Mortgages: February 2019 Archives


Most people, particularly first time buyers, want 100% financing or as close as they can get. Actually, most first time buyers don't have a down payment and couldn't put a significant down payment (5% or more) if they had to. And since 5% of $400,000 is $20,000, and 10% is $40,000, that's a significant chunk of change. Especially when you think in terms of lifespan to save: a family that makes San Diego area median income ($69,700 per year when this was written) and manages to save a full 10% of their gross salary - $580 per month - takes almost three years to save a $20,000 down payment, and 69 months to save $40,000! Never mind closing costs, which can be anywhere from another $4000 on up, depending upon how many points you want to buy the rate down. Considering the psychology of the average American, these time estimates are hopelessly optimistic.

For at least ten years, 100% financing had been available, and the means to qualify for it had been routine. Since the vast majority of all buyers need a loan, this availability has been priced into the market. Indeed, it was one of the early factors that led to a run-up in prices in many areas. Nor is there anything wrong with 100% financing, per se. When you look at fully amortized fixed rate loans done on a full documentation basis, the levels of default and lender loss are not significantly higher than the most hidebound "traditional" loan standards.

It was only when the standards became so relaxed that this was too much to ask for that everybody got into trouble. There is a reason why less sustainable loan types - interest only, short term hybrid ARMs, and negative amortization loans had always required a much larger down payment - greater risk of default! Lenders, under pressure from the government under CRA and with an eye on selling the loans to Wall Street figured there was no down side to loosening loan standards until even "fog a mirror" was asking a little bit much. The assumption was that prices had gone up by double digit percentages several years in a row, so "of course" they were going to keep going up forever - and ignored anyone who tried to tell them otherwise.

Well, we all know by now how that one turned out. Unfortunately, everybody in positions of responsibility at various lenders (and the regulators as well) went into full blown damage control mode - by which I mean playing CYA by slamming the barn door after all the horses have departed. For good measure, they've locked the doors to all the other buildings as well - even the ones that never held horses. Among these are full documentation 100% loans.

The best and cheapest way to get 100% financing was split the amount into two loans - a first for 80% of the value and a second for the remaining 20%. Unfortunately, as I have been reporting for some time now, second mortgage holders found out that they were the ones really holding the sack for all of this, and stopped approving anything over ninety percent of value. As I said then, this made things worse, especially for everyone trying to get out of unsustainable loans and those who lent to them. When someone buys with a loan they are going to need to refinance within a set period, and lenders suddenly pull all refinancing programs that could have refinanced them, that property is going to be a distress sale. People can sit in denial right up until the eviction notice, but that's what's going to happen. Multiply this millions of times over, and you have all of the problems that have plagued real estate since the bubble burst.

The second way to get 100% financing was with Private Mortgage Insurance. PMI rates had gotten very cheap when they were competing with another option for 100% financing. It was still more expensive than splitting the amount borrowed into two loans, but it was possible to get PMI even after second mortgage holders bailed out of the market. If the debt to income ratio was lower for A paper, it only made a marginal difference on qualification of approximately 10%. Even when PMI rates suddenly jumped, things were still manageable. The decline we had already had here in San Diego more than covered the additional cost.

But lenders have withdrawn all 100% financing programs except for the VA Loan.

So what happens when 100% financing suddenly isn't available? People who could have bought and were willing to buy suddenly cannot because they do not have the necessary cash. This constricts demand for housing, as there are fewer people able to qualify for the loans. Prices fall, when they would have been stable otherwise. Because of prices falling below what is owed, people are unable to refinance. Whether it's because they cannot refinance or there was just no way they could really afford the property in the first place, people who sell are unable to sell for enough to pay lenders in full, and those lenders, predictably enough, lose money they otherwise would not have. Poetic justice to a degree, but the lenders aren't the only ones paying. Just like when things were going crazy in the upwards direction, this is all a vicious cycle - except in the other direction

Furthermore, even if you are able to qualify, via one of the governmental or quasi-governmental programs, the added cost constricts what you can afford. If your family makes area median income ($69,700 in 2008), you can't afford a $300,000 property at 6%, even if you have no other debt. About $270,000 is the absolute limit.

Who are the big winners? Two sorts of folks, and for either one this is a real buying opportunity, the sort where if you buy now, you will be very happy in a few years. The first is people eligible for a VA loan. That's the only 100% financing program available right now, and since there is no PMI on VA loans, it can really make a difference as to what you can afford as well. Someone eligible for a VA loan making area median income can stretch nearly 20% further in terms of purchase price than someone without, and I don't know of any income limits on VA loans. Assuming the new limits come in, a family making $100,000 per year will qualify for $500,000 with no money down on a VA loan. When you can qualify and other people can't, that's negotiations leverage. The current owners can keep waiting and hoping for a prospective purchaser in the who makes $120,000 or more per year, but that's about two more standard deviations. Look up the normal probability distribution - at $100,000 per year you're already looking for about one family in 10,000 who might qualify, and most of those already have the property they want.

The other winners are people who have cash for a down payment. All this stuff about PMI doesn't constrict people who don't need PMI, or who at least have enough so that they don't need 100% financing. If you get up to 10% down payment, now you've got the possibility of a second mortgage, and once again, PMI goes away. So if you have a 10% down payment on a $400,000 property, not only are you only borrowing $360,000, but there's no PMI on that money, either. This saves you $480 per month on your first mortgage, $453 per month on PMI, and if it costs you about $293 for a second mortgage, you're still saving $640 per month, meaning you can qualify as if you were a purchaser who makes an extra $1420 or more per month - $17,000 per year!

Suppose you don't fall into one of these two categories? There are about four alternatives. First, you can accept purchasing a less expensive property, which is probably the smartest alternative for most folks. The best way to save for a down payment on the property you really want is to buy something less expensive now. People call this "settling" in a demeaning way as if there's something wrong with financial sanity - a sentiment I do not understand. Second, you can wait until you have saved the difference, fighting against leverage the whole time. Most folks never save enough to make the property more affordable. Third, you can find an owner with enough equity to carry back a large part of the transaction, a consideration for which they are going to demand a much higher price. For one thing, that money is their down payment for their next property. To say this is not a good way to get a bargain on your property purchase may be the understatement of the year. Finally, you can do completely without - in other words, stay a renter until the situation changes. Now every time I write one of these articles, I get some clueless watchers of immediate cash flow who have no understanding of leverage, real estate markets, or the fact that the crashing of the market is putting significant upwards pressure on rents, for two reasons. First, the people who have lost property have no choices except renting or homelessness for at least two years. Second, the leverage that was working in the landlord's favor these last ten years, encouraging them to keep rents relatively cheap, has disappeared with the housing bubble. Locally, I've seen the average rental price in the areas I work jump by $150 per month or so just in the last year, and this is just the leading edge of the adjustment. Paying attention to only the cash flow as it exists now is a way to make a bad decision - you need to look at the entire situation as it is going to be for the rest of your life.

Property values are going to come back. For one thing, I still expect 100% financing alternatives to become more available again. Since their absence had a negative effect on the markets, what's going to happen when they become available again? If you answered, "A one time shift back upwards in property values," give yourself a pat on the back. If you followed it with, "Which will have the further psychological effect of causing everyone who's been putting off purchasing to rush back into the market for fear of getting priced out again, putting further demand and causing another shift upwards in pricing," then you have some memory of how the general population chases last year's returns and the effects thereon. Fear and Greed, just like last time. Some people never learn. But if you buy before the great mass of humanity gets their fear and greed up, that will amount to a nice large chunk of change in your pocket, especially if you then want to move up. I expect San Diego to at least recover most of what we've lost very quickly once the average person gets it into their head that current price levels are unsustainably low, which they are.

Caveat Emptor

Original article here

I get the same junkmail and spam most of you folks do. They don't know who I am when they send it out. It's just that I know what's going on behind the scenes with this stuff.

So I thought I'd get out my calculator and deconstruct what's going on with the advertisements I've gotten in the mail.

The first one starts with "30 year fixed rate 5.125% (APR 5.42)" Well, computing that out, it converts to $10,100 of nonexcludable fees on a $300,000 loan (UPDATE: actually, I discovered later in light fine print that the APR is based on a loan amount of $359,650, the so called "maximum conforming" loan at the time, which means the imputed number of points are slightly higher). This works out to 2.71 points, assuming they get it done for the same $1700 or so of excludable fees everyone else has (Title, Escrow and appraisal charges are excluded from APR computation). I had that rate at 2.25 discount points at the time, so they're making about half a point extra if there's no prepayment penalty. So if there's no prepayment penalty that's not a bad loan, except that I called and found out there's a five year prepayment penalty on it. That's a good healthy (or unhealthy, depending upon your point of view) cha-ching of about two and a half or three points to the loan provider. Not to mention that the postcard was "old and the rates are higher now" according to the voice on the phone I talked to at the time, "so you should start the loan now before the rates go higher." The lowest rate they could do as we were talking? 5.375, which I could do for 0.75 discount points as I was talking to them - giving them as a loan provider almost two points in their pocket without the 2.5 to 3 points for a five year pre-payment penalty.

Then, after a faint dotted line designed to be overlooked, they tell you all about payments. $250,000 is $632.14 per month, $300,000 is $758.57 per month, etcetera. Going over to the calculator (even though I can tell you what's going on without it), I get a negative interest rate when I punch in thirty year amortization. I shouldn't need to explain to adults that something is wrong with that picture. Well, what's likely going on is that this is a forty year amortization, and indeed, when I punch in a forty year amortization I get an interest rate of 1%. So on top of being on a forty year amortization, the payments they are quoting are on a negative amortization loan. It is neither on the same rate nor term as the previously talked about loan. And that's the purpose of that thin dotted line that's designed to be missed. They want you to think payment B is connected to loan A, when in fact they are talking about a completely different loan. And indeed I can find that in small, very light print on the other side of the card, under some darker print about about $1000 "Best price guarantee." Voice on the phone explained that, "If you close and subsequently prove you qualify for a better rate with someone else, we'll pay you $1000." Well, first off, if they pay you $1000 to make three points on the loan, they are still $8000 plus to the good, and if I were the sort to be giving that sort of guarantee I'd have no problem wriggling out of it on any of several fronts such as "rates are lower now - why don't you refinance with us (so we can hose you again)". And if you refinance or sell within five years, you're out over $7600 in prepayment penalty. Since 95% of all clients sell or refinance within five years, if you've got to have the 5.125% rate, statistically you're better off paying somebody honest one point of origination as well as the lender discount points for no prepayment penalty. One point of origination works out to a little over $3000 on a $300,000 loan. This is less than the difference between the loan they advertised and the loan they theoretically had when I called the day after I got the card.

But the rate is voodoo magic to most people. Theoretically, you've got to be able to understand some mathematics to graduate high school, or at least be able to figure out how to get numbers out of a calculator. Nonetheless, what most people "buy" loans on is payment. This is well known factual information to everyone in the real estate industry. Very few people ever call saying, "Give me that rate." What most customers want is the payment. And when the advertising apparently links the cheap payment on a negative amortization loan to the "Thirty year fixed rate of 5.125%", most companies are doing what I call "lying by association". Most clients want to believe that the one goes with the other and that the listed item is a pretty good bargain, when in fact I have shown that not only do they have nothing to do within each other, but also that they are both the sort of loan I would wish my worst enemy in the loan business would get for some enemy of civilization like Chairman Mao. Then when Chairman Mao gets a lawyer (and enemies of civilization never have a problem getting competent lawyers), I get to watch the whole thing blow up on both of them from safe on the sidelines.

Oh, and this postcard also talks about "skip one or maybe 2 payments." As I cover in Prepaid Interest and Why You Never Really Skip a Mortgage Payment, you never really skip any payments, EVER. You can either pay them out of pocket or roll them into the costs of the loan. Anybody who represents otherwise is lying, with malice aforethought, unless they're going to whip out a checkbook and pay it out of their pocket. How likely do you think that is?

To avoid this trap: First, don't "buy" loans based upon payment. Second, get (or find) a calculator and use it, or even learn to do the calculations yourself. Third, ask the prospective loan provider the hard questions, and make sure that the question they answer is the one that you asked. Fourth, Shop Shop Shop around for a loan. And apply for a backup loan. Finally, always realize that with the kind of money loan providers make from loans, they will promise anything to get you to call, do anything to get you to apply for a loan, and even though they never have any intention of actually delivering what's on the Good Faith Estimate (or MLDS in California) there is little chance of you being able to get any kind of legal satisfaction from them.

Caveat Emptor

Original here

I've said upon more than one occasion that the factors at closing are all in the loan provider's favor. Unless they signed up for multiple loans, the typical consumer has no leverage to get the loan provider to play it straight at closing, and actually deliver what they said they would back when you signed the application. Many people never notice that their lender has taken advantage of them until they get the first payment notice, which is far too late to do anything about it. Furthermore, others never notice at all, and of the ones who do notice something is wrong in a timely fashion, eight to nine out of ten are so fed up with the loan process that they sign the documents anyway. I keep hearing sworn oaths from people who signed up with my competitors that they won't sign the documents at closing if they're not what they were promised, yet when I follow up the vast majority of them did. I can only conclude that these people actually enjoy being led on like the rats by the Pied Piper of Hamlin.

Assuming that you are not one of those people who enjoys being treated like a disposable rat by someone who's making a goodly sum of money from your business, what can you do? The first thing used to be apply for a back up loan, but the new lending environment stopped that. The loan isn't real until it's locked, and lenders have made it far too expensive to lock loans before there is an underwriting approval. If it isn't locked, the rate/cost tradeoff will change with the market's daily movements, but closing costs don't change like that. There is no excuse for not correctly disclosing all closing costs - and that includes escrow title and appraisal - at loan sign up. Rate and discount are the only things that should be able to change.

How can you tell if you've been treated right by the loan officer? There are dozens of pieces of paper that get pushed in front of you at signing. Disclosures for this and disclosures for that. Truth in lending statements. Yet more disclosures. Certificates good for a discount here and a discount there. This is partially legal requirement, partially intentional on the part of loan providers. There really is a legal requirement for most of these disclosure documents, but the loan provider likes that they are there because they all distract your attention from where it needs to be focused.

There are three documents at the heart of every loan closing. They are the Trust Deed, Note, and Department of Housing and Urban Development form 1 (HUD 1). I advise reading everything, especially any title transferring documents (Grant Deed, Quitclaim Deed, Deed of Special Warranty, etc), so the lender cannot easily throw a curve in amongst the auxiliary documents. But most don't bother trying. The three main documents are where you should be focusing your attention.

Sometimes, the Note is included in the Trust Deed, but most of the time they are separate, stand-alone documents. The Trust Deed gets recorded with the county, while the Note usually does not. Some states that I haven't worked in may use other systems (A Mortgage Note, for instance, which needs an actual court action in order to foreclose, and which California along with most other states have gotten away from because it is more costly).

The Deed of Trust is simple enough. Look over the Deed of Trust enough to see that it properly references and does not contradict the Note.

The Note requires more attention, and cross referencing between it and the HUD-1. Is the amount borrowed consistent with what you were lead to believe? Is the rate correct? Is it fixed for the correct amount of time? Is there a prepayment penalty, and if so, for how long? Check out the repayment terms, and make certain there are the payments are what you were lead to believe. The Note is a legal contract detailing what you are agreeing to by signing all of this paperwork. Make certain it reads the way it is supposed to. Take your time, read it over, do not allow yourself to be rushed. Do not think to yourself, "I've got three days to call it off" because once you are done signing the odds are long that you will not think about your loan further until your first payment becomes due, and that is too late. Read it now. If there is anything that you do not understand, ask for a clarification. Good clarifications start from a point of the wording that's on the paper, and make easy sense in English. Do not accept a clarification that you do not understand. Do not sign hoping to get a better clarification later. Do not sign period if you aren't certain you understand.

Check out the HUD-1 carefully. It is the only form that's required to give an accurate accounting of the money. Make certain the costs are what you were led to believe, and that it all adds up correctly. The numbers should start with the Old Loan (if Refinance) or purchase price, plus costs, plus reserves if you're doing an impound account, plus prepaid interest, minus any money you're bringing in (down payment, etcetera) or the seller or your broker is crediting you, and that should be the balance of the new loan. Take your time with the HUD-1 and the Note, and do not allow yourself to be rushed. Do not sign until you are certain that you understand and agree. If this takes a little longer than the signing agent planned for, tough. Many loan providers are adept at distracting you with this disclosure or that disclosure. Some companies actually provide them with training in how to distract you, and how to gloss over thousands of dollars that you didn't agree to. Stick to your guns. The Note is what you are agreeing to, the Trust Deed is there to enforce it, and the HUD-1 is the only form accounting for your money that is actually required to be accurate. The Note, Deed of Trust and HUD 1 are what the lender is going to force you to comply with in a court of law. Make certain that they are what you agreed to before you sign them. If they're not, it's probably time to start the process over with someone else.

Caveat Emptor

Original here

"Should People in their sixties take out a mortgage?"

The short answer is "Not if you don't have to." Now if I suddenly vanish, the explanation will be that the loan industry put a contract out on me.

Success in loans, and sales in general, is often attributable to selling people stuff they don't need. If you don't sell something, you don't eat. Getting people to call or stop by the office is expensive. The traditional idea of sales is that you have to make a sale at every opportunity, whether it really makes sense for the client or not.

The various tricks of selling a mortgage to retired folks is a case in point. "It's a cushion," "It's there in case you need it," and all sorts of other stuff to that effect. Combine this with the "If you wait until you need it, you won't qualify!" and most folks who don't know any better will cave in and apply.

This is exacerbated by the fact that most people seem to want to stay in the same home they raised their family in. This is very understandable, emotionally, and often the worst thing you can do financially.

Let's consider the typical three or four bedroom house with a yard, and the retired couple. It becomes more and more difficult, physically, for them to do the required routine cleaning, and even more difficult to do the maintenance and repairs that any home needs from time to time. Sometimes the kids are close enough and willing to help, sometimes they aren't. If their finances are tight in the first place, they get tighter and tighter over time.

Into this environment comes the guy with a Reverse Annuity Mortgage (RAM) to sell. This is a special kind of mortgage, with a special protection for the homeowner (here in California, and in many other states as well) that they cannot foreclose in your lifetime. You cannot be forced out. Well, what if you're sixty-five and live to 100, as a far larger proportion of today's 65 year olds will? That's thirty-five years they are locking this money up for, and there is always the possibility that by the time they consider the cost of selling, etcetera, there will be no equity. The interest rates are significantly higher than a regular "A paper" mortgages, higher than most sub-prime loans, even, and the pay to the loan officers who do them is much higher than a typical loan.

Lending is a risk based business, and that kind of lending carries its own risks. Who pays for the risk to the lender? You do. Especially as opposed to the typical loan where half have refinanced in two years and ninety-five percent in five, this is a long term loan they are being exposed to. Yes, the recipient could get cancer and die in a few years, but they could well survive that. The lender has no way of knowing what the interest rate environment for the money will be in a few years. So either the rate the clients get is variable, or the clients pay a higher rate to have a fixed interest rate.

Once you start taking money out of the RAM, it starts earning interest. Since in the most common forms the homeowners are typically not making payments, it's usually compound interest. If you are making payments, it makes your cash flow even tighter, and you need to take more money. In either case, your balance is increasing, faster and faster with time, until you hit the limit, at which point you can no longer get additional money. This often happens surprisingly quickly, as you have the power of compound interest working against you. This all but guarantees that the family will have to sell the home, often for less than they could have gotten had they the luxury of a longer sale time. Furthermore, if keeping the home in the family is something you would like, a Reverse Annuity Mortgage is almost certain to torpedo the hope.

Contrast this with the swap down option. Suppose instead that adult children buy a small place suited to the parents needs such as a condominium, and the parents live there, while the adult children live in the parents home. This minimizes cleaning, upkeep, and maintenance that the parents need done.

If this won't work, another option is selling the home and buying something smaller. Remember, a RAM will almost certainly cause the family to lose the home anyway. You get more mileage out of cashing in the equity by selling, and investing the equity, than you will from borrowing against the equity. Instead of working against you, compound interest is on your side. Most states have laws preserving property tax basis if that's something that is advantageous.

Let's say that with a $500,000 home, moving down to a $200,000 condo. Net of costs, you net at least $250,000 to invest, and let's say you do so at 7 percent, well below a well invested portfolio. This gets you $17500 per year, or about $1460 per month, indefinitely, and you keep both the condo and the $250,000. Contrast this with taking the $1460 per month out of your equity. Even if you can find a RAM at the same 7 percent, the entire equity is gone out of your home in a little over fifteen years, and that's without including initial loan charges.

Nobody can make you do this, and there are many reasons why you might not want to. But looking at it from a strictly financial viewpoint, it's hard to find the justification for a Reverse Annuity Mortgage. In fact, I have never seen a situation where I would recommend it from a viewpoint of financial prudence. There might be family situations that make it the "least bad" solution, but that doesn't mean it isn't bad.

Caveat Emptor

Original here

For years when the market was hot, in all of my conversations on mortgages with prospects, there was one subject that came up over and over and over again (and still does), and that is the subject of payment. "But that loan over there only has a payment of $1450! The payment you are quoting is $2700! The other guy has a better loan!" Then I tiredly have to tell them about negative amortization loans and what is really going on, and why my 6% thirty year fixed rate loan was a better loan.

Usually, they didn't believe me. Over 80% of people were in denial when I was done explaining how a negative amortization loan works. They so desperately wanted the Negative Amortization loan to be a real payment, and they trusted the guy trying to sell it to them. After all, he told them all about his little girl's soccer game, or whatever irrelevancy he used (like all the good sales books tell him to) to make him seem like a trustworthy human being. So I'll tell them about what is usually my favorite loan, the 5/1 ARM, but with an interest only rider instead of fully amortized. "Now I shopped eighty lenders for real loans and real payments that you would actually qualify for. Of all those lenders, this 6% was the best thirty year fixed rate loan for no more than one total point. But I have got this other loan over here that another lender is willing to give you. It's at 5.375%, and the payment is interest only to start with, so you'll only be writing a check for about $2015. How does that sound?" They'll say it sounds better but not as good as that other loan that the other guy is offering. Then I'll tell them the downsides, "That's okay, because this loan's rate will adjust starting in five years, and at the same time, it'll start to amortize, meaning your payments will go up. If the index stays where it is now, it will jump to 7.25% that first month after five years, and your payment will be over $3250 in that sixty-first month. Furthermore, you'd have had to pay over three points discount to get that rate. So adding $10,000 extra to your balance, and suddenly having payments $1200 per month higher, is the price you pay for cutting your payment about $650 per month. What do you think the price is for cutting your payment by $1250?"

Well, as I've covered elsewhere, the price for a negative amortization loan in these circumstances, by whatever friendly sounding name they have for it, is a real rate two percent higher than you could have gotten, a balance that increases by about $70,000 over a five year period, and a prepayment penalty for the first three years, while your real rate isn't fixed even for one month, let alone 5 years.

Selling by payment is the number one trick of unscrupulous people. You go out car shopping, and someone says you can get a $20,000 car for $608 per month, while the lot down the street says you can get a $25,000 car for $303 dollars per month, that second car sounds fantastic, right? Never mind that the loan is based upon a ten year repayment, and the interest rate is two percent higher than the three year loan the first car was based upon. Never mind that the second car dealer is actually going to give you a payment of $339 after they soak you for $3000 in bogus fees simply because you are so happy you got this wonderful car for what these suckers think of as half the price, and you're so happy with that payment that you don't watch what they're doing as closely as you normally would, because, after all, you're getting this car for about half price! Except that you aren't.

Real estate, and real estate loans, are no different. You've got to be able to make that payment - the real payment, not the minimum payment. If someone's quoting you a payment that much lower for the same thing, there is a reason. But it is amazing the number of people who would never fall for the low payment line of patter out on the used car lot when they're talking about a car will fall for it the nice plush office in real estate that some of that money they soaked their suckers for bought. Those few I can get to own up admit to thinking of the mortgage loan as something akin to rent, which is kind of like thinking of your car payment like you would think of bus fare. Hey, here comes a bus that's seventy-five cents cheaper than the express bus right here - but this other bus is jam-packed, you can't get off until the driver's shift is over, and it's going in the wrong direction!

Payment is not price. Many people know this but forget to apply it. The amounts at stake in real estate are usually many times the amount at stake in any other product aimed at consumers, and the chance of banks giving away that kind of money are correspondingly lower. The great rule that applies everywhere else applies equally strongly for real estate: Sales folk who try to sell by payment are trying to get you to pay too much, and not just for the item you are purchasing, but for the loan as well. I have helped folks who first bought their houses in the seventies for forty thousand dollars, and who now have four hundred thousand dollar mortgages on the same property. They have refinanced ten or twelve times and now they need to sell and are netting $20,000 instead of $450,000 they would have had if they had simply been more careful.

One thing to remember is that you can never go backwards in time with what you know today. What is important is not just the type of loan, but the interest rate and the cost it takes to get it. Mortgage loans are not free - all of the people whose help is required do not work for free and you - the borrower - are going to pay for every penny they make in one way or another.

Your greatest friend once you have own a home is inflation, particularly if you've got a fixed rate loan. You only borrowed $X. Just because these dollars are now worth less does not increase the number of dollars you borrowed. If you have a fixed rate loan, or at least long enough to get through the period of inflation, you don't care that the interest rates on new loans are 14%. On a thirty year fixed rate loan, you've got this nice 6% loan locked in for as long as you care to keep it. Matter of fact, back in the late seventies, lenders offered these folks a much cheaper payoff to those folks who paid off such a mortgage early. But four years of ten percent inflation and that $400,000 loan is worth about $273,000 by the standards of the day you took it out, and all the folks who were laughing at you because your monthly cost of housing went from $1650 rent to $3000 mortgage are now paying $2350 rent and getting none of the deductions you are, while your costs are fixed and theirs are still riding the escalator up, and if they want to step off now, that property with a $400,000 loan is now $5100 per month!

Nonetheless, choosing a loan based upon payment is financial suicide. If you cannot afford a real loan with a steady payment on the house you want, instead of a loan that messes you up for life, consider buying a less expensive property. Yes, everyone likes house bling, and the more expensive of a house you buy, the more leverage works in your favor. But, as millions of folks are finding out the hard way right now, if you can't make the real payment on a real loan, you are at the mercy of the market, and the market has no mercy.

Caveat Emptor

Original here

One of the things I keep getting told by people is that my loans are the same as everybody else's. When I originally wrote this, I had quoted a 5.625% with no points, and got told, "That's the same rate someone else quoted me!"

Rate, yes, but what's the cost of getting that loan? There's always a tradeoff between rate and cost, and focusing only on the rate ignores half of that very important equation.

It turned out that they other folks wanted to charge him more than a point for the exact same loan I was able to do for no points. Seeing as this was a $340,000 balance payoff, it was the difference between a new balance of $343,000, with a payment of $1974.50 and monthly cost of interest of $1607.81, versus about $346,500 with a payment of $1994.64 and monthly cost of interest of $1624.22. Don't think that's a lot? Then consider the difference of $3500 in what you owe and $16.41 per month in cost of interest, every month you keep the loan.

I've heard similar things from people I was offering a lower rate to, for less money. For instance, that was a 5.375% loan with a bit less than a point at that time. So for actually a bit less than a balance of $346,500, he could have had an interest rate of 5.375. In the interest of keeping things simple, I'll even use the same balance when it would have been a little less. That drops the payments to $1940.30 and the monthly cost of interest drops to $1552.03, saving over $70 per month! If you keep it a statistical average 28 months, that saves you $1960! If you keep it the full 30 years, that's a difference of over $19,000! But I can't tell you how many times I've heard, "Is that all you can save me?" Hello! Do you really need a better reason than thousands of dollars?

It just doesn't seem like all that much, because people think in terms of payment. Clever salesfolk will seize upon this as a method of selling inferior loans to people who don't know any better. Salesfolk, after all, get the difference in pay for the loan right away. Therefore, they understand in their bones what a big difference those small differences make over time. If you multiply it out, you should understand as well. This is all real money coming out of your pocket!

Far and away the biggest component of any new loan is what you already owe, or what you've agreed to pay to acquire the property. The fact that the base loan is for $300,000 or so can make differences seem small, but I guarantee it wouldn't seem small if someone was asking you for $3500 cash out of your pocket (not to mention most providers lying about cost)! I've said this before, but don't let cash make you stupid. $70 per month is $70 per month, every month for as long as you keep the loan, and money added to what you owe with this loan will quite likely still be there when you sell or refinance, converting it into a strict liability. That's money you won't have, and additional interest you'll pay because you don't have it! The fact that the base loan is a hundred times bigger may make the costs of doing the loan seem minor, but it doesn't make them any smaller in actual size.

The differences may appear to be marginal, but they're not. Would you rather add $3500 to what you owe, where you'll pay interest on it, or keep it in your pocket, or at least out of your mortgage balance? No, it's not paying off your mortgage entirely, but it is saving you money. Over time - and most people will have mortgages for the rest of their working lives - it makes a substantial difference. If you refinance every three years like most people have been doing for the last generation, this makes a difference of $35,000 over thirty years. Would you like that money in your pocket? If not, well I can certainly always charge you more than my normal costs - it never hurts my feelings to be paid extra. Don't like that idea? Then perhaps that money is important to you, after all.

Caveat Emptor

Original article here

The answer is a modified no. The same answer applies to property that is only structurally damaged, but not condemned.

That condemnation is a matter of public record. I've seen any number of them while perusing title records. It shows up kind of prominently on the title commitment, which every regulated lender is going to require.

It is a rule of regulated lenders that they will only lend upon the state of the property right now. If a house is condemned, you can't sell it to anyone as a house. Furthermore, with a condemned house on the property, it really isn't vacant land, either. It's less valuable than bare land, as you have an expense that vacant land does not. You have to pay for demolishing the structure and hauling away the garbage. You'll occasionally hear agents (me included) talking about "land less demolition and haul-away" describing properties like this.

In the case of structurally damaged but repairable property, regulated lenders won't deal with it as a house either, although some may deal with it as if it were vacant land, less the cost of demolition and haul away. It depends upon lender policy.

The only place to get loans upon structurally unsound or condemned property is a hard money lender. They don't have the Securities and Exchange Commission to answer to, and only much smaller responsibility to the Federal Reserve Board. Many of them are individuals holding the loans in their own name. They can do almost anything they want. If one of them can be convinced that the property can be marketed for a given sum, they will typically loan based upon that sum. It's all a matter of what they want to do.

Hard money lenders will loan a maximum of only up to about seventy-five percent of whatever the marketable value of the property is, and the rates are unfriendly, to say the least. However, they may choose to lend in situations where a regulated lender can not. They can be your only option other than no loan at all. Most brokers will have at least a couple hard money lenders available to them, but your average direct lender cannot. As a final note however, before doing business with a hard money lender, you want to think long and hard and consult some experts as to whether you should - whether it's a good idea or not. It's well and good if this is a temporary thing and you can see an exit strategy to selling or more normal financing. But all too often, it's simply a way to delay the inevitable and make it worse at the same time.

Caveat Emptor

Original here

I recently closed a mortgage loan. The loan officer told me there would be no prepayment penalty. When the documents came there was none and the loan funded and closed.

Two weeks later I got an e-mail stating some documents had been missed and we need to sign and return them. They contained a new TIL, prepayment rider and addendum.

The original TIL states there is no prepayment penalty. I have not signed these and the lender is telling me I have to because of the compliance agreement.

Is this true?


Talk about scummy behavior!

I wouldn't sign the new documents. As a matter of fact, talk to your state's department of real estate about this behavior immediately. I hope that whoever is responsible for this loses their license to do loans in your state. You also will want to consult an attorney, as a precaution. A lender attempting to modify the contract after funding requires your consent. This strikes me as a a good candidate for fraud, depending upon the particulars of the contracts. Explain to them that you would not have signed the documents had this been presented as a condition of your loan funding, and so to attempt to alter the contract ex post facto (after the fact) is, in some cases, grounds for a prosecution based upon fraud.

That contract is a two-sided document, freely agreed to as it originally was by both parties. The fact that the loan funded is evidence of this. I have never heard of needing to sign a pre-payment agreement as a compliance procedure after the fact - except to comply with getting that lender paid more, via the secondary market. A pre-payment penalty adds anywhere from 3 percent of the loan amount up to almost ten percent to the price the lender will receive when they sell your loan, and they probably figured, "Why not try for the extra?" Or they may have intended this from the beginning, giving you a great quote to lure you in, figuring to make their margin with the pre-payment penalty they were hiding. It's amazing and disgusting how often people will sign such documents. Unlikely as this is, if it did happen, boy could you have gotten a great loan out of it.

If lenders could require this sort of thing, they could unilaterally change the agreement any way they want to after funding. So what if you signed a thirty year fixed rate loan at 5.5 percent and paid three points to get it? You new rate is eight percent, "for compliance"! According to everything I know about contract law - which is limited, because I'm not an attorney and you should talk to one - they have no legal grounds to demand this of you.

At the very least, it would be the case that signing these documents is what starts the clock on the the three day right of rescission. That the lender funded the loan before then is evidence of a severe error on their part, and when you rescinded, they would have to restore you to the situation as it existed prior to you signing the original documents. There are also legal issues with the fact that they're trying to alter the Truth In Lending form. Since the beginning of 2010, changing the APR less than seven days before signing final loan documents is an offense against federal lending law. If you get a sharp enough attorney and help from your state's regulators, it's very likely that you might get yourself some really significant loan concessions, or possibly even a settlement from the lender.

Every state's laws are different, so you need to talk to your state's department of real estate, and I do strongly recommend consulting an attorney before you draw any lines in the sand, but this is my best understanding of the situation.

Caveat Emptor

Original article here

This sentence is a textbook illustration of the most effective way to lie. Tell the truth, but not all of it. Not that I'm trying to coach habitual liars, but I am going to deconstruct this astoundingly dishonest claim that I keep encountering. It's mostly used by less ethical loan officers trying to persuade someone not to shop around.

At the bottom-most level, all mortgage money does come from basically the same place. It's all investors looking for a return on their money in a historically well secured market where they are somewhat protected from taking a loss. It is the ugly surprise that this security isn't perfect that has a lot of investors in panic meltdown mode after they took it for granted for years, and now they are refusing every loan that's not essentially perfect because of the rude awakening.

What happens to it after that, and whose hands it goes through, matters a lot. Just like saying all water comes from the ocean doesn't mean it's all drinkable, just because all mortgage money comes from investors doesn't mean it's all equal. The lender and loan officer make a huge difference.

Consumers cannot, in broad, go directly to mortgage investors and request a loan. Most of the investors wouldn't know how to do loans if it bit them. They don't have the actuaries, the underwriters, the tools, and the networks to get the best value for their money. That's where the lenders come in.

I'm not going to get into all the details of CMOs and MBSes- Collateralized Mortgage Obligations and Mortgage Backed Securities - how they are sold, how to price them, yada yada yada. It's something I am not involved in, and I don't need to know as much as I do. Even when I was financial planner, the nuts and bolts just aren't that important to most investment portfolios. Two important things to note: The higher the interest rate of a loan, the better the price the lender will get from the investors, and the lower the rate, the lower the price. The higher the default and loss rates is expected to be, the lower the price, and the lower the default and loss rates are expected to be, the higher the price. Default and loss rates translate to "How tough are the underwriting standards?" As with all other things economic, it's a trade off. Low interest rates at a lender usually means very tough underwriting, and fewer people qualify. High interest rates means relatively easy underwriting, and more people qualify. However the former means that there will be a lower default rate, while the latter translates into a higher default rate. In the end, the price they get for their loan packages will be comparable as higher rate translates into more money when the lender sells the loan but higher default means less.

What you really going on here is that the banks - the lenders - are the middlemen putting investors and consumers together. For this, they get paid. They get paid enough to pay for all those fancy offices and the executives' salaries and everything else the bank might have. Mortgage lending is big business. Lest it sound like I'm saying the fact they get paid is a bad thing, it's not. It makes the market far more efficient, as most individual investors can't afford an entire mortgage all at once, and individual borrowers would have a daunting problem in finding investors willing to lend money at a decent rate in their situation.

Each individual lender tries to hit a certain market segment. It works like branding in the consumer world, in that there are clients they are aiming at, and ones who are incidental to their business. Lending is a risk-based business, and the higher the risk to the lender, the higher the rate. What will happen the vast majority of the time with the vast majority of lenders is that they will sell the loans, whether or not they retain servicing rights. In other words, just because you have a loan with bank A doesn't mean they'll keep it. It is very rare for a lender to keep the loan. Even if they retain servicing (for which they get paid - and they're not even risking any money!), so that you keep sending that lender your payment, they don't hold the actual loan. Some lenders are interested in A paper, whether conforming with Fannie Mae and Freddie Mac, or nonconforming but to essentially the same standards. These loans are fairly uniform and highly commoditized, but lenders put their own stamps on them. One bank might have incredibly tight standards, but offer lower rates. They will have a record of fewer defaults, practically zero losses, and get a better price on their loan packages in the bond market. Another bank might be somewhat looser in their standards, and so not do as well on selling the loans. Those lenders will charge a higher price for their loans, in the form of interest rate, in order to compensate.

This phenomenon expands out progressively farther in the A minus, Alt A, and sub-prime lending worlds. A paper has noticeable differences between lenders, while the further down the loan quality ladder you go, the more differentiation you get between lenders. Almost all of them have their own niche, or niches, that they will underwrite to, trying for a mix of rates to borrower and underwriting standards for approval that results in fewer of their loans defaulting, and thus the ability to command a premium price in the bond market over and above what mostly equivalent lenders will give.

Below sub-prime is hard money. It's called hard money because before they fund your loan, they are recruiting individual lenders and syndicates who will hold your loan for as long as you have it. This is why hard money is typically multiple points up front, interest rates of thirteen percent and up, and three year hard prepayment penalties, as well as only going to about sixty-five or seventy percent of the property value at most. Without the lenders, every loan would be hard money.

No lender has the capability of running programs that are good fits for everyone. Some of them have a few dozen, some have only ten or twelve. This sounds like a lot, but it isn't. Every single loan type is a different program. Just to cover the most standard loan types for their market is usually between twenty and thirty different programs. Back when I originally wrote this, I could point to lenders with twenty-five or more different Option ARM programs. They're gone now (quite predictably) but they sure looked like they were doing well for a while on the surface.

This is where brokers and correspondents come in. There's an old saying about how "If the only tool you have is a hammer, pretty soon all the problems start looking like nails." You walk into a direct lender's office, and they has a couple dozen programs focused on one segment of the market. You're not an ideal fit for any of their loan programs, but so long as you can qualify for any of them, they are going to keep your business rather than refer you to someone else. They're hammering nails, never mind that your problem is a threaded bolt. They get you pounded into the board. Yes, you get a loan, but you could qualify for a better one if you wandered into a different lender's office.

Brokers and correspondents have lenders wandering into their offices. Lenders who will give the brokers better deals than they give their own loan officers, because they're not paying for the broker's expenses, and the broker knows better than to be a captive audience. The fact is that brokers are usually capable of getting a deal that's enough better that they can pay their expenses and salaries, still have profit left over, and nonetheless offer the client a deal enough better than the lender's own branches as to be worth the trip. Brokers also shop multiple lenders, looking for a better fit. If you're a top of the line A paper borrower, someone that any major bank has a good program for, the broker can still get you a better loan, but maybe only by as little as an eighth to a quarter of a point. On a $300,000 loan, that's $375 to $750 in cost at the same rate for the exact same loan. If you're in a marginal A paper situation, the difference made is liable to be that you qualify A paper with a broker who knows where to shop, where you'd likely have to go sub-prime, with inferior options and a prepayment penalty, by walking into a bank office. You get into sub-prime situations, and I have seen pricing spreads of two and a half percent on the interest rate between the best lender for a given loan, and the rest of the pack. The fact that most subprime lenders are gone and the ones remaining have radically changed their business model only accentuates this. You can physically go to twenty or fifty different banks, fill out an application and furnish paperwork in each - or you can go to a broker.

(Correspondent lenders are brokers with one difference: They initially fund the loan before selling it to the lenders whose standards they met. The loan is still written to the real lender's standard, underwritten by their underwriters, etcetera)

The point is that no lender is both offering low rates and loose underwriting. As everything else having to do with money, it's always a trade off. The lenders charge higher interest rates, they get a better price for their loans. The lenders underwrite to tougher standards so they will have fewer defaults, and practically zero losses, they get a better price for their loans. The lenders need a certain margin to keep their owners happy, and a certain margin to keep investors happy, and neither one of those in the business of giving away money for less than it is worth.

The ideal thing for a given borrower is not an easy loan. Unless you're so high up on the ladder of borrowers (credit score, equity in the property, lots of documented income) that you'll qualify for anything easily. The ideal loan, where you get the best trade-off of rate and cost, is to find the loan where you just barely scrape through the underwriting process. With average loan amounts in California being about $400,000 now, chances are that any extra time and effort you spend will be handsomely rewarded when you compute the hourly costs and payoffs.

So you see the partial truth of the title statement, and the utter falsehood. All mortgage money pretty much does start out in the same place. Nonetheless, what happens to it after that, before it gets to the consumer, renders the statement "All mortgage money comes from the same place" incredibly dishonest.

Caveat Emptor

Original here


With the state of financial education in this country, many people shop for loans by payment, figuring the lowest payment is the best loan. As counter-evidence to that idea, let us consider the negative amortization loan. I've seen them with minimum payments computed based upon a nominal rate of zero point five percent on forty year amortization. This gives a minimum payment of $1150 for a $500,000 loan - but the actual rate on that loan is eight point two percent, meaning if you were just going to pay the interest, that would be $3417 per month. If you made that $1150 minimum payment, you'd owe over $2200 more next month - and you'd be paying interest on that added principal as well. By comparison, principal and interest on a six percent thirty year fixed rate jumbo loan is only $2998 - and there's no prepayment penalty either.

Don't get distracted by payment. Look at the real cost of the money - what you're paying now in interest, versus what any new loan will cost, plus what you'll be paying in interest on it. You do have to be able to make the payment, but once that's covered, look at the real cost of any new loan, both in up-front costs and in interest paid per month. Those are the important numbers.

Let's suppose you were one of those folks who had to settle for a subprime loan a couple of years ago. You had something bad happen, but now you're past it. You've been diligent and careful with your credit these last couple years, so you're now able to qualify "A paper". On the other hand, your current loan has now adjusted to nine percent, and your prepayment penalty has expired, while there are now thirty year fixed rate loans in the sub- five percent range. When I originally wrote this I could have moved you or anyone else able to qualify A paper into a thirty year fixed rate loan at about 6% for literally zero cost, meaning there is no possible (financial) reason not to do such refinance as long as it lowered your rate even slightly. (These days, thanks to Congress trying to "protect" consumers, zero cost loans are gone)

The only real question in such a situation is this: "Is it worth the extra money it takes to get a better rate?", because there is always a tradeoff between rate and cost. For instance, to look at the differences for someone who currently has a $300,000 loan, when I originally wrote this two of the choices were six percent for zero cost or five point five for about half a point. Both are thirty year fixed rate loans.

The six percent loan has a balance of $300,000, same as your old balance, and payments of $1798.65. The five point five percent loan carries an initial balance of $304,325, and payments of $1727.90. Lest you not understand, that 5.5% loan cost you $4325 to get done, as opposed to literally zero for the six percent loan. This isn't a matter of "keep searching for the provider who gives you the lower rate for the same cost", as this tradeoff is built into the entire financial structure. Some providers may have higher or lower tradeoffs, but the concept of the tradeoff isn't changing for anything less than a complete and radical rebuild of the financial markets. Not. Gonna. Happen. You can find different costs for the same rate, but the difference between a low cost provider and a high cost provider usually isn't going to be more than two points on the cost.

However, for spending that money all in a lump sum, you get a lowered cost of interest. You save $105.19 that first month in interest, and this number actually increases slowly for the first few years of the loan. In month 21, you've theoretically broken even, even though your loan balance is still almost $3600 higher, you've gotten the extra money you've paid to get the lower rate back. However, because you still owe $3600 more, if you refinance at this point, you're still going to end up behind as that $3600 you still owe translates to $216 per year at 6%, assuming that's the interest rate on your next loan. Maybe you sold the property and bought something else, maybe you refinanced for cash out. In either case. you owe $3600 more than you would have, which means you're paying interest on it when you get your next loan. But something like thirty percent of all borrowers have sold or refinanced by this point, and when they do, those benefits you paid for stop. Nor do you get any of the money you paid in the first place back.

It isn't until you've kept the loan 124 months - over ten years into the loan - before you are unambiguously better off with the lower rate but more expensive loan. That's how long it takes until the balances are even on the two loans. Of course, by then you have saved about $13,000 in interest - if you actually keep the loan that long. Less than one borrower in 200 does.

Real break-even is likely to be somewhere in year four in this case. After three years, you've saved about $3800 in interest, and if your balance is still that almost much higher with the expensive loan than the cheap one, we're getting to the point where time value of money will keep things in favor of the more expensive upfront costs. Of course, last time I checked Statistical Abstract, decidedly less than half of all borrowers kept their new loans this long. Something to think about, because you don't get the money you spent to get the loan in the first place back. By the end of year four, assuming we keep the loan that long, we've saved $5000 in interest, while the balance is only $2600 higher for the 5.5% loan than for the 6% loan. Even without time value of money and with a ten percent assumed rate of return, that's additional twenty years before the costs of the higher balance catches up with the benefits you've already gotten through lower interest. Considering time value of money, it's really never going to catch up.

So when you're looking at refinancing, don't just consider rate and payment. Consider what it's going to cost you in order to get that new loan, and remember what the costs are of doing nothing (i.e. you've already paid the upfront costs of doing nothing). Many people refinance every two years, spending much more than $3400 every time they do, because they'll spend two or three points to get the lowest rate. This, as you can see now, is a recipe for disaster.

Caveat Emptor

Original article here

What Drives Loan Rates?

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Supply and Demand.

Now that I've given the short answer, it's time to explain the macro factors behind interest rate variations. But I'm going to keep referring to those first three words. It is a tradeoff between the supply of money and demand for it.

The most obvious thing influencing loan rates is inflation. This is a general environmental factor. If the inflation rate is higher, then other factors being equal, there will be fewer people willing to lend at a given rate, and more people willing to borrow. Who wouldn't want to borrow money if the money you have to pay back is actually worth less than they money you borrowed? All loans are priced such that a given inflation is part of the background assumptions of making it. If inflation is 4 percent, someone lending money at seven is making an effective 3 percent. If inflation is ten percent, they are losing that selfsame three percent. Which scenario would you prefer to loan money in? Which scenario would you prefer to borrow money in?

On the other hand, when inflation is high, loan rates usually rise to compensate. When the prime rate is twenty-one percent, that means that a business borrower has to make a minimum of twenty-one percent on the money just to break even. That's if they're a prime customer. Making twenty one percent is tough. The reason you borrowed ("rented") the money was because you have a use for it to make money. There's a lot fewer opportunities that make enough over twenty-one percent to make them worthwhile, than there are opportunities making enough over seven. This is one reason why inflation is a Bad Thing.

What alternatives exist is a major factor on the supply side, as well. If you absolutely must invest your money in US Government securities, that's where you're going to invest, and since you're increasing the supply of money to the treasury, the price is less. Supply and Demand. This is one of the many reasons why Congress' handling of the social security trust fund is a national disgrace. If they were private trustees, they would be held liable for not investing it where the best returns are. If, however, you think that stocks are looking more attractive now, that means that the supply of money for loans will shrink by whatever dollars you move out, and the rates will rise. The effect for any one person is small, but there are a lot of people in the market. In aggregate, it's many trillions of dollars. Supply and demand.

Savings rates means a lot, also. When there is a lot of new money coming available in the borrowers market that money is going to be cheaper to borrow, in the form of lower interest rates. This is partially why rates went down throughout 2002, and stayed down into 2003, and 2004. People who had been burned in stocks wanted nice "safe" mortgage bonds. When there is comparatively little new money coming into the market, the only source becomes old loans being paid off. Negative savings or negative investments in the bond market means that what money is coming off older loans is at least partially being used to fund the withdrawals. Competition for money gets fierce, and price - by which I mean interest rate - rises. Supply and Demand.

Competition for money is also a part of the demand side. When the government needs to borrow a lot, for instance, that increases the competition. Even on the scale of our capital markets, whether the government is breaking even or needs to borrow the odd $100 billion has a real and noticeable effect When they need to borrow $400 billion, you can bet it'll raise the cost of money. The government doesn't care, and the bureaucrats running the treasury have been told to get this money. They will do their jobs and get the money, whether it costs 4 percent, 14, or 24. Every time competition from the government drives up rates, a certain number of borrowers whose profit margin on the loan was likely to be marginal will drop out of the auction. But government spending rarely grows the tax base. It's those corporations and small businesses investing in future opportunities that grow the tax base, and they are the ones dropping out of the auctions as money gets more expensive. This is why government deficits are a Bad Thing. Supply and Demand.

The desirability of the alternatives is another factor on the demand side, as well. There's more than one way to make money for most. If it become prohibitively expensive to borrow (bonds), sell part ownership instead (stock). There is a point at which even the most die-hard sole proprietor needs the money, and just can't afford it as opposed to selling some stock to new investors. This can dilute earnings, and cause you to lose control of the company (there were multiple reasons why the high inflation period of the seventies and eighties was followed by the era of the corporate raider, but that's one major part), but better to dilute your share of the pool by ten percent while increasing the size of the pool by fifteen. That is a net win, while borrowing the money at twenty-something percent is likely not.

Now, let us consider the money supply here in this country, and thence the state of likely interest rates. We have increased government borrowing. We have the social security trust putting decreasing amounts of money into the government. We have a national savings rate that's negative (and it is the overall rate, not just working adults that we're concerned with, here). More and more people are becoming comfortable with foreign investment. And mortgage bonds are looking jittery right now, with foreclosures the way they are. Supply and Demand, remember?

Therefore, in my judgment, we are likely to see raises in the interest rate, at least in broad. If you're on a short term loan that is likely to adjust in the next couple of years, the time to refinance is now, unless you're planning to sell before it adjusts.

(If, on the other hand, you have a long term fixed rate loan, stay put. Once you've actually got the loan funded and recorded, they can't just draw the money back unless you do something like fraud or default. Even if you go upside down on your loan for a while, if you're already in a fixed rate loan, that's okay. The market price of the home only matters at loan time and at sales time. If you don't need a loan and you don't plan on selling, why should you care? Oh, and one final note to the young: home prices will rise again. Sooner than you probably think, around here.)

Caveat Emptor

Original here

People sometimes ask how they can improve their credit if they have old collections on their credit record.

Well, the answer is NOT to simply pay them. Paying off a five year old collection can cause your credit score to drop by 100 points.

You say that makes no sense? Well, here's the logic of it: Collections are weighted by how old they are; when your last activity was. They are weighted heaviest for the first two years, then somewhat lighter from two years to five, then lighter still after five years. If you pay it off, it's still a derogatory notation, because after all, you were way past due on it. But now the date it gets marked with is TODAY, and now you've got an absolutely fresh collection on your credit record. In other words, it comes back to bite you just as hard as it ever did, for another two years, after which it'll still be worse than it was for another three. You pay off an old collection, and it will be five years before it hurts you as little as it did before you pay it off.

So what you do is get a promissory letter of deletion. This says that *if* you pay $X, they promise to issue a letter of deletion. You need this promise in writing. Call or write the company involved, and come to an arrangement that if you pay however many dollars you agree upon, they will give you a deletion letter. Tell them to send it to you at your current mailing address. Don't pay until you do have the promissory letter in your possession, lest your credit suffer the hit I discussed above. These things are old - it is better for your credit to simply leave them sit than to pay them off and bring the delinquency date to TODAY. Many creditors apparently do not understand this. Make sure you explain it to them. "Without your written promise to delete this account upon payment, I am better off not paying this." Because that is the truth.

Once you have the promissory letter in your possession, then pay the bill. Include a copy of the letter with the bill to remind them. They will wait until your payment clears. They should then issue an actual letter of deletion. This is on company letterhead, has a contact name and phone number and an authorized signature. It should be short and sweet, reference the account, and say "Please delete this account."

You then send copies of that letter to the credit reporting agencies (Experian, Equifax, and TransUnion) and get your account deleted. Once the account - and the negative reference - is deleted, it's like it never existed. It is only once the account is actually deleted that your credit will see any actual benefit, and for the period between paying it off and deleting the account, your score will plummet. If you don't get to the point where the account is deleted, paying off old bills maims your credit instead of improving it as most folks would think.

If the company reneges on the deletion letter after promising to issue it, you have the legal ability to sue them. That promissory letter is a legal contract, with offer, acceptance, and consideration, for a legal purpose, etcetera. Talk to a lawyer about the details, I'm just a loan officer who's helped people with this a few times.

This entire process does take a month or two, and it can take thirty days to show up on your credit after it's complete. There is a process called Rapid Re-Score which can accelerate it, but Rapid Re-Score should not be something you plan on using - it's expensive, and doesn't result in as good a score as doing it the normal way. Optimally, deletion letters are not something to try when you already have a mortgage loan in process; it's something to do before you apply. Trying to do this while you've got a loan in process is expensive, because you're going to blow your lock period and need to extend it, sure as gravity. Thirty days of extension for your loan lock is approximately half a percent of your loan amount, so on a $400,000 loan, that's $2000. Most collections are a lot smaller, and you may have to resign yourself to the hit on your credit in some instances, in which case you will probably be better off to have it paid off through escrow at funding, where the loan will be funded and recorded before paying off that old collection hits your credit score by being brought up to the present day. Otherwise, you could find your loan denied due to credit score dropping, and discover that you're not getting another one on anything like comparable terms. Maybe you are not getting another loan at all, because your score has dropped too much. Be careful, plan ahead, and take care of old collection accounts ahead of time.

Caveat Emptor

Original here

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About this Archive

This page is a archive of entries in the Mortgages category from February 2019.

Mortgages: January 2019 is the previous archive.

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