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Question from an e-mail:

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

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

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

Now, let's look at the individual situations.

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

Continued from The 2010 Good Faith Estimate (Page One)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

The concluding article on page three is now here

Original article here

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

I know 401k contributions impact a persons Adjusted Gross Income, thus would it also affect the amount a person could qualify for? If so, I will delay enrollment for a few months...

This depends upon what documentation you use to qualify. For most of those who are salaried or hourly W-2 employees, debt to income ratio is calculated using gross pay from w-2s and pay stubs. This is more more than half of the people out there. For these people, it doesn't matter, because the computation is based upon gross pay before any deductions - even withholding. The thinking goes that you can always stop retirement contributions if you need the money now to afford your mortgage .

For those who have to use the full federal tax forms to qualify however, the computation is based upon Adjusted Gross Income. This is basically three groups: The self-employed, commissioned sales people, and construction trades, the last being notorious for periods of unemployment between the end of one project and finding another project that's hiring. Adjusted Gross Income, or AGI, is after retirement contributions from taxable income, as well as business expenses and several other things are deducted. The reason for this is those people have more expenses that statutory employees, whether those employees are cube farm dwellers, have a corner office, or whatever. Lenders are well aware of this. The only reason why they're willing to accept taxes as proof of income is very few people will tell the IRS they make more money than they do when it means paying so many cents of every dollar they didn't make in taxes.

This can make it very difficult for people in these three groups to qualify via documentable income. This is the reason why stated income loans were created and why the complete demise of stated income is a very bad thing no matter how much I hated doing stated income loans. There was an excellent reason why reason why they existed - people in this category got to legitimately deduct more on their taxes, but it hurt their ability to qualify for a mortgage. The rates were higher and the underwriting requirements were tougher, but without that, some people would never be able to qualify for a home loan, no matter how credit-worthy. As I've said before, stated income was subject to ridiculous abuse, and you'd really rather qualify "full documentation" if there's any way you can, especially once lenders and investors started suffering suffering stated-income-phobia and it always meant having to come up with tens of thousands of extra dollars down payment and pay an interest rate that might have been two full percent higher than people who can qualify full documentation would pay, but it meant there was a loan such people could qualify for.

So retirement contributions will make a difference if you're one of those who needs to use tax forms to qualify for a loan, but if you're someone who can use w-2s to qualify, it shouldn't.

Caveat Emptor

Original article here

Saw a sign driving: "Negative Equity? Sell and Get cash!"

Notice that it doesn't claim that you can do so legally.

I saw another of these signs on the way to the office this morning.

When things are going sour, there are any number of scam artists who will promise the moon. We had them in the early nineties, and we have a lot more of them now.

Perhaps the largest number of these are flat out liars. They have no ability and no intention of actually delivering whatever they're dangling out there as bait. They're just putting something out there to get you to call, so they can get you into their office and try to do whatever it is that they do. Most of these are fishing for victims of a "subject to" scam. Notice that they didn't say they could do it for everyone? "Subject to" deals are illegal, but sometimes the lender will let you get away with it. Of course, if they don't, they go after the person who signed the Trust Deed, not the scamster who talked you into it. Note that if they're reasonably careful, the people who are dangling "subject to" deals are legally in the clear. Nor is it illegal (as far as I know) for them to use an advertising hook they have no intention of delivering. Even if it is illegal, it's not like anybody gets charged for the initial handmade sign by the side of the road that's long gone before there's any investigation into what happened.

Even if these people are telling the truth as far as they go, there is something wrong with this scenario.

Either 1) you weren't in a negative equity situation in the first place - you really could sell for at least what you owe on the property, or 2) You are going to commit fraud, and the lender is not going to be happy when they find out. Expect a very unpleasant visit from the FBI, large legal defense fees, and an extended vacation courtesy of Club Fed.

There is no lender in the world that is going to accept a short payoff where the borrower walks away with cash. End of discussion. That's the entire bargain you make with a lender when you borrow money. They get paid every penny they are due first - and you get only the excess, however much - or little - that may be. If their payoff is short, they will not accept you walking away with a single penny from the sale of that property. To do anything else is a violation of securities and banking regulations. The Wicked Witch of Wall Street may be politically dead, but this is one issue that the financial world has developed extreme sensitivity to.

If the lender did not know about this cash that you are supposedly getting, you are going to be committing fraud. The person who sold you this scam is very probably committing fraud as well, but you definitely are committing fraud if you do this. That lender is going to require you, the owner of the property, to sign a statement to the effect that you are not receiving any money that the lender does not know about. So let's add perjury to the list of charges against you, and quite likely conspiracy. Your defense lawyer is going to cost more than any cash you're going to get out of it.

I had someone ask me whether an agent can volunteer to just give you some money from their commission. I'm not a lawyer, but as far as I am aware, it is legal. However, if they're bringing you into their office and getting you to sign up with them to sell their house based upon such a promise while the lender ends up with a short payoff, you are still committing fraud, perjury, and conspiracy when you sign that document that says you're not getting any money from the sale from any source, and that agent is committing at least fraud and conspiracy as well. The whole set-up is pre-arranged, and that give-back is a condition of the transaction that you and the agent are both aware of, but the lender is not. This makes you guilty of those three crimes. My understanding is that In order for the "gift" to pass legal muster, it has to be a pure gift, conceived by the agent with no pre-arrangement, executed for no consideration and no exchange of value on your part. Since that is not the case - they're luring you in with the promise of cash from before they even saw you - it's not going to get past the courts. Furthermore, even if such a gift was a pure gift on the part of the agent, it's not likely that the courts or a jury is going to believe you when there are well-known scams like this going on.

People put these scams out there because they figure they've got an angle whereby they can still make money. I can think of several ways to do so off the top of my head, from using the property as bait to meet buyers (see Tina Teaser) to having you sign an agreement for a very large listing commission, and several ways in-between. All of them involve a violation of that agent's fiduciary duty to you. Show of hands: How many people would sign up with an agent who straightforwardly told you he intended to scam you, and that as a consequence of this transaction, you would be likely to spend several years in prison? Anyone?

It is kind of elegant in a way: The victim of the scam (that would be you) can't complain without putting themselves in line for several years as an involuntary guest of the taxpayers. But it's amazing how often some outside factor causes the whole thing to unravel. Actually, cancel that. It isn't amazing at all. Real estate and mortgage operations are all a matter of public record, and audits and record keeping are a part of life for anyone in either field. Failure to keep complete records is in itself an offense that practitioners can and do lose their licenses over, and the escrow and title companies have their own record-keeping requirements, and the lender will most certainly keep records. If they can show you've committed fraud - and you have if you do anything alone these lines - then any legal shelter you may have had from their ability to collect the money they lost simply vanishes. This means, among other things, that even if your loan would have normally been non-recourse, the act of committing fraud means it becomes a full recourse loan.

You don't want any of that to happen, and once you do it, you have no defense except to hope that you get unreasonably lucky, and nobody notices until the statute of limitations runs out. The only justification for doing a stupid stunt like this is if it gets you out of a worse predicament. It doesn't. If anything, it makes any existing predicament worse.

Caveat Emptor

Original article here

From an e-mail:

I live in (City 1) and recently signed a work order on a semi-custom new construction house in (City 2). My wife and I make a combined 120K income and still can't afford a decent place in City 1. It was preapproved rather quickly from both the builder's mortgage company and a few outside companies and everything was moving along splendidly, until my employer decided to refuse to transfer me (something we had mutually decided on back in April). To make a long story short, the house will be built and ready to close in early November and 2 of mortgage companies are asking for a Relocation letter from my employer. Seeing as how I make 66% of the 120K combined salary, my plan is to tough it out here until I find (1) a job in City 2, or (2) a job here that will transfer me to City 2. My question is, if I can't supply them with a relo letter am I dead in the water? Do I have to scrap the loan (primary residence) and try to get a second home or investment loan? The broader question here, is how critical is any piece of documentation? Obviously W-2s and bank statements can be deal breakers, but what about the other stuff? I.E. relo letters, proof of homeowners dues, etc etc.

First off, you have an obvious potential issue with your current employer. If your work order was predicated upon a promise of transfer, you may have a case against them if you want one for the amount of any money you're out. Consult an attorney, preferably one that is licensed in both states. Obviously, this poisons the atmosphere, so you may not want to. On the other hand, you may have decided by now that you are done with them one way or the other.

Second, getting to the item of contention, the relocation letter. Every lender's guidelines are different. You didn't say how many lenders you had applied with, but few people apply for more than two loans. Any item the underwriter asks for can be a deal-breaker, especially if you can't provide it. What the underwriter is looking for is a coherent picture of someone who is going to be able to repay the loan. If the loan underwriter doesn't see a coherent picture of you being able to repay the loan under the circumstances it was submitted under, the loan will be declined. The underwriter can ask for anything they want. They can ask for proof your father gave birth to identical triplets, if they think it has some bearing on the loan. If you cannot furnish them what they want, and your loan officer can't shake an alternative or an exception out of them, the loan is dead.

They're not likely to ask for proof of something impossible and irrelevant like my example. Legally they probably could - Everybody has a biological father, so it's not discriminatory on the face of it. They're certainly not going to violate anti-discrimination lending laws by asking for something based upon race or sex. But they're in the business of making loans, which in many cases make more money for the developer than the sale. However, if the underwriter approves loans that go sour, they can expect to be held accountable by their employer, and so they require and are permitted a certain degree of necessary latitude on additional requirements in order to do their jobs. If I tell an underwriter that I make $2 million a year in the stock market, I'd better be able to furnish proof. If it's not relevant to the loan, I should keep my mouth shut about it because it's asking for trouble. Never tell an underwriter anything not absolutely necessary for loan approval.

It's a horrible lie about people from Missouri, but I tell people to think of underwriters as Missouri accountants. Their favorite sentence is, "Show me on paper." All loan approvals are based upon the potential borrower and their current status quo. In other words, the situation as it is, not as you hope it will be someday. Yes, when doing Verification of Employment they ask about prospects for continued employment, but that's just to establish that the employer isn't willing to admit they're about to fire you. They know that in the real world, people get told "Yes, we're going to keep Mr. X here forever" and next week Mr. X is applying for unemployment.

What the underwriter is looking for is a coherent picture of you occupying the property and working at your current employer. You're working in City 1 and living in City 2, which are not within daily commuting difference, but you applied for the loan as intending to make it your primary residence.

Given that they are requiring a letter of relocation, you have several options. I know it has happened in the past that employers who were not willing to relocate employees were nonetheless willing to write letters that said they were. This is stupid. This is fraud, and if the loan becomes non-performing the employer could potentially become liable for whatever the lender lost, not to mention that a lot of your protections as a consumer go out the window. Second, they could sign a letter that says you are going to be telecommuting from your new home. Yes, your job is in City 1, but you could legitimately be living in City 2 and still employed and doing your current job. Bingo, happy underwriter (probably). If your loan officers aren't complete idiots they will have asked you about this, so I presume the answer is no.

So now we're bringing in other issues as well. Now you have a husband living in City 1, while the wife and new home (and I presume wife's job) are now in City 2. Fact: husband needs a place to live in City 1. "What's that place to live going to cost him?" they ask. They take this answer and add it to the previously known total of your other monthly payments. Because you now have more in known monthly expenditures, now you may not qualify for the loan you were "pre-approved" for. Pre-approval doesn't really mean diddly-squat, and the developer knows it, so they likely required at least a decent sized deposit from you, so if you don't get the loan, you don't get the house, and you may have a substantial forfeiture. See my first paragraph at the start of the article. Furthermore, some underwriters may see a potential divorce situation here, so they may ask for some kind of testimonial from third parties that you're not getting a divorce.

Now, if you had a decent agent, he likely wrote your offer "contingent" upon your relocation. Unfortunately, if you're buying from a developer, your agent probably works for the developer, and so didn't do this. You may or may not have a case against the developer and the agent. Consult an attorney, but this is one area of many where buyer's agents really pay off.

(Even if they're inclined to trust me, I do not want to represent both sides in a sale, and will usually insist that one side go get another agent, or at least sign a release indicating that they realize I am working for the other party, not them, and have no responsibility as to their best interests. As your experience indicates, too many actions are a potential violation of fiduciary duty to one side if you do them and to the other if you don't. There are some agents who get greedy and do both sides, but usually they make their attorneys very happy. If your agent wants to do both sides of the transaction, that's never a good sign.)

However, what I suspect you really want is the house and the loan you signed up for. So I'm going to go on that presumption.

You make $10,000 per month. You may be able to get a friend to rent you a room in their home in City 1 for fairly cheap, so that there is not enough difference so you don't qualify for a loan. Several years ago before I met my wife, I rented a room out cheap to a friend who was in a situation not too different from yours. "A paper", you are permitted up to about about a forty-five percent debt to income ratio, and it can go higher if you have a high enough credit score such that DU or LP (Fannie and Freddie's automated loan underwriters) will buy off on it.

You could go to a different loan type, carrying a lower rate and hence a lower payment. Unfortunately, the debt-to-income limits on these are lower. Unlikely to work.

You could go to a "second home" loan. Unfortunately, the standards on those a a little tighter, and there may be an additional fee of a quarter point or even a half, and you're still going to have to show the underwriter a residence in City 1, which means the payment qualification issue raises it's ugly head here, also.

Finally when this was originally written you could have gone to a sub-prime lender (where maximum Debt to Income ratio can be higher) or done a "stated income" loan. Both of those options are now non-existent. If you were working with a broker's loan officer as opposed to a direct lender or packaging house loan officer, either would be no sweat - you might not even have to do another application. The broker would simply withdraw your loan package and submit it elsewhere. Unfortunately, from a subsequent email, I know that you're not working with any brokers. Well, the developer probably has a sub-prime lender on tap as well, so that may be a low stress option. On the other hand, if they are a different branch of the "A paper" lender, they may not be able to do your loan either. Or, if you're lucky, the developer is acting like a broker in the first place rather than a direct lender.

One of the great rules of the business is that you cannot go from a higher documentation loan to a lower documentation loan on the same borrower at the same lender. If I submit to lender A "full doc," I cannot then later submit it to lender A "Stated Income." The reasons for this should be fairly obvious, and this is a no brainer without exceptions across the business.

For brokers, because the paperwork is in their name and not the lenders in the first place, this means no new reports. But since you're not working with brokers, what this means is that you're likely to need a completely new set of reports from the appraiser on down in the new loan company's name. This may be done on a retyping basis if you are lucky, or you may have to pay for completely new ones.

I strongly advise you NOT to quit your job, unless someone a lot more familiar with your situation and prepared to take the consequences of being wrong tells you otherwise. Here's why: You quit your job. Now you are unemployed. It does not matter if you've been doing what you're doing for forty years. Right now you are unemployed. As things currently sit, you do not qualify for the loan. Even if you've got a written offer of employment somewhere else, many lenders will not approve the loan until you have a pay stub to show for it. Since this means waiting several weeks at least, it's almost certainly outside your window of opportunity.

One final issue: here in California, it's illegal for a developer (or anyone else) to require that you do the loan with them in order to get the property. But it happens anyway (I've been told point blank by more than one developer's agent that if the client doesn't do the loan through them, the purchase contract will be canceled. Many others won't tell you point blank, but they will throw obstacles up until you give up on the other loan), and it's a long hard slog to prove legally and it costs you thousands and you still don't get what you really wanted in the first place: the house you signed an order for. I am not certain the practice is even illegal in City 2, where you're buying (although from some things I've heard about that state's practices, I think it's probably legal). So you probably want to be certain you're not fighting the developer on this by finding your loan elsewhere. Unfortunately, you've already (probably) put a deposit down and you said in subsequent email that the home has appreciated while it was being built, so the developer has incentive to throw roadblocks in your path. Your transaction falls through and not only do they get to keep your deposit but they can turn around and sell the home for more. Preventing this kind of nonsense is what buyer's agents are for (it also gives you someone easy to sue if something goes wrong!). Unfortunately, most developers will not cooperate by paying a commission to buyer's agents for precisely this reason, which means that the average buyer will decline to pay an agent out of their own pocket and try to do the transaction on their own, which leads to situations like this.

Best of luck, and if this does not answer all of your questions, please let me know.

Caveat Emptor

Original here

Online Mortgage Quotes

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(This is a reprint from December 2006, with a few updates. It is instructive in the wake of a certain new mortgage quote service, launched with great fanfare. The negative amortization loan is gone, but I'm seeing lots of other fairy tales being told there - deliberate low-balling on costs and payment being most common. Heck, their automated property tax quotes are about half the real number, and there's no ability to change them.)

I got a question about what I think about those online quote services.

The answer is that they vary from okay to putrid.

There are two sorts of online quote sources. The first is where mortgage companies have their rates online, and people come along and browse. Those are pretty much a waste of your time. Here's why: Those companies have absolutely no hold and no real tracking on the people who come to browse. They might put a cookie on your machine, but it's hard to parlay those into contact information, which is their whole entire goal: Getting loans out of it. Unless they have some way of contacting you, which they don't, they need to use that forum to get you to contact them. They do this by low-balling their quotes, making it look like they are offering something nobody else has. Unfortunately for consumers, that's not even an estimate. Here in California, the one caveat is that the rate must exist, but the real costs of getting that rate can be many times the costs they quote. This suffers from all of the limitations that a Good Faith Estimate does, plus more. They can say that they've got a 3.625% rate, and as long as they have a 3.625% loan, they are in the clear. Never mind that it costs a full six points and adjusts every month, that sounds like a great loan to the uninformed (at this update, rates are actually lower than that, but this was written when a reasonable rate was in the mid fives). Furthermore, many places will quote the nominal ("in name only") as opposed to real interest rate on the negative amortization loan. When there are people apparently offering you 0.5%, that's who most consumers will call, ignoring the people who have and can really do 5.5% thirty year fixed rate loans, more so on those forums where they include a payment quote as well. I've got the same 0.5% nominal rate forty year amortization loan available to me, but it will always be a putrid loan, as the real rate is a little over 8% and the rate is subject to change every month. I should note that lenders pay a lot of yield spread to brokers who do those loans: How often do people sign on the dotted lines for mortgage rates in excess of 8% (with a three year prepayment penalty!) when rates under 5% are available on a thirty year fixed rate mortgage with no prepayment penalty at all? I'll tell you how often: Whenever people aren't smart enough to realize that that $960 payment on a $417,000 loan isn't the real rate. Indeed, they'd have to pay $2794 per month just to pay the interest - while the fully amortized payment on a thirty year fixed rate loan is hundreds less. But there are an awful lot of people who aren't smart enough right now.

Furthermore, those online forums are supposed to enforce their quotations policies. I've never heard of one that enforces real concrete penalties for violators. On two separate forums, I went straight down the line contacting every listed company, using a loan scenario that was close enough to what they were supposed to be quoting to that I should have gotten the same quote or a little bit better, if they could really do those loans. Not once did I get a rate that was within half a percent of the rate listed online, and most of them were over a full percent off, and for those quoting negative amortization loans, they weren't even in the correct ballpark. When I contacted the forums themselves, neither of them was interested in enforcement.

In short, those online quote forums tend very strongly to get business for the company that tells the biggest, most boldfaced lie. Often, the consumers are lulled by the existence of the forums into thinking they're getting a deal, and they don't bother going through the necessary steps to shop their loan around. Meanwhile, the companies that will advertise honest rates quit those forums in disgust. Since there are a lot more companies playing games with their quotes than honest ones, the forum wins by not enforcing their rules. However, since the consumer wants to find companies that really will deliver the loans they advertise, consumers lose. Matter of fact, I don't think I've ever seen a real rate on a loan I would be willing to sign up for advertised in any forum: online, newspaper, or otherwise.

The second type of online quote forum work like the advertisements plastered all over the internet. "$510,000 loan for $1698 per month!" (to use the first I found just now). They show a couple dancing happily, having a party because their mortgage payments are reduced, or so they think. Another shows a guy jumping for joy. What they don't show is those same people when they figure out all of the downsides to the negative amortization loan that they signed up for. "This is Jack calling his lawyer again, only to be told there's nothing the lawyer can do again. This is John and Jane losing their home to foreclosure."

Their come on is that you're supposed to get four competitive loan quotes. The company advertises negative amortization loan payments because more people will click on them and sign up for the service if they think they might get something so great that anyone would want it. Unfortunately, just like every other negative amortization loan out there, the payment or interest rate they quote to get you to click their ad and complete their form online is not the real payment and it is not the real rate. Yes, they will accept that as a monthly payment. But the interest you are being charged is based upon a rate of 7.87%, and you have to pay $3345 per month just to break even on the interest - that other $1647 gets added to your loan, so that next month you owe $511,647. Doesn't seem like a lot of extra, but go along for three years until the pre-payment penalty expires, and even if your rate doesn't adjust upwards, your balance is now $576,600. If you go the full five years that the minimum payments last, you owe $630,000, and now your payment jumps to $4813, and you can't refinance because you are upside-down on your mortgage, and your credit score is 100 points lower because you have that negative amortization loan!

The games don't stop here, by any means. You'll be told that there are "no costs out of your pocket," and even though they'll be rolling $23,000 in costs and points into your loan, they give you a quote based upon the amount of money you tell them you need. No, $23,000 doesn't make that much difference at half a percent forty year amortization, but it lets them quote that payment just a few dollars lower, even though they know that you want the $23,000 rolled into your loan. Nor is what they're telling you about a good loan in any way shape or form, but most people shop mortgage loans based upon payment.

Furthermore, they aren't telling the truth about four mortgage providers calling you. They may sell the lead to four different places, but those four places turn around and sell them to four others each, and each of those sells them to four more. There may be as many as six levels of this going on, and the average person who does fill out their form will be called by at least fifty providers in the first week, with others trailing out for potentially years. The lead seller doesn't care - they made their money, and they don't give refunds simply because the loan they talked about is toxic. Nor does it matter to them that the loan they talked about puts the loan providers paying them for leads in the position of either telling people - honestly - that the loan that was used to get you to sign up is a piece of garbage that causes people to lose their homes, or just selling you one of the abominations. They don't get refunds from the lead seller in the first case; they're just out the money. In the second case, they get paid roughly 3.75% of the loan amount by the bank ($19,125 on a $510,000 loan), plus whatever points of origination that they can con you out of. Finally, if they don't, they know that one of the fifty or more other companies that will be calling you will sell you one of those loans. So their motivations are not on the side of telling you the downsides of their loan. Matter of fact, their motivations are never aligned with telling you the downsides of the loan, so if you find someone willing to talk frankly about good and bad, they are a treasure and it is worth keeping their contact information, and making a habit of talking to them first about future loans.

Once upon a time, if you could cut through the morass of fifty or more companies calling, those "competitive quotes" ads were a great way to find a good loan provider. Ethical low cost loan providers could make a very good living buying those leads. Unfortunately, that is no longer the case. First off, ninety-nine percent of the leads you pay for were lured in with the promise of a negative amortization loan. You don't get refunds for those. You are just out the money, time, and phone expense of calling those folks - unless you make a habit of selling negative amortization loans, which low cost ethical providers do not. Furthermore, even on the few leads that are not lured in by Negative Amortization payments, just because you don't try and sell them a negative amortization loan doesn't mean that one of the other fifty companies won't. Having been there and done that, I can tell you from experience that trying to talk people out of negative amortization loans is usually a waste of breath - the competing company will use conspiratorial tactics like, "That's because this mortgage is too good - they don't want you to have it!" People want to believe in Santa Claus, the Tooth Fairy, and Negative Amortization Loans. Bottom line for ethical loan providers: paying these services for leads no longer works. You cannot make any money at it. Since making money is what you're about, and the payoff is too low to survive on the thin margins of good providers, you are driven elsewhere for your business leads. Since that's the type of loan provider consumers want, it's a waste of time to go to either sort of online mortgage quote service.

At this update, negative amortization loans are now long gone, but all of the old standby games are still being played. "Forgetting" about adjusters that apply, lowballing the actual rate/cost tradeoff, quoting rates for a loan there is no way the people will qualify for, (there's quite a divergence currently), quoting conforming rates when the loan should be non-conforming, and forgetting to add the costs to the loan balance when quoting payment. Anything to get you to call.

Caveat Emptor

Original here

I usually write medium-long articles, I try to write articles you can read in a few minutes, on break or lunch, but sometimes that's just not compatible with giving the readers an understanding of the subject. Part of that is because I've done all of the easy subjects, part because sound bites facilitate sloganeering, not serious thought that's likely to result in a better answer - or the realization that you've been wrong in the past.

But long articles take a lot of time (not that short ones are easy, as Mark Twain knew well). So I've been trying to come up with ideas for short articles, and one of the things I came up with was: Pack a list of the most important things consumers need to know about mortgage loans, as packed into the words I can say in thirty seconds without sounding like an over-clocked squirrel.

Here goes:


There is always a tradeoff between rate and cost. Never choose a loan based upon payment or APR. Shop by the cost of money and what you get - not by how much somebody is making. People refinance about every three years, so the higher rate may be better.

Ask the right questions of every lender. Lenders can legally lowball you on the initial paperwork, and this isn't changing. The new disclosure rules were intended to make this more difficult but failed, while the new market rules make it impossible to get a guarantee that means anything at sign up, and not even I can do back up loans anymore. Now more than ever, you need to have a real problem solving type discussion with prospective loan officers, rather than quote shopping, because what someone tells you to get you to sign up may have no relationship to what they actually deliver.


How'd I do?

I recommend this guy for loans ;-)

Caveat Emptor

This has been significantly altered from a prior article found here

(This was originally published March 18th, 2006. I've added a couple updates, but otherwise it's as published. It's still very relevant, and if there's anyone that wants to tell me I didn't nail it, please speak up)

Somebody wrote a comment about going upside-down on their mortgage:

What happens if the property value falls and becomes far less than the loan ammount? (POP) Lets say you get a loan for $280,000 on a home that was $330,00 and then three years later is is only worth $150,000, but you still owe $250,000 on it?

Now "upside-down" in the context of a mortgage is just slang for owing more than the property is theoretically worth. This is a tough situation to be in, and there's not much that can be done while you're in it except get through it. Before, yes. After, yes. During, no.

I've predicted that this is going to be a widespread phenomenon over the next few years, and it's going to cause a world of hurt, but it doesn't need to include YOU, unless this has already happened, and I thought Sandy Eggo, where I live, to be on the bleeding edge of bubble problems, and appraisers are still able to justify near peak values even here.

Surviving being upside down is actually pretty easy if you have the correct loan. I bought near the peak of the last cycle, and was upside down myself for little while. If you take nothing else away from this article, understand that the only time your current home value is important is when you sell or when you refinance. If you don't need to either sell or refinance, it does not matter what the value of your home is. It could be twenty-nine cents. It's still a good place to live. You've still got the loan you always did. You should be able to keep on keeping on until the situation corrects. Prices will come back sooner or later.

The key is to have a sustainable loan. I did. I had a five year fixed period, during which time the market recovered and I paid down my loan. By the time I went to refinance, five years later, things were better.

This is the real sin of the local real estate and mortgage industry. Yeah, the bubble's going to pop, and everybody knows it. Actually, it's already had significant price deflation. But if they had been putting folks into longer term sustainable loans, they'd be fine. Instead we've had about forty percent of purchase money loans being negative amortization and another forty percent being two year fixed interest only loans. The period of low payments for the former, and the fixed, interest only periods for the latter, are going to expire while prices are still down. That would be tolerable if the people could make the new payment, but if they could have made the new payment, they would have been in longer term fixed rate fully amortizing loans in the first place. What's going to happen next is kind of like when Wile E. Coyote looks down.

I've been telling people there are no magic solutions to the problem for over three years now. If you borrow the money, you're going to have to pay it back. Make the payments now or make them later, and the later it gets the worse it will be. There is no such thing as free lunch, and those who pretend that there is are not your friends. The Universe knows how much more money I could have made by keeping my mouth shut and screwing the customer. $200,000 is a conservative estimate. Instead of struggling to convince people to do the smart thing these last eighteen months, I could have been glad-handing everyone in sight and making a mint off of ignorant people. But then there would be court dates looming in my future (those in my profession who were not so careful are going to be in for a hard time, and I hope you'll forgive my schadenfreude when it happens. Those con artists masquerading as professionals stole a lot of money from me and from the people who became their clients by convincing them they could afford more house than they could, or by not admitting to the tremendous downside of what they were offering the client. "No, he just wants you to do business with him and he can't do what I'm doing." I could have gotten the loans, as I informed more than one of the clients I lost, and on better terms, but I wanted them to know the downsides. So I lost the business to the con artist who pretended there wasn't one. There were downsides, but people want to believe the con artist).

What to do if it has become obvious you're headed for the canyon? Figure out what your payment is going to do for the next several years. Determine if you're going to be able to make that payment before it happens to you. If not, refinance now if you can, sell if you can't. Pay the prepayment penalty if you have to, because given a choice between a prepayment penalty and foreclosure, the former is much better.

If you want to refinance, find a long term fixed rate loan. Minimum of five years fixed, fully amortized. Since thirty year fixed rate loans are actually about the same rate as 5/1 ARMS right now, I've been recommending the thirty year fixed for almost everyone. This is a loan that never changes, and you never have to refinance because the payment is going to jump.

(UPDATE: 5/1s are now significantly cheaper than thirty year fixed rate loans again)

The critical factor for refinancing is the appraisal. The critical factor for the appraisal is how much value can be justified by the appraiser. In order to justify the value, there have to be comparable recent sales (not more than one year old) in your neighborhood. The appraisers don't always have to choose the most recent; they have the option of choosing better matches for your home. May the universe help you if there are model matches selling for less in your condominium complex, because there the lender is going to insist on the most recent sales. All the more reason to act now, while you can, rather than wait and hope.

(UPDATE: With Home Valuation Code of Conduct the appraisal has become the source of more problems than any other aspect of a real estate or mortgage transaction)

If you're already over the chasm and prices have fallen, consult some local agents about selling. Short payoffs are no fun, but in the vast majority of cases, they're better than foreclosure if you're not going to be able to make your payments. At least when they're done, they're done. Foreclosure is a hole that keeps on draining you long after you've lost the house, and after it's cost you thousands of dollars more than a short sale (and if sale prices continue down, that 1099 love note from the lender after the foreclosure is going to be worse). As for waiting, well, if it's an honest consensus that things are coming right back, but here in San Diego the Association of Realtors had not yet admitted there's price deflation despite it going on for almost a full year. They've been playing games with reported figures to make it seem like things are rosy. There are obvious motivations for this, not all of which are explained by self-interested greed, but it's not something you can paper over and ignore indefinitely.

Who's to blame for the impending train wreck? I'm not really into blame, but here are several targets. Unscrupulous lenders and agents bear a lot of blame, but not the exclusive burden. Panic and greed on behalf of the buyers is certainly a significant part. And if several folks are telling you that the best loan they have is five and a half or six percent or even six and a half, shouldn't a normal, rational adult be suspicious of an offer that's theoretically at one percent? I can maybe believe somebody who offers something a quarter of a percent better than the competition. Half a percent might be just barely possible at the same price. Somebody who offers money, of all things, that's less expensive by an interest rate factor of five isn't telling you the whole truth. (Unfortunately, in this case, these loans are so easy to sell on the basis of minimum payment and nominal rate, it got to the point where these loans were what the vast majority of agents and loan officers were talking about)

As a final note, 125% loans do exist (UPDATE: Not really, anymore, but for a while, there was a 125% refi in place program enacted by Fannie and Freddie, if your loan was backed by them), but they are ugly. Very ugly. Not as ugly as Negative Amortization, but ugly, and the payments and interest rates aren't any more stable than the real terms on those Negative Amortization loans. They don't do stated income, either, or non-recourse loans. You stiff those folks, they will get the money out of you.

Prices are going to come back up. It's as predictable as the fact that they were going to fall. Can't tell you when, anymore than I could tell you when exactly they would start falling. (UPDATE: Housing recovery is ready to happen, whenever the government pulls it's head out of where it is right now) Doesn't mean it won't happen. The trick is to have a sustainable situation in the meantime, and this means a loan with payments you can make every month, month after month, indefinitely until the loan is paid off or you have the ability to refinance or sell. If you've got this, someday you'll be telling yourself how happy you are that you bought that property. If you don't have it, get it. If you can't get it, get out.

Caveat Emptor

(I originally published this March 18, 2006, but most of it is still highly relevant.)

from an email:

First let me say that I really learned a lot from your postings/articles/website; its awesome that a resource like yourself exists.

Now to the problem. I recently refinanced and the mortgage broker lied to me about many, many things. I was sold a negative amortization mortgage. The broker provided me a chart showing my payment schedule for 30 yrs; it showed my payment split between interest & principal. I was told that my rate was fixed for 5 yrs and that it would go up to as high as 9% after the 5 yr period. When the closing came and I inquired about the 9% highlights in the docs and the negative amortization disclosures he stated that they didn't apply to me or this loan. He pointed to the section of the doc that stated that my payments would be fixed for 5 years and that my interest rate would also be fixed for that 5 year period. After closing I received the docs from the lender which outlined the fact that I had 4 choices for payments and when I called for the explanation I almost died. The broker apparently didn't really understand the loan at all; he has now offered to refinance me without any fees...but I am supposedly stuck with the prepayment penalty. When the broker and I originally discussed the penalty he explained that I would probably want to refinance at the end of the 5 yr period anyways so I shouldn't worry about it. The broker also took my lead from a mortgage company he was working with when I originally inquired about the refinance. About 2 weeks into the process he told me that he had quit his job @ the mortgage company and was now out on his own as a broker (emphasis mine DM). Only now did I just realize that he really didn't have the ownership of my lead as his original employer paid for it & provided it to him during his employment. I'm sure that his original employer would be very disappointed to learn that he had taken the business with him when he resigned.

Now that the problems been explained my questions are as follows; Can I sue the broker to recover the refinance fees and the prepayment penalty?

Can the broker that lied to me and provided all the false info be sued or charged; can he lose his mortgage brokers license?

Any advice as to what I can do/what I should do at this point? Thanks in advance for any info you can provide. Please let me know if you respond directly to emails or if I need to go to a specific website to look for a reply.

There are several issues raised here. The largest major red flag is about the Negative Amortization Loan Disclosures. If it didn't apply to your loan, why did they present them to you? There isn't a good answer to that question. If something does not apply to your loan, you are within your rights to not sign. If they don't apply to your loan, then the lender doesn't need it. I don't have my clients sign negative amortization disclosures for thirty year fixed rate loans, or anything else to which they don't apply. There are any number of disclosures that legally have to be filled out for every loan and sometimes multiple disclosures for basically the same purpose. I had to do four "equal opportunity" disclosures for my most recent loan. But those are utterly harmless, simply informing you of your rights. A negative amortization disclosure isn't. With that, they can prove that you were told that your loan was negative amortization, and you must have been expecting it, because you signed it, didn't you? That's the lawyer's logic.

I am rapidly becoming more aware of a trend with unscrupulous mortgage lenders: Instead of putting bad stuff in the actual Note, they are adding it on as part of the all the disclosures people have to sign, hiding it in packs of supplemental stuff along with all of the standard stuff that everyone knows have to get signed. Sometimes, they are even coming back to people after funding and asking them to sign horrible things, prepayment penalties and negative amortization disclosures, among others, "for compliance." I want to see a standard booklet or checklist of forms that actually are required by law for every loan, so that innocent consumers who are trying to do the best they can know what is and isn't required by law.

If disclosures do not apply to your loan, do not sign them. They don't need it to fund your loan. There is no reason why someone who's getting an amortized, or even interest only loan, needs to sign a negative amortization disclosure. Just refuse to sign. If it doesn't apply to your loan, then they don't need it to fund your loan. If they then fund your loan and it is negative amortization, you have a good case, so they're not likely to fund it. Refusing to sign stuff that does not apply to your loan protects you.

Now, as to the broker not understanding that the loan was negative amortization: I suppose it's possible. There are people out there in my industry who are mind-numbingly stupid. But the odds are overwhelmingly in favor of the likelihood that they lied to you. There are required submission forms on every loan that most consumers will never see, but it's a requirement for the loan officer to fill them out. They are filled out and submitted with your loan package, and they quite clearly indicate all the relevant facts of your loan.

Now, as to your options going forward. There's nothing wrong with people quitting their employers and going into business for themselves, if they provide good loans at a good cost. Yes, his former employer may want to sue him for the commission he earned, and such might be one way of extracting vengeance, if such is your mindset, but it's not going to help you at all. Nor should you care about who "owned" the lead. You as a consumer are not obligated to anyone except the provider who delivered the best loan at the lowest real cost. And of course the broker who did your loan wants to get paid again with a new loan. Since they are claiming to be stupid enough to drop your state's average IQ by twenty points, you may have to give him directions as to exactly which tall building or cliff you want him to jump off of. They have proven that they are not worthy of your business or anyone else's. Please do make a formal written complaint to your state department that regulates mortgages. In most states it's the Department of Real Estate, but if it's not, they will know who to direct you to. This person should lose their license and be barred from the industry for life over this. Unfortunately, your complaint alone probably won't do it, but people who get multiple complaints do lose their licenses, and sometimes, one is enough, if it's egregious enough.

The next issue is what can the writer of this email sue for? I'm not a lawyer, but every adult in the United States should know the answer to that question is "anything at all," or even "nothing." The better question is where are you likely to recover money, and how much? Once again, I'm not a lawyer and you should talk to one, but I strongly doubt that you've got a good case for anything in civil court. He's got all of those documents you signed ("the weight of the evidence"), and even if you get some jury to agree that you are owed money, it's likely to be overturned upon appeal. This is why unscrupulous folks want you to sign all those documents.

What do you want to do? You indicate your interest rate is fixed, and it must have been low enough to be attractive. If this is the case, make your monthly payments on time, and make the fully amortized payment, usually the third payment option on Negative Amortization ("Pick A Pay") loans. However, I don't believe that is likely to really be the case. I have never once seen one of these abominations where the real interest rate was fixed, or where the real interest rate was competitive with amortized loans. The attraction of these loans is low payment, and the real interest rate is usually at least 1.5% more than I could get the same person on a fully amortized 5/1 ARM, and right now thirty year fixed rate loans are about the same as the 5/1 ARM. People who don't know any better get the low payment, the bank gets your signature on a loan that's 1.5 percent higher than you could have gotten, and people who don't know any better will line up and fight for these loans! They are easier to sell than free beer to people who don't know any better! The hard thing is selling them something else when other providers are telling them about Option ARMs. So you're probably going to want to refinance, as over a three year period, 1.5 percent rate differential will save you a lot more than the pre-payment penalty.

I answer question emails directly. It may take me a few days, but I do answer them, provided they don't get lost in the spam filter. If it's an issue I haven't covered before, or only tangentially, I do like to use questions as the basis for new articles, but I answer questions asked via email by return email. If there are already good answers on my site, I'll send you the link, because it was obviously too hard to find it. If there aren't, you'll get your question answered before any article appears.

Please ask if this does not answer all of your questions!

Caveat Emptor

Original here

I am continually horrified how many people shop their loans by APR, just as I am by people shopping their loan based upon payment. Why? Because in either case, you're setting yourself up to spend a lot of money in closing costs that most people will never recover. But you shouldn't choose a loan based upon APR, just like you should never choose a loan based upon payment.

There is always a tradeoff between rate and cost in real estate loans. If you want a lower rate, you're going to spend more in up-front costs to get it. This is a law of finance on the same order as the law of gravity, or Newton's laws of movement. Some lenders and originators have different tradeoffs, for better or worse, but they are always present. The question of rate should never be asked or answered on its own, but always in conjunction with the costs it takes to get that rate. If you keep a loan long enough, yes, you will eventually get back your upfront investment, but most people don't keep their loans nearly long enough.

Let's illustrate by example. Picking a random rate sheet from one lender as I wrote the original article (rates are much lower now), I had one thirty year fixed rate loan with a rate of 5.00 percent, and assuming an existing loan payoff of $350,000, and rolling costs only into the balance, an APR of 5.484, and payment of $1993. Looks better at first glance than a loan at 5.625%, with a payment of $2056 and an APR of 5.764. As other alternatives, 6.00 percent is available with a payment of $2119 and an APR of 6.048, or 6.375% with a payment of $2184 and APR of 6.375.

But here's what may not be apparent. As a matter of fact, it isn't apparent to most consumers. That 5.00 percent loan cost 4.8 points to get, and involved paying over $21,300 in total costs to buy the rate down that far. You're almost up against California rules limiting the total costs of a loan to 6% of total loan amount. The loan at 5.625% is done with a single point, and costs a grand total of $7070 to get done. The loan at 6.00% requires no points, and costs a grand total of $3500. Finally, the loan at 6.375% is a true zero cost loan.

What this means is that that getting that 5.00 percent rate is a nonrefundable $21,300 bet that you will keep that property and that loan long enough that the money you save in interest every month will be more than that upfront cost. It takes 141 months for that loan to do that as opposed to the 5.625% loan - almost twelve years - when you consider time value of money. It takes 108 months - nine years - before it pulls even with the no points loan at 6.00, and 92 months - over seven and a half years - before it pulls even with the zero cost loan at 6.375%. The 5.625% loan (a $7000 bet) doesn't start in first place either, but it does get there a lot more quickly. It takes 55 months - four and a half years to pull in front of the 6.00% loan, and 53 months to pull in front of the zero cost 6.375% loan. That poor 6.00 percent loan for no points is the only one that's never the absolute best choice - it takes the exact same 55 months to pull in front of the zero cost loan as the 5.625 takes to catch it, but since you're only betting $3500, at least you've lost less if you refinance or sell before break even, which most people do. Last time I checked (a few months ago), the median age of mortgages in the United States was 28 months - just about half the time that any of the other loans takes to pull even with the 6.375% loan that doesn't cost a penny, either out of pocket or rolled into the balance.

Let's consider how much money you'll be out if you refinance after 28 months with that 5.00 percent loan (or sell the property), like approximately half the population will. Your balance is $18,860 higher than the zero cost 6.375% loan, while on the plus side you have saved $1288 in payments. On the minus side, however, if you get another loan, you still have to pay interest on that $18,860. Whether it's because you sold that property and bought another, or a refinance loan comes along that you like better, it means a loan balance $18,860 higher even if you don't pay points on the new loan. You're still paying for your old loan, while all of your benefits stopped on the day you let your old lender off the hook by selling or refinancing. Admittedly, the chance of this happening is lower as you get to lower and lower rates, but it's still a bad bet, in my estimation. People not only sell, they want cash out, they want debt consolidation, the list goes on and on. If you get another 5% loan, you're paying $943 extra per year because of that higher balance. Alternatively, if you kept the extra in your pocket and invested it elsewhere, a 9% rate of return would mean it would cost you $1697 that first additional year. So far, I haven't worried about tax deductibility, but it works against the higher cost loan, making the picture even less favorable.

I need to note that these were honest calculations. The ones you encounter won't always be. Sometimes, they're based upon the payoff balance - in other words, calculate the payment for that 5% loan as if you were going to pay all of the costs in cash, even though the loan officer probably knows that's not going to happen. This would allow them to quote a payment of $1879. It also assumes they're giving you an honest quote on your MLDS (California) or Good Faith Estimate (the other 49 states) is accurate, as the APR is calculated given that information. If the underlying document is inaccurate, and I've covered how badly lenders can legally lowball, then the resulting payment and APR calculations will therefore be too low.

Now the difference between the two numbers, APR and APY, can give you a certain amount of information if you know how to use it, assuming that the loan officer tells you the truth, unlikely though that may be in some cases. I'm going to assume you've got a financial calculator or can do the calculations yourself, because none of the ones I've seen on the web are up to this task. Furthermore, this is only an approximation of the actual computation method, so there will be a small amount of slop in the calculations, but much smaller than the eighth of a percent fixed rate loans quotes are permitted to be erroneous. Using the term of the loan, the payment, and the contractual note rate (APY), tell your calculator to compute principal value of the loan - in other words, the new balance. This may not be accurate in and of itself, and that will tell you there's something funny going on with the numbers. Then repeat the calculation with APR substituted, which should give you the balance less the cost of loan, albeit with third party fees (appraisal, escrow, title) still in the amount as those are excludable from APR calculations under Federal Reserve Regulation Z. The difference in the two numbers tells you the fees the lender is charging - or the ones they're willing to tell you about, anyway.

Note that the "spread" or difference between APY and APR gets larger as costs get higher or the term of the loan being contemplated gets shorter. The reason is that these costs have to be paid off over a shorter period of time. It also increases for smaller loans and decreases for larger ones. If you have to pay them off over fifteen years instead of thirty, the difference gets much larger. That 5.00 percent loan that had an APR of 5.484 with a thirty year loan term goes to 5.834 with a fifteen year loan term - not quite twice the difference, but nasty enough!

Despite the fact that the person refinances about every three years, APR is always calculated upon the consumer keeping the loan for the full term, which isn't likely. Ninety-five percent of everyone has sold or refinanced within about seven years, and this number climbs towards an effective 100% for loans that begin adjusting before that. Sure, you could theoretically keep a hybrid ARM (although not a Balloon) after the adjustment, but nobody does.

With that in mind, let's calculate APRs of each of these loans assuming you'll refinance after 36 months - significantly longer than the fifty percent mark where half of the country has refinanced or sold the property. The 6.375% zero cost loan still has an APR of 6.375 - because it has no costs to recover. The The APR on the 6.00 percent "no points" loan, which only has $1800 of non-excludable costs (see Regulation Z), doesn't go up much - to 6.391. The 5.625% loan you can have for one point jumps up to 6.643 APR, and the APR on that loan that the people shopping by APR or payment will choose - the one with a 5.00 percent contractual interest rate - skyrockets to 8.663%! If you only end up keeping it three years - beating out median age of loans in the country by better than 25% - this loan is the worst of the choices I have presented, not just by calculation of money spent, but even by calculating APR honestly.

If I had to pick a few things I could pack into a sixty second public service announcement to tell all 300 million people in this country about real estate loans, the fact that they're severely unlikely to keep the loan for anything like the full term would be one of those things. People just assume that they're going to keep a loan for the full term, but then they don't actually do it. Meanwhile, all of the calculations that are made presume that they will, even though that presumption is nonsense, and making those calculations on that basis will actually cause many consumers to make erroneous decisions, because they paint the facts as something other than what they are. If gravity was a tenth of what it is, we could all fly in the manner of Daedalus as described by myth. But those pesky facts keep getting in the way, and over half the people who take out thirty year financing don't keep it for even one tenth of the full term. If you're wasting nearly nineteen thousand dollars of your money every three years, as the people here did once, those facts will have an ugly tendency to bite you just as hard as they will any modern day imitator of Icarus.

Caveat Emptor

Original article here

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