Mortgages: May 2009 Archives

Hi Dan wondering if you could help me out I'm getting a lot of different answers from a lot of people and I'm really searching for help I bought my house brand new (three years ago) for 550,000, and (the next year) I refinanced into a mta loan. which at that time was around 4.25% and now is 7.125%. I have a hard prepay of $12,000.00 which expires in (fifteen months) house just appraised for $775,00 balance on 1st loan 440,000 balance on 2nd 148,000. should I ride the next 15 months out to avoid pre pay or refinance now into a fixed. The rate on the second is prime plus zero.

Your rate moving like that is one of the many reasons I recommend so strongly against negative amortization loans. The person who did your loan at the time had to know that, due to the nature of the MTA (Moving Treasury Average) yours is based upon, the rates were already set to rise into the sixes for certain, and likely further, as older months were dropped from the average in favor of newer (and they're even higher now). Were it fully explained, would anyone rational agree to take a loan where you get a lower rate for six months, but then the rate rises inexorably, as the treasury rates the loan is based upon had already been rising, to a level that is well above what is available on A paper three or five year fixed? And with a three year prepayment penalty, so you're in precisely this sort of situation?

"No points" thirty year fixed rate loans were sitting right around 6.375 when I originally wrote this, and you're at 75% Loan to Value. The bad news is you're definitely a jumbo loan (although that has now changed with the "temporary conforming" or "jumbo conforming" loans that carry a charge of about 3/4 of a discount point, but are otherwise conforming loans), as the conforming limit is $417,000. This boosts your rate more than a tad, depending upon the lender, to 7.25 percent right now if you're going to do it without points (usually this spread is much less). I prefer to discuss loans without prepayment penalties or points, but it might be in your best interest to pay a little to buy the rate down if you refinance. I'm going to use seven, as it makes the math slightly easier.

The good news is your loan to value ratio. According to the numbers you gave me, you're below 80 percent, even with the prepayment penalty. You owe $588,000 (If you bought for $550,000, the turkey who did this negative amortization loan scammed you out of a lot of money), and the prepayment penalty boosts this to $600,000. Assuming you have enough liquid reserves to put up the money for interest and impounds, this means the costs of doing your loan are going to put you at about at $605,000 new balance (perhaps a bit below, but let's keep the math as friendly as possible).

Basically, it cost you $17,000 to save yourself an eighth of a percent on the interest rate. Under more normal circumstances, I wouldn't even put that one through the calculator. No way that's in your best interest. But your real rate on that MTA is going to keep rising - by at least another quarter percent due to increases already on the books, more likely half. I'll use 7.5 as your mean rate. Furthermore, the second is at 8 percent, likely to soon be 8.25. Monthly interest under the current loan at that rate: $2750 for the first, $987 for the second as it is. Monthly interest on the new loan, $3530. It saves you $200 per month in interest, albeit with a higher payment, $4025 as opposed to what you've got now. I am assuming you have documentation that you make enough money to justify the loan in the underwriter's eyes, and that your credit score is about average. On the other hand, divide $17,000 by $200 per month, and you get 85 months to break even on the cost of doing it.

However, this decision does not take place in a vacuum. You can't let that negative amortization loan go forever. In fifteen months, I think equivalent rates will be higher (as lenders fail and there's less competition for consumers), which translates to to adding an unknown cost to waiting. When I wrote the original, I believed prices would slide further, something I no longer believe. In fact, I think we're likely to see a recovery of at least a quarter of what we've lost in the next fifteen months. Any of these prognostications is an educated market guess, no more, and I could be way off. The appraisal would come in just under $700,000, but let's say $700,000. Your first, for $560,000, would be at 7.5%, and for your second, I'll presume you get a new HELOC on the same terms, on which the balance would be about $33,000. Interest on first and second, at 7.5% and 8.25% respectively, comes to $3500 plus $227. The payment on the first would be $3915, plus $227 (assuming interest only HELOC) for a total of $4142. So $12,000 saved if you wait, versus about $200 per month less in interest charges per month if you dive in. Divide that out and it comes out to 60 months. Five years. If you keep the new loan five years, approximately, or more, you'll be better off refinancing now. If you keep it less than five years, you're better off waiting is what the calculations say. Plus chop off the $200 per month you save starting right now for the next fifteen months, and the answer turns into forty five months or a little less being your time until break-even.

Actually, at this update, the HELOC isn't available. Nobody is doing them above 90% of appraised value. Even first mortgages are problematical and iffy above 90% of value right now. Between the tightening of loan standards and values fallingAs much as prices slid, lots of people who would otherwise be able to refinance cannot. There are the new programs from Fannie and Freddie that allow refinancing up to 105% current value, but your loan has to be with Fannie or Freddie or underwritten to their standards in order to qualify. Yours isn't. This inability to refinance despite otherwise being able to afford it because prices have fallen is one of the killer aspects of the whole bubble pop we had, and I'd like to see real estate brokerages and mortgage lenders who talked people into horrible loans on the basis of "You'll have more equity and we'll refinance you in two years" sued out of business. There's no changing the fact that you owe $588,000. If you don't make the money to afford payments on a $588,000 loan, and didn't in the first place, that's a real problem. You don't give me enough data to be certain, but if you made the money to make the payments on a sustainable loan, why didn't they put you into one?

I'm a reasonable risk taker. Were I plopped down in your situation, I have to tell you I would probably hang tight until the prepayment penalty expires. Roll the dice and bet on my personal ability to come up with a good loan. On the other hand, you may not be as much of a risk-taker as I am. The stuff I quoted you for refinancing now is available now, no suppositions about it. The rates could well be higher in fifteen months than I have estimated, perhaps much higher, or they could be lower (although I don't think so with increased federal borrowing). You need to decide what your level of comfort is. If you're the sort that is averse to risk, refinancing now could pay for itself just in peace of mind, because you're not worrying about it. That's why I always offer a 30 year fixed rate loan, no matter how wide the interest rate spread is between that and my favorite hybrid ARM, which is usually a better buy, although not now. There are folks who just won't sleep nights. In real terms of cost of money, the difference comes out to about $7 per night, and my sleep is worth more than that, so I presume yours is, as well.

Also at this update, rates are below 5% for people with reasonable credit and sufficient documentable income. Right now, if you could refinance (I don't think the person who wrote the original email could), it's a no-brainer if you can refinance. Lock in the best interest rates of my lifetime on a thirty year fixed rate loan and break even in about eight months, even with paying that prepayment penalty? Sign me up! Anybody who can't pull themselves out of trouble given the current rates really needs to talk to a lawyer, as it points to a situation where a mortgage originator and likely your real estate agent as well actively circumvented their fiduciary responsibility to you.

Caveat Emptor

Original here

This is one of those things that trips up people to buy a house or refinance it: student loans.

First off, Form 1003, the Federal Uniform Residential Loan Application has the following relevant questions on page 4, among the "deadly thirteen"

a. Are there any outstanding judgments against you?

f. Are you presently delinquent or in default on any Federal debt or any other loan, mortgage, financial obligation, bond, or loan guarantee?

One of the things they don't generally tell people about student loans is that a default of a federally guaranteed student loan stays with you for life, or at least until it is paid off in full. Unlike most defaulted debts, which are a black mark on your credit for 7 to 10 years, this one never goes away. With interest and penalties, the amount owed can be much larger than it was, even at the default point. Bankruptcy doesn't cure this debt. It is basically there forever. So don't default on your student loans. A yes answer on any of these questions turns a slam-dunk loan into a very questionable one. In this case, you can kiss any possibility of actually getting a VA loan or FHA loan funded, and first time buyer programs, which are provided via federal funds, are off limits as well. This includes both the Mortgage Credit Certificate as well as local first time buyer programs. Sometimes a conventional conforming or subprime lender will do a purchase money loan - but refinancing is right out unless you're going to pay the debt as part of escrow. With the federal government now owning Fannie and Freddie, I would anticipate the conventional conforming becoming even more difficult in the future, leaving subprime lending as your only option. Truthfully, it's been quite a while since I had someone in this position, so it might already have happened.

But most folks pretty much figure that if they're in default on student loans, they're not going to get much help from the feds or anyone associated with the feds. They might try to get around it, but they're not really surprised or bitter when they can't.

The thing that jumps out and surprises people is student loans not currently in "payment" status. You're not making payments on them now, so you don't tell the loan officer about them, and he doesn't take them into account in determining your debt to income ratio. Since the loan officer doesn't know about the student loans, they don't take them into account, and they say you qualify for a loan amount that you're not going to qualify for. Actually, this is pretty common even without student loans, but with them, it's practically ubiquitous.

Whether the loan is in payment status or not, it's a known debt. You're going to have to start making payments on it at some point. Sure, you might have a much larger income then, but that's not something you, I, or anyone else can guarantee. So what you're going to be paying in the future, when the loan enters payment status, is something that needs to be taken into account. You need to be able to afford the loan payment as well as all of your other debts, which most pointedly includes student loans.

So it doesn't matter that you're still in school, or the loan is in deferral or forbearance. The real estate lender is going to want to see documentation from the student loan lender as to exactly what that payment is anticipated to be. You might as well ask for it ahead of time, so you have it ready when it's needed. You should want to take it into account in figuring what you're able to afford, as well.

The last of the most common questions has to do with student loan consolidation. Since student loan consolidation usually extends the repayment period, consolidating student loans has the effect of boosting what you can afford a portion of the way back up to what you could afford without them. The catch is that consolidation has got to be complete to get this benefit, a process that takes about six weeks. It's not something to try when you're in escrow; it's something you need to have done ahead of time if you want it to make the difference in getting your loan approved.

Most folks want to stretch to the limit to get the most house they possibly can. In fact, quite a few ask if there's any way they can extend what they qualify for. The general answer to that is "Only if interest rates drop or you start making more money that we can document." But in order to know how much you can really afford, you have to know not only the income, but what you're already obligated to pay via student loans as well as other credit payments.

Caveat Emptor

Article UPDATED here

This is a warning to those who purchase restricted sale property. I've gotten a couple of calls for refinancing these in the past couple months, and I've never covered this subject.

A restricted sale property is one where the identity of who can buy it and/or at what price they can buy it is restricted. Many local first time buyer programs restrict the conditions under which the property can be sold. The purchaser must be someone who has themselves qualified for their first time buyer program, the purchase price cannot be above the original purchase price plus a certain margin (usually reflecting a given percentage of Average Median Income for a given Metropolitan Statistical Area), or both.

These are by no means the only restricted sale programs. Many academic institutions have such property upon the grounds of their original endowment. There is a covenant which runs with the land that only faculty members or employees of the college or academy are allowed to purchase the property. I'm sure there are business employee restrictions and others.

This is a classic "good news - bad news" situation. At purchase, it's good news (mostly) because you typically get a far lower price than other, equivalent property, meaning you can afford it when you couldn't otherwise. At sale, however, it means you can't sell for a true market price because either the general public is prohibited from buying or the sales price is restricted by the bargain you made in order to purchase.

What this means is that if lenders have to foreclose upon such a property, they are pretty much up the creek. Such a property is unlikely to sell at auction, they can't just hire an agent and put it on MLS. If the property got beat up before the foreclosure (as happens quite often), it may not be something any of those eligible to purchase it are interested in.

Since it's not generally marketable, most lenders don't want to touch restricted sale properties. This means your loan choices are going to be restricted from the day you sign the purchase contract on. You will probably not be able to get a purchase money loan with most financial institutions. You almost certainly won't be able to refinance on favorable terms, even if everyone who bought without such a restriction can.

Typically, there are only one or two financial institutions willing to touch such a property, and only through their own internal loan officers rather than through any brokers they may do business with. What's going on is that the restricted sale entity (usually a municipality or educational institution) has contracted with them to somehow take care of the problem if there is a foreclosure. This usually takes the form of taking over the property themselves and buying out the lender's Note.

For refinances, all of the above applies, even more strongly because one lender already has the indemnity contract; any others that you might have been able to choose between do not. This means your choices are limited to "refinance with that lender or not at all". Not a good situation to be in as regards to getting a good rate for a reasonable cost. Whatever they feel like offering you is what you get. Nor do you get the standard rates everyone else gets from that lender. You're not in the same situation as everyone else. You're in a special program where nobody else can lend to you because your property cannot be sold to the general public. You're almost certainly stuck with that one lender. It's not like you can go somewhere else.

Due to this lack of competition, expect the rates on loans for such properties to be above market average. Some are fairly close, but it seems an average of half to three quarters of a percent higher on the rate is what you're going to pay when you finance such a property. Furthermore, the only ones able to refinance may be the current lender, as nobody else has that indemnity contract from the restricted sale entity. Lender's don't want to take over your property - they want the loan to be repaid. But they must be able to take over your property and sell it on the market for a market price in order to accept your loan. Anything else is a violation of their duty to their stockholders and bondholders, as well as a violation of federal banking regulations. Since they can't do this, it shouldn't surprise anyone that most lenders can't touch a restricted sale property.

Caveat Emptor

Article UPDATED here

I said a few days ago that Banks hate the concept of mortgage brokers, because without brokers, they could jack up their margin per loan. Here's what they're doing about it: Introducing a bill into Congress making it impossible for mortgage brokers to do exactly what the banks themselves do.

You can track HR 1728 here.

Text of HR 1728. Most of it is redundant, iterating other things already done. One that isn't, however, is found in Section 103, subsections 1, 2 and 4

'(1) IN GENERAL- For any mortgage loan, the total amount of direct and indirect compensation from all sources permitted to a mortgage originator may not vary based on the terms of the loan (other than the amount of the principal).

This means that they are not permitting differing compensation to an originator based upon the tradeoff between rate and cost of real estate loans. Defensible, in and of itself. But not in conjunction with other parts of this section.

'(2) RESTRUCTURING OF FINANCING ORIGINATION FEE-

'(A) IN GENERAL- For any mortgage loan, a mortgage originator may not arrange for a consumer to finance through rate any origination fee or cost except bona fide third party settlement charges not retained by the creditor or mortgage originator.

'(B) EXCEPTION- Notwithstanding paragraph subparagraph (A), a mortgage originator may arrange for a consumer to finance through rate an origination fee or cost if--

'(i) the mortgage originator does not receive any other compensation from the consumer except the compensation that is financed through rate; and

'(ii) the mortgage is a qualified mortgage.

This removes the ability of a broker to allow consumers the choice or paying the origination fee via yield spread. I've explained yield spread more than once. It can be thought of a "negative discount" because that's exactly what it is: Something the banks voluntarily pay brokers in order to get those brokers to bring them loans at that rate of interest. It is rooted in the secondary market for loans, and what that secondary market pays for such loans. If the secondary market won't pay a premium (i.e. more than face value of the note) for such loans, I've never heard of a single lender offering any yield spread on such loans. In fact, there's usually a difference of about 1.5 points between secondary market premium and yield spread, with yield spread being the lesser of the two. So if it's a $400,000 loan with a yield spread, that lender is making about $6000, over and above what they pay the broker - just for the act of funding that loan long enough to sell it on the secondary market. This premium has nothing to do with whatever interest the consumer may be charged - it's a strictly cash bonus earned by being an intermediary middleman between the broker and the secondary market. Many loans with secondary market premium bonuses are still charged discount by lenders. In short, this section prohibits brokers from simply sharing in the premiums earned by bankers on the secondary market.

Furthermore, there is absolutely nothing compelling lenders to offer yield spread in the first place for any loan. It is purely voluntary on their part. They do it because otherwise brokers will shop other lenders for their clients requesting loans in that current cost range. Since this happens to be the vast majority of all mortgage loans I have experience with, this will have no effect other than the restriction of consumer choice on the most popular loan choices, forcing them to go to direct lenders, prohibiting brokers from competing effectively. This is in the consumer interest how?

The answer is that it isn't. It's in the big direct lender's interests, because it would enable them to jack up their profit margin per loan.

The exception might be taken as allowing yield spread to be used to finance origination, except for the following in subsection 4

'(4) RULES OF CONSTRUCTION- No provision of this subsection shall be construed as--

'(A) permitting yield spread premiums or other similar incentive compensation;

'(B) affecting the mechanism for providing the total amount of direct and indirect compensation permitted to a mortgage originator;

'(C) limiting or affecting the amount of compensation received by a creditor upon the sale of a consummated loan to a subsequent purchaser;

'(D) restricting a consumer's ability to finance, including through principal, any origination fees or costs permitted under this subsection, or the mortgage originator's ability to receive such fees or costs (including compensation) from any person, so long as such fees or costs were fully and clearly disclosed to the consumer earlier in the application process as required by 129B(b)(1)(C)(i) and do not vary based on the terms of the loan (other than the amount of the principal) or the consumer's decision about whether to finance such fees or costs; or

'(E) prohibiting incentive payments to a mortgage originator based on the number of residential mortgage loans originated within a specified period of time.'.

The last sentence should be known as the "encouraging unethical mortgage originators clause" but it's that first sentence that's the real killer. It flatly prohibits yield spread, something that the lender's lobby has been after for years. Individual lenders pay yield spread because they make more money by encouraging brokers to place the loans with them (as I said, about 1.5 points per loan), while the industry as a whole has been looking for a way to ban it because if no lenders are legally allowed to pay yield spread, they will make even more money per loan, not to mention cut down on the competitive advantage brokers have by economizing.

I wrote in Yield Spread is a Beneficial Tool That Can Be Misused that yield spread is not a cost paid by consumers, and it isn't. It's a premium paid by banks so they can make more more money (roughly $1.50 per hundred dollars loaned) by doing a higher volume of loans. By having yield spread available as an option, consumers have the option of not increasing their loan balance, or not increasing it by so much. You can't do reduced cost loans, let alone zero cost loans, without yield spread.

Here's an example to illustrate: Suppose you have a $400,0000 loan at 7.5%, and rates drop (as they have currently). However, you're also planning to sell in a year or two. So you don't want to spend a huge amount of money you'll never recover before you sell the property on refinancing your property. Along comes a broker who says, "Instead of refinancing you at 4.5% with a point of discount and a point of origination, costing you $8000 extra on your loan balance, suppose I refinance you at 5.25% with no discount and no origination. I make what I need to via yield spread, and it only costs you about $2000 on your balance to refinance. You save 2.25% every year in interest cost, or $9000, so if you go a year and a half, that's $13,500 you save in interest charges, less $2000 on up front cost, giving you a net of $11,500 in your pocket a year and a half from now." Wouldn't you say "yes" to that? It is completely logical and to your benefit to do so. But HR 1728 would remove that option by prohibiting the payment of yield spread. The only people to benefit by this are the lenders who keep you in higher interest rate loans.

I personally work through a correspondent lender. We don't get yield spread (unless we choose to work as brokers instead) because correspondent lenders fund in our own name - thereby getting most of the secondary market premium that the big lenders get. HR 1728 would probably be a good thing for me, personally, at least in the short term by putting brokers out of business. But I have learned the hard way that anytime consumer choice is adversely impacted, I will pay for it later. Yeah, they're only coming for brokers and I'm not a broker. But then what happens next? Easy: Once true brokers are out of business, they figure out a way to kill correspondent lenders. Instead, I choose to help brokers, even though I haven't got a personal stake in it - yet. Furthermore, it seems rather spurious to villainize a process that is a much smaller piece of precisely the way the big lenders themselves do business.

Stand up and be counted as in favor of permitting yield spread. The only people who benefit from banning it are major lenders and corrupt politicians engaged in paying them back for campaign contributions and personal favors (Yes, I'm looking at you Barney Frank (D - Malfeasance), and Chris Dodd (D - Corruption), too.)

Caveat Emptor