Recently in Mortgages Category

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

PS: I actually like the 5/1 fully amortized and use it for myself. But I'm also aware of the potential downsides and understand what could happen - I'm just comfortable with the risks and like the lower rates for the same cost it usually has.

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

Is this true?

Talk about scummy behavior!

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

Supply and Demand.

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

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

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

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

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

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

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

Now, let us consider the money supply here in this country, and thence the state of likely interest rates. We have increased government borrowing. We have the social security trust putting decreasing amounts of money into the government. We have a national savings rate that's negative (and it is the overall rate, not just working adults that we're concerned with, here). More and more people are becoming comfortable with foreign investment. And mortgage bonds are looking jittery right now, with foreclosures the way they are. Finally, no matter what the government propagandizes, we see the real inflation rate is substantial. Supply and Demand, remember?

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

In an attempt to debunk some of the slanders that are floating around out there, this article is an itemization of how lenders and brokers make money on loans.

The first method is obvious: Origination or discount points charged to the consumer. This is money that the person getting the loan is paying, or someone else is paying on their behalf. One point is one percent of the final loan amount, two points is two percent, and so on and so forth. There is an actual difference between origination and discount points, but they have become almost interchangeable in their usage by many lenders and loan officers who often claim origination is discount. Origination has to do with a fee charged for getting the loan done. It's not a trivial amount of work to get the loan done, and unless you're a close relative or have repeatedly saved their life, the person doing the loan is going to get paid somehow (and often, the family member or close friend gets rooked the most). If you're uncertain just how they are making money, you should ask. Discount points are theoretically a cost that the actual lender is charging in order to give you a rate better than you would otherwise get, but many brokers camouflage origination points as discount points and many banks also camouflage origination points as discount points. The former makes you think the bank is making the money when it's the broker, while the latter makes the consumer feel like the lender isn't charging them origination, but that you are actually getting something most consumers quantify as real for their money (This also makes you feel like you're getting something for nothing, always a good selling point to anything - suckers eat it up).

Related to this are junk fees or markups of legitimate fees that are required to get the loan done. I do not believe I've seen a fee that some lender or another hasn't tried to mark up. If in doubt as to whether there's a markup, insist upon paying it directly. If they can't explain exactly what it was for in easy to understand words, it's probably a junk fee. Again, real fees usually run to about $3400 on a loan, although many lenders and loan officers are adept at hiding this at loan sign up.

The second way that lenders and loan officers make money is in rebates, also known as yield spread. This is pretty much limited to brokers, as neither traditional lenders nor packaging houses get direct rebates from lenders. Once again, rebates can be thought of as negative discount points and discount points can be thought of as a negative rebate. There should never be both discount points and a yield spread on the same loan. It is fundamentally dishonest. If there is a yield spread, you are being charged origination, not discount. Period.

The third way that lenders make money is in the sale of the loan. This is usually far and away the largest amount of money made on a loan. It is only applicable to actual lenders, whether traditional or packaging house or correspondent. Brokers never "own" the loan, so they can't sell it. Mortgage loans, particularly grouped in vaguely compatible bunches varying from $50 million on up, are (usually) among the most secure of all investments (indeed, in terms of historical risk, only US Treasury bonds have been superior - but treasuries will have a rude awakening). Because they are very low risk, the lender makes a nice premium on them. As I originally wrote this, CMO bonds trading at 5% even were basically at par, while 6% bonds were earning about a 3 percent premium. At par means the bank gets the face value of what they're selling, whereas a 3% premium means they get a bonus - an extra $30 for every $1000 of bond value. For a $50 Million CMO offering, this is $1.5 Million. (There are other factors such as underlying quality, whether there is a pre-payment penalty, what tranches they may be assigned, and so on, but this is a basic article on the phenomenon.) By comparison, on a random fairly good "A Paper" lender's pricing sheet at the same time, 5% was not available and 5.25% carried a discount point and a half while carrying a premium on the secondary market of half a percent or so, so the lender was making two full percent on that loan at a minimum, and unlike a broker's yield spread, this is never disclosed to a borrower. Nor is there any limit as to how much this can be, but with even decent to good A paper lenders getting 2% or more, it shouldn't stretch your mind too much to find out that this number can go to 6 or 8 percent in the subprime and negative amortization markets. 6 percent on $50 million is $3 Million dollars the lender gets for selling $50 million worth of loans - this translates to about 100 regular 3 bedroom homes here in California. $30,000 each, over and above any points and fees these people may or may not have paid, and for holding onto the loan for maybe one month. Lenders are not hurting - and many even have the guts to badmouth brokers who may make $5000 while cutting the consumer's actual cost by $7500 to $10,000 and the bank still makes $15,000 per loan. (Note: these spreads and premiums used to be much larger years ago when people didn't reliably refinance or move about every two years).

What brokers do is essentially play these lenders off, one against another on a professional basis, to see which one will cut the best deal on your behalf, because brokers are never captive audiences while the lenders regard you as theirs from the time you walk in the door.

Also, the point needs to be again that cost of a rate is always inverse to the rate for precisely the reasons of yield spread and bond premium. The lower the rate, the higher the cost. The higher the rate, the lower the cost. Some lenders and brokers may have better cost/rate tradeoffs than others, but there is always a trade-off.

The last method of receiving traditional income is to actually hold the note and receive the interest. This is actually rare these days on the part of lenders. More often, what the lender will do is sell the loan itself while retaining servicing rights (for which they are paid, of course). Most often, the lender can make more money by selling the note to Wall Street - whether or not they retain servicing - than they can by holding the actual note themselves. Keep in mind that the premium they get from sale of the note is immediate, and they can "sell the same money" several times per year, as opposed to just holding on and collecting the interest as it accrues.

How can (and should) you compare a broker's offer, where compensation is disclosed, with a bank's offer where it is not? First off, make sure that they are on the same type of loan at the same rate. My questionnaire here is a good start.

(At this update, lenders have changed the market so that locking upon loan sign-up like I used to do will cost me and all my future clients large amounts of money, but I will go back to doing that immediately if the lenders change back). None of the standard federal or state forms are binding in this sense; not the Good Faith Estimate, not the Mortgage Loan Disclosure Statement, not the Truth-In Lending form, and not the application form itself. Furthermore, keep in mind that for all third party items, such as title, escrow, attorney fees, appraisal, etcetera, they are able to exclude them from the precomputed costs of doing the loan, so most lenders and loan providers do. Not coincidentally, these are the biggest items in the closing costs section of your loan. Insist upon full disclosure of each item, and ask them to guarantee the total.

And once you are certain that the loans you are being told about are actually the same loan or the same type of loan, then you can make the decision as to which is better by choosing the one that actually gives you, the prospective client, the better loan.

One more thing, the most important: Choose loans based upon the bottom line to you, not based upon how much the loan provider makes, or whether they even have to disclose it at all. If you were shopping for a refrigerator and got a price of $500 at store A versus $520 at store B for the same model, would you care that store B paid $40 more for the refrigerator wholesale, so their margin is lower? No, you'd buy the $500 refrigerator at store A. The same principle applies here. Choose the loan that delivers the best terms for you. Type of loan, interest rate, cost to get it, you need to consider all three, because there are always tradeoffs. Failure to consider any of them is a good way to end up with a rotten loan.

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(NB: With HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007, now expired, there was a time when this might have been zero on the federal level but there were still be consequences on the state and local level. As I said, this 'get out of tax obligation' formerly existed but is no longer valid. Check with your CPA or EA for more information)

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

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

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

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

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

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

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

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

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

Finally, for as long as you remain responsible the mortgage, it will hit your debt to income ratio. This can mean that you will not be able to qualify for another mortgage. In my experience, it is rare that it does not. You are obligated to make those payments, so it's a part of your credit-worthiness. Especially considered in conjunction with likely alimony and child support in the case of a divorce, you may have difficulty qualifying for another property, even ones that would have been well within your means before. It is possible to have them realize that you're not the one making the payments (and might therefore be approved for loans on that basis), but you are still responsible if something happens to one or more of the people who are making the payments.

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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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