Mortgages: August 2010 Archives

I hear it and read it all the time - advice that says to pre-emptively reject the possibility of paying points. People that talk to me about loan rates that tell me they will not consider any loan that requires paying points.

What they're thinking is that they don't want to pay origination. They don't want to pay for the person who gets their loan approved, figuring that the interest rate is enough for the bank. Here's a cold hard fact: Nobody does loans for free. The interest you are paying does not go to the bank who does your loan. It goes to the actual investor who furnishes the money. And here's the fallacy that completely guts the advice: What has become the most common system of loan origination, where the originator is separate from the investor, has become the most common system because it is cheaper for the consumers. Despite Congress' recent attempt to eliminate brokers as competition for big lenders, brokers are still far cheaper.

Once upon a time, all residential mortgages were done by lenders who intended to hold them for the life of the loan. There was no origination. There was no discount. The Rate was The Rate, and they would give you whatever rate they were offering everybody else that week - if you qualified - as they wanted to make a certain comparatively high margin on the money. If you didn't qualify for The Rate, there were alternatives but none of them was advantageous. In any case, The Rate wasn't that great, but there weren't many alternatives at all, and all the banks charged about the same Rate, and there was pretty much always a prepayment penalty of some sort because they had to be certain they'd make enough money via interest to pay their employees for doing the loan.

This started changing a very long time ago, with the advent of Fannie Mae (and its younger sibling, Freddie Mac). Nonetheless, the two GSEs didn't work in a way that made their role obvious to the consumer until about thirty to forty years ago. The fact that they bought mortgages, allowing lenders to loan what was essentially the same money over and over again meant that rates went down, but also as part of the same phenomenon that lenders were no longer making money from the interest rate of holding those mortgages. The upshot was that consumers now had a choice: In order to get the cheaper rates made possible by the GSEs, they had a choice: They could pay origination, or they could accept a higher rate, such that the lender who did their loan received either a bond premium or yield spread premium, which amounts to a different piece of the same thing. The advice not to pay points for a mortgage actually dates from this period, as holdouts equivalent to today's portfolio lenders came up with what was an advertising slogan that made it look like dealing with agency lenders was actually costing you more, when in reality agency lenders were saving consumers money over the longer term, albeit with slightly higher upfront costs. But when it's saving you as much as two percent per year over the portfolio lenders of yesteryear (who began charging points themselves because they could), it doesn't take long to see that paying a point of origination, or one percent of loan amount upfront in order to get a rate two percent lower with the agency lender was a much better deal than the alternative.

Once started, the advice to not pay points took on a life of its own. After all, what's not to like about not paying for something? But origination points pays for a real service, and if it saves you money in your particular context, then it is worth paying. But if you reject in blanket fashion the possibility of paying points, then you never consider the very real possibility that it might save you money. Nor, in the modern world, is not paying origination a real possibility. I can make my money in the form of points, I can make it via an explicit dollar figure charge that amounts to the same figure, or I can jack up the rate and make the money when the secondary loan market pays me more than the face value of the bond because the interest rate is above that of similar mortgages. Note that there is no option that says "your lender doesn't make money for doing your loan." If your lender doesn't make money, they don't stay in business. I don't do free loans. Nobody does free loans. If I'm not going to make money anyway, I'd prefer to stay home and play with the dog and teach the girls about TANSTAFL, because plainly there are an awful lot of naive children somehow getting through the educational system without absorbing this critical concept. Pretty much everyone else in the loan industry needs to make a living also. Refuse to pay origination, and you're back in the old days of portfolio lenders - with a rate two percent or so above the agency lenders for the same loans.

Points actually come in two forms. As well as origination, there is discount. Origination is going to be paid on every loan. It can come from a figure in points you are being charged that amount to a certain number of dollars, it can come from an explicit number of dollars you are being charged (that amounts to the same number of dollars as the points do), or it can come from jacking the rate up so as to receive yield spread (which must be disclosed) or a secondary market bond premium (which does not). It literally does not matter to me how I make my money - it's still the same number of dollars - but it is going to be made or neither I nor anyone else is going to do your loan. Some companies charge more origination than others, but if they can deliver a loan that is likely to save you money overall, that higher origination is worth paying. Don't lose sight of the forest because you're obsessed with one particular tree, and origination is not the only way that loan providers make money. Not too long ago, I had someone bring me a HUD-1 form where the lender hid eight thousand dollars of profit in plain sight where the borrower couldn't recognize it, in addition to the $1500 they claimed was all they were making via origination. Nor do all forms of origination have to be disclosed. Direct lenders and correspondent brokers do not have to disclose what they make when they sell the loan to the final investor and so advice telling you not to pay points or not to pay origination allows them the ability to cut out other loan providers, at least with the gullible, which is most of the public. Evaluate the loan in terms of the bottom line to you.

I happen to think it's both fair and a good idea to charge origination in terms of points. When I set the rate and cost of your loan, I'm risking more for a bigger loan - and working harder, too. If I make a mistake in pricing the loan, I have to pay a figure in points in order to make it good. If your credit score suffers a sudden drop, the difference isn't a flat fee - it's a charge in points. If you don't get me information I need promptly, or the lenders are just so snowed under that we need to extend the rate lock, that's a charge in points. The bigger the loan, the more work it is to get it accepted by the investor. Conforming loans are, by and large, the easiest - but that's not to say they're easy with the current paranoid lending environment. Super conforming gets tougher. Non-conforming loan amounts these days are like pulling teeth without anesthesia and it gets worse from there. The points charge for origination may go down in steps for larger loans, but for everyone in the industry, you're going to find that the bigger the loan, they larger the number of absolute dollars the lender needs to make it worth their while. They can hide it, lie about it, or risk scaring children of legal age away by honestly disclosing it, but I promise you that you are going to pay it in the final analysis.

Discount is an explicit charge for getting a lowered rate. This figure is always expressed in points. I can translate it into dollars for you, but the actual charge is a certain percentage of the final loan amount. Paying discount is pretty much optional, and the answer to the question of whether you should (and how much) changes with the type of loan, your situation, how long you're planning or likely to keep a particular loan, and the tradeoffs between rate and cost available at any given point in time. Discount points can be thought of as negative yield spread or bond premium, and yield spread or bond premium can be thought of as negative discount points. You cannot have discount points on a loan with yield spread or one where the loan officer says they will make what they need to on the secondary market. What you are paying in such cases is origination, not discount.

In neither case is cutting points out of a loan a matter of negotiating skill. Cutting points down is a matter of effectively shopping your loan and asking the right questions of prospective loan providers and nailing them down as to exactly what they are really offering and paying attention to the answers. You're probably not going to see huge differences of three points for the same rate or a full percent lower on the same loan for the same cost unless you're comparing yourself to someone who doesn't shop their loan effectively, but saving half a point on a $400,000 loan at the same rate is $2000, and saving an eighth of a percent for the same cost is $500 per year for as long as you keep the loan. I don't know about you, but that's more than enough to motivate me to spend the necessary time and effort to shop for a better loan.

In any case, evaluate loans in terms of the bottom line to you, not by how much the provider makes or has to disclose that they make. How much it's going to be in points and closing costs to get the loan done in the first place, versus what it is going to cost you in interest charges every month. They're not going to yield a single unequivocal answer, but rather breakeven points, or "How long do I have to keep this loan in order to get back my initial investment via lowered monthly cost of interest?" When you're refinancing, a zero cost loan is the only thing that can be ahead from day one, but even an ardent fan of zero cost loans like myself is finding them hard to justify in the current market, because the rate cost tradeoff is so shallow on that part of the tradeoff curve. In plain English, when you break even on increased costs in six or eight months due to lowered cost of interest, it's very hard for me not to recommend you pay those slightly higher costs, knowing that the median time people keep loans is about 28 months, and they'll get their money back four times over in that period, and keep getting it back all over again every six or eight months they keep the loan.

By the way, if someone won't guarantee their costs, how are you going to get those figures that gives you the answer of which loan is most likely best for you? The lender knows, or should know, what they can really deliver. You don't, except for what they tell you. If you're not going to follow this model, you're in the same position as the woman who goes to the singles bar looking for Mr. Right. What she's going to find is Mr. Right Now, the sleaze ball who says anything to get her into bed with him and leaves her feeling dumped on and used. The parallels are exact. Nothing wrong with it if all you're looking for is a quick roll in the hay - but I've never heard of anybody who went loan shopping with the intention of getting screwed.

If you don't nail them down with a written guarantee, loan providers can and will lie, omit charges that you are going to pay, and just flat out pull promises out of their backside in order to get you to sign up for a loan. The new RESPA rules only a little more difficult to lie, and it you don't sign up for their loan in the first place, there is no way they're going to get paid for doing that loan.

What I hope you take away from this article is simple: The idea that it may be to your benefit to pay points on a loan, and rejecting the possibility only encourages prospective loan providers to lie about what loan they are really going to deliver. Instead, nail them down as to exactly what they're willing to offer, whether they're willing to guarantee it, and what the limitations upon that guarantee are. Once you have this information, you have the information necessary to decide whether paying points is in your best interest - because it might very well be.

Caveat Emptor

Original article here

I am continually confirming that a large percentage of people can't handle negotiations like an adult. They focus in on garbage and ignore what's really important.

I recently was going to deliver a loan that cost less, as well as being 3/8ths of a percent lower interest rate on exactly the same terms as the competition quoted. Furthermore, my quote was guaranteed where the competition's was not. However, because my company's compensation was disclosed while the competition's was not, they chose the other loan.

Real Estate loans are not something that the minimum wage fast food worker can toss off in a few seconds like filling a soda cup. If we get all of the paperwork just right with no hitches and everything works on the first pass and it doesn't take too long to price it, such a loan can be done in five to ten working hours when I first wrote this. With complications due to new regulations and overly paranoid lenders that have arisen since, thirty working hours and 45 days seems to be about the minimum for a loan now. And getting in done in minimum time requires not just the right situation, but a lot of skill and a not inconsiderable amount of knowledge of the loan market.

Nobody does loans for free. Typical loan production, even at a busy brokerage, is three to six loans per loan officer per month. That's got to pay rent and utilities and the salaries of everyone from the receptionist to the CEO. Yes, I've done more, but if you investigate you're going to discover that for most loan officers, most of their time is spent prospecting and selling. That's part of the reason why most places have processors and transaction coordinators - to relieve sales folk of tasks that they don't have to do so they can go out and sell more with the time they save. I can point to lenders and brokerages where basically the only work that loan officers actually do is talk to prospects and clients. They don't price, they don't do the application, they don't process, they don't deal with underwriters or escrow or title, they don't attend signing - all they do is sell the loan. The reason for this is so they can talk to more prospects. The time of good sales folk is important, but some of these loan officers have no clue as to whether the loan is ultimately going to be approved. This is one of the reasons why people end up with different loans than they were originally told about. There was a reason why they weren't going to qualify for the loan on which the loan officer gave them a low quote, but the loan officer didn't know, and it's sure as gravity no one else is going to tell you between sign up and delivery, and at delivery, your choices are to sign these documents or don't. If you need that loan at that time, guess what? You are going to sign those loan documents and become part of the statistics.

Not too long ago, I had some people call me through Upfront Mortgage Brokers (UMB). They had heard the UMB way was better, and it is better than most, but it requires you be able to deal with money like an adult. These people wanted a million and a half dollar loan with a low down payment. They had great credit and likely sufficient income, but they wanted an A paper loan with no pre-payment penalty. Now I can get zero down payment A paper loans with no pre-payment penalty no problem up to the conforming limit (currently $417,000), but above that, lenders start making it harder and harder, and there are three break points in most lender's rules between conforming loans and a million and a half. When I'm working under UMB rules, I have to negotiate every penny that my company is going to make up front, and I told these people that my company needed $5400 to make that loan worth our while. This was between three and four tenths of a point grand total, and that included credit and what the processor was going to make. But that sounded like "too much" to these people, who told me that they were going to the bank who "promised never to charge more than two points." When you do the numbers, they were telling me that $5400 was "too much" but $30,000 wasn't - not to mention the fact that I know this lender, and they'd have made another four percent on the secondary market with the loan they gave these people - $60,000 in addition to the 2 points they charged. It's to be admitted that the lender I was going to put them with likely would have made about 2.5 percent, or a little under $40,000, selling their loan on the secondary market, but these lowered margins roughly $45,000 total that I and my lender would have made versus $90,000 that the other lender would charge translate directly to less cost, a lower interest rate, or some combination of the two (there is ALWAYS a trade off between rate and cost in mortgages). Direct lenders can price your loan to make anything they want on the secondary market - and they don't have to tell you about a penny of it, unlike brokers. Indeed, the loan I quoted was better all around to the prospective client - but my compensation was disclosed and theirs wasn't, despite the fact that what we were going to make was chump change compared to everyone else. So this person, a highly paid professional who should have known better, went with the other provider.

So despite the fact that working to UMB guidelines actually lets me quote and deliver loans with slightly better pricing than my usual way, I have discovered that it's mostly a waste of my time. The client is assuming pricing risk, all I get is a flat, pre-negotiated fee - but they know what that fee is, and it's not what most folks think of as "cheap." Never mind that it's a lot cheaper than the provider they ended up with, people seem to think that the $5400 they know about is somehow worse than the $30,000 they don't.

The smart thing to do, of course, is judge that loan based upon the net terms to you. Type of loan, rate, total cost, and whether there's a prepayment penalty. I can get my commission paid out of yield spread or rolling it into your balance, same as anyone else. You don't have to write me a check just because I'm working for known compensation. In fact, since that known compensation is less, I can get you a lower rate, or pay some or all of the closing costs that you'd end up paying through another provider - sometimes even both. But just because I can't hide my compensation in your new loan amount and rate, or pretend that I wasn't paid somehow, doesn't mean the other loan is better than mine.

Loans aren't free. If you don't understand how someone is getting paid, chances are they are making a lot more money than the loan officer who is willing to go over it. If this seems like too much work to you, take comfort in the fact that you're not wasting time scrutinizing the wrong thing.

The intelligent way to compare competing loans by the terms to you: What type of loan is it? What is the rate? How much will it cost, grand total? Is there a prepayment penalty? Will they guarantee their quote, or are they just talking "bigger better deal" to get you to sign up? Ask specific questions, and don't settle for anything other than specific answers. The usual modus operandi is to hide loan costs in your new loan amount after pretending that there aren't any until you go to sign documents. Just because nobody wants to talk about it doesn't mean the answer is "zero." Just because you don't have specific numbers doesn't mean it's going to be better for you - in fact, the opposite is the way to bet. Nail them down before you sign that loan application.

Caveat Emptor

Original article here

Got a search for "mortgage closing documents do not sign changes."

Unfortunately for this person, the documents you get at closing are what legal folks call a contract of adhesion. This means you can either accept it, sign, and adhere to all the terms as presented, or you can walk away. Basically your choice is to take it or leave it, in exactly the form presented.

Now on those rare occasions someone actually has the intelligence and good sense to walk away from a situation where the terms have been changed, the prospective loan provider does have the option of offering you a better deal as incentive to do business with them. Like, say, the loan they originally talked about to get you to sign up with them. Mind you, they don't have to, and the costs of that other loan may mean that they would rather do no loan than that loan. Furthermore, they've got to re-draw the appropriate paperwork.

Now I'm not a lawyer, but the way contracts of adhesion were explained to me is that if there is any legal ambiguity, it will be interpreted in your favor. This doesn't mean you can claim you thought it meant something different than the average person would understand; this means that if there is a legally ambiguous wording that could legitimately be interpreted two different ways, and you and your lender disagree as to the meaning, the courts will generally rule in your favor. Once again, the law is different from place to place and the courts have the final say; check with your lawyer.

Now in the loan world, it is much more common than not to be offered a loan contract at final signing which differs in some material form from the loan terms that were described to you in the beginning. The loan provider will generally offer you a loan of the same type, and usually at the same rate, but most often the costs to get that rate will be significantly higher than were listed on the Good Faith Estimate or Mortgage Loan Disclosure Statement. Neither one of these forms is in any way, shape or form a legal commitment, nor are any of the other forms you get at the beginning of the loan process, such as the Truth In Lending Advisory. This has improved for consumers somewhat since the new rules for the 2010 Good Faith Estimate became effective, but there are companies out there who have the loopholes completely wired to let them pull a legal "bait and switch" like the worst of the bad old days.

The only thing that means anything is the loan contract, or Note, that you are offered at the end of the process, together with the HUD-1 form, which is the only accounting of the loan required to be correct and complete.

Now the difference between the initial teaser loan they talked about and loan contract they actually got approved is one of the reasons why the less than ethical providers out there often want a cash deposit for the loan, particularly if their rates are not particularly competitive and they know it. If they're nervous someone will come along behind them and offer you a better deal, they want a cash deposit so that they still get something if you pull out, and many folks obsess about the cash deposit to the point where I could offer them a deal that saves them several times the cash deposit, and they still wouldn't switch. This isn't to say not to pay the twenty dollars or whatever it costs them for the credit report, this is to say don't deposit the appraisal fee (several hundred dollars, which should be paid at point of service) or even part of a point "to be refunded if the loan funds within (a certain amount of time)". Chances are the loan isn't that great, particularly not the real loan they are really going to offer, and that's why they want to lock you in by having something to hold over you if you don't sign on the dotted line at the end of the process.

Caveat Emptor

Original article here