Mortgages: July 2009 Archives

I recently received an email asking about a Good Faith Estimate on a $200k loan. The person asking my opinion attached the actual "estimate" to the email. In addition to a point of origination and a point of discount and $3000 in other closing costs plus $2500 in alleged government charges separate from the $3500 in FHA's initial mortgage insurance premium, it just assumed a 6% seller credit of $12,000 which made it look like the loan wasn't going to need much more than the down payment money to close the loan. They just automatically assumed that the seller would offer that much or be willing to pay that much, because the FHA says they will permit the seller to do so.

Ladies and gentlemen, the FHA limit on seller-paid closing costs may be 6%, but that doesn't mean every transaction has 6% concessions - or any at all, for that matter. I don't think I've heard about any where the seller concession was maxed out - and I have heard of a couple FHA loans recently where they was no seller concession. Keep in mind that on FHA loans there is no mandatory concession, unlike VA Loans which prohibit the veteran from paying some very real and necessary transaction costs that buyers and borrowers traditionally pay. Nor does it change the fact of how expensive the loan is. If you had a less expensive loan, it would be even less net money out of the seller's pocket.

It also makes it appear as if their loan was less costly because of lowered requirements for cash to close. People are often stupid about cash, because they understand that this is real money which they accumulated in their bank account little by little. Loan amounts, not so much - at least not until they've been paying on them for a while. This has the effect of lowballing the cash necessary to close, and the buyer possibly ending up shy on cash to close.

The loan referenced was a damned expensive loan, but by playing "let's pretend someone else is going to pay this" with the consumer and pretending that consumer weren't going to have to pay these costs, they hope to assuage consumer skepticism. But you always pay these costs. If there's a $10,000 seller concession for whatever in the cost, any well-advised seller would also take $10,000 less with no concession, as they will end up with more money in their pocket. This loan officer was pretending to give with the right hand while taking with the left - the standard lender game of making it appear as if their loan is lest costly than it is so you sign up with them and not the competition. By subtracting that 6% of the sales price off the loan cost, they are making their loan look more attractive than it really is.

Except for VA loans, I would advise people to never accept estimates or figures that assume a seller concession. Even with VA loans, you're paying for it one way or another, so I would want to know the real cost of the loan without seller concessions. After all, if the seller is going to pay $5000 more of the proceeds if he accepts my offer than if he accepts someone else's offer, he's going to want at least $5000 more in sales price in order to accept my offer over the other guy's. Assuming his agent has anything like a clue - and I never assume the other side is stupid or clueless until they prove it. Even if there are no competing offers, they should accept an offer of $5000 less without the $5000 in costs you're asking them to pay. I get the same amount of money to start, but then I don't have to pay for higher commissions, higher title and escrow fees, or anything else. Subtracting the amount of the needed concessions from your offer and submitting it without a demand for such is always superior to an offer that may be for the higher amount, but has more givebacks to compensate. Seller concessions cost the buyer/borrower money - it just might not leap off the page in black and white.

Finally, unless you have a fully negotiated purchase contract, you have no idea whether a given seller will actually be willing and able to give those concessions. Many times, the lenders in short sales will disallow them even if the purchase contract price reflects those concessions. Asking for closing costs says two things to those in the know - you don't have a lot of cash and there is a high risk the transaction won't actually close. Neither one of those is a signal you want to send to sellers or listing if you can help it. On lender owned properties, it can cause the lender to bypass your offer in favor of a lower offer without that request, because the one thing that costs them even more money than accepting a lower offer is accepting an offer that doesn't close. Even on "regular" sales, which seem to have shot up to about forty percent of our local market in the past couple of months, a competently advised seller is going to know they're risking a lot of money because of the likelihood of you not having enough cash to close.

Caveat Emptor

Article UPDATED here

It's very easy for loan providers to talk about a much better loan when you're shopping than they have any intention of delivering. Then you give them thirty days after you sign up, and you're put into a situation where the loan isn't what you were promised to get you to sign up with that loan provider, but you have a choice of signing now and getting it over with, or going all the way back to the beginning with a new loan provider. If it was intended as a purchase money loan, you may not even have the time to start all over again. This creates powerful incentives for loan officers to paint their loan as being better than it is, and there's no practical legal downside for them doing so.

It's very much like a zen koan: Consumers want the best possible loan, but the better the promised loan, the more likely it is that it won't actually be delivered. It is very difficult for consumers to tell if what's being promised will actually be delivered. This has only become more of a problem recently with HVCC on the one hand and lenders charging for failed loan locks. Both of these have bad effects which loan officers have no choice but to pass on to consumers in one way or another. I would like to go back to locking every single loan and guaranteeing total cost and rate as soon as I have an application, but doing so would inevitably mean that all of my clients would pay higher costs for the same rates in the end.

Despite Washington's high minded words of the last few months, the changes in the loan industry have universally hurt both the consumer and the ethical loan officer, while helping lenders and to a lesser extent, unnecessary bureaucracies like Appraisal Management Companies. Nor will the new rules for the HUD-1 and Good Faith Estimate make any difference except around the edges when they take effect. They do a few things very right, but loan providers can still lie with malice aforethought to get you to sign up with them, and as long as they give you the notice of what they're really going to deliver seven days before the end of a thirty day (or more) process, they are still golden. If rates have gone up in the meantime, it's quite likely that the rational thing to do is stay with the liars, even though they can change their minds again as long as it's another 7 days to closing. If you think this is a recipe for jerking consumers around, you're right. Loan officers can tell you they've got 5%, then 5.125, then 5 again, then 5.375, all before finally delivering the 5.75% they intended to deliver all along, and similar games with cost apply. Remember, it's always a tradeoff between rate and cost.

What is an informed consumer to do?

Well, if you're an adult about costs, you can ask loan providers to guarantee their total compensation at loan sign up - the Upfront Mortgage Broker Guarantee. I would still prefer to do loan quote guarantees because they put the risk for misquoting squarely on the loan officer. However much I'd like to do them, though, the costs to me and all of my future customers of failing to deliver on Mortgage Loan Rate Locks is just too high for me to lock the loan before I have a reasonable assurance of the loan actually closing. In some cases this means once I have a full loan package, in others it means I need to wait until I have a loan commitment from the underwriter. Until then, in order to protect my ability to actually deliver low cost loans, I've got to let the rate and cost float. That's what is real, and it's easy for liars to say a loan is locked when it isn't. Loan quote guarantees would take all the uncertainty out of it for the consumer, but I can't do them at sign up any more except in a very few cases.

The "We'll do the loan for $X total compensation" removes a lot of the incentive for loan officers to actually find the best rates as opposed to the loan quote guarantee, which quotes an aggregate figure for costs and rates that includes everything, including what the loan officer makes. It focuses upon the mouse of loan officer compensation, not the elephant of what the loan is actually going to cost you, but it's better than nothing. This is an intentional choice of words - think of the standard cartoon "elephant scared of mouse" schtick and you've captured the ridiculous nature completely. You really should focus on the total bottom line to you, but since we can't lock the loan under current market conditions until we are pretty certain the loan will close, we can't guarantee those terms at sign up, no matter how much we want to. One hopes if you're looking for a mortgage loan you're enough of an adult to realize nobody does loans for free. Nor are loans what most people think of as "cheap". It can be hidden in many ways (yield spread must be disclosed, but SRP and secondary market premium do not), but nobody really does loans for free. No matter which way they hide it or don't, you're still paying for it.

Ask your loan officer the hard questions. Every single one of them. Nail them down as to exactly what they are offering, when they can lock it, what the closing costs will be, and how long it should take. The total closing costs shouldn't change even if the loan is allowed to float rather than locking. If you discover they have lied, well the best thing to do for the long term health of the loan market is to walk away, but most people won't do that.

Things have gotten a lot more difficult for loan consumers wanting to actually get the best possible deal, rather than merely signing up with the loan officer who talks the best game. I would really like to go back to the way I used to be able to do things - Quote a loan I know I can deliver, lock it immediately, get the application done and work it so as to fund within the lock period. Unfortunately, if I tried it my future clients would all be paying higher costs when my closing ratio dipped lower than the lenders require it to be, and therefore they started charging me higher costs for the same rate, costs that my future customers would end up paying because there is no other way any more than there is for any other business. That's a good way to not only hose my future clients, but be forced out of business completely. One more koan to the loan shopping experience - this one from the loan officer side.

Caveat Emptor

Article UPDATED here