Mortgages: October 2013 Archives

The question every good loan officer hates is "What is your lowest rate?", usually the first thing in a phone conversation. People think that this sort of rate shopping is going to help them. The fact is that it almost ensures they are going to get ripped off or worse, as millions of people have discovered in the last few years - and most of them don't understand that this attitude is precisely what got them into the toxic loan that ruined them financially.

First off, everybody doesn't get the same choices. As I've said before, somebody who can prove they make enough money, has a history of paying their debt, and offers the lender a situation where there's 30 percent equity (or more) gets a different set of choices than somebody who can't prove they make enough money, has a questionable history of paying debt, and wants to borrow 100 percent of the property value (or more).

Second, different loans get different rate-cost tradeoffs. The loan that most people seem to consider the most attractive loan, the thirty year fixed rate loan, is always the most expensive loan out there. It always has the highest set of cost/rate tradeoffs. Why? Because on top of the cost of the money, you are essentially purchasing an insurance policy that says your rate will not change for thirty years. Even when long and short term rates are inverted there is a premium charged for the thirty year fixed rate loan. It makes a certain amount of sense; insurance policies are never free, and the thirty year fixed rate loan is the most desired loan out there. Simple economics: Higher demand equals higher price. Goods perceived as more valuable carry a higher price tag. So if you're looking for a thirty year fixed rate loan, and all you say is "What is your lowest rate?" you are likely to get quoted a rate from a Negative Amortization loan, the most toxic, least desirable loan out there, because it carries the lowest nominal rates. Even today with those gone, there are replacements which may not be quite so toxic, but are certainly nothing you actually want to be signing a contract for. If you want to argue with me, consider the meltdown we've been having these last several years caused by toxic loans. If interest rate (or worse, payment) is your only datapoint from the various loan providers you talk with, you are likely to do business with the one who quotes you the negative amortization loan, not the thirty year fixed rate loan. Matter of fact, the loan provider who tells you about the loan that you really wanted is least likely to get your business in this scenario, because you're focusing in on the red cape of rate and payment when you should be paying attention to other things.

Third, and most importantly, for every situation and every loan type, there is more than one rate available. Why is this, you ask? It seems obvious to you: Why not just choose the lowest rate, which has the lowest payment? It takes a little examination to see why.

The difference between the rates is in cost of the loan. There will be a rate called par. This is the rate at which the lender will loan you the money straight across. They don't charge you any money (discount points) to get a lower rate. They don't pay any of the costs of the loan. Getting a loan done really does take a minimum of about $3000 in closing costs (actually, that figure is for California, which believe it or not is one of the cheaper states to get everything done in - every other state I've done business in has higher closing costs), plus whatever the lender makes in order to do your loan. Whether points and closing costs are paid out of your pocket or added to your mortgage balance, you are still paying them. Indeed, when shopping for a mortgage, the phrase "nothing out of your pocket" from a prospective loan provider should immediately put you on guard.

For rates below par, you must pay discount points. This is an upfront incentive to a lender to give you a rate lower than they otherwise would. Every situation is different and should be analyzed with numbers specific to that situation, but as a rule of thumb: Unless you're getting a thirty year fixed rate loan and you have a history of keeping loans at least five years before sale or refinance, you should avoid paying discount points if you can, and accepting a rate with a bit of yield spread to offset origination is probably a good idea. The lower payments you get, quite simply, are usually not worth the cost of adding points to your mortgage balance. People who don't qualify for A paper may not have this option, but more people qualify A paper than think they do. These days, with true subprime essentially extinct, it's A paper, what professionals used to call "A minus" which is essentially for people who barely miss qualifying A paper, or nothing.

For rates above par, the lender will actually pay part or all of your closing costs. It's rare that they will actually put money in your pocket, but it can happen. Note that this is different from a stealth "cash out" loan that adds the cash you get to your mortgage balance, charges you closing costs, and often puts a couple points on the whole amount of your new mortgage, and so where you've been told you're getting $2000 in your pocket, there may be $20,000 or more added to your mortgage balance. This is where the lender is actually paying part or all of the costs of the loan, so it is neither coming out of your pocket nor being added to your loan balance. This is called a "yield spread" or "rebate". Yield spread can be thought of as the opposite or negative of discount points, and discount points can be thought of as a negative rebate. There are never both discount points and yield spread on the same loan, although there can be origination points on loans where there is a rebate. I still believe it's a material misrepresentation, but that's the way Congress and HUD now require it to be done.

Now here is the critical fact that most consumers never figure out for themselves, and certainly never realize the implications of: The vast majority of borrowers don't keep their mortgage loans very long. The median age for a mortgage was roughly two years when I wrote this and is still under 3 years. Fewer than 5 percent of all loans are five years or older. If you're the exception, bully for you. Otherwise, take heed and remember this fact: Whatever costs you pay for a mortgage are sunk at the beginning. This money either comes out of your pocket, or goes onto your mortgage balance. If it goes onto your mortgage balance it is even worse than paying it out of pocket because this money you owe sticks around a very long time and you pay interest on it. When you sell or refinance, (or when your rate starts adjusting), the benefits stop. They are over. Done with. If you haven't recovered the costs you paid to get a lower rate by that point in time, you have made a losing investment. Period. End of story. No chance for recovery. Matter of fact, even if you are technically ahead at that point in time, you can go negative later.

Let us consider a $270,000 loan. Smallish for California, but large in most other areas of the country. As I said earlier, real closing costs of doing this loan are somewhere in the neighborhood of $3400. Rates are lower now, but here are some real options that were available from one lender when I originally wrote this article:

You could do a thirty year fixed rate loan at par of 5.75 percent. Or you could get a one point rebate at 6.25, or you can pay one point and get 5.25 percent. Rates at this update are hovering right around four percent or a little lower but this is still a good example to use so I'm going to leave the original figures untouched.

Assume you roll any costs into your mortgage like most folks do. Your starting loan balance will be $276,162 if you choose the 5.25% rate. If you choose the par rate of 5.75%, it will be $273,400. If you choose the one point rebate rate of 6.25%, your balance will be $270,666. These are real examples off the first rate sheet I happened to look at.

Let's compute the linear break evens: The 6.25% rate cost you $666 to get (Closing cost less dollar value of rebate). You pay $1409.72 in interest the first month. The 5.75% rate costs you $3400, and you pay $1310.04 in interest. The 5.25% loan cost you $6162 (Closing cost plus dollar cost of discount), and you pay $1208.21 interest the first month. Difference in cost divided by difference in interest.

6.25% versus 5.75% loan: $2734/$99.68 = 27.42 months.

5.75 versus 5.25 loan: $2762/101.83 = 27.12 months

5.25 loan versus 6.25: $5496/201.51 =27.27 months.

Actually, the break even is likely to come a month or two earlier. But let's compute what happens if you refinance again into a 5% fixed rate loan for zero real cost right at breakeven time, 27 months. This makes the residual cost of the previous loan as low as reasonable.

The 6.25% loan leaves a balance of $263,241. When you refinance under this scenario, the new monthly interest charge will be $1096.84.

The 5.75% loan leaves a balance of $265,193. The new monthly interest charge will be $1104.97. The extra money on your balance costs you $8.13 per month, $100 per year. Plus you still owe almost $2000 more. Yes, you have technically broken even at this point because you saved that much in interest, but that benefit is gone into the past, while the extra money you owe and the costs of it are still with you.

The 5.25% loan leaves a balance of $267,104. The new monthly interest charges will be $1112.94. The extra money on your balance costs you $16.10 per month, $193 per year, from here on out. Plus you still owe almost $4000 more.

These are actually favorable assumptions compared to the real world in that they treat the 5.25% loan option much more kindly than it deserves compared to the 6.25% loan. Furthermore, the breakeven on buying a loan down is usually 3-5 years, a much longer period. Also, in this example I chose to wait to refinance until you had theoretically broken even, even though you didn't, really.

Most people have done this multiple times. $10 or $15 per month doesn't sound like a lot, but do it a couple times and you have $100 per month, and owing tens thousands of dollars more than if you'd gotten a cheaper loan that carried a slightly higher payment in the first place. I believe in offering choices, but I also know which I would recommend and choose for myself.

One point that needs to be made again is sometimes costs get built into the back end of a loan, via a pre-payment penalty. Most loan officers will not volunteer whether there is a pre-payment penalty, and many will lie even if you ask, just to get you to sign up, knowing that once you sign up you will likely consider yourself committed. This may not be legal, but it happens, and is another reason to read your loan paperwork carefully and shop several lenders. Reading the Note carefully at signing of final documents is the only way to be sure that there is no prepayment penalty.

The tradeoff between rate and cost is the most important fact of loans, and almost nobody pays attention to all the money they sink into the front end of a loan that they never get back via the lowered interest rate they bought with it. Instead, they refinance (or sell the home and buy another, requiring a new loan), and how they do this over and over again, adding thousands of dollars into their loan balance, needlessly and wastefully.

Caveat Emptor

Original here

Sooner or later, a pretty fair proportion of the population are going to get an offer for a much better job, but the catch is that job is located in another city on the opposite end of the country. What are the major issues relating to the mortgage?

Well, first off, the relocating spouse may not have the job until they actually report for their first day at work. Many times people are told "Go there and you'll have a job," and when they get there, they don't. So no matter how much time you have in that line of work, until you actually have the job things are iffy and you can expect loan underwriters to reflect that. The job offer letter may or may not get the job done - it usually doesn't. Usually they want at least an employment contract, sometimes (particularly A paper) the first pay stub as well. It can be rough, and a waste of money to rent, but over the lifetime of a loan with a higher interest rate, it may pay off to actually wait until you've got that first pay stub.

Now just because the one spouse has a job offer doesn't mean the other spouse will get a job in their field. Sometimes they work in a field where there is no problem finding work, like health care. Sometimes they work in a field where moving means they don't have a career, and they're going to have to start all over in some other field. If you worked in a distillery and you're moving to Salt Lake City, you're probably going to need a career change. If that job is similar enough to the one you left behind, that's cool. But if you used to be a bookkeeper and now you're a retail clerk, then you do not have two years in the same line of work. Chances are your family is not going to be able to use your income to help qualify for the loan. They are not going to be able to use it at all until you have a job that has income. Since this can take a while, you really might be better advised to rent for a month or two (or even six, if that's the shortest lease you can find). Of course, if one spouse isn't working and doesn't plan to, this isn't really an issue.

Next, there are the issues with the property in the old city. Many times, especially in a market like the current one, the property has not yet sold, becoming a drag upon your ability to qualify for a new loan. If you can rent it, that's certainly one solution, but most lenders will only allow 3/4 of the monthly rent to be used to qualify you for a new loan, but will charge all of the expenses against this. Considering that around here it can be tough to get a positive cash flow for a rental property, you can imagine how tough it is when your monthly income from the property is chopped by 1/4, and how much more you will need to be making, in order to justify the loan. Furthermore, there are caveats to whether the lenders will accept any rental income. Be damned certain there is a paper trail on everything: accept no cash - checks only and keep copies of those checks - and even if the rental is month to month, have a written rental contract.

Another thing is that most folks expect to be able to use the entire amount of the new salary to qualify, and that's not the way it works. If you made $6000 per month for the past two years, one month at $9000 isn't going to move that monthly average income up very much. The computation is done on a weighted average basis - you've got 23 months at $6000 per month, or $138,000, and 1 month at $9000, which when added makes for a grand total of $147,000, or about $6125. When it was available, often newly relocated folks had to settle for sub-prime loans when they are normally A paper so that they could use bank statements or something else to qualify. Stated Income is also dead for now - only certain types of lenders can offer it, and they were getting so much as a proportion of their total loans that they stopped offering it. I don't know of a single lender that's actually funding stated income currently.

Showing enough of the right income - and a paper trail to document it - has never been so critical to those wanting a loan so that they can buy a home. In cases of relocation, it has become necessary that you pick a loan officer and work with them to dot all your i's and cross all your t's before you apply - lest you go through the entire process only to find on moving day that you have no loan.

Caveat Emptor

Original here

"What mortgage fees can i recover after loan denial" was a search I got. The answer is basically, "None."

The only thing that should be charged up front is a credit check, which costs about $20, and you should be prepared to spend that $20 several times over while you're shopping lenders. If you're worried about twenty dollars when you are applying for a mortgage, chances are that you shouldn't apply.

Once you have selected a provider, however, expect to pay for the appraisal before it is done. The new appraisal code of conduct means that they are going to get paid for any appraisal done. Loan providers have zero control over the appraisal process, and once ordered, no avenue of appeal if the value is low, while being obligated to pay that appraiser. This means every loan company out there has had to make a bleak choice: Decide whether to charge an upfront deposit, or jack up their margins so that the people whose loans close and fund pay for the appraisals of those that don't. As I said in Loan Providers Offering to Pay For The Appraisal, this means that those companies that offer to pay for the appraisal (i.e. choose to jack up their prices) will make more. Your choice as to which to deal with, but either way you choose, you will need to do upfront due diligence. My choice has been to require payment for the appraisal before I order it. I don't like doing this but I like the alternative of charging those clients who stick enough to pay for the clients who don't even less.

Deposits were historically charged by lenders who want to get you committed to the loan, and they do it for at least two reasons. The first is psychological commitment. Usually when I mention things like that, I get people who immediately come back with, "Those kind of mind games don't work with me!" I'm not looking for an argument, and with most folks, I don't know their past history well enough to come up with an example, but this phenomenon is essentially universal as far as humans go, and those few not subject to it are probably suffering from some other more debilitating psychological problem. In fact, the normal progression of a loan is a series of commitments upon your part. The decision to talk to potential providers. The application.

After the application, lenders want the originals of your documentation and money. The original documents are requested so that you cannot shop or apply for a loan elsewhere. I, as a loan officer, do not need your original documents for anything I can think of. I need the original of the loan application and a couple other items you fill out with me, but not of your pay stubs, your taxes, your insurance bill, or any other documents you have pre-existing. Copies are just fine for any lender I do business with, so long as they are clean and readable.

The next step is to get money out of you. If all they want is the credit report fee of about $20, that's fine and normal. Credit Reports cost money, and if you're just shopping around, a loan provider has two choices: raise their loan prices slightly so that they charge those people who finalize their loans more, or charge folks whatever the cost is to run credit when they apply.

But many loan providers want more than the credit check fee. A lot more. They want a deposit that varies from several hundred dollars to one percent of the loan amount, even two percent in some cases. They might say it's for the appraisal, and usually at least part of it does go to the appraiser. I used to say that you should not give it to them, but the standards behind that advice are changing. I've had my clients tell me about the tales they've been told, about how that money is to pay the appraiser. The best thing for consumers is that the appraisal should be paid for when the appraiser does the work. Unfortunately, the new appraisal rules prohibit the consumer paying the appraiser directly, and require the lender to pay the appraiser (as well as preventing the lender from firing bad appraisers). As I've said before, you want to be the one who orders the appraisal, and therefore controls it. Unfortunately, the new standards completely prohibit this consumer advantage. An appraisal done under the old way of business will cause it to not only be wasted money as it is unacceptable, it stands a good chance of costing a lender their ability to do any business. Therefore you may have no real choice but to put a deposit for the appraisal up-front. But don't give the lender any more than the appraisal money.

The reason they really want larger amounts of money out of you upfront is two-fold. First, it builds that psychological commitment I talked about a while back. Second, it makes you financially committed to a loan, which tremendously raises the level of psychological commitment. It means they've got some of your cash. Most people don't really understand loans, not deep down where it really matters. Consider, for a moment, which you would rather have: $400 cash, or a loan that costs $5000 less (not so incidentally making a difference of $25 on the monthly payment), but is otherwise identical. Dispassionately sitting there on the monitor in front of you, the choice seems obvious. You're going to have to pay that $5000 back sometime, and in the meantime you're paying interest on it. But move it to a situation where these potential clients have already put down a $400 deposit with an overpriced loan provider, and the vast majority of them won't sign up for my loan. Why? Because they're thinking of that $400 in cash that came out of their checking account, not the $5000 in extra balance on their mortgage. Companies want that deposit to stop you from going elsewhere, to a loan provider that can do the loan (or, more importantly, is willing to do the loan) for much less money. Practically speaking, they're not only guaranteeing themselves a certain amount of money, they are guaranteeing that the client won't change their mind about their loan.

So do you get it back if the loan is denied? Nope. At least I've never been told about an instance where it happened. That money was a good faith deposit. Legally, it was an incentive for that loan provider to do the work of that loan, all of which costs money. Provably costs money, I might add. The loan processor doesn't work for free. The underwriter doesn't work for free. The escrow officer doesn't work for free. The appraiser doesn't, the title company doesn't. Nobody works for free. Phone calls and copies and word processors to generate all of your documents from the title commitment to the loan documents. Some documents are the same for every loan and can be computer generated. Others, like the title commitment, require humans to enter literally everything on them.

But a deposit for more than appraisal and credit report isn't necessary. In fact, you can find loan providers out there (I was one of them, and would like to be again, but while I can blow off a $20 credit check if the loan doesn't fund, I don't make enough money off loans that fund to enable me to pay for $400 plus appraisals that don't) who routinely work the whole loan on speculation of it funding. They might ask you to pay for the credit report and appraisal up front, but everything else is paid for when the work is done and the loan funds. I would much prefer that you write the check to the appraiser when they do the work, but I can't legally do that any longer. You might ask the advantages to the consumer of this. That advantage would be that these loan providers are not holding your money hostage. This means that if the loan falls apart because the loan provider told you they could do the loan and they couldn't, they're out the money, not you.

As of this update, the law of getting loans has changed a lot in the last few years, and it's to the advantage of the banking and other interest groups, not the consumer. Look to the people in charge of Congress for the reason. Furthermore, the lenders are instituting more changes because they can, now that there are a lot fewer lenders and less competition. I'm not happy about any of this, but even the best loan officers have two choices: Adapt as best we can, or find a new line of work. If the best loan officers trying their hardest to help consumers leave, ask yourself what would be left?

So if a loan provider asks for a large cash deposit up front to begin the loan, chances are that you shouldn't give it to them. Chances are they are trying to lock you into their loan by holding your money hostage, and when you discover at closing that they tacked thousands of dollars onto the loan charges that they conveniently "forgot" to tell you about or pretended didn't exist ("Escrow's a third party charge. We don't have to tell them about it until afterwards"), and now you are facing a choice between forfeiting your deposit and signing off on a loan that's not what you agreed to when you gave them that deposit. Better not to face that choice, by not agreeing to pay anything beyond the credit fee up front, and the appraisal when ordered. The purpose of this article is to help you understand - before you sign that loan application and fork over a deposit - exactly what your choices are and the possible consequences to you.

Caveat Emptor

Original here

Since May 1, 2009, we've been having problems with appraisals like never before. It's an interesting case study how the attorney general of one state used threats to blackmail a nationwide industry, installed personal controls and opportunities for graft into that industry, added a layer of overhead and administration increasing costs to consumers, decreasing compensation for appraisers, and many other things. Everybody in the industry - appraisers, loan officers, etcetera - agrees that this is one of the most misbegotten abominations to come down the pike in the political "let's pretend to do something to fix the problems without goring the ox of any major campaign contributors" response to the lending meltdown. The only people who don't hate it are the appraisal management companies.

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 final rule is here.

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 since May 1, 2009. 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) had 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 - just covering the fact that it applies to brokers too. 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 who paid for it (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." This is nonsense (to be polite). 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 used to have a couple of appraisers I had 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've had 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 (and thereby losing the ability to do loans with Fannie and Freddie) is not to discuss anything with them verbally. I have stopped meeting appraisers, and am only communicate a bare minimum of information through things like email and facsimile, and I'm advising my clients not to be there either. I have 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, or actually, appraisal management companies, have 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 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 the de facto law of the land. Every loan officer has 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.

The appraisers were pushing for this, but appraisers didn't come out all that well by it. 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 able to attract business any more. It's all 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 making 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 any more of 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.

Caveat Emptor

Original article here

"I am married but want to refinance my house only in my name. What do I have to do?"

Most lenders policies require the property to be titled in a compatible manner to the loan. Some few do allow the spouse to be on title and not a party to the loan, in which case they will be required to sign the Trust Deed, although not the Note. Most lenders, however, will require that if you are the only one on the loan, the property be titled in your name exclusively. So your spouse will be required to sign a quitclaim to "Jenny Jones, a married woman as her sole and separate property" (Or "John Jones, a married man as his sole and separate property). If you don't like the title being this way, that's fine and don't sweat it. You can quitclaim it back to "John and Jenny Jones, husband and wife as joint tenants with rights of survivorship" as soon as the loan records. What matters is that the people agreeing to the loan, as of the moment the Trust Deed comes into effect, is reflected in the official title of the property.

For those intelligent individuals whose property is in living trusts, this is also a common feature of getting a loan on the property. The lender will usually require it be quit-claimed from "John and Jenny Jones, trustees of the Jones Family Living Trust" to either the sole individual who qualified for the loan, as in the previous paragraph, or to "John and Jenny Jones, husband and wife as joint tenants with rights of survivorship."

All of that is the easy part. Now comes the hard part. If one spouse wants to be the only one on the loan, then they must qualify on their own. Only their income may be used. However, since most debts in a marriage are in the names of both partners, typically they are going to going to be charged for most debts on their qualification sheets. This really is no big deal if that particular spouse is earning all of the money anyway, but in most cases these days, both spouses are working, and they want to buy the biggest home they can, so it can be difficult to qualify them for that home based upon the income of only one spouse. Here's a typical scenario: He makes $5600 per month, she makes $5000. They have two $400 per month car payments and $120 per month in credit card minimum payments. But he has rotten credit, so they are hoping to secure a loan on better terms. By A paper full documentation guidelines, she only qualifies for a PITI payment of $1330 ($5000 times 45%, minus $920), which might get a one bedroom condo in a not so hot area of town. So then they have to go stated income in order to qualify for the loan on the home they really want - and stated income loans are dead, at least for now. As a couple they qualify for payments of $3850 ($10,600 times 45%, minus $920), which will get a decent single family residence in an okay area of town. You, the readers, can guess which of the two properties the average couple in this situation is going to shop for. Unfortunately, if they can't use his income, they don't qualify for the property they want. This is a real issue, especially if they went and got a prequalification from someone who figured both of their incomes in the equation, so here they are with a purchase agreement and they can't qualify like they thought they could. This is one reason I've learned never to trust someone else's prequalification of a buyer, because in this situation, the only way to make it happen is to put John, with his rotten credit, on the loan. Because he makes more money than Jenny, he will be the primary borrower, and so the loan will be based upon John's bad credit history, not Jenny's above average FICO. There used to be ways to potentially get around this, but the lenders have closed pretty much all those loopholes (and then some...) and so John and Jenny often don't qualify for the loan amount they need for the property they shopped for. Better to get John's credit score up where he will qualify for a good loan beforehand, of course, but usually these folks want a loan now so they can get this home they've already signed a purchase contract on. The ability to improve credit scores in a short period of time is limited, and it's even more limited if John and Jenny are short on cash, which is usually the case.

These can all be issues with the spouse who makes less money, also. Reverse the incomes, so that John, with his bad credit, makes $5000 per month and Jenny, with her good credit, makes $5600. So at least Jenny is primary on the loan now but that doesn't help a whole lot in the A paper loan market, where both borrowers have to meet the same standards.

Now, in point of fact many borrowers these days are ones that have settled upon a property before they even considered a loan, and are determined to get that property no matter what they have to do. Alternatively, they may have talked to someone about loans who gave them a budget which was in fact accurate, but they liked this property so much that they are utterly ignoring that budget. Such people are going to end up with bad loans or, more likely today, no property and a forfeited deposit. They want more house than they can really afford, and they want it now. When first I wrote this, I could get the loan for them, any competent loan officer could have gotten the loan for them, but there would be consequences down the road, because there are still those pesky payments they have to make (or negative amortization that builds up. Or both). A loan you cannot afford is a course for disaster, and the longer you're on it, the worse the disaster gets. And the lending standards now are much more paranoid on the lenders part. The Era of Make Believe Loans is over.

Another thing that bites a fair number of people is divorce, where one ex-spouse figures that because he (or she) qualified all by themselves so they should be able to make the payments all by themselves. But the loan officer back when they originally bought used stated income without telling them, and once that other income is gone, it turns out that they can't make the payments. Not only can they not make the payments, they cannot qualify to refinance now, even as a couple. Typically, most people live in denial about this for way too long, ruining their credit to where they can no longer qualify for the loan on the lesser property they would have been able to get if they had done the smart thing and sold as soon as they figured it out in the first place.

One spouse qualifying for a loan on their own has some real issues to be aware of, and that will turn and bite you if you're not careful enough.

Caveat Emptor

Original 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. 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

Original article here

I read with great interest you article on the internet about pre-payment penalties. I find my self in a situation involving a pre-payment penalty and would appreciate your advice on this. I currently have a loan in which the prepayment penalty is up on DELETED. I have gone to another lender for a refinance and have been approved for a loan. Since this loan process occurred before the pre-payment penalty was up, my current lender has included it in the payoff demand information. My new lender has approved funding a loan with this penalty ($12,000) included. Documents are scheduled to be signed DELETED and the loan will be funded (13 days before the penalty expires). If I try to push back the date of my loan, my interest rate will go up, and I may not even qualify for a new loan since my FICA scores have dropped. My intention is to go through with the loan and have the loan person hold onto the payoff check until DELETED, after the pre-payment penalty has expired. I will then request a refund of this amount from my current lender. Do you think this strategy is viable or can you suggest an alternative without changing the the time schedule or amount of my new loan?

Doing it your way is okay if you want to pay the penalty and are willing to pay interest and points and everything on the extra. If not, just have your loan provider get a rate lock extension. You'll pay about roughly a quarter of a point in fees, but that's less than the interest - or the penalty. Have your new lender get a payoff demand valid from expiration of the pre-payment penalty forward.

Your new lender is not going to tolerate being second in line for several weeks. Until that previous trust deed is paid off, the loan to value ratio is higher than their underwriting allows, and I'll bet that debt to income ratio is as well. Suppose there's a fire during those two weeks? Is there enough money in the insurance to pay both of them? The answer is no. Until that prior loan is paid off, the value of the property is exceeded by the loans against it. This is the purpose of escrow - and there's escrow in a refinance as well as in a purchase. You don't get that check - you only get what's left over after escrow does their job, which includes paying off the prior lender.

As to your personal situation, why has your FICO dropped? Credit scores don't drop without a reason, and one credit check isn't going to make that much of a difference. Basically, it looks like your lender is trying to make more money off you, and feeding you a line of nonsense to facilitate it. By boosting the loan amount, their compensation in the form of origination and yield spread rises. Okay, so 1% of $12,000 is only $120 - but that's $120 more for basically the exact same work. Not to mention the loan is funded now and they get paid now. Loans that are finished don't fall apart. I'd bet millions to milliamps that they're intending to fund your loan before the penalty expires. If they weren't, there's no reason to have you sign loan documents that early. I wouldn't have you sign until your right of rescission runs out concurrently with your penalty.

From the information given, this is not likely to be a lender with your best interests at heart. About the only thing I can even think of where it might be in your interest is if there's a notice of default or trustee's sale looming - and then we have to consider whether paying that penalty and all of the costs of the loan is really in your best interest. And since you didn't say anything about either one of these situations, I have to question the wisdom of basically volunteering to pay 6 extra months of interest plus loan costs. In this loan environment, I just have trouble believing that the new loan is going to save you that much money over the course of the time you are likely to keep it, let alone over the two weeks early you're paying it off. Even if you're at 8% now and moving to a 4 percent thirty year fixed rate without points, you're spending $12,000 you don't need to in order to fund 2 weeks earlier. It's basically impossible to construct a realistic scenario where paying that penalty is in your best interest. And yes, rates are going up, but neither I nor any other analyst I read is expecting that much higher, that quickly - even if your rate isn't locked, and rates that aren't locked aren't real.

Rate lock extensions cost money. But sometimes they're still the smart thing to do. In your case, it's spend approximately a quarter of a percent of your loan amount (depending upon lender policy), or three to four percent for six months interest that I can't see any compelling reason for you to owe.

Caveat Emptor

Original article 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 a few 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, albeit for mostly unrelated reasons. 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 why the backup loan is dead - even I can't do them any longer. 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 suddenly became 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" did not used to be a factor if the buyer's agent knew what they were doing. This has changed because the new appraisal standards are a disaster for consumers, loan officers and appraisers, and only good for corporations in the appraisal management company business. It's a bad news/good news/horrible news situation. The bad news is that good ethical appraisers and good ethical loan officers basically can no longer develop or keep 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 of the relationship, and the good ones are going to complain. The horrible news is going to be that there is nothing that good loan officers can do about rotten appraisers. If you don't think this doesn't have consequences, let me know - I need a good laugh these days. The appraiser's professional organization has learned the hard truth about being careful what you ask for, as appraisers are making less despite appraisals being more expensive, and it's not the careful and honest appraisers who are getting the work.

When I first wrote this, "Borrower didn't qualify" was 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. It's been a long time since the necessity of buyer's agents consulting a loan officer before you make a purchase offer began, 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 that letter 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 honest about it. The less ethical ones are continuing to give you the same snowjob you've always gotten from them.

One of the practical effects of this is going to be to essentially kill online mortgage quotes as being of any actual 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 have made 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, and those who believe otherwise are fooling only themselves.

Caveat Emptor

Origianl article here

People are understandably hazy on the difference between pre-qualification and pre-approval. Pre-qualification is a non-rigorous process whereby somebody says that based upon the information as presented to them, it appears you'll qualify for the loan.

Pre-approval should be more rigorous. For A paper, it should mean that you have documentation of income and assets acceptable to loan underwriters, and then taken the information off that documentation, including qualifying rate, income information, credit information, etcetera through one of the automated underwriting programs, and it has come back with an "accept". All that is needed is the actual information on the property, and the actual underwriting.

Due to the nature of the loan and real estate market, very few people actually get a pre-approval. Why? It costs money to do all of that, and takes a lot of time. Furthermore, it's based upon a qualifying rate. If rates go up, you have two choices: live with a higher rate or pay more money to buy the rate down, and sometimes no matter how much money you pay, the old qualifying rate isn't available. You can't lock the loan with any lender that I am aware of until you have a specific piece of real estate, so your rate will float between pre-approval and a fully negotiated agreement to purchase. Nor is the fall-out rate significantly lower for pre-approval as opposed to pre-qualification.

Furthermore, people have an unfortunate habit of stretching to the very limit to buy more house than they should. If you attempt to build in a little margin on the pre-approval, you're going to qualify them for less money than someone else.

With sub-prime lenders, they don't have Fannie and Freddie's programs to fall back upon, and if Fannie and Freddie will approve you, you shouldn't be getting a sub-prime loan. So in most cases, they have to go through essentially a full underwrite of the file, and agree to pay a cancellation fee if you don't fund within X number of months. Remember also what I told you about having an underwriter do part of their work now, part later. Every time they pick up that file is a real possibility that they will find something wrong that is a good reason not to fund the loan, or imposing a condition that the borrower cannot meet. Result: Dead loan, and in this case where you thought you had it covered, it really ticks off the client, understandably so. I'm a correspondent broker; I can always submit elsewhere, but direct lenders are stuck, and the client doesn't exactly like paying that cancellation fee, either.

Many seller's agents are getting tired of getting metaphorically left at the altar because a preapproval and pre-qualification mean so little, and are starting to demand a lenders letters with special conditions accompany their offers. I do sympathize with their plight, but that doesn't mean that the solutions they are trying aren't illegal under RESPA or even merely Counter-productive. Loan standards are way too tight right now, unsustainably so in my opinion, but that doesn't change the fact that agents have to obey the law and really need to learn what loan standards are. I submit an offer on behalf of a client, they are required to submit it in any case. Most seller's agents wouldn't know what a qualified buyer was if it bit them. Income documentation? Credit Score? Debt to income ratio? They are happily clueless, and they don't know how to negotiate for an appropriate deposit, with appropriate controls on who gets it and when. Furthermore, they don't want to drive off potential buyers, although this is exactly what most of their tricks do. A good buyer's agent knows better in this current market, but on the other hand they don't want to waste time with an unqualified buyer in the first place, and many of them have no more clue than listing agents what a qualified buyer looks like.

I've told you before that a large number of listing agents are lazy clods whose skills are mostly limited to getting the seller's signature on the listing agreement. They don't want to do the work more than once, and will drive off willing buyers who actually are decently strong, hoping for someone like King Midas to roll in so they only have to do the work once. Never mind that if they do it right, most of the time the clearances and such only have to be done once. But in the current market, driving off any willing buyer with a decent chance of qualification is a good way to have the property sit for months. if not have the listing fail altogether. Every so often, when I'm calling around to check about showing properties, an agent will tell me that they have two offers. Sure you do, Mister. After it sits for six months, suddenly two separate groups decide it's worth buying when everything else on the market is languishing? If the two offers are real and not a figment of someone's imagination, neither one of them is good, or it would have accepted it and the property would be in escrow. If such offers are real, they're desperation checks from the sharks.

But even in a seller's market, requiring illegal pre-approvals is counterproductive, and may mean that you are disallowing the person who would give you or your client the best offer, and are very likely to be a well-qualified buyer. Yes, it may stop you from dealing with some of the "riff-raff", but the work it saves you could cost your client thousands of dollars, and you signed on to do that work. So if you're a potential seller, ask questions about this potential situation.

Caveat Emptor

Original here

Just like "we'll beat any deal!" in any other competitive sales endeavor, this is a game. Actually, it's even more of a game for loans than it is anywhere else, used cars included. What they are hoping is that you'll go there last, and tell them what the best thing you've been quoted, and then they can sell you on their loan and most people will go with them, because "we're here, not there."

The first issue is that anyone can give a low quote. It's like the old joke, "Your lips are moving." Unless they guarantee that quote, that's all they're doing: flapping their gums. All a quote is is an estimate, and I've more than adequately covered the games it is legal to play with a Good Faith Estimate (or MLDS in California). By itself, A low quote means nothing. Loan officers can, legally, quote you one loan and deliver a completely different loan at a completely different rate with a completely different (higher, or course) closing cost. This has become a little more difficult with the new rules for the 2010 Good Faith Estimate, but there are still loopholes you can steer a supertanker through and the people who practice bait and switch are very good at hitting those loopholes.

The second issue is that even if they are quoting a loan they intend to deliver, unless they are quoting to the exact same standard, the quote game favors the lender who pretends third party costs don't exist, who pretends that you're not going to pay for add-ons that you are going to pay for at the end of the process, the lender who quotes based upon a loan that you do not qualify for. Are you going to pay these costs? Absolutely. Would you rather know about them at the beginning, so you can make an informed choice, or get blindsided at closing (assuming you even notice)?

The third issue is that they are looking for safe harbor, and they're hoping you give it to them. If someone brings them everyone else's quotes, they know what everyone else has talked up, how big the lies are that the prospect has been told, and they just have to tell one that's a little bit better. This is trivial when you've got all that information you've been freely given. This is called false competition. You've metaphorically given them a mark, and told them to "tell a more attractive story than this one." Easy enough in a storytelling context - tell the same story with a little more sex - and even easier with loans.

A good loan officer has no need to know what quote you've been given to tell you what the best loan they can deliver is. Tell them to quote you the best loan they can without this information. Ask them if they'll guarantee that quote, because a quote that isn't guaranteed - as in they pay any difference, not you - is worthless. That's how you can choose the best rate that can really be delivered, not by allowing someone the advantage of knowing how much they have to lie to get the business.

Caveat Emptor

Original article here

I found you on the Web after doing some research for my parents regarding short sales and foreclosures. I appreciate your straight talk regarding the whole loan and real estate process which I know they find incredibly intimidating. Right now, they're sort of putting their head in the sand regarding their financial problems. I have been trying to help them stay afloat but it's becoming tight. My mom received a default letter from the lender last week since she was two months behind. She sent one payment last week and I wrote a check to her lender for this month's mortgage to bring her current. I told her I couldn't do this again. She wants to walk away from the house, I told her "bad idea." My parents can't make the payments anymore and I am wondering if they should sell or refi. Here are the stats:

They've got a 7% fixed for three years which they are about a year and a half into. The payment is plus or minus $3100. The mortgage is $468,000 with a $12,000 pre-payment penalty. I don't know how they got into this mess but seeing her struggle and cry each month is something I can't watch anymore. My father and she (they're in their early 60s) have 2 pensions and 2 Social Security payments they receive each month. They make enough to make their house payment but not enough to cover all the other bills. My mom's logic is - "If I didn't have the house payment I could pay my bills." I tell her that her home is more important, and looking at your articles it seems to me the consequence of not making your mortgage if far worse then not paying credit card and car loan debt. Their credit is good but they don't want the house because the mortgage is so high. They talk of renting but I am afraid if they walk away from the house-the consequences will be dire.

In your experience is their hope? I've offered to refinance with them, the three of us, but would that help? I already own a home with my husband - I imagine there are occupancy restrictions? I have good credit. If they sell, it would be short with the pre-payment penalty. Are their agents that would sell the house? I can't imagine they'd want to since there would be no money for a commission.

Here's the real crux of the matter: These folks owe $468,000 and have a payment of about $3115 at a seven percent interest rate. Those are cold hard facts. As of this writing, there just aren't any loans out there that will help them enough to be worth paying that pre-payment penalty. There are loans that would make it appear as if they can afford the loan for a while longer - with even more dire long term consequences. Someone could boost their interest rate by maybe a quarter of a percent in order to cut their payment slightly with an interest only payment - but then the hole would stay just as deep as it is, and all interest only payments eventually start to amortize. The longer it is before this happens, the worse the payment shock when it happens. Most interest only loans adjust upwards on the rate at the same time. Sudden forty percent increases are nothing out of the ordinary. Even a longer amortization isn't going to help very much - even assuming the interest rate doesn't change, by the time you add that prepayment penalty in there, you've got a payment of $2982, even assuming no loan costs or fees get rolled in.

The point I'm trying to make is that I can't see a way for them to really be able to afford this property. Matter of fact, I have a very hard time believing that the agent and loan officer who sold them on this situation didn't do something both illegal and unethical along the way, and your parents should consult a real estate attorney about that. Nor is refinancing with you on the loan likely to help. As of right now, despite the fact that rates are about tied for the lowest in the last fifty years, there just aren't any loans enough better than what they already have to be worth paying both the pre-payment penalty and the cost involved, especially given the circumstances that they have major hits to their credit situation with the late payments. Not to mention the fact that the appraisal is going to be problematic, even more so now than when this was originally written. Sure, there are still appraisers willing to say that property is worth $500,000 when it isn't, but they're a lot fewer, and the one positive thing the new appraisal standards now implemented have is making it very difficult to direct loans to compliant appraiser (the greatest negative from consumer point of view is I can't direct them away from utter incompetents, either). And if you can't afford to make their payment as well as your own, putting yourself on their mortgage is a good way to sink your credit as well as theirs. Then you have problems down the line with your own property.

I sympathize with these folks and you, but the only way they're likely to get rid of unaffordable mortgage payments is to get rid of the property. Unless, of course, they've got enough cash sitting around somewhere to pay their mortgage down enough to make it affordable. However, if they could do that, why didn't they put the money in as a down payment? I'd need more information to be certain, but I strongly suspect that it's time to own up to the truth, which is that they have purchased too much house (or taken too much cash out) and they cannot afford it.

With that said, "walking away" is just about the worst thing you can do in most situations. Now the lender has to go through the whole dreary process of foreclosure, with is going to effectively kill their credit for seven to ten years, and might cause the interest rate on any other debt they have to rise as well as making it more difficult to rent. They need a lawyer to advise them on their situation. Anyone in this situation needs a lawyer, and I'm not a lawyer. With that said, the following options are usually better:

You can talk to the lender about the situation. They don't want to foreclose. They don't make money when they foreclose. In fact, they lose it by the railroad carload. If it'll keep them out of foreclosure, chances are good that the lender will agree to a temporary loan modification of the note which will give your parents time to sell the property. They may or may not agree to accept a short payoff as well. It'll depend upon the listing agent and the lawyer. And yes, banks will usually agree to allow agent commissions in short payoff situations - it gets the property sold, which means they lose less money than if it goes all the way through foreclosure and they have to hire an agent anyway.

Another option that can be worth exploring is the Deed in Lieu of Foreclosure. This is where you sign the property over to them in satisfaction of the debt. It has the advantage that it stops future hits to credit. Although Deed in Lieu is itself one of the deadly sins according to mortgage providers, it's not as bad as a Trustee's Sale in most cases, and you don't have all the individual derogatory reports of the late (non-existent!) payments between now and whenever the Trustee's Sale happens.

One thing to warn of is that all of this, except perhaps for the Trustee's Sale, is the cause for a 1099 to be issued for income through debt forgiveness. Your parents will probably owe taxes on this money, so I strongly advise them to consult a tax professional as well (As best I recall, it's ordinary income, the same as if they had earned it working). In some cases, there may be a deficiency judgment as well, while in others there may not be. Nonetheless, this money is likely to be for a much smaller amount than $468,000, so they can probably dig themselves out, given time, and without living completely poverty stricken and without completely torpedoing whatever financial future they may have.

I know you wrote to me as a loan officer, but with the rates and loans available right now - especially considering the late payments on the mortgage - there's nothing the loan officer can do that actually helps, although there are a lot of loan officers out there who would say they'd help. If they were sitting in my office, it would be time to put on my Realtor hat and talk about selling that property. I wouldn't be happy about it, but the universe doesn't particularly care about making me happy, and it's the best way I see out of a bad situation.

Caveat Emptor

Original article here

It seems every week I get asked about some new or revived trick that loan providers are pulling. The one thing they all have in common is that they are methods to avoid competing on price. What the basic terms are and how much it will cost you.

The first big weapon in the arsenal of most bad loan providers is the tendency to most folks have to shop loans based upon payment. Payment has no intrinsic relationship to interest rate, which is what the money is really costing you. But if you do tell people "$510,000 loan for $1498 per month" most people assume that payment covers the loan charges even though it doesn't. People who can afford $1500 per month payments go buy $510,000 properties based upon these payments, and only after they've signed the papers do they figure out that the catch is their balance owed is increasing by $2500 per month! negative amortization loans are the obvious problem here, but less ethical loan providers also use this fact to push interest only loans and temporary buydowns and loans that cost so much in discount points that it would take fifteen years to recover the cost through lower payments - and that is based upon straight line computation, not taking into account the time value of money.

The second tool bad loan providers use is the desire of most folks to get something for nothing, or at least appear to get something for nothing. This covers not only Mortgage Accelerators, but also Prepayment penalties and biweekly payment schemes and even debt consolidation. They show you an actual method whereby you might hypothetically have your mortgage or debts paid off in a fraction of the time and without apparent discomfort or compromising your lifestyle if you fit their profile and stick with their program. The slight of hand here is two-fold. First, these are distractions, and if you examined competitive products, you can tack these allegedly neat features onto just about any loan or do it yourself, while they're acting like their programs are somehow unique when they're not. Second, these programs see the lion's share of the benefits at least five years out - when for all practical purposes, nobody sticks with the program that long. I lumped pre-payment penalties in here, because they are an often hidden charge that brings the lender more money down the line when you refinance before it expires, or immediately when they sell your loan on the secondary market, but they don't show up anywhere on the loan paperwork as a figure in dollars you are being charged. at the time you agree to the loan. Nonetheless, most folks who accept pre-payment penalties end up paying them, and they are real dollars you end up paying.

The third tool in their arsenal is: If the cost of something isn't explicitly disclosed, most people will assume it's zero. If there's not an actual dollar figure associated with something, many people think it's somehow free. Many loan providers feel no need to disclose escrow charges, or lenders title insurance, among others. They'll mark it "PFC" as if they don't know how much it's going to be. The net result, as I've said before, is that you end up thinking that "$2495 plus third party charges and two of these points things" is cheaper than the provider who tells you they're going to deliver the exact same loan for $6000 all told (on a $300,000, loan, you're looking at over $10,000 worth of charges from the provider who didn't quote a total figure in dollars. People gripe about "junk fees" when the costs are real, but they've been deliberately lowballed. There never was a chance that they would end up not paying those fees - and they're high dollar value fees - but by not associating a dollar figure with these fees, less than ethical providers are causing people to think they're either free or something comparatively small, like the $2 per tire waste disposal fee.

All of these tricks feed upon ignorance. Ignorance of what they are really doing, ignorance of how financial markets work. The fact of the matter is that nobody is going to do a loan for free. There's a hard line where it's not worth my while to do a loan - I'd rather spend the time doing something else. Same thing with every other provider in the known universe. For some providers it's more than others, while for other providers, it's less than average. Everyone wants to make more money for the same amount of work. Competing on price is not a way to get a high number of dollars per loan - so many loan providers will do everything in their power to avoid competing on price. But there really isn't any other reason to choose a loan, other than that it's offering the same terms at a better price. A loan is a loan is a loan, as long as it's on the same terms at the same price. It's not like one loan is a Jaguar while another is a Prius and a third is a Mustang, or one is a Craftsman while another is a Colonial and a third is a Cape Cod. The only intelligent reason to choose a more expensive loan is if there is some facet of your financial situation that means you don't qualify for the less expensive loan. Unless lenders pull a major policy change in the middle of your loan process (as happened at the end of January 2009 - luckily I didn't have anyone in process who was suddenly unable to qualify), your loan officer should know what those are, and quote you an appropriate loan that you can qualify for in the first place. Many don't, but they should.

Because they don't want to compete on price, loan providers have a long list of gimmicks and irrelevancies they use to sell loans. Whenever the consumers figure out the problems associated with one, they come up with another or start pushing something else that consumers in general have forgotten about. Comparatively few people will do the research necessary to test the real value of these gotcha loans. They seem to be afraid that if they investigate, the value will somehow disappear. In reality, the vast majority of these come-ons (especially the heavily advertised ones) have no value in the first place. The ones that really do have a value to the consumer will survive scrutiny.

There is no magic wand to make loans more affordable. Not in reality. There is a reason why the thirty year fixed rate loan is the standard for consumers and lenders, and why moving away from it carries costs or risks or both. There are many valid reasons to choose another loan such as a 5/1 hybrid ARM or a fifteen year loan, but they are based upon accepting risks or costs or reduced benefits in order to get a lower cost of money.

Loan providers that don't compete based upon price compete based upon hiding the gotcha!, or pretending it's not important. If you understand the gotcha! associated with a particular loan, and are fine with it, that's great. If you don't understand the gotcha! chances are that it's going to bite hard.

Caveat Emptor

Original article here

Somebody asked, "What are my legal options when there's a change on a good faith estimate."

Short answer: Sign the documents or don't. Same thing with a Mortgage Loan Disclosure Statement here in California. Neither one means anything binding; that's why they call the one an estimate. Nonetheless, because there is a perception that they mean something, that people think the lenders are trying to disclose everything fully. The fact is that some are while others aren't, and there is no correlation with size of the lender, how well known they are, or even what the loan officer at the next desk over is doing.

The fact is that if the loan officer cannot persuade you to sign up with them, there is a guarantee that neither they nor their company will make anything. This creates an incentive to tell you whatever it takes to get you to sign up. Once signed up, most folks consider themselves committed or bound to that lender, and stop looking around.

But the only documents that mean anything, legally, all come at the end of the loan process. Note, Trust Deed, HUD-1. So you can see the motivation exists to pull a bait and switch, or more often just not to tell the whole truth. Nor will they point out the differences at closing from what you signed up for. That would get you upset to no good purpose, from their point of view. The fact is that a majority of borrowers don't take the time to spot the difference, and of those who do, some just don't understand how to spot the difference. Of those who do take the time, and do spot the difference, most will cave in and sign just to be done with the process, and of course there are those who are trying to purchase who won't get the property and will lose the deposit if they don't sign.

The fact is that these forms are estimates. They may or may not be accurate estimates. In some cases, the loan provider tells you about every single dollar you're going to need up front, in others they might as well be telling you the loan is going to be done for free at a rate two percent below any real loan out there. If they can't get you to sign up, they don't make anything, so the incentives are for them to over-promise and under-deliver. In other words, tell you about something better than what you'll end up with. Now the loan officers know what it's going to take to get the loan done - or they should know, anyway. But they often tell you a fairy tale that might as well begin "Once upon a time..." to make it seem like their loan is better than the competition, because if they can't get you to sign up, they don't make anything.

This has improved somewhat with the new 2010 Good Faith Estimate, but there are still enough loopholes that a loan provider who is so minded can drive a supertanker through them.

Now, the fact is that the vast majority of people out there go out shopping for loans in the wrong fashion. They find someone they think they can trust, because they are family, because they are the scoutmaster, or because they go to church with them. Exactly what type of loan will they deliver, and at what rate? With what costs? It is always a trade-off between rate and cost on any given loan type.

Even less likely to get a good rate at a decent cost are the people who do shop around, but won't give loan officers a chance to figure out what's really the best loan for them. The first group of people might stumble onto someone trustworthy who gives them a good loan at a reasonable rate for a reasonable cost; these people are going to fall for the biggest lie, because a loan officer can always tell you about a better loan than really exists and they are motivated to get you to sign up. They call around asking about the lowest rate or the lowest payment, and don't want to hear anything else out of the loan officer. They are going to get ripped off by whomever tells the most attractive lie.

The fact is that it's going to take a good, in depth conversation about your situation for a loan officer to figure out the best loan for you, and you want to have that conversation with at least three or four loan officers. Why? Because the first one could have told you exactly what they thought you wanted to hear. Ditto the second. Keep going until you hear a couple of different suggestions. Furthermore, once they've given you their suggestions, ask about the other suggestions you heard in the past. Don't shop by lowest payment; that's a good way to get stuck with an abomination like the so-called Option ARM or another loan type that you don't want. Don't shop by interest rate alone, because you'll get stuck with a loan that has six points and you'll never save enough money on the payments to recover those sunk costs. Shop by the trade-off between rate and cost, because there always is one.

At the end of the process, the lender has all the power. You need or want this loan, and they're the ones with it ready to go. In the case of a purchase, you've got a deposit you're going to lose and a home you wanted that you won't get if you don't sign the loan documents. If you sign the documents, you are stuck with the loan, that quite likely isn't on the terms you were originally told about. I pointedly did not say "promised" because the earlier forms are not promises unless somehow guaranteed, and with changes in the market it has become almost impossible to guarantee a quote.

One of the most important articles I have written is Questions You Should Ask Prospective Loan Providers, and the most important question in that list is "If I say I want this right now, will you personally guarantee this rate with those closing costs, and will you cover the difference (if any) between the quote and the actual final cost?" You won't get a flat "Yes." If you do get a flat "yes", they're making a promise on something that is not under their control, and I wouldn't trust it as far as I can throw an aircraft carrier. What you're hoping for is something like "Subject to full underwriting approval, yes we will guarantee this quote as to closing costs. Tradeoff between rate and the cost to get a rate changes every day, and we will discuss when to lock and the tradeoffs that are currently available once we have a loan commitment." This is a simple sentence that makes a specific guarantee subject to a reasonable condition, as loan officers never know if a prospective borrower is intentionally hiding or shading something at loan sign up. If you get a response full of nonsense about how long they have been in business, how they honor their commitments, or any such equivalent claptrap, then they are trying to buffalo you. None of the forms you get when you initially inquire about the loan is a loan commitment in any way, shape or form. I'd rather have a higher quote that was guaranteed than a lower one that wasn't, and I strongly suggest you adopt that attitude as well. For an illustration as to why: If the quote is guaranteed, there's no incentive to stick you with a rate an eighth of a percent higher so they can make a little more money - they're going to have to make it good. There's no incentive to pad the closing costs with junk, because they've got to turn right around and give it back to you. If I offered you a choice between two envelopes, one transparent where you can see the $100 bill (guaranteed), and the other one opaque where I told you there might be any amount from zero up to $110 in it (not guaranteed), which envelope would you choose? The same thing applies to loans. If they can't get you to sign up, they are guaranteed to make nothing, and this creates incentives to tell you about a better loan than they can really deliver.

So (if you can't find someone who guarantees their quotes) how do you force the loan provider to deliver the loan they told you about in the first place? You can't. I used to advise people to get a back-up loan, but once again changes in the loan industry have sabotaged this. It is no longer economically feasible for loan officers to do back up loans. On refinances, you may need to walk away and start over after two or three months of working on your loan. Unfortunately, on purchases you are pretty much stuck with the first loan provider you choose because there is a deadline on making the purchase happen. The power to control the transaction belongs with the consumer, but Congress and the major lenders making large campaign contributions have used the "loan crisis" as an opportunity to remove it from them.

The loan provider is going to make money, or they won't do your loan. Judge loans by the benefits and costs to you, not by how much they loan provider is making, or whether they even have to disclose it (brokers do, direct lenders do not). The important thing to you is that you were delivered a thirty year fixed rate loan at 6.5 percent without paying any points, as opposed to 6.625% with one point and higher costs, not that loan provider A had to tell you they made $4000 by doing it while loan provider B doesn't have to tell you anything. Sounds obvious, but I have seen people who chose the higher rate at more cost for the same loan, even stuck themselves with a prepayment penalty where my loan had none, because they thought I was making too much. In point of fact, I would have made a fraction of what the other guy did make, and by the only universal measure - delivering a loan with a lower rate, lower cost, or both - I performed work considerably more valuable to my client. So don't shoot yourself in the foot like that.

Caveat Emptor

Original here

Every so often I get questions about loan cosigners. The main borrowers do not qualify on their own, so they get someone - most often mom and dad - to cosign. Cosigners are a different thing, or so I understand, in the other major credit areas - automobiles, rent, etcetera. But this is about Real Estate.

The only time this usually makes a difference is in credit history. The main borrowers qualify on the basis of income, but don't have enough of a credit history to qualify. Sometimes they just don't have enough open credit to have a credit score. This is rare, but I did have one executive couple who made a habit of paying cash for everything (a good habit, I might add). They had precisely one open line of credit, a credit card they paid off every month, and the major bureaus require two lines in order to report a credit score. No credit score, no loan - it's that simple. Even there, the solution was to walk in to their credit union and apply for another, not to get a cosigner.

When you bring other folks into the loan, you're bringing their credit history, their potentially high payments, and every other negative they have into the loan. Most of the time, the folks who are willing to cosign do not materially aid the qualification process.

Pitfall number one: If the cosigners make more money than the "real" borrowers, they now become the primary borrower, and it becomes a loan on investment property as far as the lenders are concerned, adding restrictions, raising the trade-off between rate and costs of the loan, and perhaps making the loan require a larger down payment. This does assume they won't live there, but usually if they were going to live there, they would have been on the loan in the first place.

Pitfall number two: The cosigners are overextended also. Sure, they make $10,000 per month, but they have payments of $5000 per month already. There's nothing left over where the bank sees them as having enough money left over to help you out. They may, in fact, have money to spare, particularly if they make a lot of money, but according to the standard ratios, they do not. You can't have the cosigners be stated income or NINA if the main borrowers are full documentation. If you had to downgrade to stated income in order to qualify (back when stated income was available), that would cost a lot of money through higher rate/cost trade-off, not to mention requiring a larger down payment in most circumstances, going to a higher cost portfolio lender, whether you're in a line of work that's eligible for stated income under current guideline. Obviously, better that you qualify for a lesser loan than that you don't qualify at all, but you don't want to downgrade if you don't have to.

Pitfall number three: This one hits the cosigners. They are agreeing to be responsible for your payments in the event you don't make them. Suppose they want to borrow money for something else. Especially if it's a large amount of money, as real estate payments tend to be. It really cramps their ability to qualify for other things. This works the other way, also. People come to me for real estate loans who have agreed to be cosigners for a car loan are responsible for the $400 per month for that loan. Many times, this means they don't qualify for the real estate loan. So we have to prove to their prospective lenders that the "true" borrowers are making the payments. This is usually not difficult, but if the cosigners wrote the check for the payment anytime in the last six months to a year, it can be problematic.

Pitfall number four: This also hits the cosigners rather than the main borrowers. Suppose a payment gets made late. It impacts the credit of the cosigners as well as the "real" borrowers. It doesn't matter if you're the "real" borrower or the cosigner, it hurts your credit just as much and for just as long. If you cosign, you want some kind of proof that payment is being made on time, every month. You shouldn't cosign if you don't have the resources to make that payment pretty much indefinitely. Furthermore, should the cosigners decide to cut their losses, it can take months before the monthly hits to the credit stop. If the "real" borrowers don't want to liquidate, the cosigners may have to go to court to get out of it, and the only people who are happy there are the lawyers.

Now suppose the loan being applied for has a Debt to Income Ratio maximum of forty five percent, and the cosigners make $10,000 per month, but they have expenses of $4300. This will mean that they only have $200 per month to contribute towards qualifying for the new loan. If the "real" borrowers weren't fairly close to qualifying without them, they aren't going to qualify with them. If they have expenses of $4600 per month, they have nothing to contribute to the loan qualification. In such cases, the work of asking them to cosign is wasted.

Caveat Emptor

Original here

An e-mail I got from a single mother I spent two months working with before she found a special low income program for a property she wouldn't have been able to afford through me. The first paragraph is her addition to me on the front of a forwarded message. I've redacted information that might lead to specific identification of the culprits or their victim.

(I haven't been paid anything on this, nor did I expect to be, despite the fact that they told her that I would be to close the deal. She felt obligated to me, but who wants to stand in the way of a single mom finding and affording a better property?).

Dan - This is an FYI. I really wouldn't recommend this program for any of your other clients, or if you do get them involved that you warn them that things stand a good chance of not going as promised. Judging by what is happening to me, I doubt that you ever received your commission from these people.

-----Original Message-----

Good Morning DELETED,

My name is DELETED and I've purchased a condo at DELETED. My close date was supposed to be June 28th. On June 28th I went to DELETED Title and signed off on all the final paperwork and had my bank wire them over $7,000.00. My first scheduled move-in date was on Friday, June 29th. I had to cancel (the move - DM) because it wasn't recorded yet. On Saturday, June 30th I drove over to the DELETED Sales office (my phone and internet has been shut off and transferred) and spoke with DELETED. My next scheduled move-in date was Monday, July 2nd from noon - 4 pm. I asked him if I had to change my plans again and he said "No - because you were supposed to close on the 28th of June and I can go online and see that you have wired your money and completed your paperwork I am going to make an exception and give you your key and let you move in on Monday."

Early Monday morning (we) started bringing all of our boxes and furniture downstairs. At 9 am I rented a U-haul. At 11:30 I went over to the Sales office for my key. I had scheduled someone to pickup and deliver the appliances I purchased for 12:30 pm. (The person who had promised the move in) was "in a meeting" and nobody seemed to know anything about my key. By 1 pm I was quite upset because I still had no answers and only 3 hours left to accomplish my move in.

DELETED sent someone down to try and make things right. I don't think a sobbing woman in their office was very good for business. They went over to the Uhaul place and had the truck reserved until Friday of this week and bought a lock for it. They told me that they would pay my rent and that I could get reimbursed for food if I kept the receipts. Hopefully they will really do this. (it occurred to me later that they also promised me a key and broke that promise) DELETED is calling DELETED (Title officer) twice a day for a status update and what they keep telling me is that the paperwork from the City has not yet been received.

Can you tell me if there is a reason for this and when I might expect this paperwork to be completed?

I'm in a bit of a panic now (to put it mildly) because I need to be out of the apartment so they can clean and paint it over the weekend. I have so little information, I don't know whether to put my things in storage, board my pets and get a hotel for my son and myself. This is also very stressful because most of my money is tied up in the condo and I'm bleeding what little money I have left....sleeping in an apartment on my couch and hoping that the truck on the street in front of my complex doesn't get ticketed or worse yet robbed. Hauling everything back up two flights of stairs was pretty much out of the question (For health reasons - DM).

I feel absolutely miserable. It would be quite ironic to wind up homeless after all this.

If you can shed any light on what is going on, or help me plan what to do next I would appreciate it. I'm really in the dark here.

My phone and internet are at the new place. I had been taking vacation time to move in, but I don't see the point now, so I'm back at work trying not to worry.

This is, unfortunately, not an atypical experience. Public program means you're on a bureaucratic schedule. It's not that bureaucrat's money that's getting spent. They don't get paid any different whether your loan funds and you get your property today, next week, or never.

Furthermore, it has been my experience that companies with the ability to use restricted provider public programs are often looking to boost their profit margin, and because the competition is restricted, they can often get it. That's one of the reason that FHA (among others) is looking to reduce their annual audit requirements, so that the small brokerages and those with thinner profit margins might be willing to sign up and endure the hassles. I've seen loan firms charge two extra points and over half a percent higher rate because the competition was mostly eliminated, and what was left was other high margin places. Special programs nobody else has are a license to print money, particularly if access to those programs is restricted by the government. The fewer providers who can do it, the less competition there is, and usually, the higher the mark up they want in order to for the privilege of being one of the lucky selected beneficiaries.

This is not to say that all public housing programs are difficult, or delayed, or costly. There are individual providers who provide just as good a product at just as good a price. However, the statistics seem to be a much higher than usual incidence of delays, costly extras, and just plain gouging going on due to restricted competition.

This is also not to say in any way, shape, or form that public programs aren't worth it. The lady could never have afforded this unit, part of an income restricted program, without a municipal government stepping up to the line on her behalf. Those with a knowledge of economics may realize that this means the other units were made more expensive due to this, likely pricing out other potential buyers so that this particular person could have a better unit. Robbing Peter (and Penny and Porgy and Poppy and pretty much everyone else) to pay Paul and the bureaucrats helping Paul, but that's a matter of housing policy supported by the voters, and my choice is to help Paul or not to help Paul. Peter, etcetera have already been robbed and they're not getting the money back. The bureaucrats will be paid exactly the same whether I help Paul or not. The only question will be exactly who gets this benefit, and I think that under the circumstances I might as well help Paul get them. And if Paul doesn't take it, somebody else will. From the perspective of a given individual's available options, such programs definitely assist people in affording housing superior to what they could otherwise afford.

However, you need to realize that there are likely to be delays and unexpected extras in a program like this. One of the requirements of many of these programs is a certain maximum amount of total assets - but if that's all you can have and you have to use some of them for down payment and closing costs, this can mean you're cutting it really tight as far as other expenses go. Indeed, on this scale, paying for an extra few weeks rent at your old place can be a real hardship - but that's the cold hard fact of what happens quite often. If you put in your thirty days notice to the landlord, you're stuck when escrow doesn't close on time. If you don't put in your thirty days to the landlord, you're stuck paying rent for the extra month, costing (in this case) a minimum of about 15% of her total liquid assets, never mind what was left over after what she put in her down payment.

There is no universal guide to this situation, and what works in some situations may be totally inappropriate in others. One of the best things is an elected ally in the bureaucrat's chain of command. Another is the willingness of a family member to step in with a gift or extend an interest free loan if you require it, because pretty much all of these first time buyer programs have income and asset limits, and if your cash falls short, everything you paid is pretty much wasted. You won't get the property, and you're unlikely to get that money back.

Anytime the government - city, county, state or federal - limits the providers who can work with a given program, they create a pricing differential between that program and the general market, as well as creating a situation where those providers have an assured income from people who don't have any other choice. Given this, the incentive to provide good competent quality work at a competitive price is pretty much absent, leading to situations such as this poor lady's. These programs all keep a list of their special participants, but sometimes there are ways for others to participate. It never hurts to ask, and it may very well prevent situations like this one.

Caveat Emptor (literally!)

Original article here

An email:

Hi Dan,

I was reading your article on "should you pay off your mortgage faster?" (DM: link here DELETED It'll be a fresh 30 year loan and I'm 44 years old so this discussion has interest, I don't really want to be making a mortgage payment at 74 ;).

I must be really dense but A: I don't get it and B: the table looks like it has an error in it to me.

Start with B: first - the investment column can't possible be correct. The assumption is you save or pre-pay $100 per month and invest at 8%. The amount for year 1 is $1,353.29, if you saved $100 per month at the end of a year you'd have $1,200 in principal + $100 * 12 months @ 8% + $200 * 11 months @ 8% + $300 * 10 months @ 8% etc. Even if you socked away the whole $1,200 on day 1 you'd only have $1,296 and have to pay taxes on $96.

What I don't get is this - by prepaying $100 on my mortgage I get a guaranteed return of 6% or 6.5%, whatever the mortgage rate is. I do not ever have to pay interest on that piece of principal again, it keeps on giving. Yes my payment stays the same but the amount going to principal increases by the amount of interest I am not paying due to the previous principal payment.

Now, the valid comparison to that is a risk free investment alternative no? I've got savings accounts currently yielding 4.5%, 5.3% and 5.4% APY, you might find 6% - might and it probably is an intro rate. Let's be generous and assume I can get the same rate of return on the savings as I pay on the mortgage and put that at 6%. If I pay $1,200 extra in principal on day 1 of the year I don't pay $72 in interest and can't deduct it. If instead I put $1,200 in a savings account on day 1 I earn that $72 in interest. It is a wash, The tax issue is a red herring since not paying the principal gives me a $72 interest deduction but the equal investment return is added to income so (72) + 72 = 0 Could it work out if you put the investment dollars at risk? Sure, but that is a gamble and an apples to oranges comparison.

I have different mental pots of money.

Pot 1 is investment dollars for retirement, 10% or so of income goes to a tax deferred account invested at various risk levels and doesn't get touched - ever. Until I retire at least!

Pot #2 home equity + the carrying cost on the mortgage which is the 25% or so of income that pays the PITI on the house.

Pot #3 is liquid reserves, currently about a years worth of #2's income requirements.

My goal is absolutely to eliminate the P&I part of PITI over time. With enough in pot #3 I'll be plowing as much as possible into principle reduction over the next few years once we get moved in and clear the costs associated with a new house such as drapes and furniture. I make a pretty decent salary but who knows how long that will last? As long as the job is secure I'll keep the current mortgage and pre-pay as much as possible. If a few years down the road I felt a little vulnerable to layoff or whatever I'd seriously consider refinancing the then smaller principle balance for a smaller required monthly nut and keep making the higher payments as long as the income stayed intact. Alternatively I may need to do that in 10 years anyway when my kid goes to College. What we are currently paying in private tuition from current income + available cash flow might be a bit short, or we may be ok - depends on where he goes. I'm a College administrator so if he goes here he gets a 100% tuition waiver, 50% at other state schools. And I did look at saving for College in one of the tax deferred accounts, we don't qualify for all the juicy ones based on family AGI. We could do a 529 but I've made the personal choice that we're better off driving the retirement savings and paying off the mortgage rather than killing ourselves to give the kid a free ride .

I like a guaranteed 6.5% return. With any luck the house will get worth more over time as well making the return even better. I played leverage to the max in 1999 when I bought a townhouse for 78K by assuming a mortgage, I just sold it 2 months ago and cleared $112K cash in my pocket, principle balance was 64K so 14K of the 112K was return of my principle payments. That was great but now we're in a little better position financially and I'd like to preserve it over time. I've owed huge piles of money to CC companies and auto loans in the past - don't ever want to go there again!

One other thought. Despite the current turmoil in the market houses do tend to be worth more over time. Probably not as good as the stock market if the time horizon is long enough but they do go up. In my case 60% of the asset value is borrowed so there is a leverage factor on the return. Here is the thought - under current tax rules that return is tax free where as the stock market return is not. It's all about risk tolerance I guess.

Upon examination, I think you're probably right, although I have assumed "a start of the month/year" program where the question was academic until you actually had some money to put to one place or the other; i.e. an initial $100 today and $100 every month, so a year from today you've got $1300 without interest. Kind of like the old problem where if you've got an eighty one foot wall and beams every nine feet, you need ten beams to have a real structure. One to start (at the zero point), and then another one every nine feet.

The pots of money idea is a good one, but most people shouldn't be limited themselves to theoretically risk free investments, especially once you've got your reserves. 1) They're not risk free 2) The big certainty if you don't take any risk is that you will make less than someone who did. Kind of like being chased by headhunters, and having a choice to sit there and be killed an eaten immediately or jump off a cliff into a river with crocodiles. Sure, the crocodiles might get you, or you might hit the rocks when you land and you might even drown. But if you do nothing, you're going in the stew-pot for certain.

Question: How do you think the bank or insurance company can afford to pay a return on the money? It doesn't come out of some hyperspatial vortex! They take this money and invest it in basically the same places you would. The difference is: They take the risk, they get the reward. This reward is plenty to pay their employee salaries, all the expenses of operating, plus your little pittance, and have plenty left over for the stockholders. If their results are adverse, what's going to happen to your money?

Question: If you never refinance, how hard do you think it's going to be to make a $1500 payment in thirty years? Assuming a 3.5% rate of inflation, about like paying $530 per month now. Shouldn't be difficult at all. If you do refinance, you are making a conscious choice that the other loan is, in total, a better deal for you. Sure you might not have a lot of income after retirement. My point is that with time and diversification, the assets you would accumulate from alternative investments will be more able to pay your loan out of interest than any money you saved.

Question: If you can't make the low payment, what will your equity situation be like? Once again, this is assuming you never refinance, but 29 years out, you'll owe roughly $15,000, and assuming average 5% appreciation, the property will be worth about 4.3 times as much. Even if you never paid a penny of principal down, that's well over a million in equity. This gives you options such as selling (take the money and run), a RAM (take the money and stay - which I generally advise against), a move "down market", etcetera. Stop thinking of money as something that pays the rent and other expenses, and start thinking in terms of what it can do.

Furthermore, it's not a risk free 6.5%. For most people, it's more like an effective margin of 4.7% or less. I'm not advising anyone to go out and strip equity without a very strong reason to do so so and a clear eye on potential consequences, but which after tax return sounds better to you: 4.7% or 7.2%? I agree with the NASD rule that prohibits member firms from accepting borrowed money for investments, but I have to admit that it does work, at least for the "average over time" numbers in theory. The 7.2% assumes investment income is all ordinary income, fully taxed every year. In point of fact, at least some is likely to be capital gains and some is likely to be deferred. The downside is that any investment return is purely speculative and you could lose your principal. You don't ever gamble with money you can't afford to lose, no matter what the long term odds. Nor do you put it all on the same bet, no matter how you split it up. On the other hand, the biggest risk is not taking any. Instead of paying off your mortgage, diversifying your money amongst a sufficient number of stock and bond investments is so likely to leave you with so much more in total net assets over the next twenty years that the expected exceptions are a statistical non-event.

Caveat Emptor

Original article here

(Note: This article is a reprint of one of the earliest articles I wrote, from a time when rates were higher. The principles, however, are quite valid - and even reinforced by the fact that rates now are much lower)

The Truth-In-Lending is a form that can or does provide some useful information, but the useful information it provides is both smaller than most people think, and not in the numbers everybody looks at.

The first thing to be aware of is right below the title. "This is neither a contract nor a commitment to lend." They are telling you right there that this is an estimate. It may or may not be an accurate estimate. That depends upon the loan officer and the provider they work for. Again, the relationship between this form at the beginning when you apply for the loan and the loan that is actually delivered with the final documents can be extremely tenuous, even with the new rules that went into effect at the beginning of 2010..

The APR in the very first box is the result of an attempt by Congress to compress what is fundamentally at least a two-dimensional number into one linear measurement. It is intended to help give you a direct, one number measurement of the effective interest rate, given the expenses. But, in order to this it has to make some assumptions.

The first of these is that you're never going to sell the property, or at least not until after the period of the loan. Back in the early 1970s with stable secure jobs for a large portion of the populace not only in government but in private industry as well, and people living their whole lives in their first house, this was a reasonable assumption. No longer. The median time for ownership duration is about nine and a half years.

The second of those is that you're not going to refinance. This also was not an unreasonable assumption back in the early 1970's. Our habits as a society have changed since then. The fact is that the median age of mortgages (half older, half younger) is currently under 3 years. Only something like 4 percent of all mortgages are older than 5 years. I'll have other implications of these facts later, in other essays.

But by making this assumption, that you're never going to sell and never going to refinance (despite already having done so several times) and just make that minimum payment every month for thirty years, it allows the illusion that you're going to spread those costs out over thirty years, when the appropriate time frame is much shorter. This is a dangerous illusion. To give a specific example, because it means that, when measured by APR, a 5.5% loan with closing costs plus two points looks like a better loan than a 6 % loan with closing costs but no points. In fact, it is quite likely that the 6% loan is a better idea, and a 6.5% loan where the lender pays your all of your closing costs for you may be better yet.

Let's go through the calculation involved. Let's give the more expensive loan at a lower rate the benefit of every doubt. Assume they're both thirty-year fixed rate loans, so you'll actually keep getting benefits as long as you keep the loan. Assume the base loan we're looking at is $270,000, the same figure I've used elsewhere. This can be either an existing loan, or a purchase where you need $270,000 beyond your down payment to cover purchase price and costs of buying.

As we computed in looking at the Good Faith Estimate, the closing costs of doing this loan are somewhere in the neighborhood of $3400 or so. But "third party" costs, such as escrow and title, are excluded from APR calculation, so we're going to deduct about half of that, or $1700, from them when we calculate APR. I'm also going to assume that you actually pay all of your "prepaid" and "reserve" items out of pocket, which keeps things simple. Your actual loan amount in the case of the 5.5% loan with two points is $278,980, and your monthly payment is $1584.02. Your actual loan amount in the case of the 6% loan is $273,400, and your monthly payment $1639.17. The third loan has a payment of $1706.58 on a balance of $270,000 even. The APRs (a complex calculation) work out to 5.742, 6.059, and 6.500 percent, respectively. Looks like the first is a better bargain, right?

Your actual interest expense the first month is $1278.66 the first month for the first loan, $1367.00 for the second. This is a difference of $88.34, and this number is actually going to increase for the first several years of the loan. The rest of the money is a principal payment. Equity. Money you don't owe anymore. The principal paid the first month on the first loan is $305.36; on the second is $272.17, a difference of 33.19 the first month in the first loans favor. For the third loan $1462.50 represents interest and only $244.08 is principal. This is really looking like you make the right choice with 5.5%, correct?

But let's look at two years from now - about the age of the median mortgage. I'm going to use the loan in the middle as baseline.

Loan 1 has paid $2130.05 less in interest, and $806.37 more in principal than Loan 2. Looks great, right? But they also paid $5580 more for the loan, or which $4773.36 remains on their balance. Remember, fifty percent of the people have sold or refinanced at this point. When you sell or refinance, The Benefits Stop. But the cost is sunk. You paid it in full two years ago. And at this point if you sell this home, you will actually get $4773.36 less in your pocket than in if you had taken the 6% loan. This is somewhat compensated for by the fact that you spent $2130.05 less in interest expense. But you're still $2643.31 down as compared to the 6%, and there's no way around that. Meanwhile, the 6% loan itself lags the 6.5% loan by $414.07 at this point in time.

And if you refinance, it gets even worse. You're now paying interest on the $4773.36 in higher balance for the rest of the time you're got your home. Let's say the rate is 5% now because you got an even better deal. This means $238.67 per year, $19.89 per month extra that you're going to pay for as long as you have that loan, all for benefits that you don't get anymore and never paid for their costs in the first place. This is truly the gift that keeps on giving, isn't it? To the lenders.

Now let's look 5 years out, when over 95% of the people will have sold or refinanced.

At this point for loan 1, you have saved $5353.23 in interest and paid down $2044.02 more in principal, right? Yes, but you paid $5580 more for the first loan than you would have for the second, and you still owe $3535.98 of this difference. If you sell, you will get $3535.98 less to put in your pocket, although that will be more than balanced out by the interest you saved. Net profit to you of choosing the first loan: $1817.25, neglecting tax treatment. Boy did you make the right choice, right? But remember that over ninety five percent of everyone who made the same choice you did never made it to this point. Furthermore, if you're like most people and you intend to buy some other property where the transaction includes a loan, that loan will have a starting balance $3535.98 higher to start with than if you'd chosen loan number 2 in the first place. Assume you got a great rate on your new home: 5% even. This means you're now paying $176.80 per year in interest that you wouldn't be paying if you'd simply chosen Loan 2 in the first place. Assuming you intend to own property for the rest of your life, in a little over ten years your gain is gone.

On the other hand, you are doing safely doing better with loan 2 than 3 at this point. The difference in interest you've paid has more than made up for the difference in starting balance. Whether you refinance or sell, it's going to be difficult to make up $4122.80 with the interest based upon $1660.98. Assuming 5%, this is $83.05 per year it amounts to 50 years to recover. Loan 3 shows up pretty well against loan 1, though. $5196.96 difference in balance times 5% per year is $259.85. Divide the $1479.49 by this number and get that in 5.69 additional years, your benefits from loan 1 as opposed to loan 3 will be gone.

If you get a great deal and refinance instead of selling, that extra $3535.98 that you still owe on that mortgage is still there, and will be for as long as you own that home. Assume you got a really great deal of 5%. This means $176.80 per year of extra interest expense - just from the fact that your balance is higher because of sunk costs to pay for benefits that have stopped. Assume you keep your home another five years, so altogether you've had it ten years since the initial loan. This has cut your gain to $933.25.

This happens all the time. It is not uncommon for me to talk with people who bought their homes in the 1970s, have refinanced ten or twelve times, and now owe more than ten times their original purchase price, a good portion of which is directly attributable to unrecovered closing costs of the refinances. Here's the point: closing costs and points stick around, sometimes a long time after the benefits you got from them are gone, and people refinance or more often than most people admit. The only loan that can be ahead from day one is the true zero cost loan.

(At this update, I need to note that the Democratic-controlled Congress of 2009-2010 did everything in their power to make the true zero cost loan illegal, to make such loans appear as if they cost money when they don't, and to define terms in such a way as to prevent loan officers who offer true zero cost loans from calling them "zero cost" even though when you really crank the numbers, they are zero cost to the consumer).

Loans that have closing costs and even points will, in general, pay for those costs eventually, and more than pay for them if you hang onto it long enough, but you're sinking a significant amount of money in the bet upfront, money which is going to be around in your balance a long time. Furthermore, people don't hang onto these loans as long as they think they will, and very few people hang onto them long enough to see profits from high closing cost loans. Finally, the rate at which a zero cost loan can be done varies from day to day, and by quite a lot over time. Let's say six months from now I can do a 6% loan no cost. It costs you zero, and now if you're loan 3, you've got the same loan at a lower balance than the guy who chose the 6% loan 2 above, whom I can't necessarily help with those better rates.

Then three years down the line, rates really drop, and I can do 5.5% for no cost. A call to both loan 2 and loan 3 nets borrowers who are eager to cut their rate for zero cost, but I still may not have anything that helps 1 in the sense of being worth the cost of doing it. Now loan 1, loan 2, and loan 3 all have the same rate, but loan 3 owes the least amount of money, therefore has the lowest payment, and has the most equity in their home.

Here's another dirty little not very secret, but rarely publicly acknowledged, fact: People don't always refinance into a lower rate when they refinance. If you've been a homeowner 15 years or so, chances are reasonable that you've done it - possibly more than once. Don't worry, I'm not going to pillory you in public over it, but if you won't admit it to yourself then there's not a lot that can be done for you. People have various reasons for refinancing into higher rates, some of them reasonable, some of them relating to necessity, and some quite frivolous. But you'd be amazed at how often people looking to refinance expect me to believe stories that numbers show to be obvious fiction about how often they've refinanced a property. This is math, and if the numbers tell me you've been making payments on this loan for two years when you tell me five, I'll bet millions to milliamps that if I go check the public records that are maintained on every piece of real property in the country I'll find that Trust Deed recorded two years ago. Now, it's okay to tell some lies of certain kinds to your loan officer, and assuming that any prepayment penalty has expired, this is probably one of them. No harm, no foul. What a typical loan officer cares about is getting paid, and if you're withholding or correct information doesn't make a difference to that, there's been no harm done. A good loan officer will add, "Putting the client into a better position" to that first, paramount concern, and if the information you withheld would have resulted in a different answer to this question, you have only yourself to blame. (Looking for altruists in business is both pointless and hazardous to your financial health. Businesspersons donate huge amounts of time and money and energy to charities or other works for the public good. But we're at work to Make Money. I am very good at what I do and getting better because I want to Make More Money, and mistakes do the opposite of Make More Money). But you need to be completely honest with that wonderful person you see in the mirror every day who follows you around twenty-four hours every day, shares in all of your triumphs and joys, and has to deal with all of your mistakes for the rest of your life. Otherwise you're going to waste a lot of money on mortgages making the same mistakes over and over again.

Getting back to the actual Truth-In-Lending form, finance charge assumes you keep the loan the full term, as I have explained. Amount financed is subject to the same limitations as the Good Faith Estimate, and in fact assumes that the Good Faith Estimate is honest and accurate. So is the Finance charge. Neither of these, nor the Total of Payments, which is simply the sum of these two, is any more valid than the Good Faith Estimate this form is based upon. Do NOT use the Truth-In-Lending or APR as a way to compare loans, numbers-wise. Many people do precisely this because it's such a simple looking, apparently easy to understand form. But if it's based upon a Good Faith Estimate that's not accurate, it means nothing. Zip. Nada. Garbage In, Garbage Out.

Nope, the minimal information provided by this form is in the details that start about halfway down.

Demand Feature: If checked, this means the lender can require that you repay the loan in full, with a certain number of days (usually 30) notice. It can also mean there's a balloon on the loan.

Variable Rate Feature: if checked, this means that at some point, if you keep the loan long enough, become a variable rate loan. I've seen loans that went as long as ten years before a variable rate kicked in, or it can be right away. It all depends upon the loan you agree to.

Credit Life and Credit Disability are two products that I would generally recommend against unless it's the only life or disability insurance you can get. Some states do not permit them to be a requirement of the loan - and in those cases where the lender would otherwise require one or both, you won't get the loan as a result. (On the other hand, without these state prohibitions, many lenders would require them much more often, costing consumers in the aggregate billions. Just like everything else in mortgages, it's a tradeoff with winners and losers no matter what you choose.) Both of these products typically pay any benefits directly to the lender, when you want them to come to you or your family. Buying your own life insurance or disability insurance is typically a much better idea.

Property and Flood Insurance The lender can and will require you to maintain proper insurance on the property as a condition of your loan. In California, they cannot require this be for the full amount of the loan, but they can and will require you to maintain coverage for the amount of full replacement costs - what it would take to rebuild your property as it is from the ground up. Many lenders delegate the responsibility for making sure this is done on their behalf to big administrative operations that cover the whole country, and they are ignorant of individual state law even for such major states as California. Be polite, but firm, when they tell you they are looking for coverage in the full amount of the loan. Flood insurance is a separate policy that can also be required if the property is on a flood map. The lender can either demand your loan in full immediately or purchase insurance on your behalf and force you to pay the bill if you fail to show them continuing proof of adequate coverage.

SECURITY: The first box should be checked for purchases, the second for refinances. In rare cases I do see somebody taking out a loan on a home that is free and clear to get a better rate than they would on a new property they're buying, because they'll get a better rate that way. In this case, the second box should be checked.

Filing Fees are for filing the papers with the county recorder, and should be the same as listed on the Good Faith Estimate

Late Charge basically discloses what your penalty for any late payments will be. It is expressed as a percentage of your normal monthly payment.

Prepayment penalty: Should tell you honestly whether there will be a prepayment penalty on the loan, but often doesn't. Says nothing about the duration of it. Forget the second line. All of the costs to get you the loan are sunk and nonrefundable from the time you sign the papers. All of the interest that you pay as it is due is gone forever. You'll never see it again. They earned it. They're not going to give it back. I've never heard of a loan where in the initial contract the borrower was promised a rebate of part of those costs if they paid off early. Banks did make a lot of offers to discount loans if you paid them off in the late seventies and early eighties, but these were offers made at a later time, long after loan papers were signed, by the banks because they were losing their shirts buying money at 14% or so when it was already loaned several years earlier to customers at 6%. It wasn't a part of the contract in the first place.

Assumption: This means that if you sell the property, the buyer can keep your loan in effect. The VA loan is the only one out there that is generally assumable by the buyer if you sell, but there are some other loans that are assumable as well. It's not usually a good idea to let a buyer assume the loan, but there may be no alternative. The reason: You can still be liable for these if you do allow them to be assumed.

Then there's a line where there are two final square boxes to check, where "* means an estimate" and "all dates and numerical disclosures except the late payment disclosures are estimates. Expect the second box to be checked. It's all based upon the Good Faith Estimate. If they're stretching the truth there, the numbers here are going to be similarly distorted. And if it's not checked, that's "an inadvertent oversight" and unlikely to be prosecuted. Which is as it should be - unless there's a pattern of it, which is the case with all too many loan providers.

Caveat Emptor

Original here

Another relevant article: The Difference Between Note Rate (APY) and APR