to do when your mortgage loan might not go through at the very last minute. I live in DELETED, and realize your in the San Diego area, but you really opened my eyes on the subject and I had to let you know. We are in escrow with a close date of DELETED, and our VA lending agent no longer works with the company after 2 months of paperwork, assurances and promises. The newly appointed agent says they don¹t know how DELETED was going to close the loan and everything is falling apart. DELETED went as far to say he could close the loan in 5 days to use as a negotiating tool to get a contract with the seller which won us the house. We never heard of getting a back up loan or a purchase money loan? It¹s not over yet, but any advice would be GREATLY appreciated as we are 1st time home buyers and really feel taken.

My response

(name deleted),
VA loans are dead simple providing you have the following qualities:

-VA eligibility

-sufficient income to cover the payments and other debt (see debt to income ratio)

-acceptable loan to value ratio. In the case of VA loans, this can be up to 103% of the purchase price or appraised value, whichever is lower. This is the only widely available "no down payment" loan right now.

-Property that meets VA and FHA standards (No holes in walls or cracks in windows, subfloors all covered, etcetera)

-enough time to get the government bureaucrats to do what they need to.

Unfortunately, there's a lot of loan officers and real estate agents out there who still don't understand how the market has changed. I have always built client affordability and a budget into my transactions, but the reason we're having problems is that a lot of my competitors didn't.

Here's what you need to do: Find out if there is a reason this transaction is not going to fly.

Obvious reasons why it definitely would not fly:

• Can't document enough income for a long enough time
• something wrong with the property
• property appraises way too low
• no VA eligibility

There are other possible reasons, but those are the main ones. If there is such a reason, bail out NOW. If there isn't such a reason, find someone who knows what they're doing IMMEDIATELY. Alas, I don't know anyone in DELETED, but I believe my company (Clarion Mortgage Capital) does business there. The good news is you still have almost
a month, which should be enough time.

If this property doesn't work out for you, may I suggest finding DELETED or DELETED and asking one of those fine gentlemen to be your agent? They're both ethical agents who won't be searching for properties you can't afford and who do know competent loan officers. I can get their contact information if needed, but they're both easy
to find online. Tell them I sent you - they both know I neither ask for nor accept referral fees, but that the occasional free client I send their way will disappear if they mistreat anyone I send.

I went out looking at property, and when I came back this email was there:

Thanks for your quick reply Dan, I know you must be busy, and I really appreciate all your information.

The only factor the new agent is citing is that we do have a high income to debt ratio. We know this. Everyone knows this, and it has not changed since we started the process 2 months ago. The first loan agent was going to get by this by paying down one of our high credit cards with seller money. We asked for 4% back from seller for this reason which they agreed to. Done. Now the new lending agent is saying that won't fly, that we can't pay down the debt we have to pay it off, and the 4% is 2000 short of our credit card debt. So she does not know how she can do it but is getting back to us today.

We have not talked to our real-estate agent yet, but we will today as well. Would you recommend we contact your mortgage company in the mean time to try to push through and cover ourselves?

Oh my.

Lions and Tigers and Bears and people trying to commit fraud. Oh, my!

My heart goes out to this person, especially as they are a veteran, but there's very little I can do beyond make them aware of some facts before things get any worse.

This is fraud. No maybe about it. I have written about this before in Cash Back From The Seller to the Buyer in Real Estate Sales. If the purchase price is $400,000 but the seller is returning cash back to the buyer under the table, then the buyer isn't really paying $400,000, are they? Nor is the seller really getting $400,000, are they?

here's the legal definition of fraud:

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Now if they don't disclose that 4% cash back, they are misleading the lender and the government into believing that the property is worth more than it is. In other words, fraud. Furthermore, the former loan officer evidently hadn't disclosed it from the fact that the new loan officer is saying the lender isn't buying off on it now.

(I should say that the Department of Veteran's Affairs apparently allows this, but they are not lenders or loan officers, and whether the lenders would accept it is another matter. They can add other requirements if they so desire, and I would not expect this to pass muster with any lender I am aware of, as it violates generally accepted accounting principles (GAAP). Truth be told, I've never tried to get such a thing accepted, but I would try if the client really needed it and understood what needed to happen and the dangers to them. Even if the VA and the lender both permit it, it must be disclosed to them and approved by the underwriter in order for it not to be fraud. For standard conforming "A paper" loans, and for that matter even subprime ones, cash to the buyer from the seller, or cash to pay the buyer's debts, is strictly forbidden. Finally, considering such things from a dispassionate neutral point of view such as "are they a good idea?" or "Is the consumer likely to be able to repay the loan?" or "Is this a good risk for the lender?", I have to agree with GAAP - the answer is no, and the prognosis is that given the consumer's financial habits, this is setting them up for failure. But "good idea" and "legal" are two distinctly different concepts.)

Whatever the lender's fraud policy may be, the government comes down on people who participate in mortgage fraud that involves VA or FHA guarantees like a ton of bricks. Just because the VA permits it doesn't mean it isn't fraud if the lender doesn't, or didn't approve it in this particular case. They are going to throw the book at you. Have you ever seen the list of government regulations? Ouch, both literally and figuratively.

Let's suppose the buyer and seller do not commit fraud, fully disclosing the cash back to the lender and the government. If they do this, the lender and the government will both treat the purchase price as being the appropriate amount less than whatever number is on the paper. As I said in When The Appraisal Is Below The Purchase Price for Real Estate, this will mean the borrower basically has to make up the difference in cash. Net result, the buyer/borrower needed that 4% cash not to pay off their consumer debt, but for the down payment on the property. Net gain to the buyer from that money: Zero. Nada. Zip. Zilch.

Both the loan officer and real estate agent and their brokerages need to hear about this, at a minimum. The loan officer for actively planning a fraudulent transaction, the real estate agent for not speaking up and putting their foot down, because they should have known better, but were keeping their mouth shut to get a bigger commission check.

Now that stated income is, to use Miracle Max's wonderful phrase, "mostly dead", there seems to be no shortage of nitwits trying this fraudulent trick to get loans and transactions through. It is not a minor violation that nobody cares about. It goes straight to the heart of the notion of property value, and the lender's expectation that if you do default, they will be able to get their money back by selling the property. This trick fraudulently persuades a lender to accept more risk than they are aware of, or worse, tricks them into taking a risk that they would reject were they in full command of the truth. That's fraud.

It also goes right to the heart of whether the client can afford the property. In this case, they clearly can not. If they could, there would be no need to commit fraud in order to generate a false picture of them being able to afford it. Debt to income ratio is there for the borrower's protection as much as the lender's.

Here's the rest of my response to the clarification:

Your loan officer has hosed you badly. I really hope it's not going to end up losing your deposit. If so, in your place I would talk to their company about paying it in your stead. Their loan officer was trying to make a fraudulent transaction fly; that's failure to supervise. If they don't promptly agree to indemnify you in writing, talk to a lawyer. Actually, talk to a lawyer anyway. But if your loan contingency is still in effect you may be able to get out of it without losing your deposit.

I don't know your situation or your state's law or the contract you signed on this, and I definitely am not a lawyer. Talk to your real estate agent about getting out of the contract RIGHT NOW because this transaction is not going to happen.

Once you're out of the contract, I'd fire that agent if I were in your shoes. He helped negotiate the contract, he should have known it was fraudulent and the requirements for making it legal and the consequences thereof.

After sober reflection several hours later, I am, if anything, madder than I was. I would be ready to do violence to these two twits for what they did to someone who not only wants to put money in their pocket, but served our country, so it's a good thing they're not here in front of me. If it were me, or some situation I had an interest in (legal standing), I'd certainly make a written complaint to the regulatory authorities. I want these clowns gone, out of business, locked up in prison so they can't attempt to repeat this nonsense with some other innocent client who doesn't know any better, and I want their enablers and those who fail to supervise them gone, too. Helping someone with their home buying is a trust, and I have no more sympathy for those who knowingly and willfully violate that trust than I do for pedophile priests.

I'm not here to act like the Black Knight, shouting "None Shall Pass!" That didn't work out too well. But you need to consider 1) Can you really afford it? 2) Is it consistent with your financial habits?, and 3) Is it fully disclosed to everyone it needs to be? That lender is loaning out hundreds of thousands of dollars based upon their understanding of the situation. If that understanding is not in full accordance with what is actually going on, that's a problem.

Caveat Emptor

Article UPDATED here

HUD has announced a new Federal Good Faith Estimate and HUD 1 form. The regulations have been finalized, but as I write this, they have not yet been published, at least in their final form. They appear much superior to the current forms, but I have a major gripe in that the new forms will not be required until January 1, 2010. There is no reason on this planet why they can't be enacted effective at the beginning of 2009 at the latest.

I haven't exactly made a secret of my disgust for the loose loan disclosure rules we have had for these many years, and these loose requirements were a major cause of the meltdown we currently find ourselves in. I've been griping about the loopholes in the Good Faith Estimate from my very first articles on the site. I said a year ago in How to Avoid A Repeat of the Housing Market Mess, if I had to pick one place to prevent a repeat of this whole mess, it would be in the loan disclosure requirements. Without a copy of the regulations, I can't confirm how well they've done, but the new form appears to be light-years ahead of the previous version.

You can view the document here. Go ahead and click on it - it should open in a new window or tab. You're going to want to be referring to this while viewing it.

The "Summary of Your Loan" box on page 1: All of those questions are wonderful to see where they are highlighted, not hidden in the middle of other stuff or altogether missing:

Your initial loan amount is

Your loan term is

Your initial interest rate is

Your initial monthly amount owed for principal, interest, and any mortgage insurance is

Can your interest rate rise?

Even if you make payments on time, can your loan balance rise?

Even if you make payments on time, can your monthly amount owed for principal, interest, and any mortgage insurance rise?

Does your loan have a prepayment penalty?

Does your loan have a balloon payment?

On Page 2, it explicitly tells the consumer what they are paying in origination versus discount (often incorrectly used on the previous form), whether they are getting anything back, or what they are paying (discount) in order to get this loan rate.

1. Our origination charge This charge is for getting this loan for you.

2. Your credit or charge (points) for the specific interest rate chosen

The credit or charge for the interest rate of % is included in

"Our origination charge." (See item 1 above.)

You receive a credit of $ for this interest rate of %.

This credit reduces your settlement charges.

You pay a charge of $ for this interest rate of %.

This charge (points) increases your total settlement charges.

The tradeoff table on page 3 shows that you can change your total settlement charges by choosing a different interest rate for this loan.

Now here's another change I approve of: Lumping the fees into categories, rather than playing hide the salami by pretending charges do not exist, or they don't fit exactly on a given line:

3. Required services that we select

These charges are for services we require to complete your settlement.

We will choose the providers of these services.

Service Charge

4. Title services and lender's title insurance

This charge includes the services of a title or settlement agent, for example, and title insurance to protect the lender, if required.

5. Owner's title insurance

You may purchase an owner's title insurance policy to protect your interest in the property.

6. Required services that you can shop for

These charges are for other services that are required to complete your settlement. We can identify providers of these services or you can shop for them yourself. Our estimates for providing these services are below.

Service Charge

7. Government recording charges

These charges are for state and local fees to record your loan and title documents.

8. Transfer taxes

These charges are for state and local fees on mortgages and home sales.

9. Initial deposit for your escrow account

This charge is held in an escrow account to pay future recurring charges on your property and includes all property taxes, all insurance, and other .

10. Daily interest charges
This charge is for the daily interest on your loan from the day of your settlement until the first day of the next month or the first day of your normal mortgage payment cycle. This amount is $ per day
for days (if your settlement is ).

11. Homeowner's insurance
This charge is for the insurance you must buy for the property to protect from a loss, such as fire.
Policy Charge

B Your Charges for All Other Settlement Services $

Then on page three, it breaks the charges into three groups, the first group being charges that are not allowed to change

These charges cannot increase at settlement:

Our origination charge

Your credit or charge (points) for the specific interest rate chosen (after
you lock in your interest rate)

Your adjusted origination charges (after you lock in your interest rate)

Transfer taxes

The total of these charges can increase up to 10% at settlement:

Required services that we select

Title services and lender's title insurance (if we select them or you use companies we identify)

Owner's title insurance (if you use companies we identify)

Required services that you can shop for (if you use companies we identify)

Government recording charges

I'd rather title and escrow charges be in the first category (cannot increase), but I'll take what I can get. This forces actual price sensitivity upon loan officers, although there is still room to lowball. It also limits title and escrow junk fees to an amount you agreed to pay in the first place, plus 10% at most. Once again, the actual regulations, once they are available in final form may short-circuit the usefulness of all of this, but taking things on the face of it, this is a HUGE amount of improvement.

Finally, the list of things that can change prospectively without limit:

These charges can change at settlement:

Required services that you can shop for (if you do not use companies we identify)

Title services and lender's title insurance (if you do not use companies we identify)

Owner's title insurance (if you do not use companies we identify)

Initial deposit for your escrow account

Daily interest charges

Homeowner's insurance

I do not understand why daily interest charges are in this list, unless they are merely in the sense of the number of days you are being charged interest for changes. The actual per day charge should be known exactly as soon as you have a loan amount and interest rate, but the number of days prepaid interest will vary with the actual settlement date. Since the calculation is in the form of $x per day times y days = $z, no matter how many decimal places you're correct on the $x per day figure, if the number of days (y) changes as settlement gets moved forward or pushed back, it doesn't take a genius to figure out that the figure for $z is going to change.

The next item is as beautiful to my eyes as any work of art. I've been harping about the tradeoff between rate and cost since day one on this site, and quite a while before that, but it just does not enter the public consciousness. The federal government has built this tradeoff right into page 3 of the good faith estimate!

Using the tradeoff table

This GFE estimates your settlement charges. At your settlement, you will receive a HUD-1, a form that lists your actual costs. Compare the charges on the HUD-1 with the charges on this GFE. Charges can change if you select your own provider and do not use the companies we identify. (See below for details.)

Understanding which charges can change at settlement

In this GFE, we offered you this loan with a particular interest rate and estimated settlement charges. However:

If you want to choose this same loan with lower settlement charges, then you will have a higher interest rate.

If you want to choose this same loan with a lower interest rate, then you will have higher settlement charges.

If you would like to choose an available option, you must ask us for a new GFE.

Loan originators have the option to complete this table. Please ask for additional information if the table is not completed.

Your initial loan amount

Your initial interest rate1

Your initial monthly amount owed

Change in the monthly amount owed from this GFE

Change in the amount you will pay at settlement with this interest rate

How much your total estimated settlement charges will be

The loan in this GFE

You will pay $ less every month

Your settlement charges will increase by $

You will pay $ more every month

Your settlement charges will be reduced by $

For an adjustable rate loan, the comparisons above are for the initial interest rate before adjustments are made.

Cost is attached to rate and rate is attached to cost. You cannot separate one from the other, but you would not believe how many people just assume that they can have the lowest possible rate without points or fees, and have been taken for a ride because they did not understand this fundamental truth of mortgage loans.

The new HUD 1 form is a little more readable, and links back better to the Good Faith Estimate, both praiseworthy endeavors. It's essentially the same format on the first two pages, with a third page added, linking back to the settlement charge categories on the Good Faith Estimate. I've always been a big fan of the HUD 1 form, and all they appear to have done is add more information with a third page that links back to the good faith estimate in an easily understandable way.

National Association of Mortgage Brokers (NAMB) issued a press release

NAMB will be issuing a press release announcing its disappointment with the final RESPA rule once it is released. NAMB believes that the final rule will hinder competition in the market and increase costs to consumers.

In addition, NAMB will be calling upon Congress to take immediate action to review the rule.

I wasn't involved in the process, so I have no idea if NAMB wanted a better, tighter standard or a looser one. I'm willing to be charitable, but the new form is so much better for consumers than the old one that I have my doubts as to whether NAMB, as well as the Mortgage Bankers Association (their statement is here, leading me to suspect that they got a little more of what they wanted). I don't know if they were pushing for even more transparency or less, but change would have come decades ago if the industry wasn't so dead set against it.

May I observe that this is not a done deal yet. Congress, in particular the financial committee chairmen (Barney Frank in the House and Chris Dodd in the Senate), are well known to be completely in the pocket of the industry (fee simple title, at that - and owned free and clear). I have no idea of the political maneuvering that went into this - I have no idea whether the Bush Administration is intentionally going to the mat on this one, or if it's simply career bureaucrats finally beginning to do the job they should have done thirty years ago. Given the President's history on trying to prevent the meltdown (he and Congressional Republicans tried no less than three times to prevent or lessen the mortgage meltdown, and were stymied by the Democrats in every case), I'm inclined to be believe the Bush Administration is at least complicit in the changes, although I have no direct evidence. But I suspect that any changes Congress makes if it gets involved will not be for the betterment of the consumer. In fact, I suspect the industry is behind the delay in implementation (over an entire year) to give them a chance to work the changes in Congress (where bribes campaign contributions are legal) that they couldn't get from the career bureaucrats.

To summarize, all I'm working from here is the fact sheet and the new forms. The Devil is Always in the Details, and the finalized regulations are not yet available for public viewing as of this writing. They could be so loose that the improvements in the new forms lose all meaning and importance - for example, the current regulations and the current form, which if the regulations were what they needed to be, the current form would not be the joke it is. But if these changes can be taken at face value, the new forms will be the best thing for mortgage consumers ever. I'm not saying they can't be improved. I'm just saying that I would not have expected anything nearly so good for consumers as these appear to be to have come out of the government bureaucracy.

Caveat Emptor

(Thanks to Steve Kaye for bringing this to my attention!)

A while ago now, I quoted a loan to someone, and they chose a 5/1 loan at 6 percent with .05 points of discount, and they told me the closest competition was 6.375 with more discount than that. Then when I tried to lock the loan with the lender, I discovered a transient compliance problem that prevented that lender from accepting loans from us for about a week. No biggie, I thought, I'll just go with the second best. It's not as if my competition was even close. So it became a loan that would cost about one tenth of a point of discount instead of only 5%. Difference (on a $500,000 loan): About $250. However, this particular client had opted for the Upfront Mortgage Broker Guarantee, where my compensation is a fixed amount, instead of my standard Loan Quote Guarantee, where if it's not precisely the loan I quote, I have to eat the difference. So I did the ethical thing under those circumstances, and called the client right away to let them know that the pricing was a little different. They then canceled the loan, despite having been specifically counseled about the risks of the plan they chose.

Now the loan they would have gotten was still a much better loan than the competition was offering, and I would have been legally compliant had I just waited and socked them with the difference at closing. Even the Upfront Mortgage Brokers would have accepted the facts had the client complained - if, indeed, they had even noticed. I could have kept my mouth shut and gotten a loan, and at least 95% of all loan providers would say I was stupid for not doing so.

But let's look at it through a consumer's eyes: Wouldn't you rather be told, weeks in advance, so that you know what you're really getting? So that if you so desire, you can go shopping for something better? Isn't it better than having it sprung upon you at closing? Isn't this the sign of someone you want to be doing business with?

Some people may feel it's a sign of someone who's springing a little change now in preparation for springing a bigger change later. That might seem intelligent, except for the fact that I don't have to tell you about the changes now. There is absolutely no legal requirement. The fact that your loan provider does tell you right away is a sign that they are going well past the legal requirements. The vast majority of all loan providers are pretending that thousands of dollars in fees and adjustments and even barefaced low-balls don't exist - and you're getting all angry and disappointed because someone who's delivering something thousands of dollars cheaper than the competition is telling you weeks in advance about a $250 difference between the initial quote and the numbers he's going to stand behind with a Loan Quote Guarantee that's still way less than the competition - and that competition isn't willing to issue the guarantee even on the higher quotes?

The problem with the loan industry is that lenders can tell you about one set of numbers to get you to sign up - numbers that they know good and well they are not going to deliver - and then thirty days later when they actually have your loan ready, deliver something completely different, secure in the knowledge that they have this unbeatable advantage of you having actually given them this thirty days to get ready. Entire business plans are drawn up based upon the fact that they can lie, and conveniently "forget" to tell consumers about all of these additions to what the consumer is actually going to end up paying, and consumers will reward them by not only signing up, but signing on the dotted line when it's time.

Now, take a step back and ask yourself: Is someone who comes right back and tells you about the difference within a couple of hours playing that game? Not likely. If they give you a real loan quote guarantee based upon the revised numbers, any future games they are playing are pointless. In fact, if they tell you that the difference came about in the locking process, you can be more confident that they actually have locked your loan, itself a huge problem with the industry. If I haven't locked your loan, I can pretend that the difference isn't going to happen because the rates might go down, can't I?

When people come back right away and tell you about issues in your loan, you should become more comfortable with them, not less. The less ethical ones can pretend the issues don't exist for weeks, until they spring all these differences on you at closing while distracting you with a thousand other things so that you don't notice what you're signing. In fact, the sooner they tell you about an issue, the more likely it is they are doing their best to be honest.

Caveat Emptor

Original article here

California has replaced the one page federal Good Faith Estimate with a two page Mortgage Loan Disclosure Statement. When I originally wrote this, I haven't seen a lot of abuses of this yet, mostly no doubt because it is so new. I didn't even know if there were solid regulations and implementation policies and standards on it yet. I hadn't seen anything from the Department of Real Estate in the mail, and all web searches (including with the Department of Real Estate) come up with is a link to various lenders online forms, not the regulations for filling it out. So I'm presuming that said regulations are similar to the federal Good Faith Estimate, especially as the only thing a recent seminar we paid for on changes in the business had to say was, "If you give the client a Good Faith Estimate, you will be held to have complied with federal regulations but not state of California regulations." All of which combined with subsequent developments to indicate that California didn't alter the existing federal standards so much as add a few more requirements, the effects of which are to leave all of the games loan providers play with the federal Good Faith Estimate intact, as well as adding a couple more. (See my two part essay on the Good Faith Estimate for a list of the most common of those games). This essay is going to concentrate on differences between the new California form and the Federal Form.

The first page of this new form is similar to the Federal Good Faith Estimate, and indeed you should refer to that article for the limitations of this page, and how little the quotes mean. The first major difference is that there is no explicit loan or rate quoted at the top, and the broker or lender must disclose whether each given cost of the loan is paid to the broker or to someone else. There is no explicit line item (as there is on the Good Faith Estimate) for "Estimated Closing Costs" to explicitly sum all of the things that are actual fees or costs of the loan, as opposed to reserve requirements or things that are your fees paid in advance, such as property taxes. Your property taxes are the same whether you have lender A, lender B, or no loan at all. Ditto your homeowner's insurance, school taxes (if any) and flood insurance (if any). Setting a form where they are part of a total to be compared, rather than apart from that total, is just offering the loan provider one more opportunity to play games or distract you from the really important information.

There is a sum of all the things the client is paying to the broker versus paid to others. I wonder if this might not backfire on the lending and packaging houses that got this part added. They're going to show a line of fees paid almost entirely to them, whereas the only things paid to or from an actual broker are origination fees (if any), processing fee (my processor works for me or for the brokerage, not the lender), and broker's rebate to client (if any, and which if it exists is something paid by me the broker to you the client - a good thing in most clients' opinion). Psychologically a telling advantage, even if it doesn't really mean anything.

At the bottom of page one, there are subtotals for fees paid to others and fees paid to brokers, and then an overall total. Then there's a section which says "Compensation to Broker," explicitly adding "(Not Paid Out of Loan Proceeds)". In other words, this isn't coming out of your pocket, although they could certainly give you better terms by reducing their compensation in the vast majority of cases. But the fact that one broker is making more than another (or is required to state explicitly what they make, whereas a direct lender or "packaging house" originating their own loans is not) does not mean you're not getting a better loan from them. Some brokers get discounts others do not. Some brokers disclose honestly and completely, others do not. Examine the loan you are getting - all of the terms, rates and conditions, and decide based upon those which loan is better. That's what makes a difference to you. The rest is a matador's red cape - a distraction from what is important. For instance, I have both correspondent lines (where my company funds the loan and immediately sells it to the lender who underwrote it) and broker lines (where we originate, but the lender funds it themselves). The major difference between the two is that with the correspondent lines, not only do we make more, but what we make is undisclosed because it isn't yield spread, but rather income from selling that loan on the secondary market. But if the client pays attention to what is important to their own bottom line, which is to say type of loan, interest rate, and total cost, disclosure of additional compensation is just unimportant to them.

Once again, this isn't important to you, the client, but it has in passing performed a service to many workers in the loan industry. Many lenders give bigger brokers a volume rebate, over and above the basic per loan rebate, and the brokers were keeping this a secret from even their own workers lest they have to increase compensation. Now these brokers have to disclose it to the clients. This means the brokers have to tell the loan officers about it so they can disclose it. Now that all loan officers know about it instead of only a few, those who are high producers and have leverage can say, "I'm helping you make all this money. I want part of it."

Page two of this two-page form starts with section I, which is a short accounting of the money. My advice is not to trust this any more than anything on the Good Faith Estimate. In other words, whether this is accurate is likely to be a function of your particular loan officer's good will more than anything else. Once again, the only form where there are real penalties for being inaccurate is the HUD-1, which comes at the end of the loan, not the beginning. But it's a good intention, nonetheless, and perhaps one of these years it'll actually mean something even if your loan officer is Simon LeGreedy or has a nose fourteen miles long. Proposed loan amount less costs, less other stuff of yours that's getting paid off, less the purchase price of the home or payoff of existing loan. The idea is to give you an explicit "you're going to get this much cash" or "you must pay this much cash to make this balance"

Section II is something I want to draw your attention to: Proposed interest rate is a good thing to have, although there is no more guarantee that this is the rate you're going to get than a federal Good Faith Estimate. But it has a choice of two things to check off "Fixed Rate" or "Initial Variable Rate". Just because Fixed Rate is checked does not mean the loan they are discussing is fixed rate for the full duration of the loan. Let me repeat that: Just because Fixed Rate is checked does not mean the loan they are discussing is fixed rate for the full duration of the loan. It might be fixed for thirty years - or it might be fixed for three months. This is a good place for unscrupulous loan officers to offer misleading information verbally, while checking the correct box doesn't usually mean a whole lot.

Section III is proposed term of the loan. If something less than 360 months is written here (or whatever the amortization of the loan is in years), it's telling you there's a balloon at the end. Once again, there is no way to verify that if 360 months is what is written, it's real.

Section IV is proposed loan payment. Ideally it's computed based upon the amounts given in the previous three sections. Verify that it at least makes mathematical sense by running these numbers through an amortization calculator, or doing the calculation yourself. Many loan officers will play games with the payment because most people shop loans based upon payment. Never choose a loan based upon payment. It's too easy to promise an unrealistically low one, or bait a really nasty trap that doesn't spring for a couple of years with low payment.

Section V: does the loan have a prepayment penalty, and on what basis? I'm glad to see this section here. I'll be even gladder if and when I see evidence the answers mean anything in the sense of legal penalties for lying. Lying about prepayment penalties has been rampant for a long time. Lying about prepayment penalties is a good way to make an absolutely awful loan look pretty good. Lying about prepayment penalties gets someone to sign up with the loan provider who lies because of this. And when you find out at the end of the loan process, when they present the loan documents, that they were lying (if you even notice, which many are expert at making sure you don't!), you may not have any good alternatives to signing those documents anyway.

Section VI basically tells you the lender cannot require credit life insurance or disability insurance. Many lenders would if they could. Not that disability insurance is a bad idea - quite the opposite in fact (I'm of two minds on credit life insurance, and this is not the place for that essay).

Section VII requires you the client to tell them, the lender about all the other liens on the property and hints at penalties for dishonesty. Not that the lender or broker is going to take your word for it, of course. But the gall this amazes me: requiring a consumer to be accurate on this or face penalties, pay for the loan, etcetera when many brokers and lenders could submit the form to the Pulitzer committee for consideration in the category for best short fiction.

Section VIII is about Article 7, which covers loan amounts so small as to be irrelevant for all practical purposes in California. There's also a bit about whether or not a broker is lending their own money. This is potentially both confusing and interesting, but beyond the scope of this essay. It's good that they are requiring license numbers now. In California, you can easily look them up for past violations online at http://www2.dre.ca.gov/PublicASP/pplinfo.asp (many other states have similar registries). Not that someone without past violations is pure, and not that someone with them necessarily intends to do anything dirty to you. But it's good information to know. Another good place to check them out is with the Better Business Bureau, which compiles information on every business, members or not, at http://www.bbb.org/ You'll need a business name and address, phone number, or web site. Now, if they've got one strike against them, they could easily have been caught in circumstances beyond their control. But a pattern of abuses is a clear warning. When I originally wrote this, I had just decided to risk $50 for a business card order with a company that has a truly awful rating BBB rating. The cards arrived two days later and I couldn't be happier with any aspect of the transaction. But my next order from them won't be any bigger until they have established a track record with me (and also I with them so they can see a long history of orders they want to keep coming, and which will stop if their service isn't satisfactory).

Section IX explicitly tells you, the client, that this is not a loan commitment. This is good, so far as it goes. I've spoken to many otherwise intelligent people who somehow had acquired the idea that because a loan provider filled out a Good Faith Estimate, it meant the loan was a Done Deal. It most certainly does not mean anything of the sort. No real estate loan officer EVER writes a loan commitment, and it's been that way for at least a couple of decades. Loan commitments are the exclusive province of the underwriter, who is intentionally and for anti-fraud reasons isolated from the client (i.e. the underwriter is not allowed to communicate with you directly). The most an ethical loan officer will say is "my experience does not show me anything that should cause you to have a problem"

Now, here's the rub, and an indication of what this section really should say. Does it not stand to reason that if the loan is not a Done Deal at all, it most particularly is not a done deal on the exact stated terms? This form is supposed to be an estimate. It may be a good estimate, given on a loan that has already been locked. Or it might be just a convenient fiction that gets you to sign up with that provider. There is no way to be sure it's good until you get the HUD-1 at the end.

Caveat Emptor

Original here


(Amalgamated with my article on the Good Faith Estimate at Dan Melson's San Diego Real Estate and Mortgage Website)

Quite a while ago, when loan standards were other than they have become, I wrote an article with the title Is a VA Loan a Good Deal? Back then, if you could qualify for a loan that was both A paper and full documentation, I could get you a better loan as measured by cost of interest for the same closing cost, maybe even if you didn't have a down payment. Lenders were eager to make loans at 100% loan to value ratio, and since conventional conforming rates have always been the lowest for a given cost, they could beat VA loans despite not being designed for the same situations.

That is no longer the case.

100% financing for ordinary conventional loans has completely self-destructed, at least for now. I am firmly of the opinion that it will be back for full documentation borrowers who can prove actual income via tax returns or W-2 forms, but for right now, it is gone. FHA loans only go to 96.5% Loan to Value ratio, and the down payment assistance programs that formerly enabled people to get FHA loans without a down payment have been put out of business by legislation. This leaves the VA loan as the sole loan program available that currently allows purchase of real estate without a down payment. Not only do VA loans allow over 100% financing, they have absolutely no ongoing mortgage insurance charges. There is a half a percent funding fee charged by the VA, but this is eligible to be rolled into the loan itself, and the funding fee is waived if the veteran has 10% or greater service related disability.

Not everyone is eligible for a VA loan. You must have earned it via time in the armed services. Currently active-duty service-folks are potentially eligible, providing they have met the criteria. In some cases, a spouse of a deceased serviceperson is also eligible for a VA benefit. This still isn't as many people as was true formerly. Thirty years ago, far more people served in the military than currently do. Even though San Diego is a military town, most veterans seem to leave when their tour is over, so the population of discharged veterans is lower than might be expected. They're here, but they have mostly come back because of civilian employment or following spouses who are themselves in the military, rather than choosing to retire here.

Indeed, Active duty servicemembers have an advantage over retirees. They are able to draw a housing allowance if they do not live in military housing - a housing allowance that can pay their mortgage instead of rent, and when reassigned, they can rent the property to another military family, knowing the military family receives that same allowance. A military family that exercises due diligence can retire owning five or more properties, all with positive cash flow, and most likely with huge amounts of equity, if not owned outright. Current BAH allowances for San Diego won't purchase a mansion, but they will cash flow out for quite reasonable properties in desirable parts of town. Since VA loans are all fully amortized, this will eventually pay the mortgage off, leaving them with only property taxes and maintenance for the expense of owning the property.

For a decade or more, VA loans were pretty much useless in high cost areas because of loan limits too low to purchase desirable properties. There for a while, they were only useful for one bedroom condominiums here in San Diego because the price of housing had so far outstripped VA loan limits that that was all that could be bought with them. That has now changed, both because prices have fallen (if anything, farther than they should), and VA loan limits have risen dramatically thanks to new legislation. San Diego has a current VA loan limit of $697,500 (here are loan limits for high cost areas nationwide) and recent legislation has extended VA loan limits above "regular" conforming loan limits through at least the end of 2011.

The Department of Veterans Affairs:

The temporary increase to the maximum guaranty has been extended through December 31, 2011. When combined with new locality-based Freddie Mac conforming loan limit in January 2009, VA's maximum county "loan limit" will be $1,094,625 ($1,641,937.50 in Alaska, Guam, Hawaii, and the Virgin Islands). This results in unique county "loan limits" for VA.

The one limit to VA loans is a good one to have: They require documentation of earning enough income to be able to afford the payments, either through tax returns or w2 form. This prevents something that has happened all too often of late, real estate agents and loan officers selling someone a property that there is no way there are able to afford in the longer term. This was another reason VA loans were often bypassed in the last few years, but I actually like this protective feature. Debt to Income Ratio is more important to protect the borrower than it is to protect the lender!

So even though not everyone is eligible for a VA loan, if you are one of those who has earned eligibility through service to the country, the VA loan has become the best "magic bullet" currently available to assist you in buying real estate. By not having a mortgage insurance requirement, or boosting the basic rate through adjustments as other loans have, and by requiring full documentation of income, they not only aid the veteran in affording the property, but have a significant protective element.

Caveat Emptor

Article UPDATED here