Mortgages: October 2015 Archives

When and Why does a Mortgage Company Sell your Current Loan to another Mortgage Company?

Lenders sell their loans because the lender can make an immediate premium of anywhere from 1.5 percent to four percent by selling your loan to Wall Street. Yes, this is less than the six to eight percent per year interest that most primary homeowner loans get, let alone second loans, commercial loans, etcetera. Nonetheless, they can turn the money several times per year, earning far in excess of what they could earn from the interest on your loan itself, and that's why they do it.

Selling your loan doesn't just get them four percent once. It lets that lender turn around and do another loan and make more money without getting more money in deposits. Many lenders can turn the money three to six times per year or more, getting them a twelve to eighteen percent bonus in addition to anything they make those few months that they hold the loan.

There are several philosophies on when to sell the loan. The one that seems to have the most adherents currently is the pure packaging house philosophy, where they sell it off immediately upon closing, or within a few days. Given this, they can turn the money a dozen times per year if they work at it, selling the loan for a smaller premium, but getting twelve markups per year, amounting to somewhere between twenty-four and thirty percent on the money.

The second philosophy is one that is practiced by a smaller, but still significant number of lenders, who fall more into the traditional lender's model of doing things, and that is to wait until one payment has been received. Since this eliminates a noteworthy fraction of the fraud that's out there, they get a better markup for their loans. The downside is because they have to hold it an average of two months before the first payment is received, that means they can only turn the money six times per year at most, as opposed to the twelve for the previous model of lender. So they get six markups of three percent or so, maybe close to 20 percent over a year. To this, they add maybe three percent, to cover the interest they actually received from borrowers directly. Net: maybe 22 percent. Furthermore, this leaves them stuck with those loans where the first payment is late, because nobody wants to buy those. Better from their mortgage bond buyer's point of view, not so hot for their bottom line because there is a high percentage chance of those loans becoming what is known as "non-performing." In other words, default. The bond buyers got stuck with the results of default in the first scenario, which the lender views as a much better thing than dealing with it themselves. In other words, this scenario forces the lender to actually live with the results of their riskier underwriting scenarios. They actually can sell those loans, but anybody who's paying to assume that kind of risk is going to demand a commensurately lower price for it, which is reflected in a lower bottom line. So the lenders who hold a loan until after the first payment usually have tougher underwriting than those with pure packaging house mentality.

Finally, there are still a few lenders who wait until they have three payments, giving them the best prices of all when they sell. Unfortunately, it takes about four months for them to be able to do this, so they get four percent for the loan, but can only turn the money three times per year. This actually gives them a chance to fix bill paying problems that might have afflicted the second group, but on the other hand, more people have a late payment somewhere in the first three. Nobody wants to pay a good price for loans that are not current, and a little less if it has been delinquent but is no longer, as that's a flag for possible future problems. These lenders get maybe 12 percent per year in funding markup, plus four percent or so for interest actually received from borrowers, netting maybe sixteen to seventeen percent. Needless to say, this model has largely fallen out of favor by most lenders because it doesn't put as much money into the firm's bottom line, but they still get over twice what the lender who actually holds the loan makes per year.

Selling loans has been part of what has driven rates down from their rates of years previous, as lenders face increased competition from other lenders who "want in" on that twenty-four to thirty percent per year from turning the loans, and are pressured to deliver lower rates by the fact that most of their money actually comes from selling the loan, as opposed to servicing loans they do make. Many lenders actually retain servicing rights when they sell the loan, as this gives them continuing income. Indeed, may people out there whose loans have been sold multiple times are blissfully unaware of the fact, as they are still sending the check to the original servicing company.

Another thing that this has driven is the increased use of pre-payment penalties, as the entities buying the loans, which are mostly large Wall Street entities, are very attracted by the consequences of buying loans with prepayment penalties, and thus, pay more for them. If you know that you're going to get that 7% for at least three years, or get a one time stroke of three percent if you don't, you are willing to pay more for those bonds than if the people involved could just hand you your money at any time. Many times the sub-prime market will offer the same people a better rate with a prepayment penalty than the A paper market will without a pre-payment penalty. It's all well and good to save half a percent on a half million dollar mortgage, which is $2500 per year, but if you don't last the three years you are out $15,000, twice the maximum you possibly could save! Pre-payment penalties are mostly to make the aggregated mortgages more attractive to Wall Street.

Finally, I should mention that if you're totally committed to writing the check to the same lender and sending it to the same address so you're willing to pay a price for it, there is such a thing. It's called a portfolio loan, and you can figure that the interest rate will be about one full percent higher, or maybe a little more. Even there, it's not that they legally cannot be sold, it's that they are priced higher to make up for the fact that certain loans don't meet the standardized criteria for sales in packages of fifty million or so, but may still be perfectly good loans. The higher interest rate - price of money to the consumer - is there to counter the lowered rate of return for the lender.

Caveat Emptor

Original here

One of the most true sayings in the mortgage business is, "If you can't lock it right now, it's not real."

But many mortgage providers will play a game of wait and hope. They tell you they have a certain loan when they in fact do not, hoping the rates go down to where they do. Or they'll tell you about a rate they actually have, but wait to lock it hoping the rates will go down so they can make more money because when the rates go down, the rebate for a given rate goes up or the cost goes down, and they can make more money.

Sometimes the rate/cost trade-off does go down, and they can deliver. But sometimes the rates go up, too. When this happens, the mortgage provider playing the "wait and hope" game has three choices. They can make less money, charge more for the loan, or punt by playing for time. I shouldn't have to draw adults a picture as their relative likelihoods.

Many times one side effect is a delayed loan. This is probably the number one reason for delayed loans, and one of the strongest reasons I keep telling you that if a provider can't do it in thirty days, they probably can't do it on the terms indicated. Many times they bet on rates going down, when rates actually go up, so they end up with a loan that they can't make any money by doing, so they delay it day by day, week by week hoping the market will move. Note, please, that they usually have zero intention of finishing your loan if the market doesn't move downwards enough. Whether it's National Megabank with a million offices, or Joe Anonymous working out of their home, their motivation is to do what it takes so they make money, and they will keep sweet talking you as long as they possibly can. They're certainly not going to work for free, and many of them will not do it at all rather than compromise their usual loan margin. If you allow them to play this game, when you finally give up in disgust, they still have several weeks after you apply with someone else where they're the only ones that can possibly have the loan done, and if the market moves down during those weeks, they're covered. If you could have gotten a better loan during that period, you likely would. But because you were quoted a price that didn't exist and believed it, they've got what looks to a consumer to be a competitive advantage. And if they call after you've "canceled" their loan and say that they can close the loan now when the new provider you just contracted with isn't ready yet, most people will go ahead and sign the papers because This Loan Is Ready Now.

There are honest mortgage providers who lock every loan at the time you tell them you want it. But there is no way for a consumer to verify that any given loan provider is among them. All of the paper I can put in front of you as regards a loan rate lock can be easily faked. Which brings us back to one of the standard refrains of the site: Apply for a back up loan.

At this update, there have been changes to the loan market. No loan officer can lock a loan quite so nonchalantly any longer. The penalties to the loan officer and all of their future clients for failing to deliver a locked loan to the lender have become too severe. As I said in Shopping For The Best Loan In The Changed Lending Environment, this is bad for consumers but it is a fact of life we have to deal with. If I lock a loan that doesn't close, all of my future loans get hit with additional charges, making my loans less competitive and hurting those clients who want me to do their loans in the future. I would very much like to go back to the other way, but it's not under my control.

Another change is that loans take longer now. This is due to regulatory changes and the need for CYA on the part of the lenders. Before the rules got changed in 2008, my average time between application and being ready to fund a loan was about 16 calendar days. Since then, that average has gone up to the low forties. Just a fact of life. There are a minimum of 3 weeks in new regulatory delays built into the new procedure. Oh, the government doesn't call them regulatory delays but they penalize the hell out of anyone who doesn't meet them and saddle that lender with large potential fines and unlimited liability for "misleading consumers". Net result: 3 weeks in new regulatory delays.

There is another issue with regard to rate locks. They are all for a certain set period in calendar (not working!) days, usually measured from the time you say you want it to the time the loan actually funds (not until you sign documents). Assuming your loan is actually locked when you say you want it, this means that there is a DEADLINE. Due to regulatory changes, loans are taking about 30 days longer than they used to. Also a fact.

This means that once you tell someone you want the loan, give the loan provider every scrap of documentation they ask for right away, not a week later. The loan provider is not going to pay for the delay, you are. Many banks will not even look at an incomplete loan package, so it is crucial to have the paperwork organized quickly. If that loan goes beyond the initial lock period, you can pretty much count on paying an extension. Some banks charge one tenth of a point for up to five days, some a quarter of a point for up to fifteen days of extension, some even more, but it's always charged in full from the first day of an extension. Occasionally the lender will give an extension for free if it was obviously their fault, but not very often. More likely, whether it was your fault, their fault or nobody's fault, the extension will be charged. Lenders have no sympathy for going over the lock period, and neither do most brokers. The lenders have set a large sum of money aside for your use, and they aren't earning interest on it. They want some kind of compensation, and when you think about it, this is not unreasonable.

Common rate locks are done for 15, 30, 45 and now 60 days, but they are available in 15 day increments for almost any length of time out to about nine months. However, there is a cost. The longer the lock period, the costlier the loan - as in the tradeoff between rate and cost gets shifted upwards. "Par rate" becomes higher with a longer lock period. You pay more in points, or get less in rebate for the same type of loan at the same rate. The reason for this is simple. The bank is setting all of this money aside for your use, and not getting any interest in compensation. They are doing you the favor, and they will charge you extension fees if you go past the lock period. I'm looking at a rate sheet right now that was valid a couple of days ago from a medium size lender. For a thirty year fixed rate loan, the discount points go up one eighth of a point between the fifteen and the thirty day lock, and another quarter of a point for a forty-five day lock.

The problem with 15 and (now) 30-day locks is that they are useless as an "upfront" lock, when the application is initially made. Especially with refinancing, where you lose a week by law between signing documents and funding the loan, there just is no way to reliably get it done within this time frame. Even purchases are chancy with the best of cooperation from everybody involved. 15-day locks are primarily a tool of those providers who play the "wait and hope" game mentioned above, and they lock just before printing final loan documents. The fact that they are planning a shorter lock period allows them the illusion of quoting something lower, but even if they tell you what the rates are today, they are quoting you a rate that may or may not exist when the loan is actually ready. On the other hand with regulatory changes that "helped" consumers changing things, I've become a lot more willing to wait to lock until just before I order final loan documents - provided the client agrees with my reasoning. I never did these while I had a realistic upfront lock option, but now that things have changed, they've become a lot more common for me. Unless there's a preponderance of evidence that rates are likely to go up, there's a lot less reason to pay for a longer lock. But since at least a week of the new regulatory delays happen after the loan is locked, everything has to be perfect for a 15 day lock to work without extensions.

A 30-day lock was most common lock period for those loan originators who lock the loan immediately. Until the regulatory changes "helping" consumers, if both you and the provider are organized, it was enough to reliably do all the paperwork and miscellaneous other projects, get final approval, and get the loan funded. It sounds like a lot of time, but it wasn't. On refinances, you lose a week due to legal and system requirements. Let's say you sign the final paperwork on a Monday. By federal law, you have three days to change your mind, and they're not going to fund the loan before that period expires. Monday doesn't count, so Tuesday, Wednesday, and Thursday go by before anything can be done. Good escrow officers don't usually request funds on Friday, because when they request funding is when the new loan starts accruing interest. Monday they fund the loan, and the bank has up to two days to provide the funds, then the escrow officer has up to two days to pay off the old loan before the documents record and the transaction is essentially complete. This takes us to potentially to Thursday or Friday of the following week, and that's just the time between you signing the actual Note and Trust Deed and actual consummation of the loan, when the Trust Deed is recorded. Now, with "helpful" regulations delaying loans, 30 days has become the standard "lock when you're ready to draw final documents" period.

If you want an upfront lock now (assuming you can even get one, which has become increasingly unlikely) you need a minimum of 60 days thanks to a clueless Congress in 2008. The 30 day purchase escrow is not reliably doable if there's a loan involved. A buyer's agent should not allow less than a 45 day purchase escrow at an absolute minimum if there's a loan involved, and 60 is much better.

On purchases, there is no three day Right of Rescission, but if the escrow officer begins funding a loan on Tuesday you are still talking about potentially hanging over until Monday of the next week. Funding doesn't usually take this long, but it does happen.

75, 90 day and longer locks are primarily useful for purchases where there is something external holding the loan back. Only rarely do the market conditions become such that longer locks than 60 days become necessary on refinances. Otherwise, they are most often used only when the actual purchase contract says that the purchase can't close until further out. There is a tradeoff here, and I may occasionally counsel people to wait if the construction on the house isn't scheduled to be complete for ninety days or longer. This makes for a risk that rates may move in the meantime, but rates generally don't go up in huge jumps, but rather incrementally higher from day to day, and past ninety days you may be risking less by waiting than by locking. There's no reason to pay more for a lock than you have to.

Many things have changed in the mortgage business in the last few years, but this hasn't: Even a legitimate and complete quote is fairy gold until it is actually locked. A bank can withdraw its loan pricing at any time. Sometimes this happens right when I'm in the middle of the locking process, and when this happens, the client gets the new pricing. Period. End of story (some banks will give you 30 minutes to complete locks already in process, but this is subject to limitations). Some lenders and loan providers attempt to hide this - and they call it "Consumer transparency." You may hoot in derision if you so desire. A better name would be something like their "Consumer Ignorance is Bliss" policy. "Don't you go worrying your poor little head about that, ma'am!". Until the lock process is complete, you don't have a right to those rates, and you won't get them if the lender changes the rates first.

Caveat Emptor

Original here

Our home isn't worth what we owe. So say you were just an average person selling and buying a house, meaning you put your house up for sale, get a contract to purchase on it then go put in offer in on a new house. Then you generally get a pre-approval, then the loan from a lender for the new house prior to closing on the old house. You then go to the closing sign the papers for your old house and then afterwards sign the papers for the new house. How would the lender giving you the new loan know that you were short selling the old house when everything happens the same day? It's not going to show up on my credit for at least 30 days and by that time I will already own the new house. Get it? Is this possible?

This is not the first time such a scam has been tried.

The loan application asks you about what property you own now. Falsify it, and you're likely going to spend a few years in Club Fed. Since it's unlikely you'll make mortgage payments there, this will compound the problem (Just try this on the judge: "I couldn't pay because I was in jail for lying about my financial situation, so it's not my fault!")

Furthermore, the current mortgage is going to show up on your credit.

The condition the underwriter is going to put on the new loan approval is going to go something like "Show property has been sold and debt paid in full"

Believe me, they're going to investigate. They're going to want a copy of the purchase contract and a payoff on the loan for it. Since the debt isn't going to be paid in full, they're going to figure out that you've got a short sale going on. It's not going to happen "same day" if there's a short sale. They're going to want to verify that the other lender is not going to pursue a deficiency judgment. If you're still going to owe the other lender money, the payments are going to hit your debt to income ratio (DTI).

All that said, if you come clean about the situation starting with your loan application with the new lender, it's possible you'll still be approved - just not the same day you close on your sale. They're going to want something that says your current lender isn't going to pursue the deficiency, but it is possible. Theoretically speaking. They're also going to want to figure out what you're going to owe the IRS, and how you're going to pay it. Then they're going to take that into account in underwriting the new loan.

(NB: With HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007, this may be zero on the federal level but there may still be consequences on the state and local level. Check with your CPA or EA for more information)

But trying to hide the situation is pretty much going to be a guaranteed rejection. Furthermore, whether or not you intended fraud, if you'll look up the legal definition of fraud, what you were asking about falls well within that definition, as you are deliberately attempting to conceal relevant financial information. I wouldn't be surprised to find the FBI paying you a visit. In fact, I'd be surprised if they didn't. Banking fraud having to do with amounts at risk large enough to finance real estate is a serious felony. ALWAYS tell the truth, the whole truth, and nothing but the truth on a loan application. Better to be rejected based upon the truth than accepted based upon fraud.

If you wait until the short sale is consummated to apply for a new loan, there are 13 questions on page 4 of the standard form 1003, the Federal Loan Application. At a minimum, questions a, d, and f (having to do with judgments, lawsuits, and delinquencies) are going to have interesting possibilities, but there is no question that directly asks about a short sale. It does shows up on your credit report for 10 years, as debt not paid in full. Mortgage debt not paid in full, amplifying the failure in the eyes of mortgage lenders. If there's a deficiency judgment, that will show up as well, for ten years from the date of the judgment. I can't recall ever having dealt with someone in this situation; but it's definitely a factor a reasonable person might want to consider in deciding whether to grant you additional credit. If your worthless brother-in-law wanted to borrow $1000 despite having stiffed you on other debts in the past, you'd be within reason to consider that fact in your decision as to whether or not to loan the money. Particularly if the purpose of this loan was directly in line with the purpose of prior defaults. The situation is no different with mortgage lenders.

From personal observation, it generally takes two years - as in 24 months, not as in the second New Year's Day afterwards - after a short sale before lenders are willing to seriously consider a mortgage application from you. You're still going to have to explain what went wrong, but if you're responsible with credit, pay your rent on time (which they are going to be very particular about), and your debt to income, loan to value. and cash to close as well as credit score are all within parameters, you've got a pretty decent shot at that point. I'm not going to kid you: saving the money in 24 months for a down payment plus cash to close isn't easy, no easier than it was the first time you bought. But doing so will reward itself.

Caveat Emptor

Original article here

I am currently living with my parents and they wish to deed of gift their house to me but they still have a remaining mortgage on it. Is it possible to do this or do they have to pay off the mortgage first? Thanks

They can gift the house to you without paying off the mortgage. However, the mortgage still has a valid lien on the property, and must be paid or the lender can and will foreclose.

The mortgage will still be in the names of the people who signed the paperwork (your parents) and therefore any credit benefit or dings will also belong to them. You could find yourself in the unenviable position of being unable to refinance, despite having made the payment for however long, because you're not getting credit for making those payments. Read the contract: it is possible that the loan is assumable. Even if it isn't, it's possible the lender will agree to add you to the list of those responsible (This can only help them; they're not letting your parents off unless/until you do a full refinance. Of course, adding you to the loan doesn't earn anyone a commission, so they might tell you that you need to refinance as it gets them paid, or helps them make a quota)

Quitclaiming is both legal and extremely simple, but has potentially severe tax consequences. Please check with an accountant in your area first. I'd also tell you to check with a lawyer, because each state has its own laws about the effects of how property is held. Nor will quitclaiming the property help if the purpose is to shelter assets from legal action, and if this is to enable your parents to qualify for Medicaid, all fifty states have "lookback" periods of at least thirty months (sixty months is most common), where the state will recover the value of any assets disposed of in that time frame.

If you are the party quitclaiming a property on which there is a mortgage, be advised that you are still responsible for payment of that mortgage. The lender has your signature on a contract that says, "I agree to pay" They may or may not have other signatures, but if they do all it means to you is that other people will join in your misery if the payments aren't made on time. This happens all the time. Husband and wife divorce, one keeps the property, the other quitclaims but is still on the mortgage. Time goes by, and the ex-spouse who retained the property and the mortgage fails to make all of the payments on time. Bad consequences ensue for the "innocent" ex-spouse. I have seen this feature used maliciously by vengeful ex-spouses. I would advise requiring a spouse who retains the property to refinance solely in their own name, and if they are unable to qualify, requiring the property be sold. The other spouse is also entitled to a share of equity in many states.

If the property ends up being sold through a Short Payoff, the lender is almost certainly going to drag the "innocent" ex-spouse (whose signature is still on the dotted line) back into the situation. Basically like being an Alabama fieldhand prior to the Civil War or a male whose girlfriend decides not to have an abortion (Admittedly she puts up with nine months of pregnancy, but thereafter puts the child up for adoption and walks away - he gets hit with a lien for child support from the county for 18 years). Despite not having lived in or owned the property for years, the non-resident ex-spouse is still tied to that property by that piece of paper they signed. The ex-spouse wasn't the owner, so they had no ability to control or influence the sale, but they're still on the mortgage, so the lender can get their money out of them.

Finally, for as long as you remain responsible the mortgage, it will hit your debt to income ratio. This can mean that you will not be able to qualify for another mortgage. In my experience, it is rare that it does not. You are obligated to make those payments, so it's a part of your credit-worthiness. Especially considered in conjunction with likely alimony and child support in the case of a divorce, you may have difficulty qualifying for another property, even ones that would have been well within your means before.

For these reasons, it is simple self-protection to require that the people you quitclaim to refinance the property to remove you from responsibility for paying the mortgage, and if they cannot do so, require that the property be sold.

Caveat Emptor

Original article here

No, I'm not turning into a country western singer. Just got a search for "no closing costs no points loan cheapest rates loan". The visit (to this article) lasted less than a full second. The obvious implication was that it wasn't what that person was looking for.

One of the reasons consumers get mercilessly taken advantage of in mortgage and real estate is because they assume they know everything they need to. Unfortunately, the vast majority don't know everything they need to. Most of the time there are gaps in their knowledge that the unscrupulous can sail the Queen Mary through - sideways. Hence the fundamental dishonesty of almost all mortgage advertising.

As I have said before on many occasions, lowest rates do not go with no points or no closing costs loans. Period. One of these things does not go with the others. Rate and total cost of the loan are always a tradeoff. Nobody is going to give you money, of all things, for less than the cost of money.

This is not to say that one loan with no closing costs may not be cheaper than another loan with no closing costs. The point is that there will be lower rates available with some closing costs, progressively more so as you get higher closing costs. Then if you start paying points, there will be still lower rates available. There is a reason why they are paying all of your closing costs - you're choosing a loan with a higher rate than you otherwise could have gotten.

No cost loans can be and often are the smart thing to do (Unfortunately, the Congress of 2009-10 effectively outlawed the loans by outlawing yield spread which was the only funding mechanism for it) . Because they are the only loans where there are no costs to recover, they are the only loan that can possibly put you ahead from day one. Consider the zero cost loan as a baseline, and compute what lower rates will cost you in closing costs. Consider: If the zero cost loan is 6.75 percent and you currently owe $270,000, your new balance should be $270,000. If you can get 6.5 at par with closing costs of $3500, your new balance is $273,500. Your monthly interest in the first instance is $1518.75 to start. Your interest charges in the second case are 1481.46. The lower rate cost you $3500, but saves you 37.29 per month. Divide the cost by the savings, and you break even in the ninety-fourth month - not quite eight years. So in this example, if you think you're likely to refinance or sell within eight years (in other words, practically everyone), you'll be ahead with the zero cost loan.

If the loan has a fixed period of less than the break even time (any loan that goes adjustable in less than 94 months in this example), you also know that the costs are not a good investment. If this loan were only fixed for five or seven years the rates go to precisely the same rate after adjustment, underlying index plus the same margin. If you haven't broken even by then, you never will, even if you decide you want to keep the loan.

So whereas a true zero cost loan is often the best and smartest way to go, it will never be the lowest rate available. You need to choose carefully where on the spectrum you choose, because there's no going back once the loan has funded. All of the up-front costs are sunk, and you don't get your money back just because you don't keep the loan long enough to break even.

Caveat Emptor

Original here

>broker incurred 19 inquires in 1 week dropping my score.

B.S.

I'd go the full Penn and Teller on this one if I wasn't trying to stay family friendly. The law is clear on this one, and practice is fully compliant with the law. I've seen thousands of credit reports, sometimes with dozens of recent mortgage inquiries. It could be 1, 19 or 19,000 inquiries. As long as they are all mortgage inquiries, all inquiries within thirty days count as one one inquiry. And the credit reporters and credit modelers I'm familiar with all comply.

The best and the worst loan officers are brokers, who shop your loan around to multiple lenders. But you don't have to stick with one broker, and you are silly to do so. Shop your loan with half a dozen at least. I used to tell people to apply for at least two loans, but changes in the lending industry make that a waste of time now. In all practicality, the dual application is dead due to regulatory and financial market changes meant to drive clients away from brokers and towards direct lenders and higher cost loans.

Credit Report scores falling with repeated inquiries used to be a real issue. Years ago, there would be a game as each inquiry was a hit to your credit, so prospective mortgage providers would run your credit again and again, until they drove your score under some noteworthy creditworthiness break-point. They could still use their original report, but since anybody who ran your report after that would see a 678 instead of a 686, or a 572 instead of 588, it would be unlikely that they could provide as good a loan.

However, several years ago the National Association of Mortgage Brokers sponsored legislation in Congress to change this. It was hardly altruistic of them, people not having their score hurt by multiple inquiries means that they are more willing to allow brokers a chance to compete. Nonetheless, this was a major benefit for anyone who wants to be able to shop around for a mortgage like they might want to for any major purchase, and mortgages are the second biggest purchases most people make in their lifetime (the biggest being the property the mortgage loan secures!). No matter how selfish the motive, however, they still did you a major favor, as someone who might want to have a mortgage someday even if you don't now. Tell your mortgage broker thank you for that.

There is a limitation to this, and ironically it affects credit reports run at banks and credit unions, although not brokers. Because in order to qualify for this, the inquiry has to be run under a provider code that says, "inquiry for mortgage." Mortgage broker inquiry codes all say "inquiry for mortgage," because that's the only type of credit they deal with. But banks and credit unions give loans for other purposes also, so they have a minimum of two inquiry codes, one that says "mortgage inquiry," and one that says, "general inquiry." If you are talking to a loan officer at a bank, who does car loans and credit cards also, sometimes they use the wrong inquiry code, and it counts as another inquiry. Talk to four banks, potentially four inquiries. Talk to four brokers, unless you space them out by 30 days or more, it's never more than one inquiry.

So anybody who tells you not to let other mortgage providers run your credit because they might drive your score down is either unaware of the law, or simply trying to scare you because they are frightened of having to compete. Incompetent or a liar, one or the other - maybe both. When you get right down to it, they are really telling you that their loans aren't very good. Because so long as they are done within a few days, the fact is that any number of mortgage inquiries all count as precisely one inquiry.

Caveat Emptor

Original here

For a while there, the forty year mortgage had started to make a comeback, and a few lenders started introducing the fifty year mortgage. The reason, straight from the horse's mouth, the lender's representatives, is lowered payments. In an uncertain and unstable market, investors are nervous about interest only financing, and so the lenders are tightening up on the standards of who is able to qualify for that, while looking for another way to compete on the basis of lower payments. Any fig leaf to be getting their premium and avoid competing upon real price. One way that they do this is the Option ARM, or negative amortization loan. However, to anyone who does even a minimal amount of investigation those loans are like cutting your own throat. A lot of people will still sign up for them, but after Business Week did a feature calling them "Nightmare mortgages" more and more people finally started picking up on the tremendous downsides to those loans (and they were finally all but banned, too late to do any good), but if they still want too much house and they've got to be able to qualify for, and make, the payment, they need an alternative. That is the forty and now the fifty year loan.

Note that nobody does forty year fixed rate mortgages, let alone fifty. They do two and three year fixed rate loans, called the 2/38 and 3/37. Some lenders will also do a loan that amortizes over forty years, but the remaining balance is due in thirty years. This so-called 40/30 balloon has a lot in common with a thirty year fixed rate loan - including the fact that almost nobody goes more than five years without refinancing, so that the thirty year balloon should be no big deal. All of the preceding forty year loans are sub-prime loans, by the way, with prepayment penalties and higher rates than A paper. A Paper lenders doing the forty year loan are few and far between. People get longer durations from sub-prime lenders; A paper competes for the best borrowers - the ones who can really afford their loans - on rate/cost trade-off and underwriting standards. For those lenders doing the fifty year loan, it is pretty much the same story. The fifty year amortization due in thirty, the 2/48 and the the 3/47.

Because the lender is risking their money for a longer time, and with less amortization and therefore more risk, most of the lenders - particularly the ones looking to compete on rate that you would prefer to do business with - charge a slightly higher rate for forty year loans than thirty, and a little higher still for a fifty. The difference is not huge, but it is there. Where a 2/28 might be at 7%, the corresponding 2/38 might be at 7.125, and the 2/48 at 7.25 for the same cost. Sometimes they'll say that the difference is as small as a quarter point of cost for the forty year amortization as opposed to the thirty - but that's an eighth of a percent on the rate, at subprime's usual 1 point equals half a percent trade-off.

In my opinion, these longer amortization loans are mostly a marketing gimmick to lower the payment - slightly - for those who do not qualify for interest only under lender's guidelines. The forty year amortization started making a comeback early in 2005, most as the 2/38, and the fifty year about March of 2006.

My initial perception was that refusing interest only to these borrowers is a figleaf tossed to nervous mortgage investors, and this has been borne out by subsequent events. It's not like fifty year amortization is really going to make a difference, as opposed to interest only, from the point of view of remaining principal. If a 100% loan gets foreclosed any time in the first five years, or if property values decline further, the difference is basically insignificant. Let's do some math.

Assume a $200,000 loan on a $250,000 purchase in California, just so I can do it in one loan without worrying about PMI.

Unlike everyone else who has written on longer amortizing loans, I'm not going to obsess about "interest paid over the life of the loan," although if you keep them that observation is true. But that's almost irrelevant. These borrowers are going to refinance in a few years anyway, same as everyone else. That's just the way things are. But let's do look at the difference between interest paid in the first two years, the fixed period for most of these at the end of which people will refinance.

So under these conditions, the 40 year loan only saves $1668.96 in payments over the first two years, and the fifty $2131.92. So if we subtract these numbers off the deficit in the above table, we are left that the forty year loan costs us $1299.30 in net deficit as opposed to the thirty, and the fifty year loan costs us $2434.17 net of all savings. This on top of the fact that it really doesn't make that much difference in the income we need to qualify for the loan (which in my example is limited to cost of housing with no other payments). Just paying off a credit card that takes $100 payments per month will do more to help you qualify.

These numbers get worse, not better, in the bigger loans that the lenders are using them to justify. Let's assume a $400,000 loan on a $500,000 property instead:

Considering that over two years, the forty year payment saves $3339.92 in payments, it's still down by $2599.38 as opposed to the thirty year amortization, and the fifty is down by $4869.83 in just two years - never mind what happens if you have to do it again in two years, and once again, paying off a credit card probably will do more to help someone qualify full documentation.

I don't see anything particularly wrong with forty and fifty year mortgages, although a thirty year loan is better while making very little difference on the payments, I can see some benefits for those who lie in this income range. But pardon my lack of enthusiasm for something that makes very little difference to whether someone qualifies for the loan, while costing them far more than they save in terms of payments, even over the short term and disregarding the effects if the people do not refinance. Far better to just persuade someone not to buy quite so much house in the first place, even if it means you get less of a commission. But then if most real estate agents sold property on the basis of what people could afford rather than it's beautiful and they want it and therefore it's an easy sale and now let's figure out a way to get them the property even if they can't afford it, the southern California real estate market would not have been in the state it has been in these past several years.

Caveat Emptor

Original here

I've seen a fair number of questions on impound accounts in the last several months. An impound account, also known by the confusing term escrow account because the lender is holding it in escrow, is money that you give the lender in order to pay the property taxes and homeowner's insurance on the property when they are due.

The first thing to note and emphasize is that money going into an impound account is not a cost of doing the loan. It is your money. You own it. It will be used solely to pay your property taxes and your insurance. At the conclusion of the loan, whether you paid it off with cash or refinanced or or sold the property, you get any money left in the account back. The lender is required to send you the check within sixty days of loan payoff.

An impound account is meant to address any lender's two largest worries in regards to a loan: Uninsured destruction of the property or losing the property to an unpaid property tax lien.

The problem with an uninsured destruction should be obvious. The structure is destroyed or heavily damaged and no money exists to rebuild. The borrower doesn't have it and the bank isn't going to throw good money after bad. Here in California, the average property is worth maybe $500,000 or so, but without the home sitting on it, the property may only be worth fifty to a hundred thousand. Within ten miles of my office sit hundreds, probably thousands, of new homes that sold for $700,00 and up even though they sit on a lot that's less than 5000 square feet (0.115 Acres). Many condominiums are over $400,000. Given the location, a 5000 square foot lot may be $200,000, but it's not $500,000, and the lender will take a loss even on the $200,000 because they're not in the business of real estate. They loan $500,000, it burns down without insurance, they lose $350,000. People also lose their jobs over this.

Property tax liens are a major issue as well. They automatically take priority over everything else, and the rules about what the condemning governmental entity has to do are much looser than they are for the bank. They will usually do quite a bit over the minimum, but they will sell the property most of the time, no matter how minimal the best bid. Minimum auction amounts and many other things mandated for when lenders sell the property go out the window when it's the government. Many times this situation can require the lender to step in and pay the property taxes, intending to turn around and sell the property themselves merely to take a smaller loss.

A lender wants you to pay property taxes and homeowner's insurance, and they want to know you've paid them. They encourage this via the method of impound accounts. The theory is simple. Every month you pay the lender, in addition to your actual loan payment, an amount equal to your pro-rated property taxes and homeowner's insurance, and they will take this money and pay those bills when they are due.

No lender is perfect about these, and some are less so than others. A large percentage of the biggest and worst messes I have ever dealt with came about as the result of the lender somehow messing up the inpound account. Others have arisen because even though the lender acted within the law, the client got angry about something. Sometimes it's for a good reason, sometimes it's not.

Because lenders want you to have them, however, they are ubiquitous, and every lender I know of charges extra on your loan if you do not want to do an impound account, unless you live in a state which prohibits the practice. Usually this amount is about one quarter of a discount point. On a $500,000 loan, this amounts to a charge of over $1250 just to not have any impounds.

On the other hand, in places where property values are high, you can have to come up with $5000 or more at loan time just to adequately fund an impound account. Here's a computation of how much you need to fund it works. The lender will divide the annual property taxes and homeowner's insurance by twelve. This will be the monthly payment. The lender is legally able to hold up to two months over the amount required to make the payments, and they want this reserve. So they will look at the projected payments for the next year and figure out how many months they need up front to always have two months worth in reserve. I'm writing this on February 3, and California taxes were due on the first even though they are not past due until April 10th. But the lender uses February first to calculate even though they won't actually make the payment until early April (they earn interest on the money, whether or not they pay any. Some states require that interest be paid, but it is typically something small and worthless like two percent).

February first is usually when the lenders here in California figure will be the low point of the account for the whole year. But if you closed on a loan in February, you wouldn't make your first payment on that loan until April first, and of course, they cannot count on you making your February payment right on the first. So they are going to figure that you will make payments on the first of every month April through January, ten months, before they have to pay your property taxes. Since they have to pay twelve months, and they get to keep two in reserve, that's fourteen months of payments they want to have on February first. Fourteen minus ten is four months that you will have to come up with in advance, or have rolled into the cost of your loan. On a $500k property, that's about $2000 for property taxes even in a basic tax zone, and if your insurance is $1200 per year, you'll have to come up with another $400 for that. $2400 into the impound account.

It gets better. Because the property taxes are due within two months of your purchase, you're going to have to come up with your pro-rated share right up front as well as paying for an entire year of insurance. Since California requires six months property taxes at a time, that adds almost another five months taxes and twelve months insurance up front. Total cost of this in the example given: $3700. Actually, this is due whether you have an impound account or not. Total you need just for property taxes and homeowner's insurance: $5900.

It can be worse. Suppose you were closing on a refinance in October. You originally bought in February. You are only going to make two payments (December and January) before the insurance is due, so your impound total for the insurance alone $1000 for insurance. You are going to have to come up with $3000 to pay the first half of your property taxes, plus because you only have two payments before the second half is due, another $3000, or six months payments for that. Total due, $7000.

There are really only two methods for coming up with the money for an impound account: Bring in the cash from somewhere else, or have the lender loan it to you, adding it to your loan balance. Except in rare circumstances where you are refinancing the same property with the same lender (and usually not even then), existing impound accounts cannot be used to "seed" the new account. This is because it's your money, held in trust. The rules for these accounts are rigid, and I'm not certain I understand well the rules about whether a bank even has the option of rolling one impound account into another.

This typically means that you have to come up with a good chunk of change out of your pocket for a short period, or add the additional amount into your loan, where you'll be paying for it as long as you have a loan on the property. Every situation is different, but most often I prefer to either come up with the money myself or not have an impound account. The extra charges may be sunk as opposed to refundable, but I'm not paying interest for thirty years on thousands of dollars.

Furthermore, if you are adding the money to create the new impound account to your loan balance, since it's going in before the computation of points, it can add another $50 to $100 to your costs of the loan per point you're paying. Minor in and of itself, but adding insult to injury if the loan has points involved. More to the point is that adding impound creation it to your loan balance means there may be a couple years before your balance gets as low as it was before the refinance, just from this. Indeed, the fact that it raises your loan balance is the worst thing about the impound account issue. On the other hand, unless you have a "first dollar" prepayment penalty, what you can do is turn around and put the check for the previous impound account when it arrives into paying down the new loan. It typically won't bring you even, and it won't reduce your contractual payments on the new loan (although that is usually a good thing), but it will ameliorate the damage to your loan balance.

Initial loan closing is not your only opportunity to start an impound account if you want one. If you don't have one to start with, the lenders will be very happy to let you start one later. I've literally never heard of a lender saying anything but "YES!" (usually with a pump of the fist) to a request for an impound account. Why? Because now they know that your taxes and insurance will be paid, and get to use your money, and after you paid a fee for no impounds. Oh, happy banker!

If you want to cancel an impound account, expecially within a year of whenever the loan was funded, you can expect to pay the "no impounds" fee, possibly prorated, but usually just the whole thing. Roll thousands of dollars into your loan balance where you'll be paying interest on it and then pay a lender's charge for no impounds? Ouch!

Can you force the bank not to do any of this? Not really. They don't have to lend you money. Yes, they are in the business of lending money, but if they don't loan it to you, they'll find other uses for it. Somebody else is always willing to accept the bank's terms. You try to violate guidelines that lenders have established in order to lend you the money, and you'll be told, "Sorry but you don't qualify." The golden rule of loans is that those with the money make the rules.

Furthermore, those lenders who didn't require this would be at a competitive disadvantage as regards rates, because their loan portfolio would be a significantly riskier one, and they would have to increase their rates to compensate for this. You could qualify for a better rate or lower closing costs somewhere else. Better to not argue. Assuming that I already have an impound account, all the extra I lose is a maximum of sixty days interest. Two months interest on $5000, even at ten percent, is $83. That's a lot cheaper than any of the alternatives.

Caveat Emptor

Original article here

If you read the papers and the congressional record on the housing crisis, you might think yield spread is the central culprit for the entire meltdown. You would be wrong.

Yield spread is a beneficial tool, offered voluntarily by lenders, that is an alternative to consumers paying all of the costs of a mortgage themselves.

No matter who does your loan, broker or direct lender, they need to get paid for doing it. If they cannot make money at it, they won't be in the business of doing loans. There are high cost loans and low cost loans, and any number of ways of paying those costs, but there is no such thing as a free loan, and anybody who pretends otherwise is either a naive child or lying through their teeth. There are a very few loan providers out here who will finish loans on which they don't make anything in order to keep their promise about the terms of that loan to clients, but there has never been a loan in the history of the world where the provider planned not to make anything.

Yield spread arises as a by-product of the price that the lender receives on the secondary market. On the day I originally wrote this, for thirty year fixed rate conforming loans, at 5.5%, lenders were making about 20 cents per hundred dollars over the actual dollar value, in addition to the roughly $1.30 per hundred dollars the lowest priced lender I had was charging brokers. For a $300,000 loan, this means they were making roughly $4500 for a loan where the broker did all the work from attracting the customer onwards through the rest of the loan (the rate cost more than three points in the one direct lender retail branch I saw last week, so they'd be making about $9600 there). None of this covers all the fees for service, aka closing costs, or loan price adjustors. This is purely from the act of putting the money to the deal. At 6.00%, the lenders were making about $1.56 per $100 of loan amount directly, and that's about where wholesale par was, the loans that brokers could do without any explicit charge for the money. The direct branch wanted a point and a half to do that loan. Finally, at 6.5, they were making about $2.31 per hundred dollars directly from the secondary market, and they were agreeing to give brokers about seventy-five cents of that in the form of Yield Spread.

What this boils down to is that wholesale lender is looking to make about 1.5% of the loan amount, no matter what loan the consumer is put into, merely for the act of funding the loan. It is out of the difference between the number the wholesale lenders charge, and what their retail lending branches charge, that brokers make their living. If brokers can get the loan done for less than the retail branch, and still make money, the consumer comes out ahead.

There is no requirement for lenders to offer Yield Spread. They don't do so to enable brokers to hose customers that they would rather have walking into their own retail branches. They do it to compete for the business of people who have discovered that using brokers is actually a way to get the same loan cheaper. They do so because other lenders do so. Because they really want that $1.50 per hundred dollars loaned, they'll willingly give up most of any amount over that to encourage brokers to come to them, rather than the other lender. As I've said, in loans there is no difference in brand names. It's just money. So long as the terms are the same, it really doesn't matter if you're making the check for payments out to "International Megabank, Inc" or "Fifty-Third Bank of Podunk," and that really is the only difference. In fact, using brokers as a way to expand their reach is one of the ways small lenders can become major players quickly, without the expense of opening branches. More than one major household name has done precisely that. By the way, this $1.50 per hundred dollars loaned is very low by historical standards - it was roughly $2.50 twelve months before, and twelve months before that it was more like $4.00. But there was a lot of money chasing not very many borrowers just then, and it hasn't changed much since. Nor is any of this in any way evil. As a matter of fact, it has enabled much lower interest rates for consumers than the traditional lending model where the lenders held the loans for the duration.

Nor do lenders like paying yield spread. They'd rather have the entire secondary market premium for themselves. They offer it for one reason and one reason only: Because the brokers would otherwise take their clients to a different lender who did offer it. Most brokers operate on a set margin per loan, especially the better ones. The good ones are willing to disclose this margin, the bad ones will do everything they can to hide it. This margin may vary between loans. If borrower A is a slam-dunk A paper borrower, that loan can be done a lot more easily than a sub-prime borrower who needs to qualify based upon bank statements, and will eat up a lot less of my time and therefore, the loan should be done on a thinner margin. Whatever this margin is, it can be paid via origination (a charge for doing the application and getting the loan done), it can be paid via flat dollar charge to the borrower, it can be paid via yield spread, or it can be paid via a combination of these. But it is going to get paid. When I quote a loan, I quote it in terms of terms and total cost to the consumer, including what I make, and if I'm not going to make enough to make it worth my while to leave home, I'd rather not do the loan. Others quote higher, building a bit in that they're prepared to negotiate away if the client asks. Still others just make believe that they're going to deliver the loan on better terms than they will actually deliver it to get you to sign up with them - but the chances of anyone actually pricing the loan so as not to make anything are zero. Consumers looking to tell the difference between better and worse providers should ask Questions you should ask loan providers. That is another change for the worse in the new lender environment, but the way. When I originally wrote this, I could lock every loan upon application and guarantee the price immediately. As I explained a few months ago, that is no longer the case. The lenders have begun charging me (and therefore my future clients) too much for loans that are locked but not delivered. It's hard to blame them, but it's still not a beneficial change for consumers.

Yield spread is nota cost paid by consumers, Dodd-Frank notwithstanding. It doesn't show up anywhere in the list of charges they pay. Were its disclosure not mandated by federal law, the consumer would have absolutely no evidence of its existence except, possibly, the absence of other charges or the fact that they have been paid without the consumer having to shell out a dime. I agree with the disclosure law, by the way. Indeed, I want to expand it to require lenders to disclose the secondary market premium they would be paid assuming they sold the loan. Consumers do pay for yield spread indirectly, of course, with increased interest charges during the life of the loan. But they pay those same charges whether incurred as a result of a broker earning yield spread or a lender being able to make the money on the secondary market. Furthermore, paying those charges will be to the consumer's benefit if the increased charges for interest offset or more than offset the higher fees they would have to pay in order to get a lower rate. There is always a tradeoff between rate and cost in every loan. Most consumers do not keep their loans long enough to justify the higher fees for a lower interest loan. Similarly, if the loan is going to go to from a fixed or set rate to a variable rate loan before the higher costs for a lower rate have been recouped, whatever wasn't recovered before that happens has been wasted, as all the loans of a given type reset to the same rate when they adjust - doesn't matter whether you got a zero cost loan out of Yield Spread, or you paid five points to buy the rate down, and therefore the payment. But the 4.875% 3/1 that closes today will in three years reset to the exact same rate and payment as they 6.25% 3/1. Well, not exactly. Because assuming they did what most borrowers do and roll those costs into the loan, that 4.875% loan will have a higher balance owed than the one that was initially 6.25%, and therefore will have a higher payment when they both reset. So yield spread has done the latter borrower a favor by helping them control overall loan costs.

Let's look at what happens if we count yield spread as part of the costs of the loan. First off, it makes it appear as if loans including yield spread are more expensive than ones without. This gives direct lenders an apparent (not real!) advantage over brokers. Let's consider an actual real world example: A few days before I originally wrote this, a retail lending branch offered one of my prospects a 6.125% loan for one point, while he came back to me and I locked him into for 6.125% for ZERO points, a price which included me making about nine tenths of a point in yield spread. Assuming closing costs are the same (in fact, mine are lower than theirs), here's what the client sees now on a loan with a $300,000 loan payoff. (I'm also going to assume anything other than actual costs, such as prepaid interest, are paid out of pocket)

This reflects reality. The client ends up with a loan balance $3060 lower, and a payment $18.59 lower, through getting exactly the same thirty year fixed rate loan through me as he would have gotten through that lender.

But if I have to count yield spread as a part of the cost of the loan to the consumer despite the fact that he's not paying it, here's what the sheet looks like:

First, note that the actual amounts owed by the consumer after closing the broker originated loan are exactly the same whether yield spread is counted as a cost or not. It makes zero difference to what the consumer actually pays. The loan amount is the same, the interest rate is the same, the payment is the same.

Why does the government want to make it look like the broker loan is more expensive than it really is? In the second example, appears at first glance like the consumer is paying almost as much for the broker loan as for the lender loan. They're not. Keep in mind that this is for exactly the same thirty year fixed rate loan at 6.125% - except that the consumer's loan balance if they go through the broker ends up $3000 lower. That $2726.10 in yield spread is not a cost to the consumer. Indeed, Yield Spread is only a cost to the lender. Note that the consumer's balance and payments in no way reflect yield spread, and my client has been told about it, but really doesn't care. Being a rational consumer, he shopped for the loan on the best terms to him and his family. He doesn't care if I'm making ten cents or ten million dollars. All he cares about is I get him the exact same thing for a cost that is thousands of dollars less. But if Yield Spread is listed as part of the cost on the Good Faith Estimate (or MLDS in California), then it appears as if that lender's loan is a lot more competitive than it really is, i.e. $5950 to $5626, not the reality of $5960 to $2900. Furthermore, this was an uncommonly broad difference, that still looks like the broker is offering a better loan. Far more common is a differential spread of half a point or so. If the price differential were only half a point, the broker's loan would look more expensive, while being in fact less expensive to the consumer who doesn't know yield spread is an accounting phantom as far as they are concerned. The consumer would still be saving money with the broker - about $1500, a full 25% of the actual costs of the loan, but listing yield spread as a cost makes it appear as if the lender's loan is cheaper when it is in fact more expensive.

Furthermore, listing yield spread as a cost has some other effects. Suppose you live in an area where the cost of housing is about $60,000 to $80,000 or less. Under the same bill in congress proposing to count yield spread as a cost to consumers even though it is not, is a provision limiting total costs of loans to six percent. Six percent of $60,000 is $3600. Six percent of $80,000 is $4800. There literally is not a loan that a broker can do under these limits. I can't keep the doors open on $700 per loan, which is all that's left after those $2900 of fixed closing costs at the low end. It's not like I get to spend every dollar the company makes on my family. Even at the higher end, it's probably not worth my while to accept a loan on which I can only make $1900. Effect: Brokers in those areas go out of business, but direct lenders are still in business, lessening competition. They can jack up the rates until the secondary market will pay them enough, and secondary market premiums aren't officially considered part of costs, even in the artificial environment of this new bill. Result: Rates rise, lending margins rise, competition is less. Big Winner: direct lenders, who clean up with all the extra money they make. Big Loser: brokers, who go out of business. Of course, consumers lose, too, as do real estate agents because prices are lower as a direct result of higher rates, but hey, that's okay because the big bankers who bundle million dollar campaign contributions made out!

Let me make something explicitly clear: Low cost real estate loans cannot be done without yield spread. The loan provider has to make enough to stay open. The closing costs are real, and the people performing those functions need to get paid or they won't do them. If they don't do them, the lenders will not approve your loan. There are three ways to pay these costs: yield spread, out of the consumer's checking account, or (on refinances with existing equity) by adding those costs to the loan balance, where they are still paid plus the lender gets interest on them!

Suppose you live in an area, such as I do, where the cost of housing and loans is enough higher for this not to be a danger. One cold hard fact is that there are still people who bought years ago that bankers have a free field with because brokers cannot legally do their loans and still make enough money to keep the doors open. Consider a $200,000 loan, where 6% is $12,000, so the maximum loan cost just isn't a factor. Such a person, realizing that they've owned this property ten years and refinanced five times, decides they want a zero cost loan, because they'll come out better. Well, a broker can still get them a loan that doesn't really cost them anything, but brokers no longer are legally capable of calling it a zero cost loan, because legally, yield spread is a cost. All we can do is call it by some name that sounds like a legalistic way to lie. So now lenders can advertise "zero cost loans," and brokers are breaking the law if they try, despite the fact that they offer the same loan at zero real cost to the consumer with a rate a quarter of a percent less than the lender will. Indeed, for all the low cost options, the lenders now appear to be cheaper than brokers even though they are not. Also found in this same legislation is a provision to make it illegal for brokers to get part of their compensation via yield spread and part via origination. This is the vast majority of my current loan business, because it's the range where the Tradeoff between rate and cost is best for consumers. Say I figure I need eight tenths of a point to make a loan worthwhile for me to do. If the yield spread for the rate the customer chooses is three tenths of a point, I need a half point of origination to make it work. But now I can't do this loan the simple way. I have to charge eight tenths origination, and even though I agree to rebate the three tenths of a point of yield spread to the consumer - in other words, even though it's an accounting phantom never really coming out of the borrower's pocket in the first place, it still legally counts as a cost of the loan. So the new accounting with the requirement of adding double counting the yield spread to the official cost of the loan makes it look like the broker's loan costs 1.1 points, even though the consumer is only paying five tenths net, getting three tenths of a point in their pocket. If the trade off was seven tenths of yield spread to one of origination, it looks like a 1.5 point loan by this new accounting, even though the consumer is only paying one tenth of a point. Result: Consumers are going to have to have an accounting degree to realize that the broker's loan, which looks more expensive, is in fact the cheaper loan.

This is the exact opposite of what the government should be looking to do. But the mortgage banking industry has much bigger pockets than the mortgage broker industry, and they realized quite early on in this whole meltdown that if they painted brokers and yield spread as bad and controlled the narrative and their bought friends in congress controlled congressional testimony, they could make this entire housing meltdown for which they were more responsible than any other group into a public relations opportunity to restore the dominance of residential lending they had forty years ago. Bankers don't like paying yield spread, and they don't like competing with brokers, whose costs are lower because nobody expects brokers to have flawlessly landscaped offices with three inch think carpet, security guards, and armored bank vaults, or to wear $2000 suits. They do so only through what they saw as a tragedy of the commons type mechanism, where they could compete for broker's business at the costs of lessening their own margins, or not get any. Of course, this tragedy for lenders was a boon for consumers, but their responsibilities are to their own bottom line, and if they can legally shackle brokers, not to mention legally keeping their competition among other lenders from competing for broker business, those lenders are all better off.

Who's not better off? Well, basically everyone except major banks. Lessened competition, loan documents that make it appear as if one provider's loans are more expensive than actual while not making equivalent disclosures about other provider's loans, all of this translates into higher loan prices for consumers. It may seem penny ante to object to consumers paying a few hundred dollars extra here, a few thousand dollars extra there, but when you put it together across 100 million units or more, this translates into hundreds of billions of dollars per year, all sliced into fewer pie portions because the lending industry just effectively got a lot smaller, and with brokers diminished the costs of entry just got a lot steeper for any new lenders who want a piece of the action.

Yield spread is a tool, and a highly beneficial one from consumer's point of view. It has been one of the largest contributing factors in the rise of brokers, and through brokers, of making mortgages more affordable to consumers. It is not a cost to the consumer, and should not be treated as such, although it should be disclosed, as it is required to be. It can be misused, as it was in the case of negative amortization loans, but the ultimate indictment there goes back to the lenders who offered the loans and the high yield spreads, with regulators and mortgage brokers solely in supporting roles. Indeed the best way to fix this entire problem for the future would be to fix the disclosure rules to make the process clear to the consumer, as I wrote in How to Avoid A Repeat of the Housing Market Mess - but if Congress starts to fix those, nobody would be able to hose the consumers, and (sarcasm on) we can't have that, can we?

Caveat Emptor

Original article here

It has become a trend for real estate agents who think they're being "smart" to require an automated underwriting approval.

These are automated underwriting programs from Fannie Mae and Freddie Mac saying that Fannie or Freddie will buy the loan providing that everything is precisely as represented. The advantage to automated underwriting is that it will often approve people who might not qualify under manual underwriting rules, but usually due to a particularly stirling credit score Fannie and Freddie will move someone who's marginal to an acceptance. The problem with automated underwriting is that absolutely nothing can change or it is no longer valid.

Let me tell you a true story that has happened to me twice now with different processors. In both cases, I ran automated underwriting on loan and got a full regular approval. Then my processor, for reasons known only to them that neither one of these two women were able to articulate to me, decides to run automated underwriting again on exactly the same refinance and gets a level 3. This is not a good thing. Level 3 acceptance is not the third level up the corporate food chain approving the loan. Think of it like life insurance, where level 3 means you're getting three bumps up the cost ladder because you're a riskier bet for the insurance company. That's what level 3 is. They'll still take you, but they want to charge extra. In each case, it could just as easily moved from "accept" all the way to "caution" (Freddie Mac's code word for "No, we won't buy it") What Level 3 meant in practical terms was that instead of making money on the loan, I lost money but completed the loan anyway because that's good business and the right thing to do for the client who trusted me. However, not every lender follows that business model.

If anything about the assumed scenario changes, automated underwriting that was previously done is useless. The two classics are if the purchase contract is for a little bit more or if the tradeoff in rate and cost gets a little higher rise a tad before they are locked. If the down payment is a couple hundred dollars less, or a slightly lower percentage of the purchase price. If one of the buyer's credit cards lowers the credit limit, resulting in a credit score a couple of points lower, that could trigger a change. The list of possible reasons for a change goes on and on.

There are exceptions and points in the process where as long as something is still within the same basic band of guidelines, you don't have to run automated underwriting again. For instance, if an appraisal for a refinance comes in slightly low but you're still within the same loan to value ratio band, I've funded loans without re-running automated underwriting.

The thing to take away from this is not to put your faith in automated underwriting from Fannie and Freddie. Above the cutoffs for manual underwriting, it is extremely finicky. It can be finicky even below those guidelines, as one of the above mentioned processors found out. Truthfully, if lenders didn't give price breaks for automated underwriting, I wouldn't do it except in those circumstances where the buyer doesn't qualify under manual underwriting rules.

In fact, the real Gold Standard for preliminary approval is manual underwriting. Going through manual underwriting isn't sexy, and it doesn't generate a result that looks like it was Handed Down From On High. "Hey, I put this information into the computer and it said I was approved!" as voices from heaven sing "Hallelujah!" (at least in the mind of that deluded individual). But if a borrower qualifies under manual underwriting rules, then they qualify. Maybe that lender won't give their loan officer that quarter of a discount point for automated underwriting, but they will fund the loan provided everything checks out and there aren't any loanbusters. Somebody will approve it and it will fund.

If there are loanbusters present, automated underwriting won't catch that any better than manual. As a matter of fact, manual underwriting is better at catching loanbusters before it gets that far. If the buyer's ratios are tight and qualification depends upon rates that might not be there tomorrow at a cost they can afford to pay, that shows up quite well under manual underwriting. As a listing agent, if I see someone with a 44.9% debt to income ratio and just barely enough cash to close under the listed assumptions, I know that's a shaky deal at best. Automated underwriting doesn't tell you how close to the line it is, it just tells you the result. Manual underwriting lets you know how resilient the buyer's ability to carry through on the purchase is likely to be if something goes a little bit differently that projected. I don't know about you, but in my experience, transactions where everything goes precisely according to the initial plan are about as common as battle plans that survive contact with the enemy.

(Note however, that the originator of that quote strongly believed in planning the whole campaign out in an extensive and detailed manner beforehand so that when issues happened, he and his officers knew what their options were and were not. As a result, he was the most successful general of his day even if most Americans have never heard of him. While Lee and Grant were mucking about mostly over a small patch of Virginia for years, Helmuth von Moltke the Elder planned and executed two successful winning wars in a single campaign each)

As a listing agent, I will not accept automated underwriting results attesting to the buyer's qualification. I want to know how subject to failure this offer is. As a buyer's agent, I don't write them unless clueless listing agents demand them. The object, after all, is to get the property for the buyer at a price they are willing to pay, and beating the listing agent up on this subject is counterproductive to that, no matter how stupid it on their part. If you're a seller and want to know how qualified a buyer really is, insist upon seeing the manual underwriting numbers.

Caveat Emptor

Original article here

Can I qualify for first time home buyer financing if I buy a duplex and live in one and rent out the other?

I thought if I bought a duplex, lived in one side and rented out the other would be a good idea to help pay the mortgage. I would live there for a couple years then move and rent the entire duplex as an investment property

It would be very popular to answer "yes".

However, the fact is that the only nationwide first time buyer program in existence, the Mortgage Credit Certificate, explicitly disallows all multiple unit property from participating.

Furthermore, I've dealt with the federally funded local first time buyer programs throughout southern California (in excess of forty different municipalities). In every single case I'm familiar with, it's a requirement that it be a single family residence. Just like the MCC, no duplexes, no apartment buildings, no "2 on 1" properties. Condos, townhomes, and PUDs are fine, but nothing intended for more than one family to live in.

People sometimes get confused because of the way residential property is defined (1-4 units), but just because something qualifies as residential property doesn't mean it is eligible for a first time buyer program.

Finally, for every first time buyer program I'm aware of, the government assistance goes away (as with the MCC), or worse, becomes immediately due should you move out. For example, in one San Diego suburb they have a very nice "silent second" program. It means you only have to actually pay the mortgage on a potentially much smaller amount, usually wiping out a need for PMI or a conventional second mortgage, while the city's second accrues at a very low rate. But if you move out, they'll call the loan, which means you've got thirty days to get them their money somehow before they foreclose.

(They also flatly refuse to subordinate, meaning you're not going to be able to refinance without paying them off, so you'd better choose a fixed rate loan that you can really afford for your primary mortgage in the first place)

There may be municipalities somewhere where this is permitted under their local programs, but I've never heard of one, and I do suspect it's prohibited in the legislation and regulations for the federal administration that funds these local programs. The First Time Buyer programs are intended to stabilize neighborhoods, and make it a little easier for people to be able to afford to buy housing they intend to live in. They are not intended to help you build a real estate empire - as a matter of fact, that's somewhat counter to their purpose.

First time buyer programs are also never free of strings. If you intend on taking advantage of these programs, it would behoove you to make certain you understand what those strings are, as well as all of the implications, before you've got a purchase contract. Some of the strings on first time buyer programs are real deal-killers. For example, a city about a half hour's drive from my office has one that looks really nice at first glance, but restricts both who you sell to and what you can sell for, eviscerating the economic benefits of ownership and making you essentially a renter who also pays maintenance and property taxes. Unless you're just going to live there forever, which may not be under your control, that's not a desirable situation. Probably better to buy in the city next door to that one, which has a more useful for your financial future "silent second" program much like the one described above. You need to be careful with first time buyer's programs, lest you end up in a situation that does not justify your expenditures with future benefits.

Caveat Emptor

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