Mortgages: March 2009 Archives

Effective May 1, 2009, we're going to have problems with appraisals like never before. I'm going to cite relevant sections of the new code and its implementation and comment individually, but save the comments on the entire thing for the end.

To help enhance the integrity of the home appraisal process in the mortgage finance industry, in March 2008, Fannie Mae entered into an agreement with our regulator - the Federal Housing Finance Agency (FHFA) (then the Office of Federal Housing Enterprise Oversight) - and the New York Attorney General's office to adopt certain policies relating to appraisals for loans delivered to us. Following a public comment period, the Home Valuation Code of Conduct has been modified and will be effective for single-family mortgage loans (except government-insured loans) that are originated on or after May 1, 2009, and delivered to Fannie Mae.

The new appraisal standards are here, and if that stops working, try this one.

I'm going to quote large chunks of it and comment

B. No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, appraisal company, appraisal management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, inducement, intimidation, bribery, or in any other manner including but not limited to:

(1) withholding or threatening to withhold timely payment or partial payment for an appraisal report;

(2) withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser;

(3) expressly or impliedly promising future business, promotions, or increased compensation for an appraiser;

(4) conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary value estimate requested from an appraiser;

(5) requesting that an appraiser provide an estimated, predetermined, or desired valuation in an appraisal report prior to the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser's completion of an appraisal report;

(6) providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided;

(7) providing to an appraiser, appraisal company, appraisal management company, or any entity or person related to the appraiser, appraisal company, or appraisal management company, stock or other financial or non-financial benefits;

(8) allowing the removal of an appraiser from a list of qualified appraisers, or the addition of an appraiser to an exclusionary list of disapproved appraisers, used by any entity, without prompt written notice to such appraiser, which notice shall include written evidence of the appraiser's illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP) or state licensing standards, substandard performance, improper or unprofessional behavior or other substantive reason for removal (except that this prohibition will not preclude the management of appraiser lists for bona fide administrative reasons based on written, management-approved policies);

(9) ordering, obtaining, using, or paying for a second or subsequent appraisal or automated valuation model (AVM) in connection with a mortgage financing transaction unless: (i) there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or (ii) unless such appraisal or automated valuation model is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control process or underwriting guidelines, and so long as the lender adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value; or

(10) any other act or practice that impairs or attempts to impair an appraiser's independence, objectivity, or impartiality or violates law or regulation, including, but not limited to, the Truth in Lending Act (TILA) and Regulation Z, or the USPAP.

Most of this section is actually pretty reasonable, and I agree with the majority. But subparagraph 2 removes the ability of anyone - loan officer or otherwise - the ability to stop using a bad appraiser short of an actual provable violation. Anybody else see a problem here? This has, of course, been a long term goal of appraisers. But just because I can't get them convicted of actual malfeasance doesn't mean they're any good. In conjunction with subparagraph 8, once they're approved, we no longer have the right to stop using them. Waste the money of every client they get by coming in with a low appraisal? Set me up for fraud by coming in with a high one? I am completely helpless to simply stop using them.

Subparagraph 5 is another one I have issues with: I can't ask them not to waste my client's money if the value obviously is not there. A good loan officer wants an appraiser who will return an honest value no matter what, but when 5 minutes checking says the transaction isn't going to fly, this is a waste of client money.

What they are doing is called "rent seeking behavior". Look that up. And everything else about this section was already present.

III. Appraiser Engagement
A. The lender or any third party specifically authorized by the lender (including, but not limited to, appraisal companies, appraisal management companies, and correspondent lenders) shall be responsible for selecting, retaining, and providing for payment of all compensation to the appraiser. The lender will not accept any appraisal report completed by an appraiser selected, retained, or compensated in any manner by any other third party (including mortgage brokers and real estate agents). The lender may accept an appraisal prepared by an appraiser for a different lender, including where a mortgage broker has facilitated the mortgage application (but not ordered the appraisal), provided the lender: (1) obtains written assurances that such other lender follows this Code of Conduct in connection with the loan being originated; and (2) determines that such appraisal conforms to its requirements for appraisals and is otherwise acceptable.
B. All members of the lender's loan production staff, as well as any person (i) who is compensated on a commission basis upon the successful completion of a loan or (ii) who reports, ultimately, to any officer of the lender not independent of the loan production staff and process, shall be forbidden from (1) selecting, retaining, recommending, or influencing the selection of any appraiser for a particular appraisal assignment or for inclusion on a list or panel of appraisers approved to perform appraisals for the lender or forbidden from performing such work; and (2) having any substantive communications with an appraiser or appraisal management company relating to or having an impact on valuation, including ordering or managing an appraisal assignment. If absolute lines of independence cannot be achieved as a result of the lender's small size and limited staff, the lender must be able to clearly demonstrate that it has prudent safeguards to isolate its collateral evaluation process from influence or interference from its loan production process.
C. Any employee of the lender (or if the lender retains an appraisal company or appraisal management company, any employee of that company) tasked with selecting appraisers for an approved panel or substantive appraisal review must be (1) appropriately trained and qualified in the area of real estate appraisals, and (2) in the case of an employee of the lender, wholly independent of the loan production staff and process.

So mortgage brokers as well as real estate agents are now completely cut out of ordering an appraisal. Actually, all loan officers are, apparently. So no more calling Appraiser A to find out how fast he can get me the appraisal. I have to use an appraisal management company, or delegate the ordering of an appraisal to an individual "appropriately trained and qualified in the area of real estate appraisals". In other words, appraisers decide who gets appraisal work. More specifically, senior appraisers decide who gets appraisal work. Not the hardworking young appraiser who's still trying to make friends. Not the independent appraiser who's willing to call other appraisers on what they're doing wrong or should be doing better. This reduces to "The old boys network decides who gets work". I thought we were trying to get away from that sort of thing - particularly when they owe no benefit of loyalty to anyone aside from each other.

Question: Would you like to have a real estate agent assigned by the old boys network without input from you? A loan officer?

This is going to have far reaching consequences for consumers, and they're not going to like it. One person, the identity of whom is not in any way controllable by them or anyone else with whom they have any contact, is going to control the outcome of their loan. Because The Mortgage Loan Market Controls the Real Estate Market, this is going to have the potential to break every single real estate transaction, randomly and arbitrarily resulting in unhappy buyers and sellers, lost deposits, and all other sorts of problems. If they take a disliking to you, all they have to do to spike the loan and the transaction is to come in just a little bit low on the appraisal.

IV. Prevention of Improper Influences on Appraisers A. In underwriting a loan, the lender shall not utilize any appraisal report: (1) prepared by an appraiser employed by: (a) the lender; (b) an affiliate of the lender; (c) an entity that is owned, in whole or in part, by the lender; or (d) an entity that owns, in whole or in part, the lender. (2) prepared by an appraiser (a) employed, (b) engaged as an independent contractor, or (c) otherwise retained by any appraisal company or any appraisal management company affiliated with, or that owns or is owned, in whole or in part by, the lender or an affiliate of the lender.

B. Section IV.A. shall apply unless: (emphasis mine)
(1) the appraiser or, if an affiliate, the company for which the appraiser works, reports to a function of the lender independent of sales or loan production;
(2) employees in the sales or loan production functions of the lender have no involvement in the operations of the appraisal functions and play no role in selecting, retaining, recommending, or influencing the selection of any appraiser for any particular appraisal assignment or for inclusion on a list or panel of appraisers approved to perform appraisals for the lender or forbidden from performing such work;
(3) employees in the sales or loan production functions of the lender are not allowed to have any substantive communications with an appraiser, appraisal company, or appraisal management company relating to or having an impact on valuation or to be provided information about which appraiser has been given a particular appraisal assignment before completion of that assignment;
(4) the lender, or its agents, and any appraisal company or appraisal management company providing the appraisal to the lender do not provide the appraiser any estimated or target value of the property or the loan amount applied for (except that a copy of the sales contract for purchase transactions may be provided);
(5) the appraiser's compensation does not depend in any way on the value arrived at in any appraisal or upon the closing of the loan for which the appraisal was completed;
(6) the lender and any appraisal company or any appraisal management company providing the appraisal to the lender has adopted written policies and procedures implementing this Code of Conduct, including, but not limited to, adequate training and disciplinary rules on appraiser independence (including the principles detailed in Part I of this Code of Conduct) and has mechanisms in place to report and discipline anyone who violates these policies and procedures;
(7) the lender's appraisal functions are either annually audited by an external auditor or are subject to federal or state regulatory examination, and, unless prohibited by law, the lender promptly provides to Fannie Mae or Freddie Mac the results of any adverse, negative, or irregular findings of such audits and examinations indicating non-compliance with any provision of this Code of Conduct, whether or not the examination was conducted for the purpose of determining compliance with this Code of Conduct; and
(8) the lender and any entity described in section IV.A. providing the appraisal to the lender recognize that, once the Independent Valuation Protection Institute is established, the Institute will receive complaints for review and referral regarding non-compliance with the Code of Conduct. Referrals and reports shall be made to Fannie Mae and/or Freddie Mac regarding such complaints and the Institute will provide information on the results of complaint reviews to Fannie Mae and/or Freddie Mac and make them available to the other parties to the Home Value Protection Program and Cooperation Agreement

This isn't independence. This is unaccountability.

An Independent Valuation Protection Institute (Institute) shall be created as approved by the parties. Subject to section IX, when the Institute is established, the lender will provide information to appraisers and borrowers regarding the availability of the Institute's services, which are expected to include: (1) a telephone hotline and email address to receive any complaints of Code of Conduct non-compliance, including complaints from appraisers, individuals, or other entities concerning the improper influencing or attempted improper influencing of appraisers or the appraisal process, which the Institute will review and report as provided in IV.B(8) and IV.C(2) of this Code of Conduct; and (2) the publication and promotion of best practices for independent valuation. The lender shall not retaliate, in any manner or method, against the person or entity that makes a complaint to the Institute.

So we can't complain about lazy worthless appraisers for anything less than an obvious violation of code - but appraisers can complain about anyone else. And we can't stop using them when they libel us. Even if the accusation is baseless. As I said above, this isn't independence. This is unaccountability.

The lender agrees that it shall quality control test, by use of retroactive or additional appraisal reports or other appropriate method, a randomly selected 10 percent (or other bona fide statistically significant percentage) of the appraisals or valuations that are used by the lender, including the results of automated valuation models, broker's price opinions, or "desktop" evaluations. The lender shall provide to Fannie Mae or Freddie Mac a report of any adverse, negative, or irregular findings of such quality control testing, and any findings indicating non-compliance with any provision of this Code of Conduct, with respect to loans sold to Fannie Mae and Freddie Mac respectively, and the Enterprise may enforce all applicable rights and remedies, including requiring the lender to repurchase mortgages or the Enterprise's participation interest in mortgages.

Here's the translation: Appraisers can't get in trouble for coming up with a value that's too low. Lenders don't lose money in the accounting sense when the appraisal is too low. All that happens is that they don't make money they could have made from doing that loan, an item that does not show up on financial statements. Appraisers can, however, get in trouble for coming in too high. Does anyone thing this means anything other than "They're going to come up with the lowest value they can justify?" That's where the incentives run. Result: Consumers get hosed (along with everyone else except the appraisers)

VIII. Representations and Warranties A lender shall certify, warrant, and represent that the appraisal report was obtained in a manner in compliance with this Code of Conduct. If the Enterprise determines, on its own or from a referral made by the Institute, that a lender is in breach of a material aspect of this Code of Conduct or in violation of a provision of the Code by a complaint referred from the Institute, the Enterprise will enforce all applicable rights and remedies, including suspension or termination of the lender's eligibility to sell loans to the Enterprise, if the lender fails to remediate.

Sounds reasonable, doesn't it? What this means is that a single appraiser making an accusation has the power to threaten a lender's ability to sell loans to Fannie and Freddie. Since those are far and away the most popular loans with the best rates, this means that lender loses most of their business - especially as VA and FHA can be expected to follow suit.

Fannie Mae put out a set of FAQ's to lenders a week or so ago

Scope of Coverage Q1. What loans are affected by the new Home Valuation Code of Conduct?

Fannie Mae has agreed to adopt the Home Valuation Code of Conduct ("the Code") for all conventional, single-family loans originated on or after May 1, 2009, that are delivered to Fannie Mae. For purposes of the Code, origination date means the date of the application. The Code will not apply to multifamily loans, or to loans insured or guaranteed by a federal agency; the Code only applies to 1- to 4-unit single-family loans sold to Fannie Mae. The Code will not apply to loans sold to Fannie Mae on or after May 1, 2009 that were originated prior to May 1, 2009.

This means every Fannie Mae loan starting May 1. The same applies to Freddie Mac.

Q3. Does the Code allow an appraiser to update an appraisal for another lender?

Yes. The Code does not prevent an appraiser from performing an update of an appraisal for another lender.

That's nice. It still doesn't force a lender to release the appraisal, something that would have made a positive difference to the public. I order an appraisal and I can't perform the loan on the terms indicated, I should release it to someone else who can.

Q6. After May 1, 2009, is it permissible for Fannie Mae to purchase private label securities backed by mortgage loans that do not meet the requirement of the Code?

Yes. The Code applies only to 1- to 4-unit single-family loans sold to Fannie Mae by mortgage originators. It does not extend to Fannie Mae's investments in mortgage-related securities.

So it doesn't apply to what caused Fannie and Freddie to melt down. This whole code is a distraction from really fixing what went wrong.

Q7. Does the Code require lenders to obtain appraisals where they were under no such requirement pursuant to the Fannie Mae Selling Guide?

No, nothing in the Code requires a lender to obtain a property valuation, or to use any particular method for property valuation. Nor does the Code affect the acceptable scope of work for an appraiser in connection with a particular assignment.

Meanwhile, back on planet Earth, lenders are required by the Federal Reserve and SEC to use all due diligence. Every loan that goes south without a full appraisal is grounds for getting somebody fired. What do you think is going to happen? How often do you think lenders go without full appraisals now?

Q9. Does Section I.B.(9) specifically prohibit a lender from ordering a second appraisal?

No. Section I.B.(9) only prohibits a lender from ordering a second appraisal when they are attempting to influence the outcome of the first appraisal and are now "value-shopping." As a risk control measure for certain loan products, it may be common for a lender to order more than one appraisal, and this subsection does not prohibit that practice.

In other words, yes it does prohibit getting a second opinion if the first appraisal is a piece of garbage. The only exception is if the lender makes a practice of ordering a second appraisal for that particular loan product. More money for appraisers, and the second appraiser isn't accountable either.

I'm going to take these next ones together:

Q11. Does Section II of the Code require the lender to provide the appraisal free of charge?

No. The Code requires the lender to provide, free of charge, a "copy" of any appraisal report completed in association with a specific loan. The lender may require the borrower to reimburse the lender for the cost of the appraisal.

Q13. Does the Code prohibit an appraiser from collecting payment for the appraisal directly from the borrower?

Yes, for loans to be delivered to Fannie Mae. The Code requires the lender or any third party specifically authorized by the lender to select, retain, and provide for all compensation to the appraiser.

If you think this isn't going to cause problems, welcome to Earth and I hope we can be friends. This places the burden for payment upon the lender, who remember has no ability to control which appraisers they use. Paying through escrow might be a theoretical possibility, but it leaves open the possibility that the lender gets stiffed and has to pay out of their own pocket. Lenders are going to have a choice of 1) Requiring an upfront deposit for the appraisal or 2) Jacking up their margin so that clients who close pay for ones that don't. Either one of these is vile, and bad business. My company (and every other lender and loan officer out there) is going to have to figure out which of them is the lesser of two evils. This is going to have implications for escrow accounting, as well - the number one reason that brokers and lenders lose their licenses (and 99% for completely stupid technical reasons having nothing to do with consumer benefit). From a benefit to the consumer standpoint, requiring the lender to release the appraisal to a new lender would be far superior. But that doesn't give appraisers power, see that they get paid, etcetera.

Q18. When selecting an appraiser, may lenders use a pre-approved appraiser list or panel? Yes. Lenders may use a pre-approved list or panel to select a residential appraiser, provided that (1) any employees of the lender tasked with selecting appraisers for the list are independent of the loan production staff; and (2) the loan production staff is not involved in selecting appraisers off the list for particular appraisal assignments.

Confirming and emphasizing what I said earlier. There is no way I or any other loan officer can keep from using a bad appraiser, no matter how bad they are.

Q19. May a servicer use an affiliate company to order appraisals for borrower-initiated private mortgage insurance cancellation based on current value?

Yes. The Code does not apply to appraisals for cancelling mortgage insurance based on current value. The Code is specific to "a mortgage financing transaction," and cancellation of mortgage insurance is not "a mortgage financing transaction." The Fannie Mae Servicing Guide states that "To determine the current appraised value of the property, the servicer must select an appraiser, order a new appraisal (which must be based on an inspection of both the interior and exterior of the property and be prepared in accordance with our appraisal standards for new mortgage originations)."

So feel free to value play games with the appraisal when you're trying to remove PMI. Why this would be such a straightjacket for new loans, and completely inapplicable for leaving lenders uncovered by mortgage insurance, contradicts all reason - but not politics.

In-House Appraisers Q21. May in-house appraisers prepare appraisal reports? Yes, in-house appraisers may prepare appraisal reports if the conditions of Section IVB. are met.

Q23. May a correspondent lender use in-house appraisers? Yes, a correspondent lender may use in-house appraisers if they meet the criteria in Section IV.B. of the Code.

In other words, so long as the appraisers are completely unaccountable. They can't even be fired for consistently producing bad valuations, so long as they don't go over the line into actual misconduct.

Appraisal Management Companies Q25. Is a lender required to use an appraisal management company for ordering appraisals?

No. A lender may order appraisals directly from an individual appraiser.

So long as it isn't any dirty filthy loan officer, anyone accountable to any loan officer, or in fact, anyone other than another appraiser doing the ordering. See above.

Q27. When a lender uses an appraisal management company, the appraisal management company is responsible for retaining and paying the appraiser. Is it likewise permissible for a mortgage broker to use an appraisal management company, since the mortgage broker does not technically retain or pay the appraiser?

No. The Code prohibits lenders from relying on an appraisal where the broker had a role in selecting, retaining, or compensating the appraiser.

Q28. May a mortgage broker provide the lender with an approved appraiser list for the lender to use when ordering appraisals for that particular broker?
No.

Q32. May a lender accept an appraisal prepared by an appraiser that was ordered by a mortgage broker?
No. The Code does not allow a lender to accept an appraisal prepared by an appraiser that was ordered by a mortgage broker as noted in Section IIIA. of the Code.

Q33. May a mortgage broker order an appraisal directly from an appraisal management company that was specifically authorized by the lender?

No. The Code prohibits brokers from ordering appraisal services.
Q34. Does the Code permit a mortgage broker to select an appraiser from the lender's list of approved appraisers, if the lender is responsible for the relationship with the appraiser, including compensation?

No. The Code prohibits lenders from relying on an appraisal where the broker had a role in selecting, retaining, or compensating the appraiser.

Once again, I'm mostly a correspondent. The restrictions on brokers don't mean that much to me, per se. This is just more emphasis that appraisers are no longer accountable in any way, shape or form. But they do seem punitive.

Portability of the Appraisal Q29. May an appraisal be transferred to a lender from a correspondent lender and, if so, under what circumstances? Yes, a lender may accept an appraisal from a correspondent lender that complies with the Code. Q30.A mortgage broker submits a loan to lender A, which orders an appraisal. The broker later decides to submit the loan to lender B because it is offering better terms, or for another reason. May the appraisal obtained by lender A be used by lender B (assuming the mortgage broker has no control over or involvement in the assignment)? Yes, a lender may accept an appraisal from a different lender that complies with the requirements of the Code and in particular Section III.A. in connection with the loan being originated. Lender A must be named as client on the appraisal report.

Note that there is still no requirement to release the appraisal - meaning the appraisers get paid again when the lender won't.

Furthermore, this means the lender's name is on the appraisal - not the broker (if there is one), not the loan officer. You think a lender is going to release an appraisal when someone wants to take potential business away from them? I don't.

Now, my comments on the entire thing. There were abuses of the appraisal process. They need to be fixed. This is not the way to do it. This does absolutely nothing to stop collusion between an appraiser and another party, which was the largest problem that has not yet been fixed. Properties were selling for those amounts. It was not the fault of loan officers, whether lender, broker, or correspondent, that the values got so high. By far the largest root cause was the fault of the loan programs the lenders were offering, or rather, very aggressively pushing. If you offer a loan program specifically designed to make it look like someone making minimum wage can afford a $500,000 property, you can expect problems when people take you up on it. Yes, there were loan officers colluding with appraisers. There were also sellers, buyers, agents (Realtor or not), and everybody else under the sun colluding with appraisers. Collusion, problem though it was, was not the largest problem by an order of magnitude - that was loans that set the borrowers up to fail, and the lenders themselves with them. This solves neither of those problems. The largest one has already solved itself as lenders stopped lending money on a Make Believe basis. The lesser although still major problem of collusion this does nothing to stop. In fact, it explicitly states that communication between an agent and an appraiser is not prohibited, nor is communication between a buyer or seller and the appraiser, or for that matter, between a loan officer and an appraiser. It's when the appraiser takes exception that such becomes a problem - there is no new control on collusion anywhere in the process. All it does is prohibit responsiveness to the needs of the consumer.

All of the incentives in place are for appraisers to come up with a value that is too low. They no longer can lose business for bringing out appraisals so low as to constitute nonsense - they can't be pulled off the eligible list, and the lender has no power to direct future work away from them. The only real way they're going to get in trouble is by coming up with a value that's too high, and that's going to be rare, both because the system isn't set up to catch it until after the fact and because that's the only thing about an appraisal that can cause lenders lose money in a traceable, accounting sense.

I don't know how many self righteous appraisers have told me "We are the only representative for the house." Well, the house is neither living or sentient. It's a thing. It has no interests. The legal responsibility of the appraisers is entirely to the lender, not to the consumer. Comparatively few appraisers understand how it damages a lender to have the value come in lower than it should - a loan does not get made where it should have been made, and the lender does not make money when they should have. Comparatively few appraisers care about the consequences to consumers of appraisals that are too low, who put money in the appraisers pocket only to be denied the benefit they paid that money for and that they should have gotten. What they have told me time and time again is important (by their actions, and more often than not, by their words) is putting money in their own pockets whether or not it benefits the consumer, whom they have no legal responsibility towards.

There will be no more developing a good working relationship between appraisers and anybody. I have (soon to be had) a couple of appraisers I have learned to trust - they're honest enough that I don't have to worry about them returning a fraudulently high appraisal, they're responsive enough that I know when they tell me the value isn't there, it isn't. They've helped me to learn what to look for so that I know ahead of time whether they value is going to be there or not. I have never asked an appraiser to give me a higher value. All I have ever done is not used them again if they ripped off my clients, and comparatively few times at that (about 5, in over 1000 loans in every county in California, and quite a few in Florida and Nevada, so it's not like I've been limited to one or two appraisers in San Diego County). That ability to stop using problem appraisers is no longer something I'm going to have. I'm going to have to get used to clients being ripped off, and there being absolutely nothing I can do. The only way to protect myself and my company from false accusations of manipulating the appraiser will be not to discuss anything with them verbally. I'm going to stop meeting appraisers, and am only going to communicate a bare minimum of information through things like email and facsimile, and I'm going to start advising my clients not to be there either. I'll get a combo lockbox for the keys, so the appraisers can let themselves in.

So don't get mad at your loan officer. If the appraisal doesn't come in for a needed value, it won't be because of anything they could have done or not have done. Nor can we complain. Loan officers are very exposed to reprisal; the appraiser is almost completely insulated from any consequences. Appraisers can potentially kill our loan business with a single accusation - justified or not. We can't do a damned thing to them unless we can prove an actual violation - a much higher standard of action, especially as appraisal standards use a lot of words like "reasonable". In other words, judgment.

I would not presume to argue that appraisal standards did not need reform. They did, very badly. They still do, as this was not what they needed.

The appraisers organization has somehow gotten themselves into a position like tenured college professors, and without any of the (debateable) reasons for that. But there are a lot of bad appraisers out there who waste appraisal money with absolutely no understanding of the damage they are doing. It's going to get a lot worse until public outrage puts a stop to it. Appraisers will own the problem - there is absolutely no way to blame any future problems on anyone except appraisers. Unless the appraisers who have been creating all of the problems, and their organization, change their way of thinking and police their own problems, I firmly believe they're going to learn to appreciate the virtues of the old aphorism, "Be careful what you ask for. You might get it."

Like it or not, however, it's going to be the law of the land effective May 1st, 2009. Every loan officer is going to have to live by it. The only way to stop it is for consumers to start expressing the outrage that they will soon be feeling every time an appraiser returns a garbage value that wastes their money. Express it loudly, express it repeatedly, express it to all of your congressional representatives and senators. Make them understand they have to actually fix the problem, which means taking the time to actually understand it and think, not finding one scapegoat and declaring someone else to be sainted by virtue of having obtained an appraiser's license. You don't fix problems by giving one person absolute power over a transaction with no real accountability to anyone else.

Caveat Emptor

UPDATE (3/27): I spent an hour or so yesterday talking to an appraiser whose information I have reason to trust. He indicated that while certain appraisers and their organization were pushing for all of this, the execution is hurting them a lot precisely because they wanted to remove the ability of loan officers to choose an appraiser. This means good, ethical appraisers who earn business by doing high quality appraisals are not going to be able to attract business any more. It's all going to be lenders ordering from appraisal management companies, who charge as much as the market will bear and pay the appraiser as little as they can get away with. There being fewer appraisal management companies than appraisers, there is less competition and therefore prices are rising - I heard $700 for an appraisal quoted yesterday - while the appraisers are getting paid less (one company is only paying them $150. As my source said, if that's the way things shake out he will go get a job at Starbucks because he'll make more money and have health care paid too). The only real way lenders can order appraisals is through an appraisal management company, and working for an appraisal management company is the only way appraiser can get work. This bottlenecks the process, and puts appraisal management companies in a position where nobody has any choice but to deal with them. Upshot: The appraisal management companies are going to make money hand over fist, but everybody else loses. I strongly urge everyone with a stake in the real estate loan process (in other words, everyone who might like a loan someday) to write your congressional representatives and senators and get this abomination repealed now, before appraisal management companies become an entrenched special interest.

The appraisers, for their part, have already discovered the gotcha! in what they pushed for. They already know that what they thought they were asking for is different from the reality.

UPDATE: 4/28/2009 Here's a video published today It's aimed at realtors and agents, but everybody should be able to understand the essential points.

Article UPDATED here

It's very simple really, and this is something I have never covered in the perhaps mistaken belief that it was too simple and everybody knew this.

The Note is the loan contract that sets the terms of the loan, repayment, etcetera. This contract is the document that controls, in conjunction with state law, your loan. Term of loan, interest rate, prepayment penalty, penalties for late payments, it's all there.

The Trust Deed is the security instrument. Without the Deed of Trust, the Note still creates the indebtedness, it's just not secured by anything specific. You still owe the money, but without the Deed of Trust the lender cannot force the sale of the residence (or take possession themselves) in satisfaction of that Note. Actually, I should say that they can't do so without recourse to the courts, and they would have to stand in line with all of the other unsecured creditors. The Deed of Trust creates that security interest, and makes the debt secured by a specific asset - the land given in the Deed of Trust. The Deed of Trust, unlike the Note, is recorded with the County Recorder with an official document number, and indexed in public records to as being associated with a particular piece of land, hence the ability to find it pretty easily.

You hear talk about a Note secured by a Deed of Trust. They're talking about a Note, and telling you that it is a note secured by Deed of Trust on a particular asset. Both real estate and automobile loans are routinely secured by a Deed of Trust against that particular property or vehicle, which is how the various holders of those loans have the ability to take back the secured property administratively, without recourse to the courts, provided certain conditions are met. If these loans were not secured by the pledge of a specific asset, these creditors would have to go through the courts, and stand in line along with credit card companies, etcetera. If they did not have a greater security interest, there would be no incentive to give real estate and automobile loans better rates than credit card holders get. So think about that before you advocate making it harder for lenders to foreclose. Every little bit you restrict a lender from its valid security interest means higher rates for everybody else as well tomorrow. This is basic economics.

There's a great brouhaha right now about "produce the Note." People who are in over their heads are telling lenders to "produce the Note" in order to proceed with a foreclosure. They're hoping for a jackpot, and a few years ago, in the case of perhaps one to two percent of all borrowers, usually with a loan that had been sold multiple times, the lender was unable to produce the note and the person ended up with a free house instead of losing it. I shouldn't have to tell you who ends up paying for those houses and the loans associated with them, should I? Here's a hint: It's not the lender or their stockholders. If you're completely clueless, It's customers of that bank and future borrowers who end up paying. If it gets bad enough, its the US taxpayers and depositors with over the insured amount in that institution. These days, however, "produce the Note" is a delaying tactic - figure the lender is going to find it in all but a very small number of cases - on the order of winning the lottery odds. It may take them a while, but it's a safe enough bet that they will find it. It may buy you a month or two delay, that's all - perhaps only a day or less. If you can solve the problem presented by the default in that period of time, all well and good. If you can't, all you've done is delay the inevitable and perhaps make it worse (The Trust Deed is part of the public record, and trivial to find and produce - the title companies can all do it within thirty seconds).

The two legal documents (or instruments) can be combined, but generally aren't, and I don't know why. However, this can be a problem for lenders who buy the loans from other lenders. It doesn't happen much any more, but it does still happen that lenders cannot produce the Note, and it usually is something that takes a while. Without the Note, there is evidence of debt and therefore no loan to satisfy, and so you can have your lawyer insist that the Trust Deed be reconveyed. to clear the cloud it creates upon your title. Essentially, free money. Without the Reconveyance, however, it's difficult to sell the property and this can give the lender leverage to require repayment if you're trying to sell the property right now. Any unreconveyed Deed of Trust creates a cloud on title, and you need to clear that title in order to be able to sell, quitclaim, or even conceivably, will the property to an heir or even have it pass by action of law. If court action is required to clear a title, it's called a quiet title proceeding.

I'm not a lawyer in any state, so if a lawyer tells you something different than this, take their word for it, not mine. Even if I'm right in every other state, the lawyer is going to know that yours is the exception. This is simply the understanding of a layman who has had things explained to him by lawyers, and is attempting to pass on general knowledge of the differences and relationship between two loan related legal documents.

Caveat Emptor

Article UPDATED here

This is going to be a long article and somewhat technical in places, but it needs to be covered and everyone who is thinking about getting a real estate loan needs to read it.

"Fall-Out" is very simple: The number and percentage of dollars of loans that get locked that eventually fund. If I lock $1 million worth of loans this month, and fund $650,000 of that, I have a fall out ratio of 35%, and a "pull through" of 65% (my personal "pull through" is much higher than that, but this is an industry wide issue). The secondary loan market is putting immense pressure upon lenders to deliver a very high percentage of what gets locked. This has implications for the way loan officers need to handle loan applications, when they lock your loan, and many other things.

I got this email sent to me the other day from headquarters. It's very representative of tensions going on between the interests of consumers and the interests of lenders, and has implications for what can be done to advance the interests of consumers and the direction the loan industry is likely to go in the near future. Because the email is long, I'm going to break it up and respond in pieces. I'm going to put the email text in various block quotes, while my responses will be normal text style. If I need to change some jargon in the body of the email to render it comprehensible, I'm going to change it and put the changed text into parentheses. Specifically identifiable information (personal or corporate), I am going to show as DELETED.

The question has come up many times "Is the brokerage business going to survive?"

I recently had factors explained to me that moves my answer away from just having a positive faith into a more realistic understanding of what elements will determine the outcome. Economic systems live or die on economics. Seems simple enough. If the brokerage channel is economically viable, then it will survive; if not, it won't. If companies are economical, they will survive; if not, they won't. And of course, the same is true for (loan officers).

In my discussions with that lender, I now have a better understanding of how fallout plays into the economic model and what lenders are going to do differently now to ensure their own survival. Brokerage channels are inherently more unreliable and inconsistent on fulfilling lock promises than retail banking. As such, the secondary market is paying substantially less for broker commitments than the equivalent banking commitment. When bank retail (loan officers) lock loans, they don't have the ability to move the loan for a better rate. The pull through on locks in retail channels is 10-20% higher than DELETED. The reason I bolded above is broker (loan officers) vary on pull through from 10% to 45% back to 100%. It's that inconsistency that prevents lenders from picking, say 40% fallout as the number. When you want the lock to exist, you want your cake. It's just broker LO's want both.

It shouldn't come as any surprise to anyone that this is changing, driven by the secondary market. When a loan officer locks a loan, the bank turns around and orders funding from Wall Street Investors at the rates available at that time. This changes with market conditions, and that is the reason why there can be half a dozen loan repricings per day as the market waxes and wanes with events. If that money that gets ordered does not in fact get used, the bank is out the money.

This is going to have effects within the industry. Consumers are going to find it much harder to get a loan locked without paying a deposit to the lender. The only way - and only loan officers - which are going to be an exception to this are loan officers who either 1) Float the rate while telling you it's locked, or 2) Ruthlessly weed out their loan applications of anyone who is less than fully qualified and completely committed to this loan. Since one or the other of these latter conditions applies to the vast majority of everyone, the practical upshot of would be a loan officer passing upon the majority of their potential income, which just is not going to happen.

Mortgage Loan Rate Locks have always been the horns of a dilemma for loan officers. Lock now and you risk the consumer bailing out on you if the rates fall, or demanding a renegotiation. Float the rate, and you risk those rates rising to the point where the consumer is angry, starts shopping elsewhere, or even just blows off the idea of getting a loan entirely. Consumers have had this choice far too easy for the last ten years or so, free-riding upon the intense competition between lenders. In case you haven't noticed, there aren't nearly so many lenders in business today as there were two years ago. Lenders are going to start charging for a rate lock because they are now able to do so. This may change back again in a few years, but for now you can look at it as the way things are going to be for the forseeable future.

Lenders need to have 75% pull through in order to make money. Think about it: in order for them to sell their portfolios, roll in all the costs of their operation, roll in all the "touches" on files that close and all the files that don't close, the lost hedge fees on loans that don't close, plus all the losses that occur on buybacks - 75% is the bar they have set. When a company is below that, they lose money.

As you've seen, lenders are starting to differentiate between profitable companies and unprofitable companies. DELETED volume makes a lender's effort at rehabilitation worthwhile. That lure is always there, but if the
relationship doesn't work, it doesn't work. DELETED has long talked about fallout as a major problem, but lenders and DELETED have been giving it only lip service in the past. No longer.

If the brokerage business is to survive, the broker has to make it so the lender wins. No lender, no broker. Since the lender knows the relationship is symbiotic, many lenders are creating pricing tiers to incentivize companies to figure it out. That is only the first step. Lenders are now dropping unprofitable mortgage as they try to improve their execution price with Fannie/Freddie. In other words, the brokerage business will be smaller, more focused, more partner-like than what has been in the previous "sales" model of mortgage brokering. DELETED plans to "partner"
with its top lenders and assure top tier pull through in order to get the best from each company. We need to make that commitment to them which will assure our mutual survival.

A very important shift must occur to be successful. The (loan officers) must shift their thinking to make sure the lender wins 80+% of the time. The math is very, very simple: What's the dollar volume that gets locked? What is the dollar volume that closes? What's the ratio?

I would take issue with the contention that "the lender needs 75% pull-through to make money". Their own captive loan officers rarely achieve 75% pull through. Talk to me about it when lenders start firing their "in house" loan officers for less than 75% pull through. But there is a point at which it is no longer profitable to do business with a given brokerage or loan officer, and a large percentage of loan officers are below that point. The upshot is that lenders are increasingly serious about this, and are terminating relationships that don't measure up. For that matter, they are terminating their own loan officers. Net result: fewer loan officers, less competition, and the balance of power shifts more towards those loan officers remaining in the business, away from consumers. Nor is this going to be an issue at brokerages only - direct lender loan officers are going to get hit by it.

This is also leading towards a dichotomy that the lenders which are more reluctant to lock a loan are going to be able to get better pricing for their loans once they do lock. The lenders are passing along the negative parts of the investor incentives to whomever is originating the loan. If you've been reading this site very long, you've heard me say upon multiple occasions that "It's not real if it's not locked." But if I lock a loan for someone who is playing games, it hurts all of my clients as well as my ability to attract future clients, so I'm going to be really careful about which loans I lock, and I am going to be very upfront about what it's going to take in order to lock a given loan. I'd rather lose one loan than the ability to compete as strongly as I do, let alone lose access to a lender with useful programs. I am still disposed against the cash deposit in order to lock, but I may have no choice in the long run. Loan officers, whether they're brokers or work directly for the bank, have to keep lenders happy or pay the consequences, which means all of their clients also pay those consequences.

This is making it a lot harder to persuade someone to provide a backup loan. It has always been difficult to persuade someone to do a backup loan, and it's going to become a factor of ten more difficult. What this means is that you have to do real due diligence ahead of time, nail down prospective loan providers by asking them all the necessary questions and insisting upon a loan quote guarantee. Alternatively, you'll probably be able to make a cash deposit - but the loan originators are going to get very hardcore about keeping it if you don't fund your loan. It won't matter why - your fault, my fault, nobody's fault. The downside of all of this is that instead of having a third option, consumers are going to be stuck with either loan A or no loan at all, giving unscrupulous originators even more of an edge than they've got already.

Here's the tough part. It doesn't matter:

* That the house didn't appraise

* That the borrower didn't qualify

* That the rates dropped significantly

* That the borrower walked

* That the borrower was related to someone who got them a better deal

* That the Lender changed their program mid stream

* Etc, Etc, Etc.!!!

If you locked, the lender lost money. Of course those are good (loan officer) reasons, but if DELETED loses our lender relationships due to those reasons, then something's got to change. The thing that has to change (and will change) is what factors must exist for the (loan officers) to lock. Ideally, after Clear to Close, lock it and doc it and get 'er done. But many (loan officers) don't work that way. Well, I am asserting that ultimately there is no home anywhere in the mortgage business for the (loan officer) who locks first and apps later. No home for the (loan officer) who locks before he's run (automated underwriting system), seen the documentation, determined value, and checked with the lender. No one will be able to lock as what will soon be referred to as "old school". All brokers will have to conform to this mode of thinking.

He's unfortunately correct - and it's going to apply to all loan officers, whether they work at a brokerage or for a direct lender. It's going to take a very sharp loan officer to be able to get away with locking before clearance to close. Loan officers who do that are going to have to know the standards cold, and still they will be taking risks. But here's the thing - you want a loan officer who is willing to lock sooner than that.

I'm not certain that any of these except "lender changing their program mid-stream" is unpreventable. At the end of January 2009, Fannie and Freddie suddenly imposed a requirement that almost half of everyone with a loan in progress fell afoul of, and that they're suddenly over conscious of the fact that they've had a major fall-out surge is supremely ironic, because that surge is nobody's fault except their own. "House didn't appraise" isn't a factor if the buyer's agent knows what they're doing. This might change in May 2009 when the new appraisal standards hit full force. It's a bad news/good news/horrible news situation. The bad news is that good ethical appraisers and good ethical loan officers are going to find it a lot more difficult to develop a working relationship. The good news is that the less ethical examples of each are going to start running up against the better ones on the other side. The horrible news is going to be that there will be nothing that good loan officers can do about rotten appraisers. If you don't think this is going to have consequences, watch out. The appraiser organization is going to learn the hard truth about being careful what you ask for, and although there are going to be what are euphemistically called "growing pains", they're not really here yet. They are on the way, however.

"Borrower didn't qualify" is ninety nine percent preventable by going over income documentation on debt to income ratio, asset documentation and being mindful of how much cash a buyer has to play with so that you know how much you need for loan to value ratio and cash to close, and if necessary, the the buyer's agent writes the purchase offer and negotiates it with the loan in mind. The time is long past when all buyer's agents should start consulting a loan officer before you make a purchase offer, and listing agents to require that a lender's prequalification or preapproval letter must be offer-specific - tailored to this particular purchase offer on this particular property at this particular point in time. If not, you might as well use the darned thing for toilet paper because it doesn't mean anything. You can't fake up a loan any longer with a 100% loan to value stated income negative amortization loan. Agents have got to learn to be clear whether a potential buyer can qualify before they write the offer - and definitely before you counsel your listing client to accept it. It's also smart to build in a bit of wiggle room in the qualification. Lender standards are cold and hard thin lines - on one side, the buyers qualify, while on the other, they don't. If buyers have stretched to the absolute limit and the tradeoff between rate and cost on loans shifts upwards just a little bit, that can put a buyer on the other side of a hard line that says "No way". For buyer's agents, the need to be able to work within a client budget, and also to persuade those clients to stay within that budget, is here to stay. There are no more Make Believe Loans.

"But what if rates drop half a percent and the lender has a bad re-lock policy?"

Don't use that lender if they have a horrible re-lock policy. The re-lock policy is a feature of the product they are selling. Don't buy from them if you don't like that feature.

"What if their rates are terrific?"

Then use them, but keep your pull through at 80% or be subject to consequences.

And that's the issue. The brokerage community has never really had to pay the consequences. Now brokers will. Therefore, brokers and (loan officers) have grown up in the industry with the mindset of the child whose parents constantly threatens and repeats, but never follows through. The shocking turnaround seems unfair. But what really is happening is a movement to align value with value. "For those that help us win, they get value. For those that don't, they're gone."

This is a fact of life for all loan officers, whether they're working for a brokerage or a direct lender. It is therefore going to be a fact of life for consumers, and it is going to have effects upon their loan choices. Consumers are going to have to decide between great rates and the ability to cancel a loan without consequences. Consumers are going to be forced to choose between locking early and not having to make a loan deposit. I despise deposits, but there it is. Consumers are going to have to learn that there are things which may not be obvious on the face of it that are important to their loan satisfaction, to do their due diligence first, and if they don't do it right, they are going to be stuck. Consumers are going to have to learn the difference between merely talking a good game, and actually delivering the loan that was talked about. Loan originators are not going to accept dual applicants (lest they lose hundreds to thousands of dollars per loan when their fall out ratio becomes unacceptably high), and while all credit reports run within fourteen days count as one, it's going to be more than fourteen days between credit reports if you've had a loan fall apart in between. And consumers are going to need to be far more in touch with the consequences of their choices, as the ability of loan officers to shelter their clients is disintegrating.

I've spoken with several small to midsize mortgage companies throughout the country. They are being cut off by lenders for several reasons: low volume, high fallout, high touches. DELETED have avoided that fate due to our volume; however, there could come a time that volume won't even help if we don't move our pull through and quality into the next era.

This is from a lender this morning that supports my point:

What does a "loan lock" mean? One top agent sent out a note to her staff. "I think as a consumer, or even a loan officer, when we lock a loan, we feel like we are simply "securing" or "holding" that rate for a client. That is only part of it. Once a lock is made, at that moment, the investor is expecting delivery of that loan at the interest rate as part of their portfolio. (In essence, the loan might not be closed, but it is already sold.) If you can't deliver, or don't close on time, or you are just simply "trying" to secure a "deal" based on rate, then the investor is going to call your lender and ask, "Where is my loan? Where is my money?" Then your lender might try to "replace" that loan with another loan, or just say to the investor, "Sorry." You are not just simply holding for you and your client an "Insurance Policy" to try to get that rate, if by some chance you get the loan, you are, in fact, impacting the investors who are trying to make money on those sold loans. It may be hard to miss that "single day" rates are awesome...but, if you are not in Contract, and you don't have an Appraisal...and you don't have a true file you can close in 30 days...then DON'T LOCK...UNTIL YOU DO! LOCK when you KNOW you are going to close it. Lock AFTER you have an approval. Don't lock at multiple Banks. A lock is a promise to deliver!"

The lenders are starting to enforce that promise to deliver, and putting loan originators who don't deliver into the penalty box if not throwing them out of the game entirely. Anywhere that loan originators go, their customers will follow. The loan originators that survive are going to be the ones who are careful about locking, and make it difficult for clients to bail out of a rate lock without an over-ridingly good reason. The ethical ones are going to be honest about it. The less ethical ones are going to continue to give you the same snowjob you've always gotten.

One of the practical effects of this is going to be to essentially kill online mortgage quotes as being of any use whatsoever to the public. I am sorry to see this happen, but that's economic reality. When loan officers can't honestly quote you a binding rate and cost without building in an an ungodly amount of slop to account for how much the market may move between quote and lock, there are going to be two kinds of quotes: High ones that the loan officer is prepared to stand behind, and low ones that are the result of lowballing, wishful thinking and just plain lying. There will be no exceptions. The originators can either quote you a rate and cost predicated upon the rate/cost tradeoffs not going up, or they can make an honest allowance for that. In the first case, if the rates go up, you're either paying the higher amount or you're not going to have a loan, as loan originators certainly aren't going to do loans which cost them money, as these would require them to do. The only alternative for this brand of loan officer is to play the "wait, delay, and hope" game in speculation of the rate/cost tradeoffs coming back down. In the second alternative, you're going to be expecting consumers to sign up for apparently high priced but real loans versus shameless lowballs that are not going to be delivered on those terms when the loan is ready to go. That hasn't been working out very well for consumers these last forty years or so - I see no reason to expect it to miraculously change now.

These developments are going to make a lot of changes to effectively shopping for a real estate loan. The one thing that isn't going to change is that you're going to have to have a real conversation with several loan officers, and ask each and every one of them all of the relevant questions. Just getting a quote and hanging up is going to become even more of a recipe for disaster than it already is.

Caveat Emptor

Article UPDATED here

Got a question asking if zero cost loans really exist. They do. I've done several dozen myself, for clients who listened to me about the nature of the loan market.

Let me define what a zero cost loan is. It is a loan with a higher rate deliberately chosen so as to get a high enough rebate, or Yield Spread, to cover not only the loan provider's margin, but all closing costs you would normally have had to pay as well. So that except for any cash you get, your loan balance should not increase by a single penny.

Even on a zero cost loan, you're likely going to write a check or even more than one, but they are for things like Prepaid interest. Prepaid interest is not a cost; it's paying money that you would have owed anyway in a slightly different manner, a little sooner than you otherwise would have, and you will get it back by not having a payment the next first of the month. Matter of fact, prepaid interest is the reason there is no payment due on the first of the next month. You're not skipping a payment. You never skip a payment, and any contention to the contrary is reason enough not to do business with that particular loan provider. You generally have the option of rolling prepaid interest (along with other prepaids) into your mortgage, but then you're paying interest on it and it's stuck in your balance forever. Ditto an impound account. That is your money, not a cost of the loan. We are talking zero cost here, which is an entirely different thing from the lender absorbing money that you would have had to pay anyway. But in a true zero cost refinance, no money gets added to your loan balance. $X before the refinance, and $X after, not $X+6000. You will likely need to pay for the appraisal (if required) out of pocket when the appraiser comes out, but you get that cost refunded upon funding for a net zero out of pocket. True zero cost. This does entail accepting a higher rate, and therefore higher payments than you might otherwise have gotten, but if you only intend to keep the loan a relatively short period of time, you start ahead by doing this and there is not enough time for the lower payments to break even. For instance, a while back I had a par rate of 6.25% on a thirty year fixed loan, but providing your balance was at least a couple hundred thousand, I could do 6.625% for literally zero cost. If you were planning to sell in two years but your current rate was eight percent, as many people have nowadays, but their credit has improved now to where they qualify A paper, this saves them a lot of money for literally zero cost, so there are no "sunk costs" to recover; it's pure profit from day one. I happen to think that with rates as volatile as they have been the last few years, it makes a lot of sense to choose a zero cost loan. If rates go down half a percent six months or a year from now, you can go get a rate that much lower for zero cost when they do. If you paid two points to get the rate, it's going to cost you the same two points again to benefit by as much.

Now this is not to say that you shouldn't be on your guard when someone talks about a zero cost refinance. What most lenders mean when they say "zero cost" is "No money out of your pocket" while rolling thousands of dollars (including multiple points) into your loan balance, where you not only pay them, you pay interest on them. Many lenders will talk about putting money in your pocket, when what they are doing is adding not only that money but all the costs and all the points to your loan balance, and people who have been doing this every two years wonder why their loan balance is ten times their original purchase price. I call these Stealth Cash Out Loans. There is no such thing as a free lunch. You paid for the cash out; you're going to be paying for the cash out for many years, just the same as you paid for your closing costs in the previous paragraph with a higher rate than you would otherwise have gotten. The difference is that money added to your balance tends to stick around for as long as you own property, whereas a higher rate is over as soon as you sell or refinance that particular property. If you choose a zero cost loan, your balance should transfer straight across; you are continuing to pay it down as soon as you write the first check on the new loan. Whereas if you chose a loan that adds thousands of dollars in closing costs etcetera to your balance, it's going to be years of payments before you're back where you started. Here is a list of Questions to Ask Prospective Loan Providers in order to pin down what they are really offering.

There are two reasons not to consider zero cost loans: First, if you have a history of keeping loans a long time between selling or refinancing, you will usually more than get your money back within some number of years. Second, if the tradeoffs between rate and cost are shallow enough so that you are likely to get any money you actually spend back fairly quickly. At this update, the slope of the tradeoff curve is so shallow that you're likely to get the money for closing costs back within six to eight months. But that's an individual computation at the time you start your refinance. The higher rate for lower cost is often better for your pocketbook.

A true zero cost loan not only has no net "out of pocket" expenses, it has literally zero added to your mortgage balance. They do exist, mostly for well-qualified A paper borrowers, despite what certain skeptics might say, and for most people who qualify for them, they are something you should strongly consider in most markets, whether you're planning a purchase or a refinance.

Caveat Emptor

Original here