Mortgages: November 2020 Archives

We got behind on house pymts & it was sent to an attorney for foreclosure.? The attorney has printed a notice in our paper on Oct 9 that it will go up for public action on Nov.16th. We found out we could get financial help on friday. Can we stop this action now without it going up for auction?

This never ceases to amaze me. People have a contract they can't meet, and they don't call the other party to see if anything can be done.

The lenders do NOT want to foreclose on any more properties right now. Actually, this is pretty much a constant of the real estate market. They never want to foreclose; they will only do so when it is apparently the least bad solution to their situation.

To be truthful, you should have called the lender and explained your situation as soon as you knew you were going to be late with a payment. Lenders will always work with anyone to a reasonable extent, but now they're bending over backwards. Foreclosures are 1) bad publicity, 2) bad for their relationship with the secondary loan market, and 3) almost certain to lose them a blortload of money.

Call them this instant (or as soon as they open on Monday) and ask for Loss Mitigation. They will not be as forgiving as if you'd called them right away, but they're still likely to be willing to work something out. Just about anything is better than losing it through foreclosure, I might add, so you be willing to give as much as you can to encourage them. Foreclosures hit them in ways beyond the cash they immediately lose. They don't want to foreclose.

Now, the downsides:

First off, you've waited until you are "in extremis", long past the best time to call the lender. They're quite likely to see your belated request to talk as a last ditch method to delay the inevitable. Lots of folks do precisely this. Had you called earlier and been working with them all along, made agreements and kept them, they'd have evidence you're really doing your best to get them their money. You're not a criminal, but this is the same sort of behavior judges see with convicted criminals at sentencing, faking penitence to avoid jail - then they go right out and do the same thing again.

Payment modifications aren't some kind of magical "make it all better" The lender wants their money, and they're not going to settle for a situation that doesn't turn the loan into what they call a "performing asset." If you borrowed more money than you could really afford, and you aren't able to make at least the interest payments on it at real rates, as many people with negative amortization loans did, then the best modification they'll agree to really isn't going to help you, and you're better off selling the property ASAP, even if you don't get enough for the property to cover what you owe ("short sales").

Bottom line: Please call and ask them. It never hurts to ask. But be mentally prepared if such a modification doesn't really solve your problem. Because you waited until the very end, don't be surprised if their willingness to work with you is limited, but even in such circumstances, they would rather not foreclose if you can show them another course that gives them better prospects for getting more of their money back.

Caveat Emptor

Original article here

That was a question that brought someone to the site and the answer is very simple: they don't give you the loan. You haven't agreed to pay them back, so why should they?

There are two major cases of this, one of which has two sub-cases. The first case is that if it's a purchase money loan. Because you don't get the loan when you don't sign mortgage documents, there may be issues with whether or not the seller is entitled to keep your good faith deposit. If you can come up with the cash to pay the seller from somewhere else, for instance, if you have it sitting around and just would have preferred to get a loan, no worries. You still have the option of hauling out your checkbook, and you can get a loan later, although it will be "cash out" loan which generally has a rate and term trade-off a little bit higher than "purchase money" as well as implications for deductibility. But since most people don't fall into this category - people with the cash lying around - you are probably looking at the unpleasant reality of not having the money to purchase the property. In most cases, the loan contingency has expired, assuming there was one to start with (I used to advise people to apply for a back-up loan, but changes in the loan environment have killed the backup loan). Matter of fact, usually all of the contingencies have expired, leaving you without anything to excuse not consummating the transaction. Therefore, any good faith deposit is at risk, not to mention that the transaction may well be dead. The seller only agreed to give you that exclusive shot to buy the property for so many days. If you want to extend escrow, most sellers will require some additional consideration in the form of cash in order to allow the extension. In fact, many agents and loan officers have gotten very lazy and lackadaisical about deadlines, with potentially severe repercussions to you, their client. Once those contingencies have expired, usually on day seventeen, you typically are stuck. Consult a lawyer for the exceptions, but there really aren't very many. This is one of the many reasons why being successful in real estate is about anticipating possible problems and taking precautions. If you wait until the problem crops up, it's usually too late, and often, the best thing to do is sign the loan documents even though they are nothing like the loan quote that got you to sign up with that company, because otherwise the consequences of not signing are even worse than signing. Many loan companies target the purchase money market with this in mind.

The second major case is if you are refinancing, which leaves you in pretty much the same boat you were in before you started the transaction. You own the property already. You have a loan now. Unless you have a balloon loan coming due, you just continue on with what you were doing before you started the process of refinancing.

There are two major reasons why people refinance: Better terms, or cash out. If you are doing it for better terms, and the new loan doesn't deliver, there pretty much is no reason to sign those documents. This includes if they are actually willing and able to deliver the rate, just not at the cost they indicated when you sign up. There is always a trade-off between rate and cost in mortgage loans. Usually, the lowest rate will not be worth the costs you have to pay to get it, but if they lie about what it really costs to get you to sign up, those final loan documents are going to have a rude surprise if you look at them carefully. All but the worst scamsters will usually deliver that rate and type of loan they talk about. Where they fall short, or actually, go over, is in the costs department, because a loan with $5000 more in costs will likely have a lower payment than the loan where they don't hit you for those extra $5000 in costs, but do give you the rate that the costs they talked about really buys. Most people shop and compare and choose loans by payment. It may be short-sighted and the best way there is to end up with a bad loan, but they do it anyway. They are more likely to bail out of a loan where the monthly payment is $60 more than they were initially told but has the same costs, then they are to back out of a loan where the payment is $40 more because an extra $8000 in costs "somehow" appeared at closing, never mind that the former is probably a better loan for them.

Refinancing for cash out is a more nebulous area. Since it's a refinance loan, you probably don't have a deadline, so you can go back to the beginning and start all over if you want to. Sometimes, however, rates have shifted upwards since you started the process, and so it can be to your advantage to go ahead and reward the company that lied to you in order to get you to sign up. If rates are the same, however, dump that problem provider and see if you can go find someone less dishonest! Furthermore, sometimes people have absolute deadlines as to when they need that cash, or it saves them so much money that they are better off signing those documents anyway, or the improved cash flow means they don't have to declare bankruptcy. Most often, there is plenty of time to go back to the beginning and try again, but there are exceptions. Once again, I used to advise people to apply for back up loans, but neither I nor anyone else can productively do back-up loans any longer due to changes in the lending environment. Meanwhile, all of this rewards the company who lies to get you to sign up - something you really don't want to do.

When you don't sign loan documents, if you have put down a deposit with the lender, you are going to lose it. Low cost ethical loan providers who really can deliver what they talk about, and whose rates really are competitive, do not typically ask for deposits, and are willing to work without them if they do ask. They know their rates are competitive, that they intend to deliver what they talked about and that there are any rates significantly better out there. It's only when the company fails one of these tests that they have a real need for a deposit, in order to commit you to their loan.

One more item needs to be covered: Irrelevant documents aren't needed. I don't need anybody except those folks who are getting a negative amortization loan to sign a negative amortization disclosure (assuming I ever did one, which I didn't). The same thing applies to pre-payment penalties. If they don't apply to your loan, they shouldn't be required. If they can't fund your loan without it, there is a reason, so don't sign disclosures you aren't willing to accept the implications of. If you sign a negative amortization disclosure, the legal presumption is going to be that you realized it was a negative amortization loan and accepted it on those terms. Ditto a pre-payment penalty rider. Of late, unscrupulous companies seem to be asking people to sign these after loan funding "for compliance". Consult with your lawyer, but I wouldn't sign them at all. If they were able to fund your loan without them, they are obviously not a necessary part of the loan structure. If not, why did they fund your loan without them? The only "compliance" aspect is to this is complying with them getting paid more money. Admittedly, it's small-minded to refuse to sign the pre-payment rider when you were informed at sign up that the loan had a pre-payment penalty, but bottom line, they shouldn't fund your loan if they aren't willing to accept it as it sits, and that's not the situation most folks are running into. They are asking the questions and being told the answer is "no," only to discover later that the answer was really "yes," but by lying to their prospective customers, some loan providers can get paid large amounts of money and pawn bad loans off on most of their customers.

Caveat Emptor

Original here

This is part and parcel of the system that's abused. Here are sample rates from one A paper lender, picked at random, that were in effect when I originally wrote this. Rates are lower now, but it's a good example nonetheless. These were Fannie and Freddie conforming 30 year fixed rate mortgages with full documentation of the loan. The first number is the cost for a 15 day lock, the second for a 30 day lock, and the third for a 45 day lock. A positive number means it costs that number of discount points to get the rate. A negative number means that the lender will pay that many discount points for a loan done on those terms. I want to make the point that these are wholesale rates, but I didn't feel like translating them to retail. I don't work for free any more than you do, nor does any other loan provider.

As you should notice throughout, there is a 0.25 spread in costs between locking in any particular rate for 15 days as opposed to 30, or 30 days as opposed to 45. This is because it costs them money to have the money standing around doing nothing waiting for your loan to fund. The difference in costs between a 15 day lock and a 45 day lock at the same rate is half a point. When I wrote this, the column you wanted to pay attention to was the thirty day column. Due to regulatory changes and market changes, that's not the case any longer. In point of fact, nobody actually locks the loan with a lender any longer until they have at least every 'prior to documents' condition satisfied with the underwriter, meaning the lender has agreed that there appear to be nothing in the borrower's financial condition that would result in them rejecting the loan, and are prepared to draw up a final loan contract for signature. It costs the loan officer - and their company - too much if a loan is locked but not delivered.

When I started in this business, I locked every loan as soon as the customer said they wanted it. That meant a thirty day lock if you (the loan officer) were on the ball. You can't do that any more without losing your shirt, because if you don't fund at least seventy percent of what you lock, the lenders are going to refuse to do business with that loan officer, and they have surcharges on the loan officer if they fail to actually fund at least eighty percent of what they lock. Given how paranoid lenders have gotten, you're going to have a certain number of applicants who flat out cannot qualify, and in at least one case out of ten, that failure is unpredictable just because nobody is the cookie cutter picture of an ideal underwriting scenario any longer.

Given regulatory changes, a loan officer has to be on the ball to get a refinance funded in two weeks from lock. Even if everything is ready to go, the lenders want a final redisclosure 7 days before signing documents, and with the three day right of rescission on refinances it takes another week after signing to actually fund the loan. That's once everything else is ready to go. You want the rate locked as early as practical, or you really have no idea whether it will be available when you get to the end of the process but other changes to the business make it prohibitively expensive to lock your loan at all before you have an underwriting commitment. Many providers work on a "promise the moon and wait and hope" basis, hoping the rates will drop. They get one loan for sure, when they lure you in with a low quote they cannot currently deliver, and if they get lucky and rates drop, you think they walk on water.

Now this is a fairly broad spread rate sheet, as the company was willing to take clients through a large range. On the other hand, at a 5/8ths of an additional point hit for 1/8th percent rate below 5.875, they were telling you that they really would prefer to keep their customer's rates locked in for 30 years above that. On the other hand, since most people dispose of their old loans about every two years, most folks shouldn't want to pay those costs, which will take much more than two years to recoup from the lower rate. It's much the same phenomenon as insurance companies guarding against adverse selection (only those folks who have major health problems buying health insurance, for example).

Which loan is the best for you? Don't know without more specifics. It depends on approximate loan amount, your life plans, your proclivities, and your financial situation.

But the devil is in the details, and one of the worst and most common devils is details is a provider "forgetting" the adjustments. Adjustments generally mean that the loan will be more costly than the basic rate/cost tradeoff outlined above, so "forgetting" to post the adjustments on a Good Faith Estimate is one of the easiest and most effective ways to lie in order to make your loan look more attractive by comparison. Since most providers don't guarantee their estimates, they can do this with basic impunity, but make no mistake - they know what the price is really going to be. If they won't guarantee their estimates, ask them why not. Here are the possibly applicable adjustments for this category:

Loan amount under $60,000: half a point
Loan amount $60k up to $100k: quarter of a point
cash out loan, 70-80% LTV: half a point
cash out loan, 80-90% LTV: three quarters of a point
Investment property 50-75% LTV: one and a half points
Investment property 75-80% LTV: two points
Investment property 80-90% LTV: two and a half points
No Impounds fee: quarter point
2 units 90-95% LTV: half a point
Manufactured home: three quarters of a point (they also have an absolute maximum CLTV of 80%)
Loan distribution
80/15/5 quarter of a point
75/20/5 quarter of a point
Interest only one and one eighths points
if CLTV over 90%: additional quarter point
97 percent of purchase price financed: three quarters of a point
100 percent of purchase price financed: one and a half points
2/1 Buydown two and a half points
Stated income FICO 680-699: half a point
Stated income FICO 700+: quarter of a point
(Stated Income loans are not available from any provider I'm aware of at this update)

So let's see. If you are doing a cash out to 75 percent loan stated income and have a credit score of 690, you add one point to the costs listed above. (half a point for stated income at 690, half a point for cash out to 75%)

If you have an investment property duplex at 90 percent LTV, you would add three points (investment property loans are relatively expensive, as you can see, and it isn't restricted to this lender. They are riskier loans)

Doing 100% financing on a $50,000 home: Two points. (when it was available)

One hopes you get the idea. To leave these out is a tempting omission for the less ethical providers. Just because they are left out does not mean you won't pay them. You will. Usually they will spring them on you with the final closing documents and hope you don't notice. Surprise!

(Between this profession and being a controller for twelve years, people should not wonder why I think that's one of the ugliest words in the language).

Indeed, during my six weeks at the Company Which Shall Remain Nameless, I had no fewer than three screaming arguments with my supervisor over telling prospective clients the truth about adjustments. They didn't want me to. I have this thing about telling clients the truth as best I know it.

Why do they do this? At signup, you have little emotional buy-in. At final loan docs, you are signing so much stuff that even a marginally skilled person who's trying to distract you will be successful a lot of the time. The industry statistics say that over fifty percent literally never notice, at least until much later, after the transaction is irrevocable. And somewhere around eighty five percent of those who notice do just want the process to be over so badly that they will sign anyway, not to mention the fact that in the case of a purchase, they probably don't have any choice at that point. They need the loan to get the house, without which they lose the deposit, and there is no more time remaining in the contract with which to go out and get another loan.

Caveat Emptor

Original here

Right now, due to the problems we had with unsustainable loans, nobody wants to consider anything but a thirty year fixed rate loan. I understand why, especially as I've been preaching the dangers of things like short term adjustable interest only loans and negative amortization loans here for almost eleven years now. The trick is one of balance. The negative amortization loan not only has a higher interest rate than other loans (aka cost of money) but you're adding to the balance you owe every month. This has compound interest working against you. If this were not the case, you could afford a better loan (there are no worse ones). For such things as an interest only 2/28, once again you're setting yourself up with a loan that you cannot afford and a short time during which you need to be able to refinance. The balance of that interest only 2/28 may not be growing, but it isn't going down much either. In only two years, you're going to not only need to refinance it, but almost certainly roll a bunch of closing costs into your balance as well. Suppose rates are higher? Suppose prices are lower? These twin facts describe the situation lots of folks are in right now, and my article on Refinancing When You Owe More Than The Home Is Worth is one of my most popular pieces of search engine bait, despite the fact that it is very much in the way of hoping you can make something a little less bad out of a horrible situation. Two years in real estate is fairly short term. Considering a two year window, I'm more certain today than at any time in the last ten years that property values (at least local to me) will be significantly higher two years from now (at least 10%), but confidence in that prediction is only in the 90 to 95% range. Two years just isn't enough time. Like when I was a financial advisor. The market is up in about 72% of all 1 year periods, and a higher percentage of two year periods (I remember 85%, but I'm not certain of that). But over a ten year period, it was a practically sure bet, historically, that the market would be up, and up significantly. The same thing applies to real estate. "Time in" is so much more important than "timing" that they don't even play in the same league. At this update, the government messing with the economy in pursuit of an agenda has managed to make things even worse than they were - and that is no trivial achievement. Eventually, we're going to get adults in Washington and Sacramento, but I have no idea when that will be (and in the case of California voters, what it's going to take to wake them up and the serious question of whether there will be any adults left in the state when they do)

When you get out to five years, I'm as certain as possible that my local market, at least, is going to be up and up significantly. Considering the state of most markets, this is a very reasonable bet. For that matter, it's pretty reasonable at any time, as five years is enough for sentiment of the moment to be outweighed by fundamental facts of the market. Furthermore, most people get at least one substantial raise (or a series of smaller ones) over a five year period, increasing what they can afford. More importantly, in five years with a fully amortized loan, you'll chop some significant money off the balance (about 7% for most mortgages out there), just by making the regular minimum payments. My point is this: you have a smaller balance on a property that is worth more. Your equity situation has improved, and by enough that unless you take significant cash out in one way or another, you're in a strictly improved situation.

What are you giving up by accepting a 5/1 instead of a thirty year fixed rate loan? The answer is twenty five extra years worth of insurance that your rate won't change at the end of your loan, which most borrowers never use anyway. The median time to refinance or sell a property was about 28 months last time I checked (for a while it was down to sixteen months). That's fifty percent above, fifty below. Add another 28 months, and before five years is up, at least seventy five percent of everybody has refinanced or sold. Question: How much good did that extra 25 years of insurance that the rate wouldn't change do these people? Answer: Absolutely none. They let the lender off the hook before that part of the guarantee began.

Let's look at some numbers that were available the day I originally wrote this - the differences are larger at the update. Full documentation, A paper loans, rate/term refinance between 75 and 80% loan to value ratio, with a credit score of 720 (national median).

Now the loan request that started this all off was a $600,000 loan. Here in San Diego at the time, that was less than the temporary Conforming limits (aka Jumbo Conforming, a phrase that makes about as much sense as plastic glass),

(Making certain I emphasize once again the tradeoff between rate and cost for real estate loans)

So, for less than the cost of a 30 year fixed at 5.875%, these clients could have had a 5/1 ARM at 5.25%. For a $600,000 loan - almost to what was called Super Jumbo territory a few months ago. the 30 year fixed costs roughly $14,500 in total costs, the payment is $3635, and interest is about $3009 the first month, assuming all costs are rolled into the loan. The 5/1 costs about $12,700 grand total, the payment is $3386 ($250 less!) and interest is $2686 ($325 less!). You pay the balance down to $556,000 over 5 years if you just make the minimum payment on the 5/1, as opposed to $570,000 if you make that higher minimum payment on the 30 year fixed rate loan. And if you happen to be the sort who makes that payment they could make on the thirty year fixed rate loan, but chose the 5/1 instead, your balance will be down to $547,000. Under such circumstances, even if you refinanced that 5/1 at the same cost, you'll be over $10,000 better off than some hypothetical twin brother who chose the 30 year fixed, even if he didn't refinance which the odds are at least 3:1 against. Given consumer habits in this country, that thirty year fixed looks like a losing bet to me at the usual rate differential between the two loans.

The same numbers apply just as strongly at conforming rates:

The difference between the thirty year fixed and the 5/1 narrows appreciably at the lower cost end of the spectrum. But it's a far cry from the days of last year when sometimes that thirty year fixed rate loan was actually less expensive for the same rate.

Some people are likely to ask about varying periods of ARM. What about a 3/1, for an even lower rate? Ladies and gentlemen, even when rates are normal, the differential is usually less than an eighth of a percent for a 3/1 as opposed to a 5/1, while you're cutting off 40% of your fixed period guarantee - the period that lets you make all that lovely profit? As for the 7/1 and 10/1, when rates are more normal, there's typically more difference between them and the 5/1 than there is between 3/1 and 5/1 - plus you're getting well past the territory where reasonable fractions of the populace keep their loans without refinancing. You're paying for insurance you're extremely unlikely to need, and hybrid ARM rates are more stable than rates for thirty year fixed rate loans.

A Caveat: Since I originally wrote this, the loan market has changed in some significant ways. Anything except A paper full documentation loans are basically gone right now. This means that if you don't fit into the cookie cutter molds imposed by such loans, getting a loan may be very difficult or even impossible. So if you're self-employed or in an unstable field where income varies widely, you can easily find yourself in a situation where refinancing can be impossible - perhaps for up to two years. Changing from employed to self-employed will also make it difficult to get a loan for two years. So if you're in such a situation rather than (for example) a government employee, I am strongly advising such clients to select thirty year fixed rate loans even though they are more expensive until the current loan market relaxes a bit. Right now the investment markets are very scared of anything but A paper full documentation, and the rating agencies who gave negative amortization loan packages AAA ratings when they should have been at the bottom of whatever rating scale used have no credibility with the investment markets, which means the investment markets aren't investing in anything but A paper, which means nothing but A paper gets institutional funding. (Hard money aka private money loans are still being made - but most people don't have 25-35% equity or more, and don't want to pay 12% plus)

Hybrid ARMs aren't for everyone. If you're going to obsess about your expiring fixed term every night for five years, the difference in daily interest works out to about $10 per night, even for our example with the $600,000 mortgage. My family being able to sleep well is worth $10 per night to me, and I presume it is to you, as well. There is an element of risk here, and there's no pretending there isn't. A very small risk that real estate and loan markets go completely weird in violation of all historical precedent for the next five years, and those choosing the 5/1 are somehow stuck with needing to refinance in a worse situation than when they started in. But I've been saving myself lots of money with the 5/1 for a long time now, in all sorts of markets. Why shouldn't I mention it to other people, including my clients?

Caveat Emptor

Original article here

When it comes to mortgage loans, people get distracted by the darnedest things.

Let's look at Wal-Mart. You think they got to be the largest retailer in the world by making less money than their competition? I assure you that is not the case. In fact, they're legendary in manufacturing circles for using their size as an inducement to get the lowest possible price out of their suppliers. With that leverage - the fact that whether or not Wal-Mart stocks your item will be a significant predictor of your success manufacturing consumer goods - they can get outrageously low prices out of their suppliers. To this, they add all of the economies of scale and function consolidation that they can possibly come up with, to the point where Wal-Mart makes more on the same item than almost any other retailer, let alone the mom and pop store that everyone complains Wal-Mart has driven out of business. How the heck do you think they can afford to build dozens if not hundreds of new "Super Centers" worldwide every year?

Their main attractiveness to consumers is one thing. Price. They deliver whatever it is, from breakfast cereal to makeup to cell phones to automotive supplies at the lowest final price to the consumer. They've also got a huge selection of merchandise so you've only got to make one stop (thereby saving on gas, if you don't count the three gallons you waste getting in and out of the parking lot), but that's not why most consumers go there. They go for price. I may hate the thought of going to stores that are even in the physical vicinity of a Wal-Mart, but you've got to give them respect for what they accomplish.

People don't shop Wal-Mart because Wal-Mart doesn't make anything on the transaction. If that were the case, we'd all be shopping government stores and paying much higher prices. No, people shop Wal-Mart because the total cost, aka purchase price, is lower there even thought they may be making more money per transaction than the Mom and Pop store that used to be a couple blocks over. Lest anyone not understand, this is a good and rational thing, not just for Wal-Mart but (as far as it goes) for society as well.

The same principle applies to loans. Shop loans by the lowest total cost of money . To know what that is, or even make a reasonable estimate, you've got to have some idea how long you intend to keep the loan. There is always a trade-off between rate and cost, because lenders have to work with the secondary markets, and that's the way the secondary markets are built. Know for a fact you're going to sell the property in two years? Then look at the costs of that loan over a two year period. In such a case, it probably doesn't make sense to choose anything with a fixed period longer than three years, and lowering the closing costs is likely to be more important than getting a lower rate, even if the payment is lower on a lower rate. That's pretty much a textbook case example of higher rate being better because it's got a lower closing cost.

If you're certain that you're going to stay in this property forever, and never ever refinance again, a thirty year fixed rate loan where you spend several discount points buying the rate down will verifiably save you money - if you're right. If you're wrong, and six months from now you're looking to sell and move to the French Riviera (or simply refinance because you need cash out), all that money you spent on points and closing costs was essentially wasted. You're not going to get it back - it's a sunk cost, used to pay the people who do all the work to make a loan happen, and to pay the rich folks who work the secondary mortgage market to give you a lower rate than you could have gotten otherwise. It's not their fault you chose to let them off the hook from that contract you negotiated. You're essentially betting a lot of money upfront that future events will happen the way you believe they will, and if you're right, you reap quite a reward. However, most folks lose this bet, which is why the (rarely followed) admonishment not to pay points for a loan gets repeated so often. That's also why people hedge their bets most of the time, by choosing an alternative that costs less, and therefore risks less, while covering a lot of future possibilities in a decent manner, if not quite perfectly.

All of this is good information to have. But there is one piece of information required of brokers but not direct lenders that distracts consumers from what is really important: How much they're making for this loan. I think it's good information to have out there providing the consumer knows enough not to give it more weight than it deserves. And it really isn't important information, because it does not impact the bottom line to you, the consumer. It's really no more important than knowing where the airplane for your flight just flew in from. The point is that it's going to cost you X number of dollars (and a known amount of time) to get on that plane to where you're going, just like the important thing for consumers about their mortgage loans is that it's going to cost them $X total to get the loan done, and they're going to have an interest rate of Y% that they're going to have to pay for as long as they keep that loan. But if it's important for brokers to disclose how much they're going to make, why isn't the equivalent disclosure required of direct lenders?

The Federal Trade Commission prepared a report, The Effect of Mortgage Broker Compensation Disclosures on Consumers and Competition: A Controlled Experiment. The upshot? Consumers will choose the loan where the company providing it makes less money, or, even more strongly, choose the loan where the company's compensation isn't disclosed at all. I think it's reasonable information for someone to want to know, but if it's important to know the information when you're dealing with a broker, and the government therefore mandates such disclosure, then why isn't it required for direct lenders? (The answer is politics, to put brokers at even more of a psychological disadvantage as far as the average person is concerned. Lenders make a lot more money than brokers, so they have a lot more money to bribe politicians contribute to campaigns). To quote from the report:

If consumers notice and read the compensation disclosure, the resulting consumer confusion and mistaken loan choices will lead a significant proportion of borrowers to pay more for their loans than they would otherwise. The bias against mortgage brokers will put brokers at a competitive disadvantage relative to direct lenders and possibly lead to less competition and higher costs for all mortgage customers.

Focusing upon what the provider makes actually hurts you. If you just focus upon how much the loan officer makes, there's no incentive for them to shop around looking for a better loan. As I've written before, if I can find a better lender for that loan, I can both make more money and offer a better loan. But if you're just going to shop by how much I make, there's no incentive to do that. I make my $X, regardless of whether you get a 30 year fixed at 5% without a prepayment penalty or a 2/28 at 8% with a three year prepayment penalty. There usually isn't that much difference, but the principle is the same. You want your loan person motivated to find you a better loan, which shopping only by how much someone makes frustrates. And if you choose a loan at a higher rate of interest and higher cost just because the company offering it is not legally required to disclose what they make, it doesn't take a genius to figure out that you're doing nothing except hurting yourself. It's the equivalent of passing up the store with the lowest price because the law requires that store (but not their competition) to hang a big sticker on it that says, "The store makes $12.98 if you buy this toaster oven." Me, I like it when people make money from my custom, especially when the bottom line cost is as good or better. It means they're motivated to work hard and do a good job so they get my business again next time I'm in the market. The principal is the same whether it's a big box retailer, a mechanic shop, or a real estate loan.

Finally, at loan sign up, the prospective lender can lie, just as much as any other item, even on the new good faith estimate. The government may tell you they can't lie on the form, but the form itself is effectively lying because what it really means is that it can't change without being redisclosed with a new Good Faith Estimate. Indeed, the government and changes in market conditions are making it more difficult, not less, for consumers to intelligently shop their loans.

The best solution for consumers: Have a real problem solving discussion with prospective loan officers. If you just ask the rate and hang up, the one that low-balls you the most blatantly is likely to get your business, and it will be too late to change when you discover the truth. But if you pay attention to the process they use for putting you into the best situation going forward, then you stand a better chance of discovering their real intentions.

Caveat Emptor

original article here

(This is a reprint from December 15, 2006 that still has quite a bit to offer. There have been market changes which I will talk about but the original stands up well)

This was a Q&A post from a certain well known site allegedly interested in helping the consumers shop loans and real estate. What they're really interested in is selling access to their eyeballs, but at the time, they were acting like they might have a little bit of concern for consumers.

What are some online resources consumers should be using to find loan rate information?

None that are any good, as in the sense of providing good relevant information that's applicable to specific cases. There are many loan quote forums that will quote you a rate. They quote you a low rate or a low payment to get you to contact them - and that's all that it is, a teaser. I have literally gone right down the line in two different comparative quote forums, contacting every company and asking for quotes that comply with the standards they are supposed to quote to. Not one company was even prepared to quote me what they were advertising. Nor did the forums themselves do anything when I complained - they are not interested in policing the quotes, as to do so risks losing some hefty income when the companies quit subscribing to their service. The few companies that advertise honest rates that are really available have given up on those forums in disgust - they attract clients in other ways.

Unpopular as this truth may be, you need to shop live loan officers and have real conversations and ask a lot of hard-nosed questions. Here is a list of Questions You Should Ask Prospective Loan Providers. If you want to suggest any additions to this list, I'd love to know.

What should a 1st time home buyer look for when comparing and contrasting loans?

1) Make certain you are really comparing the same type of loan. Asking about the industry standard name for the type of loan contemplated helps. Even if you don't know what it means, the other loan officers you talk to will. 2) There is always a trade off between rate and cost for the same type of loan. One lender's trade offs will be different than another lender's, but you always have a range of choices, even with the same lender. Just because one loan has a lower rate or lower payment doesn't make it a better loan. Find out the total cost of getting that rate, and figure out how long it will take you to recover costs via the lower interest rate. Given how often most people refinance, a higher rate with a higher payment but lower costs is often the better bargain. There is no sense in paying four points for a loan you are only likely to keep for two years.

What is the biggest mistake you see 1st time home buyers make?

Three most common disasters: 1) Buying or wanting a more expensive property than they can afford. When I originally wrote this, any competent loan officer could get you a loan that made it appear you could afford a property that you couldn't. That, more than anything else on the consumer side, was the cause of the meltdown because the folks who got them still had to face the consequences later. Find out what you can really afford with a sustainable loan, and stick to it. Settling for a lesser property is much smarter than buying something you cannot afford. 2) Not shopping around for services. Even if you trust your brother in law the real estate agent, or your sister in law the loan officer, shopping around gives them concrete reason to stay honest. The worst mess I ever cleaned up was caused by someone's favorite uncle trying to make too much money, and the niece was blissfully unaware until her husband brought me into it - six weeks after it should have closed. 3) Believing that because someone puts some numbers onto a Good Faith Estimate ( or Mortgage Loan Disclosure Statement in California, but read the article on the Good Faith Estimate) that they intend to deliver that loan on those terms. This is, unfortunately, not the case in the industry at large. If they do not guarantee their quote in writing at least with regards to closing costs, the Good Faith Estimate (or Mortgage Loan Disclosure Statement) is garbage, along with all of the other standard forms that you get with it. The only form that the law requires to be accurate is the HUD-1, which you do not get, even in preliminary form, until the loan is closing. Big national lending institution everyone has heard of? Doesn't mean a thing. Ask the hard questions, and do not permit yourself to be distracted.

At this update, it has become obvious that the only changes due to the new rules about the new good faith estimate is that the rules for lying to get a consumer to sign up are now a little more byzantine - but that companies who want to do it have the rules for doing so down to a science.

When do 50 year mortgages make sense?

Perversely, rates on 40 year amortizations are usually comparable to interest only, and fifty year amortization rates are usually higher. Nor are any of the these usually a good choice for a purchase money loan. All three are strong indicators that you are trying to buy too expensive a property for your budget. See Common Mistake Number One above.

What do you think about Adjustable Rate Mortgages (ARMs)?

I am a big fan of certain ARMs in most markets. Most of the time, a fully amortized 5/1 ARM will be at least one full percent lower on the rate than a comparably expensive thirty year fixed, and the vast majority of people refinance within five years anyway. Why pay for thirty years worth of insurance that your rate won't change when you're likely to let the lender off the hook within a few years anyway? With that said, however, sometimes the spread in rate is only about a quarter of a percent or less between a 5/1 ARM and a thirty year fixed - and at the low cost end of the spectrum, the thirty year fixed may actually be less expensive for the same rate.

At this update, the loan market has become enough more constricted that I am less of a fan of hybrid ARMs. Lenders are demanding people who fit their lending profiles perfectly - which is perversely, one of the things that is bankrupting them as with fewer people able to qualify for loans, prices plummet. If something happens to your situation or credit, the lack of alternative markets to the A paper Fannie and Freddie mainstays can easily mean that it is impossible to refinance until your situation improves, which can take two years or more. The spread between thirty year fixed and 5/1 ARMs is back up over three-quarters of a percent, but what happens if someone steals your identity forty months in and you cannot refinance before the loan adjusts?

Is there a certain number people should be looking at when determining if they should refinance?

Forget payment. With no other information to go on, I would bet that someone trying to get you to refinance based upon a low payment was pushing a bad loan, and probably low-balling the payment as well.

Once again, you've got to have a good conversation with the loan officer. Look at the money you will save from the lower interest rate - the interest charges to a loan. If you're saving half a percent on a $400,000 loan, that's $2000 per year. Compare this to the cost, and how long the rate is good for - or how long you're likely to keep it, whichever is less. If the cost is zero - and true zero cost loans do exist despite Congress making it appear otherwise - you're ahead from day one. However, if it costs you $12,000, it's going to take you six years to break even, and most folks will never keep the same loan six years in their lives. Since there is no way to know for sure unless your prospective lender will guarantee the quote as to rate, total cost, and type of loan, you need to go in to final signing with the idea firmly in your mind that unless they can show both the cost and the benefit, you're going to walk out without signing. Indeed, many companies are very adept at pretending costs don't exist, and hiding costs at closing. Industry statistics: over half of all potential borrowers won't even notice discrepancies at closing, and of the ones who do, eight to nine out of ten will just sign anyway. This rewards people who lie to get you to sign up. Haul out the HUD-1 form at closing and make certain it conforms to what you were told when you applied. Most HUD-1s don't, and the loan officer knew it wouldn't conform when you signed up. Read the Note carefully also, before you sign.

More questions? I'd love to answer them! Contact me and ask!

Caveat Emptor

Original here

Every once in a while, the subject of assumable loans comes up. An assumable loan is one where the owner of a property has the ability to pass the loan along with the property in a sale. In other words, if they sell a property with a $200,000 assumable loan on it, by assuming the loan, the buyer only has to come up with the difference between that $200,000 and the purchase price. The $200,000 loan is a constant of the situation.

About the only loan that generally has an assumption feature is the VA loan. There are other loans out there that are assumable, but it's a matter of company policy of the lender funding the loan.

Just because a loan is assumable does not mean that any person is acceptable to assume such a loan. The lender has the right to approve or disapprove a loan assumption. The way to bet is that any prospective borrower is going to have to qualify under loan guidelines at least as stringent as the original loan. Mind you, if the rate is higher than the current market, the lender is likely to be somewhat forgiving, but if the rate is lower than current market, the lender has an incentive not to approve the assumption. They may approve it anyway, if the rate still beats the active return on the secondary market. But given the latitude to make their own decision, it's not exactly amazing how often everyone will usually follow their economic best interest.

Even after an assumption gets approved, the original borrower is not off the hook. I don't think I've ever heard of an assumption where there was no recourse to the original borrower. The VA loan has full recourse to the original borrower (and their VA guarantee) for a minimum of two years. This means that those original borrowers aren't going to be able to get another VA loan for at least two years, or at least that they're limited by the amount of their overall VA limit tied up in the assumed loan.

Other than VA loans, loans where there is an assumable option are generally a little higher than the non-assumable competition in terms of the tradeoff between loan rate and costs. This is because assumability is a feature with value. They're giving you something that has value the competition does not - they want some value in return. It's generally not a huge difference, but in the absence of someone asking for an assumable loan, I generally presume lower rate/cost tradeoff is more important to my clients, and I can't remember the last time a wholesaler with assumable loans won that battle.

There is a concrete value to having an assumable loan. Particularly in buyer's markets, they are one more way to get the property sold, and sold at a better price. After all, you have a feature that few other sellers have. The offer to allow someone to assume your loan can help certain kinds of buyers who may not be able to qualify otherwise, It's a narrow niche, but it does exist, and the ability to have any niche of potential buyers to yourself is valuable in a buyer's market. This doesn't say you can ask for way more than the property is worth, it says that you have a tool to lure certain types of buyer, and have a tool to move negotiations in the direction you'd like them to go once there is an offer.

Finally, I should mention that having an assumable loan on the property is in no way a magic wand for buyers. Buyers still need to qualify to make those payments with that lender. Furthermore, assumable loans require that you be in a position to essentially step into the seller's shoes, equity wise. If the property is selling for $350,000 and there's a $200,000 assumable loan on the property, the other $150,000 has to come from somewhere, and second trust deeds aren't currently going above 90% of value, period - not to mention second mortgages have a higher rate. The existing lender is not going to put more money to an existing loan. So even though the mortgage may be legally assumable, it doesn't mean it's necessarily going to work for your transaction.

Caveat Emptor

Original article here

Note: Since this article was originally written, there have been changes in the loan marketplace. The negative amortization loan is no longer available and the damage it did has finally become obvious to everyone with pretense of a functioning brain. Nor are stated income loans available, and what few subprime lenders survive have changed their tune. Nonetheless, it's still a good article for today.

Cold Hard Fact for today: The average Real Estate Agent or Loan Officer is not motivated to tell you that you can't afford your property.

For the agent you are trying to talk people out of a property after they have already fallen in love with it, and then the argument becomes, "Why did you show it to me?". Let's face it, if it's higher in price, it should have features that lower priced properties do not, and it should have fewer things that consumers do not want. Indeed, one of the easiest and most common ways unethical real estate agents sell properties is by showing you several lower priced properties, fixers which lack those attractive extras, then show you the blinged out immaculate property while whispering sweet nothings like, "I can show you how you can afford the payments!" (which is not the same as being able to afford the property!)

All agents learn that by telling the client "no," or anything that sounds like "no," they are likely to lose that business. Good ones know that putting a client into something beyond their budget is a good way to have the transaction come back to haunt them. But for most, the temptation of the easy sale that made itself if too strong. They want that commission check. Nothing wrong with commission checks. If they provide real value to the client, they are a way of showing the world that you have done something valuable, same as a doctor, carpenter, or computer programmer. It's when you use your position of trust to sabotage them that problems start - and the agent who causes a client problems should experience problems. Many agents have not been around long enough to understand flat or declining markets. In truth, I wasn't in the business the last time we had one, either. But I am old enough to remember, and careful enough by nature that I refuse to assume that a rapidly rising market will save my bacon, as many agents have become used to.

And for the foreseeable future, rapidly rising markets are unlikely to save anybody's bacon, because the market isn't going to be rising rapidly until all the distressed inventory has cleared. Inventory is high, long term rates are set to rise, and we're just seeing a wave of problems caused by over-the-top practices of the last few years. I think we're past the price decline locally, at least as far as properties that are actually selling, but conditions aren't there for a return to the market we had most of the last decade.

Lest you be wondering, the loan officer is even more unlikely to counsel you on whether you can really afford the property. Between Stated Income, Negative Amortization Loans, and loans that are both of these, you can get anybody with an income and a not too putrid credit score into the property. In fact, I heard some real howls of outrage from certain brokers when lenders tightened their recourse on brokers in 2006. Even so, the paycheck is now and certain, the risk of default vague and indefinite, and for most loan officers, there's another concern as well.

You see, most loan officers cultivate some friends who are real estate agents, and that's how they get their business. That agent brings them business because they have a history of getting the loan through, so that agent gets paid. Sometimes they may have their hand out for a referral fee as well, but the important thing for you to know as a consumer is that referral you get from an agent to a loan officer has nothing to do with how great their rates are, and everything to do with how creative they are in getting some sort of loan approved so that agent gets paid for the house they think they just sold. Tell just one prospect who has made an offer on their dream house that there is an issue with being able to really afford that loan, and the word will get around the real estate community in no time. Result: For causing one agent to not get paid, Joe Loan Officer not only will not get any referrals from them in the future, if the client does find Joe Loan Officer on their own, the agents are going to do their best to talk them away from Joe, who, from their point of view, "stole their paycheck" by telling the client that they really could not afford the loan that was necessary to make the transaction work! Even if they took that transaction to some other loan officer who got it closed, Jane Realtor doesn't want her clients to have anything to do with Joe, lest she lose another potential commission check!

So what can you, the consumer, do about this? Well, I can't tell you all about the special cases, and I lack the programming capability to embed a spreadsheet and loan calculator. But I can give you some good general rules of comparison, and guidelines laid down by lenders as to whether or not you can actually afford that loan.

Start with your total monthly gross income. Assuming you printed this out, write that number here:

Notes:
A: use fully indexed rate for qualification purposes. This means the underlying index plus the margin after it adjusts, assuming current values.

B: If interest only, use fully amortized rate for qualification purposes.

Any four function calculator will do this much. This is the largest number you will qualify with. As you should be able to see, it's more difficult to qualify for A paper, even though that is where you want to be. But we're not done. This is total housing and debt service, the so-called "back end ratio." So from that number, you need to subtract your monthly debt service: Car payments and other installments, and minimum credit card payments. You pay this much already. You obviously cannot afford to pay it out for housing also - that would be double counting! Your lender won't believe you can afford to spend the same dollar twice.

So add up your credit card, car payment, and other monthly debt obligations. Subtract it from your numbers for back end ratios, computed above. This will give you a set of five numbers that tells what you can afford for housing costs, depending upon how far you want to go. But we're not done! This is total cost of housing; the so-called "PITI payment." It includes not only principal and interest on the loan, but also property taxes, homeowner's insurance, Condominium Association dues, and Mello-Roos assessment districts (or their equivalent outside of California, if applicable). So from this, you need to subtract all of the known stuff or stuff you can make a close approximation on, like Association dues and insurance and taxes, to arrive at how much of a loan you can afford. Please note that for Negative Amortization Loans, loan officers may use the minimum payment for qualification, but you are still being charged the real interest rate! Still, it should become obvious as to why Negative Amortization loans were so popular in high priced areas. Not only would the lenders pay between 3.5 to 4 percent commission for them, not only do they allow lower payments to be quoted, but they make it look like you qualify for a bigger loan than you can afford, which means the real estate agent gets a bigger commission from selling you a more expensive property, and the loan officer gets paid more, also, because now you have applied for a larger loan! I have heard every rationalization under the sun from loan officers and real estate agents on this score, but they are still inappropriate for the vast majority of people who have them. I can get a better interest rate on a better loan for less cost, every time, but then I have to tell the client about the full amount they are really being charged every month, and they might have to content themselves with a less expensive property, meaning that real estate agent is going to have to do some real work. Go out onto the web and look for some loan calculators (Auto loans use slightly different assumptions, so don't use those calculators), or if you have a financial calculator, use it! Use the real interest rates that are available, and if the number you get comes out much higher than your quoted payment, they are trying to snooker you with a negative amortization loan. There is no magic about loans, and a healthy skepticism will help you prevent problems from happening in the first place.

Now add the down payment you intend to make to the loan you can afford, and that tells you whether or not you can afford the property. If you can't, don't make that offer. If you're already in escrow, do what is necessary to get out. I'd rather forfeit a deposit now than a much larger amount later. And if you already own it but can't afford it, the time to sell is now.

Caveat Emptor

Original here

Question from an e-mail:

Hi, I have a question about mortgages. My boyfriend and I are looking to buy a home, and since I have recently quit my job he would be the primary applicant. He makes $44k and we are looking at houses about $150k. We both have very good credit although I have some debt. I am wondering though what kind of rate we are going to get since he recently graduated and just started his job about a month ago. Is that going to affect the rate of the mortgage or how much he can qualify for, and by how much? Also, I have a small business that has been running for about a year and a half - it made a good bit of money last year, about $55k, and is still making some (albeit less now than it was last year.) Would it be worth it for me to co-apply, based on that income, since I don't have a salaried job currently? If I am not on the mortgage, I will sign a lease to him. We are going to put about $10,000 down. Thanks!

First off, let me briefly explain that unless someone has either truly putrid credit or large monthly payments that kill the debt to income ratio, there just isn't a reason to leave someone off a loan. So what if John is a househusband or Jane is a housewife with no income? They're still part of that marriage partnership, and the same applies (minus the word marriage) if the folks involved aren't married. Unmarried gays (with or without civil unions) and cohabiting straights are exactly the same as married folks except that I have to put them on separate applications instead of applying on the same sheet of paper, and if they're committed to each other, well isn't that what being a committed partner is all about - sharing benefits as well as responsibilities? In other words, ownership of the property and indebtedness for the loan.

Depending upon your situation, however, if you sign the lease it may actually help the boyfriend qualify more than your income would if you were on the loan. Leases that fulfill lender requirements generally aren't scrutinized for the ability of the lessee to pay, where if you were on the loan, the money that the lender would believe you could contribute might not pass scrutiny.

Now, let's look at the individual situations.

You are the more clear cut candidate. You have no current salaried income from employment, but you do have a side business with historic, documentable income. If you'd been doing it for two years, you'd have two years in current line of work and the ability to use that income all in one fell swoop. The way that is measured is monthly income averaged over the previous two years, as reported on your federal income tax forms. However, at this point all you have is one year. Still, it's worth submitting, because $4150 per month over one year isn't chicken feed. If you can show some income in the business for the previous year, and evidence of when you started, they're likely to average it over the full two years leaving you with a minimum of about $2100 per month to add into the gross income kitty. After all, it's a going concern, you're still doing it and nobody fires owners.

Furthermore, if you can get a job and a paystub in your previous field of employment before you apply for that loan, now you're employed over two years in the same line of work, simply with a gap in employment. When they average that out, it'll be a bit of a hit, but you'll still get substantial credit for your employment income.

Your boyfriend is a bit less cut and dried, especially at this update. When I first wrote this, if he was in the profession for which he was was granted the degree (for instance, a doctor or nurse when he was studying medicine), then it was pretty easy to get credit for the time in line of work. He was in medicine, he just wasn't getting paid until recently. It was never written into A paper guidelines that I'm aware of, but lender guidelines had some common sense to them. With the tightening of what the secondary market for loans will accept and the federal regulatory screws however, this is now becoming more difficult to get approved. Lenders want to see the stipulated period of actual documentable income.

If the boyfriend is in an profession unrelated to the course of study, he's just going to have to wait until he has his two years in. There's no history of involvement, and people get jobs in various fields all the time that it turns out they can't - or won't - continue in. For example, sales. That's fine, but the lenders don't want to get caught by default when they leave the field and can't make mortgage payments.

So I can see possible situations arising out of what you describe that could have either one of you primary on the loan, or completely unable to do the loan without resorting to subprime financing. Each individual situation can turn upon some very fine points, kind of like theology or law.

Caveat Emptor

Original article here

I get people asking me about how much their mortgage loan providers make, usually with an idea towards negotiating it down but often with the idea of choosing one loan or the other based upon the loan officer's compensation. This is a bad idea. It's completely the wrong question.

First off, there are several forms loan officer compensation takes. There is so-called "front end" compensation paid directly by borrowers. There is "back end" compensation paid by lenders, also known as yield spread (or SRP for correspondent lenders). There are also volume incentives given by most lenders, and promotional give backs and offsets. Then there are times when the loan officer is holding out their hand for kickbacks behind your back or by "marking up" third party services that they order on your behalf. This is illegal, but it still happens. Finally, for direct lenders, there is the premium they earn by selling your loan on the secondary market, a figure which is usually several times all of the others and which is the reason why those are paid, but does not need to be disclosed at all. Trying to judge a loan by loan officer compensation is very difficult if they are trying to hide it.

Furthermore, it's actually a distraction from what is most important, which is the best possible loan for you. For instance, a couple of weeks before I originally wrote this, I was shopping a loan for a decidedly sub-prime prospect. The lowest quote I got enabled me to give a quote of a 7.25% retail rate at par, which is to say no discount points to the borrower. But that lender was better than half a percent better than their nearest competition because this borrower fit neatly into one of their targeted niches. Had I merely not shopped that loan with that lender, the best I could have done would have been 7.8 percent at par, and one full point from the borrower would only have driven it down to 7.3 percent. Now suppose I didn't shop that one lender who gave me the best price, and my competition had found something even better, say a 7.00 percent par rate loan. For that particular loan, they could have made a full percent and a half of that loan amount more than I did, and still delivered a better loan for the client.

In point of fact, I actually beat my competition by quite a bit, But the point I am making is still valid. Judge the loan by the best loan for you: Type of loan, rate, and total cost in order to get that rate. Whatever they make while delivering the best loan to you is reasonable. Whatever it is.

Furthermore, brokers and people who work at brokerages legally must disclose their company's compensation from other sources, while direct lenders do not. Direct lenders are making, if anything, more for the average loan than the brokerages, but because they do not have to disclose compensation not paid by the borrower, if you try to use loan officer compensation as a way of judging the value of the loan, the direct lender will look better than the broker for most loans. Until you go and compare the loans they actually were prepared to deliver from the most important perspective: What it means to you, the consumer. A 6 percent thirty year fixed rate loan with no pre-payment penalty that cost you a grand total of $3500 is a better loan than a 3/27 that has a pre-payment penalty, cost you $8700, and is at a rate of 6.25%, regardless of how much the respective loan officers or their companies made, or would have made. Loan Officer compensation is a distraction from what's really important. Much more important is the loan they are willing and able to deliver, its type, rate, costs, and whether or not there is a pre-payment penalty.

PS: If the loan is better for you than any other loan you're offered, it shouldn't matter if the loan officer or bank is making more than the amount of your loan. In such a situation, they won't be, but focusing on their compensation - or actually, what a given loan officer is required to disclose of their compensation - is entirely the wrong concern. Choose based upon the bottom line to you.

Caveat Emptor

Original here

Just like Mohandas Gandhi and Genghis Khan and Attila the Hun were (despite their differences) all human beings, lenders (despite their differences) make money by lending money to people who want it.

That's about the limit of the truth in that statement.

Lenders do, by and large, get their money to lend from the bond market. But not all lenders get their money from the same part of the bond market. Some get the money from low-risk tolerance folks looking for security, and willing to accept comparatively low rates. Some get the money from high risk tolerance folks looking for more return for their risk. Within each band, there are various grades and toughnesses of underwriting. A lender with tough underwriting will have a very low default rate, and practically zero losses. A lender with more relaxed underwriting will have more defaults, and higher losses, meaning they must charge higher rates of interest in order to offer the investors the same return on their money.

When I originally wrote this, I had literally just finished pricing a $600,000 loan for a client with top notch credit and oodles of income (he's putting $800k down). Even A paper and with the yield curve essentially flat, I got variations of three eighths of a percent on where their par rate was. Every single one of them had significant differences in how steep the points/yield spread curve was (if you need these terms explained this is a good place). For one lender it was "offsheet pricing" below their lowest listed rate. This lender is more interested in low cost loans, and they take it for granted that folks will not be in their loans very long. This lender is appropriate for those who are likely to refinance within a few years. For another lender, it was "offsheet pricing" above their listed sheet prices. This lender specializes in low rates that cost multiple points, so they can market lower payments. For those few people who really won't sell or refinance for fifteen years, these are superior loans.

Which do you think is really better for the average client? Well, let's evaluate a 6.5 percent 30 year fixed rate loan that costs literally zero (I get paid out of yield spread, while rebating enough to the customer to cover all their costs), with a 5.875% 30 year fixed rate loan that costs $3400 plus two points. I always seem to be computing $270,000 loans here, but since this was "jumbo" pricing and a $270,000 loan is "conforming", which carries lower rates, I'll run through both.

The 6.5 percent loan is zero cost to the client. Nothing out of pocket, nothing added to the loan balance. Gross Loan Amount: $270,000. The 5.875% loan cost 1.875 points in addition to $3400 in closing costs. Gross loan amount $278,625. You have added $8625 to your mortgage balance to save yourself $98.40 per month. You theoretically are ahead after 88 months (7 years, 4 months), but not really even then.

Every so often I get a question that asks why they can't have A for the price of B. The answer is the same as the reason why you can't have a Rolls Royce for the price of a Yugo. Another funny thing about Rolls Royces is how expensive they are to maintain. A middle class person with a Rolls better plan on living in it. The funnier thing is that in the case of loans, your friends, family and neighbors can't even see you in it, so there is no point in a "Rolls Royce" home loan except for utility, and if it's not paying for itself, then there is no utility (or negative utility, i.e. something you don't want), and therefore, money wasted.

Now, let's crank the loans through five years - longer than 95 percent plus of all borrowers keep their loans, according to federal statistics - and see which is really better for most borrowers. The 5.875% loan makes monthly payments of $1648.17. Over five years - 60 payments - they pay $98,890 and pay their balance down to $258,869. Total principal paid: $19,756. Actual progress on the loan (amount owed less than $270,000): $11,131. Interest paid: $79,134, which assuming a 30 percent combined tax rate, saves you $23,740 on your taxes.

Now let's look at that 6.50 percent loan that didn't add a penny to your balance. Monthly payments of $1706.58, total over five years $102,395. Looking pretty awful, so far, right? But your total amount owed is now only $252,750. Total principal paid: $17,250. But this same number is also the actual progress! Interest paid $85,145, and assuming 30 percent combined tax rate, same as above, it gives you a tax savings of $25,543.

Now let's consider where you are after five years.

With the 5.875% loan, you saved $3505 on payments. But you also owe $6118 more, and the 6.5 percent loan saved you $1803 more on your taxes. Furthermore, if you've learned your lesson about high cost loans, and rates are as low when you refinance or sell (6.5 percent on your next loan), it's going to cost you $397.67 per year from now on for that extra $6118 you owe! Net cost: $4416 plus nearly $400 more per year for as long as you have a home loan. Assuming that's "only" 25 years, your total cost is $14,358. I never spent so much money to save a little for a little while!

Now, let's consider that $600,000 loan in the same context. After all, the pricing really applies there (conforming rates are lower). Appraisal costs a little more, and so does title and escrow, for jumbo loans on million dollar houses. Let's say $3700 in costs. Your new 5.875% loan would be for $615,236 (disregarding rounding). Payment $3639.35, which over 5 years goes to $218,361 in payments. Crank it through 60 payments, and you've paid the loan down to $571,612. Principal paid $43,388, actual progress $28,388. Total Interest paid, $174,973, which assuming a combined 40% tax rate (higher income to qualify!) gives you a tax savings of $69,989.

At 6.50 percent, the payment on a $600,000 loan is $3792.40. Times 60 payments is $227,544. Crank the loan through those 60 payments, and you've paid the loan down to $561,666. Principal paid and actual progress made: $38,344. Total interest paid $189,209, which at the same combined 40% rate is a tax savings of $75,684.

With the 5.875% loan, you saved $9183 in payments. Yay! However, you owe $9946 more, paid $5695 more in taxes, and on your next loan, assuming it's at 6.5 percent, you pay $646.49 per year in additional interest. Total cost is $6458 plus $646 per year for as long as you have a home loan, which assuming that's 25 years equates to a total of $22,620!

Which of these two loans and lenders is better for you? Well, if you're going to stay 15 years or more and never refinance, the lender who wants to give you the 5.875% loan. That rate wasn't even available from the 6.5 percent lender. On the other hand, if you're like the vast majority of the population that refinances or sells within five years (for whatever reason) you really want the 6.5 percent loan whether you knew it before now or not, which also was not available from the 5.875 percent lender.

The billboards advertising rates aren't going to tell you cost, of course. They're trying to lure clients who don't know any better, and often they're playing games with the loan type as well. But when the rate spread between the rate they're selling and APR is over 3 tenths of a percent, you know they're building a blortload of costs into it. Keep in mind that the examples I used were almost two full points in addition to basic closing costs, and they were each only about a 0.25% spread between rate and APR. Most people are never going to recover those costs in the time before they refinance or sell. The lender who offers you 6.5 percent for zero cost is probably offering you a better loan.

Now, there were lenders targeting the markets between these two lenders, some that overlapped the whole market, and even another lender specializing in rates even lower and with higher pricing. Keep in mind that this article was limited to A paper 30 year fixed rate loans, which are limited in what they can possibly accept by Fannie Mae and Freddie Mac rules. Once you get out of the A paper market and especially down into sub-prime lenders (when sub-prime becomes available again, which it will), the diversity between offerings really multiplies, as the differences they are permitted in target market cover all parts of the spectrum. Some wholesalers walk into my office with the words, "Got any ugly sub-prime today?" Other sub-prime wholesalers ask me about "people that could be A paper but are willing to accept a prepayment penalty to get a lower rate" (I don't use those much). Some want short term borrowers, and their niche is the 2/28. Some want the thirty year fixed with a prepayment penalty. The ones who asked me about negative amortization loans, I threw out of my office but they sold them somewhere. A lot of somewheres, judging from the evidence that they were 40 percent of purchase money loans locally in 2005 and 2006.

So lenders are not all the same. Indeed, every single one of them is different, and you need to shop enough different ones to find the program that's right for you, and ask lots of questions every time. Just asking about rate is not going to make you happy, as I hope I have just demonstrated. If you walk into their office, they're not going to tell you that you're not the client they're really looking for unless they just don't have any loans at all that you qualify for (and if you're in this category, do not blindly accept any recommendations they make. Most places, they're sending you to the place that pays the most for the referral, not the lowest cost provider appropriate for you).

Caveat Emptor

Original here

This is the conclusion of the series begun in Page One and continued in Page Two

Page Three is where the most blatant lies of this whole piece take place, and the first part of page three is where they are found. It segregates the charges into three different camps: Ones that it claims cannot increase, ones that it claims cannot increase by more than 10% in total, and ones that, supposedly unlike the other groups, can change at settlement.

This is nonsense on stilts, lulling the consumer into a false sense of security.

Loan providers can low-ball every bit as much as they ever could, and this form, in my honest opinion, is the worst part of all because it explicitly states something that is not true. What it really means is that these charges cannot increase without being redisclosed three to seven days in advance of signing the final paperwork. Guess what? Crooked loan officer lies like a rug to get you to sign up, and on day 38 or 42 of a 45 day process is finally forced to tell the truth or something close to it. At that stage of a purchase, there is (thanks to other new regulations) no way on this earth that you're going to be able to get another loan ready before the deadline written into your purchase contract. You have no choice - you are stuck. And the whole concept of back up loans has been killed by changes in the market. Even on a refinance, you've spent the money for an appraisal and other sunk costs. There's no way to force them to release that appraisal to you - not that it would do any good with HVCC in effect. Net result: You're out the money and the time, and many refinances have an external reason forcing them to happen - almost all "cash out" refinances have an external deadline, a time by which the people have to have the money. People are extremely unlikely to begin the process anew at that point in the transaction, which means that the people who LIED to get them to sign up are rewarded with a loan commission, people who told the truth and are spurned by consumers because the lie looks better receive nothing and go out of business, and the federal government is an unindicted co-conspirator to the raping of the consumer by making a false promise that the liar's numbers cannot change.

We've covered how this whole premise is a lie, but let's cover the three categories and how honest loan providers are going to approach them until they go out of business.

The charges that supposedly cannot increase at settlement are loan origination charges, discount charges for the specific interest rate chosen adjusted origination (which I covered in the page one article) and governmental transfer taxes. It is worth noting that even on the new Good Faith Estimate form the government does warn you that discount is changeable until you lock your loan, something that the market is trying to push as close to the day of settlement as possible by imposing high costs on brokers and correspondents for every loan that is locked but does not fund. The reality is that these charges are going to change. Until they started charging me for loans which don't fund, I locked every loan when people said they wanted it. Now I have to float the rate until I'm certain underwriting isn't going to reject the loan. If your loan isn't locked, you are at the mercy of the market even without mixing in possibly foul loan officer intentions. The closest thing to a guarantee even the best most conscientious loan officer can give in the new lending environment is "Everything but the rate/cost tradeoff I can guarantee right now - but I can't guarantee that until we lock your loan, all I can do is tell you what it would be if we locked today" Since the this tradeoff is far and away the largest determinant of the loan you will get, this amounts to guaranteeing the molehill while the mountain moves every day. It would be a useful yardstick for comparison as to which loan to sign up for if lenders had to tell the truth at loan sign up, which they do not.

The charges which supposedly cannot increase more than 10% in total are services that the lender selects, title services and title insurance, required services where you're allowed to shop but the lender ends up choosing the provider, and government recording charges. First off, on purchases trying to get escrow and title companies to honestly disclose their charges is a battle all on its own - I don't know why, as I have no problems getting "one flat rate" quotes from them on refinances. Maybe because it's because they can seduce the less diligent real estate agents by offering them help prospecting for clients, while on refinances they have to deal with loan officers who are competing on price for consumer business. But the same thing applies to this section as the previous - these charges can change without limit if they are redisclosed three to seven days in advance of closing.

The only charges that receive a completely honest treatment from the new form are the ones that the form advises you can change at settlement; These are services that you can shop for and don't have to use providers identified by the lender, such as escrow, title (if you don't use their selected provider), etcetera.

The one thing I do like about this new form comes next, because it tells consumers for the first time anywhere in an official publication that there is a tradeoff between interest rate and cost by telling you that there may be alternative loans available for lower cost at a higher interest rate or lower rates for a higher cost. Of course, this being the government, it misses something important - the changed loan amount or how much money you will receive from the same loan amount if you do choose the different loan.

It then gives consumers an place to write down and compare the loans they are being offered. Once again, this might mean something if prospective loan providers had to tell the truth at loan sign up, which they don't. As it is, this section serves as nothing more than another way to lull the consumer into a false sense of security about what they are being told. If the loan providers are permitted to lie about their loan characteristics and what it costs, the whole exercise becomes a competition to see who can tell the tallest tale believably. Traditional methods of comparison do not help in such an environment, as the numbers they are using to compare are fabrications told for the purpose of securing your business and getting a commission check, because by the time they have to tell the truth most people cannot change loan providers and most of those who could won't.

Caveat Emptor

Original article here

Continued from The 2010 Good Faith Estimate (Page One)

The next section is on origination charges. Indeed it is titled "Your adjusted origination charges"

It starts with "Our origination charges" saying this is the charge for doing the loan. Indeed, that is and has been the meaning of origination for as long as I've been a loan officer. But they want to add other things into it. Furthermore, be advised that prospective loan officers are allowed to change their minds about origination up until 7 days before the final loan documents are signed. In short, they can tell you they are not going to make anything in order to get you to sign up - then decide they want to make 3 points after it is too late for you to change loan providers.

The next subsection talks about "Your credit or charge (points) for the specific interest rate chosen" This is what is traditionally known as discount (in the case of a charge) or yield spread when this money is money paid back into the loan by the lender (I should mention that Congress has essentially banned Yield Spread in loans on the sly - something very disadvantageous to consumers, as you can't do low cost loans without it). Then it offers lenders three different options. They can say it's included in the origination line. This means they're not breaking it out as a separate charge, but lumping it in with true origination. The second option is to tell consumers they will get a credit out of the rate chosen, which does sometimes actually come true in the real world. I have used this credit dozens of times to get clients a true zero cost real estate loan. This usually happens when rates drop precipitously, so instead of seven percent, people can get a loan at 5.5% for literally nothing, as the lender pays enough to pay me and all of the other settlement charges. Of course, people willing to pay those charges get a substantially lower rate - ALWAYS. But if the people know they're going to have to sell or move in a year (not enough time to recover the costs of those lower rates), a zero cost loan saves them money every month they have it because there are no costs to recover. Finally, you could be paying this charge on top of regular origination. The one thing I want you to take away from this part is that origination is going to get paid on every loan somehow, and you need to understand how it's going to be paid before you tell someone you want their loan. And note that none of this is set in concrete at the time you sign up for your loan.

The next set of items is "Your charges for all other settlement services" Unlike previous versions of this form, there's a lot of lumping into sections going on here. Lumping is a good thing, as far as it goes. It lessens the ability of people to pretend that certain charges aren't going to happen. However, keep in mind that at sign up, and up to 3-7 days before final loan paperwork is signed, loan providers can still change all of these simply by giving you another Good Faith Estimate. It needs to be emphasized that the general practice ever since I can remember is to delay telling you about as many of the charges as possible (and pretend the ones they can't are going to be smaller than they are) until it is too late for you to switch loan providers, and the new Good Faith Estimate is doing damned little to change that fact or hamper that practice.

"Required Items that we select" tells you about the service providers that you have no option on. Until 2009, this section should have been blank. Now with Home Valuation Code of Conduct raping consumers and making it difficult for good loan officers and good appraisers, this is where the appraisal needs to be. Loan officers are not allowed to choose appraisers or even appraisal companies in most loans. The appraisal company is predetermined for us and we are not allowed to use anyone else - and that company gets to assign the appraisal to whomever they want. Usually, this is the appraiser who is most desperate for work who submits the lowest bid. If the qualify was there, or if I even had the option to kick bad appraisers off the list, that would be a good thing. As it is, I feel lucky any time an underwriter actually accepts an appraisal ordered under this procedure.

"Title services and Lender's title insurance" Once again it might be nice, if the title insurance company provided complete charges at sign up. About two months ago when the seller chose one in a transaction, they were incomplete to the tune of about $480 when we started the loan, and when I was trying to nail everything down for MDIA compliance, they were still $120 too low on what they actually ended up charging the consumer. I was not happy, and my client even less so. Even if the title company is truthful however, there is no guarantee at loan sign up that a lender will disclose those fees honestly.

"Owner's Title Insurance" This should not be a part of refinancing. As far as I know, owner's title insurance can only be purchased when you buy the property in order to prevent what insurer's call adverse selection. Around here, the title company on purchases is specified by the purchase contract and the lender has exactly zero control over it. Furthermore, every purchase contract I've ever written requires the seller to pay for an owner's policy of title insurance. If they're not willing to pay for the buyer to have a policy of title insurance, there is a reason, and none of the explanations that are really possible is a good situation for the buyer to be getting into.

"Required Services that you can shop for" this means they have to get done, and they have to be paid for, but you can choose by who and the charges are only an estimate. Be aware that no matter how conscientious the loan officer, they can't be held responsible for accurately quoting a service you are going to choose later, either morally or legally. I quote what I can deliver from service providers I know - but you're welcome to take the business elsewhere with the understanding that you are responsible for the outcome of doing so.

"Government Recording charges" these charges are for recording your documents so they become part of the public record. This is a requirement for all regulated corporate type lenders. The mafia or your dad doesn't necessarily have to record your loan - but public lenders do, and it's for your protection as well as theirs. Whatever it is, it's charged by the government, and everyone's charges should be the same because they're passing along a charge. If they're not the same as everyone else, that's a problem.

"Transfer taxes" are charged on the transfer of real estate (or refinancing, in some states) by the government. Once again, everybody should be the same because they are just passing along a government charge where it exists. If someone is different from everyone else, that's a problem.

"Initial Deposit for your escrow account" If you want or are required to have an impound account, the money to seed it is accounted for here, despite the fact that it is not a cost of the loan no matter who or how many people say it is. It is to be used to pay your property taxes and your homeowner's insurance when those charges are due, and when the loan is over, you get any excess back. This is just the lender holding on to your money. Once again, this should be the same for everyone. If one lender is telling you something different, odds are they are low-balling you by telling you you're not going to have to come up with what you are really going to have to come up with.

"Daily Interest charges" go to paying the prepaid interest. You pay interest on every loan for every day you have it. You never ever really skip a mortgage payment - but this is what allows some lenders to pretend that you do. This is not really a cost of the loan - you would be paying it even if you didn't refinance. It should be loan amount times interest rate divided by 12, then divided by 30, times the number of days. The most common method of playing games with this is to pretend that the prepaid interest is going to be for fewer days than actual. On a refinance, it can never ever really be less than thirty (30) - it's usually a day or two more. On a purchase, it's the number of days between closing date and the end of the month, counting both days (in other words, on the first day of a 31 day month, it's 31).

"Homeowner's Insurance" This is the money that will be used to pay for your homeowner's insurance. This is required by all regulated lenders, but I cannot imagine owning a home without having insurance from a solvent company able to pay whatever claims may arise from a widespread natural disaster. So unless you're one of the people who disagrees with me on that, it really isn't a cost of the loan, is it?

Once again, I must emphasize that at sign up, lenders are permitted to low-ball costs, particularly the ones that aren't fixed in concrete by other parties (government fees, prepaid interest, insurance). They don't have to be honestly disclosed until 3-7 days before the final loan documents are signed - far too late to change lenders in most cases. Used to be I could reliably get a purchase money loan done in 17 calendar days or less, a refinance in about 24. With all the regulations building new delays into the system, even if I have everything I need in my hand at the time of application, 45 days is about the quickest loan practical these days. If there is a loan involved, I wouldn't consider a purchase escrow of less than 60 days, and I'd be mentally prepared to extend even that.

Caveat Emptor

The concluding article on page three is now here

Original article here

I had a great rant about the limitations of the Good Faith Estimate all planned out in my head when I when I was in the very first stages of planning this website in my head. It was the first idea I had for an essay, as it is the most commonly abused item in the whole mortgage system of ours, and abuse of the GFE (as the industry calls it) sets the stage for a significant amount of everything else that goes on.

Some people are asking if the new MDIA rules make any difference to this. The answer is emphatically no. They actually muddy the process. The only difference it makes is that crappy loan officers now have to tell you the truth three to seven days in advance of signing final loan documents. Since those same MDIA rules together with other new regulations have stretched what was a seventeen day process a couple years ago into forty or more, you tell me how much good it does the average buyer of real estate to find out 40 days into a 45 day escrow period that they're not getting the loan they thought they were getting. There's no time for a purchaser of real estate to get another loan - they're stuck with that crappy loan. Even on a refinance, how likely are people to start another 45 day process after spending 40 days with the first lender? Furthermore, if you rely upon redisclosure to determine whether or not you were lied to, the waters are even muddier. I just closed a loan last week where everything was exactly what I had quoted the day the folks signed up - but the lender still wanted the redisclosure made to cover their backside, as MDIA has substantial penalties for failing to redisclose, but no reasons not to. At least one lender intentionally refigures the APR in a way different from Regulation Z (which governs APR calculations among other things) to force redisclosure even though that redisclosed APR is not accurate according to Regulation Z!

Nor are the new Good Faith Estimate rules making any difference. All they mean is that if the fees change (or go outside of a margin allowance in some cases) the lender is going to have to redisclose, exactly like they are doing now, with exactly the same situation for the consumer. Too late to change lenders for buyers, have already spent appraisal money for an appraisal that can't be moved to the new lender, and even for refinances, at a stage where they are just jerking the consumer after the last practical moment to chance as the new lending environment means nobody can guarantee their quotes upon sign up any longer, and nobody is doing back up loans either. Seriously, my opinion of these new rules has evolved since they were published from my initial "they could have done better but this is a good thing" reaction to "This (expletive) was designed to muddy the waters and confuse consumers"

On the other hand, the federal Good Faith Estimate is what we will have to use, and on that note:

The first page, if it was binding, would actually accomplish a little bit of things I've been telling anyone who would listen that we need. If it was binding, it would warn people in advance of all the lenders that pretended they were getting the consumer a sustainable loan for that ridiculously low payment when it was really a negative amortization loan. However, this section is no more binding than any other part of the form and can be redisclosed (i.e. changed) up to 3 days before signing loan documents.

On item 1, the interest rate for the GFE should basically always say the quote is good for today only. If they were required to be totally honest, it would say "This rate is available right now, but may change without notice. Nor are we going to lock your loan until we have a reasonable assurance of it closing". The only way a rate is good for longer than right now is if it's got a "margin" built in to absorb some change. Since this "margin" would mean almost everybody ends up paying more than they would otherwise need to, quote good for longer than right now either are not honest quotes (see my comment upon redisclosure above) or the consumer can get better rates elsewhere. Since the second possibility means that provider becomes less competitive in the marketplace, the first is far more likely.

Item 2, the estimate for settlement charges should be better, but isn't. My company's charges are exactly the same on every loan. The only things that should change are investor charges and third party charges. If I put a loan with lender A, the charges may be as low as $225 while if I put it with lender B the charges may be as high as about $900. I have to consider this alongside of the tradeoff between rate and cost those investors (lenders) offer to determine which is the best investor for the consumer to place the loan with. On refinances, I have "one rate" contracts for third parties (title and escrow, and before HVCCrules came into effect used to be able to do that for appraisals as well, and can usually do it even now. But once again, loan officers intentionally low-ball "forget" to fully disclose these charges at sign up, knowing they are going to disclose the correct charges later.

Item 3 tells your alleged lock period, and if this were any better than the rest of the form, would be a very good thing to disclose to consumers. Item 4 tells people how long before closing they must lock. Expect this number to seven days. Why? Because seven days before closing is the longest period they might have to wait between final redisclosure, which really translates into "finally telling the truth" and loan signing.

Summary of loan is no more binding at loan sign up and no more accurate than it is now. Why? Because they are allowed to change it later, and promising a great deal at loan sign up is how lenders lure people into signing up! But let's go over it anyway

"Your initial loan amount is:" On refinances, this should be current loan amount plus closing costs plus prepaid amounts - unless the loan officer knows you intend to pay those out of pocket because you said so and mutually agreed upon it. If this number is anything else, they are telling you point blank that they are a low-balling liar. On purchases, this should reflect what you are actually borrowing, not just cost of property less down payment. Remember, it's going to cost you some out of pocket money for appraisal, inspection, escrow and title costs, etcetera. This money has to get paid somehow, and the Loan to Value Ratio is measured off the amount actually borrowed versus official purchase price or appraisal, whichever is lower. If you don't have a firm handle on where the money to pay those extra costs is coming from, something is wrong.

"Your Loan term is:" good thing to have and know. Doesn't have to be honestly disclosed at initial sign up any more than anything else, but only the real crooks lie about this.

"Your interest rate is:" Important and critical. But note that it doesn't have to be disclosed honestly here - not until the final disclosure seven days out. Usually the lender actually intends to deliver on this interest rate - just not for the costs disclosed above, and that tradeoff between rate and cost is critical. To pretend they have the rate available for lower cost than real is LYING. It is lying with malice aforethought. I can do loans a full percent lower than what I am currently quoting most people - but for outrageous costs I wouldn't trick my worst enemy into paying!

"Your initial monthly amount owed for principal, interest, and any mortgage insurance is:" What most people think of as the payment. You've got to be able to make it. If the payment needed to be honestly disclosed at initial sign up any more than anything else, might be useful. But as I keep telling people, Never Choose A Loan (or a Property) Based Upon Payment!

"Can Your Interest Rate Rise?" would be a good thing to know if they had to honestly disclose it at sign up. Amazing how many lenders told people who signed up for all of the worst loans of a few years ago that they were getting a thirty year fixed rate loan even past the period when the loan had funded - right up until the people noticed something wrong and they had to come clean. We're not talking just brokers here by the way - some of the biggest name direct lenders in the country did it. Now, they have to tell the truth (guess when?) three to seven days before the final paperwork gets signed - but still not at initial sign up.

"Even if you make payments on time, can your loan balance rise?:" See the above paragraph. Same stuff, different line.

"Even if you make payments on time, can your monthly amount owed for principal, interest and any mortgage insurance rise?:" Same caveats, iteration three

"Does your loan have a prepayment penalty?:" I will bet you money that this remains one of the most common things loan providers lie about to get people to sign up. They can and do change it later. Same caveats, iteration four

"Does you loan have a balloon payment?": This isn't a common point of lying at sign up now - hybrid ARMs tend to be better loans for everyone - even dishonest loan officers - than balloons. But it would be good to know if they had to honestly disclose it at sign up. Unfortunately for consumers, it can still be changed later.

The next section talks about escrow or Impound accounts as they are less confusingly known. If you have one, it can only increase the amount of cash you need to come up with or borrow. I generally counsel people to plan direct payment as it eliminates the need for this cash, and avoid doing loans where it is a requirement. Sometimes, however, not wanting to have an impound account can mean a hit of a quarter to a half point of cost at the same rate, and it is then that you have to weigh those costs versus your pocketbook and available cash.

Summary of Your Settlement Charges: Adjusted Origination Charges Plus Charges for All Other Settlement Services Equals Total Estimated Service Charges. I have four words to say about this calculation: Garbage In, Garbage Out. If the figures it's based upon don't have to be correct, how can the final amount be correct?

Caveat Emptor

Original article here

The article on page two is here, and the article on page three is here

The recent hot thing in mortgage circles is a mortgage accelerator program. I've heard other things, most notably biweekly payment programs, called mortgage accelerators in the past, so let me take a moment to define exactly what I'm talking about.

A mortgage accelerator is essentially a combined mortgage and checking account, where every month you deposit your entire pay, and then write checks out of it as the month goes on to pay for your living expenses, and the mortgage interest of course accrues on a daily basis. The good things about it for consumers (and it is a good thing, as far as this goes) is that the entire paycheck is applied against your mortgage balance on day one, when your pay is deposited. This means that instead of just the minimum monthly payment, your entire pay goes towards the mortgage, lessening the amount of interest you pay in any given month. The bank, for its part, gets your entire paycheck and a significantly lower incidence of default.

This isn't a new concept. Several banks had somewhat different versions back in the late eighties. It went away. Why?

Several reasons, some administrative, some financial. Basically, consumers wised up. First, the administrative. This bank has basically your entire financial activity. Let's say someone gives you a better deal. Now you either have to stick with a mortgage accelerator program, or go through the hassle of coming up with enough cash to start a new checking account if you go back to having a standard mortgage. Furthermore, when you do refinance, what happens to outstanding checks? That payoff is as of a specific day at a specific time. Your escrow officer comes in and gets the payoff demand, and then more checks clear and everything has to be re-figured. The alternative to this is freezing the account as is done with Home Equity Lines of Credit. So all of a sudden while you are going through this refinance, you have to come up with the seed cash for a new checking account, get new checks rushed through, and then pay your bills with the new checks. May the Universe Help You if you normally pay by automatic debit or any of the primary variants, because you have to set that up as well.

So what else does the bank get out of it, looking at the above? Increased opportunity costs for refinancing. In short, it makes it more difficult for you to take your business elsewhere. Cha-Ching! as the bank officer's eyes light up with dollar signs.

Now obviously, this mortgage accelerator saves you a small amount of money, if you assume it's just a matter of math, and that math shows how much interest you save as opposed to the same loan at the same interest rate, providing you keep money in your checking account, of course. But how many people do? Not that many, these days.

Furthermore, it assumes you get the same loan at the same interest rate that you normally would. I haven't comparison shopped many of these yet, but my general impression is that the rates, and costs to get them, are higher than you might otherwise get. The assumption that it is the same rate and the same costs on the same type of loan is just that, an assumption, made for modeling purposes. I have used the metaphor of the matador in the past. The bull (consumer) wears himself out on the obvious large red cape, namely the cool service and the fact that all your pay is applied to your mortgage, and never sees the sword, which is the fact that your interest rate is half a percent higher than you might have gotten, you paid an extra point of origination as well, and you're being dinged $10 per month administrative tracking charges for this cool new toy you just got, the accelerator mortgage. Let's say your mortgage is $400,000. Half a percent of $400,000 is $2000 extra interest per year. An extra point of origination is $4000. And $10 per month is about what the average person might save on their mortgage interest if they weren't paying a higher rate, which they are.

($6000 per month deposited, instead of maybe $2500, leaves $3500. You save an average of one half months interest per month on this difference. $3500 at 6% divided by 24 is $8.75. If they bill you $10 per month for the service, you are out $1.25 per month net, on top of the additional interest charges and the one time fee of several thousand dollars of origination)

So lenders with mortgage accelerators charge you more money, charge you more up front costs, and you pay higher interest charges, as well as making it more difficult for the consumer to refinance into a better deal somewhere else. The banks love this one. Only the fact that your parents figured out what a rotten deal most of these are kept them from becoming a permanent fixture of the mortgage landscape decades ago.

The vast majority of the benefit of these programs is in the extra money they assume you'll use to pay down the mortgage, a thing which almost anyone can do for free. Still, if you can find a mortgage accelerator at the same interest rate, for the same costs, and without the monthly or up-front setup fees that you don't have to pay for with any other mortgage, then YES it makes sense to have one of these programs. But that's not what most of the lenders are offering. In fact, I've never seen one offering that. They are hoping that you are so distracted by the money whizzing everywhere that somehow magically pays your mortgage down, that you won't consider that their rates and the costs to get them are higher than you're being offered elsewhere. They hope you're distracted by their (nonsensical) figures of how much you will save if you keep your mortgage until it's paid off, that you will never see how much extra you are really paying. Nor do most people keep any given mortgage longer than a few years. In fact, the median time living in a particular piece of real estate is only nine years - less than one third of the time until payoff. The metaphor of the matador is extremely apt. This is precisely what the matador does with the bull. Distracts them and wears them out with the cape so that they never see the sword. The banks dangle this wonderful mathematical concept of what might happen thirty years down the line for that one tenth of one percent of people who actually keep the loan that long and pays extra money while doing it, hoping you are so fascinated by it that you never notice that they're charging you more up-front fees and a higher interest rate than you would have gotten with a traditional mortgage, and often, more in monthly maintenance fees that you save by depositing all of your pay. In short, the lender is making more money off of you by pretending to do you a favor.

So shop loans by interest rate and cost, and then if they'll let you put a mortgage accelerator on it for free, great! If not, they're just trying to distract you from what is really important by offering you a convenience and a cool-looking trick, while charging you hefty amounts of money and tricking you into thinking you are getting something beneficial.

Caveat Emptor

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