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Posts Tagged ‘Mortgages’

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 Times has a fairly balanced article on how people are adapting to the down market in NY City’s least-populated and most suburban borough. The upshot of the story is that not everyone can seek relief through a short sale.

John and Dorothy Miele are an example. Two years ago, they wanted to refinance their home, which they inherited in the mid-1990s from Mrs. Miele’s mother. Mrs. Miele is a homemaker and Mr. Miele earns about $70,000 a year as an auto mechanic for the New York City Police Department. But their credit disqualified them from the sort of loan they wanted.

When thousands of people own a small piece of a home loan, it’s unclear who has the authority to make decisions about the mortgage when it comes to things like working out payments.

They refinanced anyway with an adjustable-rate mortgage, they say, because a mortgage broker told them that it was a step toward improving their credit and that in another six months he would give them a loan with better terms. After the papers were signed, the broker stopped returning their calls and the loan never materialized. Mr. and Mrs. Miele are now in a much tighter spot than they were before they refinanced. Nine people, including their children and grandchildren, depend on that house as a place to live.

The bank that gave them their loan, First Franklin, has since sold it — a standard practice in recent years. Now, it is part of a mortgage-backed security sold by Deutsche Bankto investors. The Mieles, who are about a year behind on their payments, are fighting foreclosure in court. Their next court date is in July.

Deutsche Bank, which acts as trustee, said in a statement: “The trustee is not responsible for foreclosures or selling foreclosed property. Such decisions are made exclusively by the servicing companies.” The servicer attached to the Mieles’ loan, Specialized Loan Servicing, would not comment.

Nine people can’t all fit into a 2 bedroom apartment. There is no easy solution here.  The article is unclear as to why they would refinance a home they inherited; some personal responsibility should be acknowledged there. Still, the broker who gave them a song and dance about refinancing in 6 months should be caned in the public square.

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Connecticut Senator Chris Dodd is addressing criticism that he knowingly accepted favorable terms on his two home mortgages. None of the talking heads revealed the terms, but the NY Times published the following:

Mr. Dodd said that he was a longtime customer of Countrywide and refinanced the mortgages on his homes in 2003 after shopping for the best deal. Ultimately, he obtained a five-year adjustable rate loan at 4.25 percent for his house in Washington and a 10-year adjustable rate loan at 4.5 percent for his house in East Haddam, Conn.

Rates were pretty low in 2003. I used to have the software to look up Countrywide’s rate sheet archive, but I no longer do. Here is what I know. Adjustable loans have lower introductory rates than 30 year fixed. We refinanced our home in December 2003 with a 3 year adjustable at 4.25%. A 5 year adjustable would have been higher, and a 10 year higher still. There is a slew of commentary about this, but few facts on the actual details of the mortgages. 

 Mortgage News Daily has some details.

The three men were alleged to be participants in a special program for “friends” of Mozilo that awarded discounts and waived fees for those friends. Portfolio, citing internal Countrywide documents, said that the company made two loans to Dodd in 2003, shaving three-eights of a point off of a $506,000 loan to refinance a townhouse in Washington. The discount saved Dodd about $2,000 in interest payment. A second loan to refinance a house in Connecticut was written at a quarter point off the going rate, saving the Senator about $700 a year.

Since anyone can pay down their rate about a quarter of a percentage point by paying a point up front, Dodd was not charged about $7500 for the Washington Townhouse, and perhaps paid $2-3000 less for his Connecticut home. That is roughly $10,000 which would have been rolled into the closing costs. He saved roughly $200 per month on his combined payments.

Is this a horrible scandal? No. Niether Dodd nor Countrywide grafted millions from the public in this deal, nor are there millions in unmarked bills in the senator’s basement freezer. Countrywide probably just wholesaled the loans, which, in industry terms, means that Mr. Dodd got the “par” rate at no profit or loss to the company.  

How aware the Senator was of the deal he was getting is debatable. Despite the popular myth that democrats are more like us working stiffs, Dodd is the son of a US senator and has been in Washington since 1975. He probably lives in lala land about the mundane details of life. That said, Washington is  tough town and he has won the war of attrition through eight elections and over 30 years in office. A guy on the senate banking committee ought to know how to cover his tush. This isn’t a free bottle of wine at a restaurant on his anniversary.

So, for about $10,000 which could have been rolled into the loans for a total of about $40 per month, Senator Chris Dodd is very embarrassed. 

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262

…mortgage companies have “imploded” since late 2006.

The resulting credit crunch has made the pool of buyers even smaller. This, coupled with the rising inventory of distress sales, short sales and bank owned foreclosures has suppressed prices enormously.

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In light of my earlier post framing the FHA loan program as part of the solution to an industry recovery, the NY Times is reporting that the program has lost $4.6 billion. The article does not say if it was in the past 12 months or in 2007. It doesn’t matter. The problem is not the program itself.

Brian D. Montgomery, the F.H.A. commissioner, attributed the unanticipated losses primarily to the agency’s seller-financed down payment mortgage program, which has suffered from high delinquency and foreclosure rates in recent years.

In other words, legalized fraud. If I were selling you a home and I funneled you a 3% down payment in an undocumented side deal, I would be a criminal. But if we were to funnel the money through a “nonprofit,” it would be kosher. But the result would be the same: the borrowers would have no skins in the game so to speak, and the default rate would be far higher.

The lesson is clear. 100% financing, zero down, or whatever nomenclature you choose to use, causes more harm than good. People who do not have their own money in the deal do not have enough at stake. To put it another way, if you have no money for even a 3% down payment, you have no business buying a house. The FHA, therefore, is right to drop this practice post haste.

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This is a commentary that I submitted to the Journal News recently that they have not (yet) published.

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With the problems facing the real estate and mortgage industries, I look to the Oval Office to be the catalyst in the recovery of the nation going forward. I am not referring to President Bush, nor am I referring to the hypothetical Presidents McCain, Obama, or Clinton.

 

The president who will make the biggest difference in solving the current crisis is Franklin Delano Roosevelt.

 

It is hard to conceive that a free market, right leaning capitalist who abhors government bureaucracy like myself would invoke FDR. However, a realist with a rudimentary understanding of what makes our industry work will understand.

 

It can be argued that the National Housing Act of 1934, which gave birth to the FHA mortgage program was the single most important piece of FDR’s New Deal legislation outside of the Social Security program. FHA made millions of previously unqualified Americans eligible for home ownership by significantly lowering the barriers to entry. A 3% down payment replaced the typical a 20% previously required. Conventional credit restrictions were relaxed. Uncle Sam would insure the loans, which was unheard of at that time. It was an innovative expansion of the home buyer base, put people back to work, and stimulated the economy.

 

Some conservatives at the time saw the Program as a naïve and risky ploy to buy votes from the democratic blue-collar base. Yet 62 years later in 1996 when I started my career in real estate, the program’s efficacy was firmly established. Its foreclosure rate was low. The interest rates were competitive. The red tape one expected of a government program was surprisingly manageable. Appraisals were more stringent than those of other loans, but understandably so, given the increased importance of collateral in highly leveraged, often credit-challenged scenario. It had been the go-to home purchase program for the citizenry for decades because it worked for borrower and lender alike.

 

Pragmatic management kept the Program in step with the times, from GI’s returning from overseas in the 40’s to single women in the 90’s.  Loan amount limits varied by market area and were raised when needed. Racist underwriting guidelines were expunged in the 60’s when fair housing laws were passed. When tweaking was needed, it was done regardless of administration or what party was in the majority.

 

Unfortunately, in the post 9/11 spike in home values, the Program stopped changing with the times. Ignoring market trends, the ceiling for an FHA loan on a single-family home in Westchester County was a paltry $290,319 in 2005. This was unrealistically low for a county where the median home price was $700,000. In 1997, FHA loans accounted for 9.1% of all new originations. That number dropped below 2% in 2007. The Program gathered dust and was supplanted in market share by sub-prime products, which had higher loan limits and lax underwriting guidelines.

 

Industry professionals should have seen sub prime paper for the fool’s gold that it was. B and C loans zigged where the FHA zagged. Appraisals, which were strict under FHA, were far too lenient with sub prime. Income and asset documentation, another cornerstone of FHA, was de-emphasized by sub prime lenders, and in the case of stated income loans, thrown out the window. Judgments and charge-offs on credit reports were ignored (FHA required them to be satisfied before closing). The only thing the programs had in common was that they targeted cash-poor, riskier borrowers. There was no mortgage insurance. To compensate, or more accurately, to hedge their bet, B/C lenders charged higher rates.

 

They had it backwards. Poorly qualified people are even less qualified at higher rates, and the whole house of cards fell last summer in the worst rash of bank failures since the Great Depression, which brings me back to FDR.

 

Earlier this year, in a move that eerily resembled erecting a stop sign at a dangerous intersection only after a fatality occurs, the government finally dusted off Mr. Roosevelt’s FHA program. Better late than never. Congress acted, and the loan threshold for a single-family home was tethered to the conventional limit of $417,000 (more in “high cost” locales like Westchester County, where it is $729,750). Other adjustments were made, but the important thing is that the vacuum left by the sub prime implosion was filled and the Program was relevant again.

 

Other political solutions to the housing crisis in 2008 are tone deaf and ill advised. Maryland has outlawed “stated income” mortgages, which will hurt that state’s economy more than it will help. Stated mortgages themselves aren’t bad; for decades, self-employed professionals with excellent credit who had to put 20% or more down used them. Often 1099 professionals, doctors and small business owners, they had a tougher time verifying their income than the typical w-2 employee. The problem was that these loans were expanded to wage earners with shakier credit and smaller down payments who often misrepresented their income. The prohibition will prevent the well-qualified people from buying at a time when the pool of borrowers needs to be prudently expanded, not obtusely contracted through knee-jerk legislation.  After the savings and loan crisis of the late 80’s and the current sub prime meltdown, we really ought to know what works and what doesn’t. We don’t need politicians in 2008 reinventing the wheel. I’ll take 1934’s remedy any day.

 

Given the current credit crunch, if anything saves our collective bacon in this market, it will be the rejuvenated FHA mortgage bringing a larger pool of buyers into responsible home ownership. Credit challenged borrowers will have fixed lower rates instead of higher interest, riskier ARM products. Unqualified borrowers will no longer sneak into a home they cannot pay for because there is no stated income or asset allowed by FHA underwriting. Appraisals will once again ensure that the collateral matches the loan amount, minimizing the all-too-common instances of negative equity and short sales. History will repeat itself and the new crop of FHA borrowers will be a solid performer. In this case, we would be wise to never again marginalize the FHA program and stability will return to a recovering market.

 

When that happens, this laissez-faire fiscal conservative will tip his hat to Mr. Roosevelt.

 

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