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Archive for the ‘Mortgages’ Category

In the almost 400 transactions I have brokered since first being licensed in the 1990s, anytime there was a problem with the mortgage and the buyer was asked how they chose their lender, I cannot think of one instance where they did not say some variation on the theme that the bank was chosen for quoting the best rate.

In the almost 400 transactions I have brokered since first being licensed in the 1990s, anytime we noted that a mortgage loan officer did a great job and the borrower was asked how they chose their lender, I cannot think of one instance where they did not say a variation on the theme that the lender was a referral from a trusted source.

Now, since I can point to dozens and dozens of transactions where the lender stunk and they were chosen for their rate, and there were also dozens of great jobs by lenders who were trusted referrals, the correlation strikes me as very strong that choosing a lender based on rate alone is inadvisable. Disclosure: I was a loan officer from 2001-2005.

Sadly, the “best rate” is a myth. The factors that go into locking a mortgage rate include the down payment, credit rating,  debt to income ratio, length of the loan, and a variety of other matters which makes quoting a prospective borrower a rate on the first meeting without a full application irresponsible at best. Published rates are based on assumptions that are so ideal that most borrowers either don’t qualify or must pay higher costs to achieve.

Moreover, rates vary on a daily and often an hourly basis based on the bond market and other financial indices, requiring extreme personal attention and knowledge of the transaction process to assist the borrower in “locking in” their rate at the correct time.

Lastly and perhaps the most bitter irony of it all is that most consumers don’t understand that the lenders all operate in the same market for money. If you walk into the corner bank, Banana Funding Corp at the mall, or log onto Fancyrates.com and ask pricing on their 30 year fixed conventional rate for a conforming loan with 20% down payment, you may get different answers when you ask what rate you’ll qualify for. But here’s the truth: conventional loans have been bought on the secondary market by Government Sponsored Entities (GSEs) such as Fannie Mae and Freddie Mac for the same prevailing market rates since the Beatles dominated rock music. The only variations have ever been the profit margin. What’s that mean to you? Simple: within reason, you can negotiate your rate.

With those factors in play, the smart consumer should therefore find the best, most trustworthy, service oriented lender they can find, who will work hand in hand with the real estate brokers, appraisers, title and attorneys, and who will be able to troubleshoot and navigate obstacles as they arise. This not only ensures a smooth transaction, it shields the borrower from bait and switch moves, junk fees, last minute changes, and the lack of accountability that we all too often see in web-based bargain lenders that raise screwing up deals to a high art.

Imagine that. You choose you lender the same way you choose the agent, attorney, inspector and plumber: the best person for the job. The numbers take care of themselves because a true professional will always watch out for you.

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The Fed’s recent decision to outlaw Yield Spread Premiums (YSP) paid to mortgage brokers by lenders is the latest success by the bank lobby to kill competition and bait and switch the public into thinking the government is actually doing something to reform the industry. It is, in fact, reaffirming a double standard that has existed in the industry far too long, and may be the death knell for mortgage brokers.

Some background: For ages, the more profitable the loan, the higher the commission paid to the originator. In mortgage brokerage, the commission has been Yield Spread Premium (YSP). For bankers and direct lenders, the commission is Service Release Premium (SRP). Even though they go by different names, they operate exactly the same:

Continued at Luck Strikers Blog

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The NY Times is reporting that the people who profit from foreclosures see loan modifications as a bad idea. Duh. It’s bad for business. I commented:

The opinion of Mr. Katari, who has a financial interest in more foreclosures (asset managers, folks, are the people who liquidate foreclosed property for lenders) is telling. Of course he’s against loan modifications and people keeping their homes; he profits from them losing them. This is like asking a wolf if protecting sheep is wise. Put the carpenters back to work indeed! We’ve already lost 50% of (admittedly inflated) value in some precincts and 20% or more here in New York. How much bloodletting does he want? Answer: more is never enough.

Call me crazy, but with rare exception, most people would happily keep their homes if their payments were lowered. The banks simply won’t agree to make the modifications permanent because they DON’T HAVE TO. Why is all the TARP money being repaid so quickly? So they can go back to being even bigger SOBs without being beholden to Uncle Sam. Remember “too big to fail?” Bailing them out with our tax money was like sharpening the guillotine blade for our own executioner. Now that they have been sufficiently re capitalized, even the Times has reported that they have positioned themselves to bet against the market improving. Did you think that the people who brought us the sub prime debacle suddenly became good guys?

It would be nice if the administration would show some courage and, once and for all, stand up to the hedge funds and their ilk to foster some real change (wasn’t that why he was elected?). The carpenters can’t go back to work if the housing market, the backbone of our economy, is further weakened. Read the writing on the wall. We should be in a recovery by now, and the real fallout may just be starting without strong leadership. There haven’t been 3 negative years in a row in housing since the Great Depression, which ironically, was also caused by the fox watching the hen house.

I felt better after letting off that steam, for sure.

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Interesting video commentary from Richard Bitner, author of Confessions of a Subprime Lender.

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Uncle Sam is stepping in to aid Fannie Mae and Freddie Mac. One might question the wisdom of government bailing out mortgage companies. In this case, I don’t. Fannie and Freddie are part of the solution, not part of the problem. By definition, they were not sub prime lenders. They just bore the brunt of problems borne of the sub prime meltdown.

Should the government help irresponsible banks that fueled the economic crisis by making reckless loans? Never. Should they take steps to shore up the institutions that are the standard bearer of responsible lending? You bet they should. It is the system working. The Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, as Freddie and Fannie are less commonly known, are implicitly backed by the Fed. Now the Fed must act.

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I have to echo Larry Kudlow’s question posed yesterday on Chuck Schumer’s involvement of the FDIC takeover of IndyMac Mortgage. Schumer is a senator from New York; IndyMac is based in California.

It is hard to believe, but he caused a run on the bank. Would Senator Schumer have expressed such a lack of confidence in a New York institution? The opportunity was certainly there.

IndyMac is the second-largest financial institution to close in U.S. history, said the Office of Thrift Supervision, which regulates the company.

In comments released to the media, the OTC said a June 26 letter by New York Sen. Charles Schumer expressing concern about the bank’s viability was the ‘immediate cause’ of the thrift’s closure.

Depositors withdrew more than $1.3 billion in the 11 days after Schumer’s letter was made public, the OTC said.

‘Although this institution was already in distress, I am troubled by any interference in the regulatory process,’ OTC director John Reich said in a statement.

What a shame!

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Why Option ARMs were so common in regular consumer borrowing is beyond me, but Wachovia is the latest lender to see the light.

Beleaguered consumer bank Wachovia Corp. said Monday it will quit offering a mortgage payment option that allows borrowers to pay less each month than the bank charges in interest.

Option ARMs are dangerous because they negatively amortize.

Critics have said paying less than the amount of interest charged can lead to negative amortization. That means the borrower owes more than the value of their home, increasing the chance of foreclosure.

In a rising market, with certain borrowers such as savvy investors, option ARMs aren’t a bad product. But in a falling market, to an owner occupant with no plans to move, they are an awful loan. And the people who have them often have no clue as to how destructive they can be. All they know is that they have a very low (often 3-5%) rate and no idea that the difference gets tacked onto their balance.

“They are taking the riskiest component out, as they should,” said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. “There is no one in this market that should be in a loan like that, not right now.”

I concur.

 

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