Rhonda recommends a credit union. Normally, banks and credit unions at least advertise legally.

Today, (9-2-08) I am looking at an ad in the Seattle Times, advertising a 6% Rate, 6% APR from a credit union, pg D3.

30-year Fixed-Rate Mortgage
Jumbo rates same as conventional!

I’m suspiscious…, so with great difficulty, I read the fine print.

Guess what? It’s a 5 year ARM.

Even a 9th grader would recognize that is deceptive, thus illegal advertising.

How can we stop illegal and deceptive advertising?

First, borrowers must stop rewarding the behavior.

Why would Mike NEED to sell? I agree he might WANT to sell, but that is different from needing to sell.

OK, say he moves. He puts the house on the market, does not get an attractive offer, and rents it out, until he can sell. Pretty common in today’s market.

He cannot lose a job he doesn’t have.

If he gets ill, he liquidates other investments to make the loan payments.

OR, he gets an incredible offer, and sells above market value, and still wins, even with the prepayment penalty.

So, maybe the credit union or a retail bank is a good scenario, I don’t know, I cannot offer those solutions. Maybe it’s better than what I proposed, in Hypothetical Solution #1 or #2. Maybe it’s not? Maybe they would have a prepayment penalty too, or their loan costs could be higher, or interest rates higher, or loan parameters more restrictive.

But I still think both solutions presented (one with a prepayment penalty, and one without) were worthy of consideration, and would consider both carefully for myself, as well as any client.

A credit union could not likely provide the range of options you or I could offer, as wholesale mortgage brokers, with our access to multiple lenders.

And, like you, if a different lender, be it retail, or wholesale, presents a clearly better solution for the borrower than what I have available, I would recommend that my client take that route.

3% prepayment penalty on $880k = $26,400. I could never advise that for a client…even though the prepayment period is just one year, if something unplanned happened, Mike would be screwed out a chunk of change.

You state: “If Mike envisions a scenario that the loan would end in a year, then of course it does not make sense to do anything AT ALL” the key word here is ENVISIONS.

Often times people don’t envision a job transfer/opportunity, illness or other reasons they may need to sell or obtain cash out for an emergency purposes.

My original advise to Mike, and others with loan amounts over $567,500 is to check out credit unions for more competitive rates in the true jumbo market w/out prepays.

Regarding prepay penalties.

Sure, I too am generally against prepayment penalties, UNLESS THEY BENEFIT THE BORROWER!

Pardon the shouting, but I am sick of lenders, brokers and originators saying they never did certain practices, like it’s some kind of badge of honor, even if the practice benefitted the borrower!

A prepayment penalty makes GREAT sense in this hypothetical scenario, and in many others.

Of course prepayment penalties have been abused. So has morphine, but no one is suggesting we don’t use it on the battlefield in the hands of trained medics.

The prepayment is needed if the broker is to pay ALL of the costs of the transaction, for two reasons.

1. The lender requires a prepayment penalty whenever the rebate is larger than 1%. I think this is an excellent policy, incidentally. The prepayment penalty is 3% of the outstanding balance.

2. The lender would require repayment of all the rebate paid to the broker (if the loan ended earlier than 1 year), thus the broker would be out all of the compensation for his work AND 3rd party costs.

If Mike envisions a scenario that the loan would end in a year, then of course it does not make sense to do anything AT ALL. That did not seem likely with the evidence presented (why even look or ask, if you think you would end the loan in less than a year).

So, let’s look at the same loan as above, with no prepayment penalty. As I originally stated, there were many other good solutions to consider. BTW, I would ALWAYS present a no pre-pay option, and divulge exactly what the prepayment penalty is.

The rebate would need to be lowered, so Mike would need to pay some, or all, of the loan costs. On the plus side, his rate would be lower, too. On the minus side, he’d have loan costs to recover.

Let’s look at

Hypothetical Solution #2

Loan Type= 5 yr ARM, not interest only
Rate= 5.75%, 3rd party loan costs paid by borrower, hard to estimate on the fly for this loan size, but for this scenario let’s assume $3,000 (title, escrow, appraisal are all higher costs at this loan size, includes lender’s underwriting fee), no prepay penalty, broker compensation to come from lender, APR 5.79%, rate may change until locked.

Payment= $5,152.95 ($883K at 5.75%, payment does not include taxes or insurance, I increased the loan amount to cover closing costs)
5 year savings= $24,555 ($409.25 x 60 mos.)

contrasted to Hypothetical Solution #1

Hypothetical Solution #2 has a greater monthly savings of $52.58. Divide the loan costs of $3,000, and you break even (recover the additional costs) at month 57.

Paying loan costs is a form of a prepayment penalty…that is, you strand the costs of the loan transaction if you do not stay in the loan long enough. In this case, if he refinanced in month 12, we would lose $2,369.04 ($3,000 – 12 x 52.58).

I hypothesized (though I did not originally write it down) that Mike truly wanted a 30 yr fixed, and that sometime between month 12 and month 60, an attractive scenario would occur to enter into a 30 year fixed, and he would not wish to strand the investment in loan costs.

This is why I state again…Consult a professional. There are multiple possible treatments for every problem, and it is important to go over those solutions with the borrower, so we can truly understand what matters most to them, and what solutions may be available. We all want easy, fast answers to important questions, but usually they are not sufficient.

Borrowers, consult a professional

Being nervous about the skills of the parties involved is a terrible thing!

Very soon after that – I got another offer on a listing that was so poorly written, but had a really nice agent who asked for help (instead of resisting it), and told me this was his first sale. The buyers had found the lender on the internet … not even a local lender. When I called the lender, there was no one person assigned to the file, anyone who answered the phone could look it up on their computer … and they couldn’t find the buyer at all in their records. There was a loan approval letter written, I had the copy, but zip! They apparently lost the file!

I re-wrote the PSA, got it all signed and as part of the sellers counter we gave the buyer 5 days to choose one of the 3 lenders, make formal application, etc. It closed, smoothly, and the new agent got paid, learned something in the process, and also learned about the wisdom of making sure buyers talk with competent, local lenders prior to making an offer.

I just hate it when we feel as agents that we have to allow anyone the buyer chooses as a lender to handle the most important financial aspect of a transaction — we don’t actually have to. We can suggest to our sellers that there is a solution and counter the offer the way I did.

The buyer is free to not accept that counter, and go buy something else.

Certainly this is a rare situation, but seller clients need to be confident that the people involved won’t drop the ball, and do know what they are doing. Buyers need to understand that choosing the best friend from high school may not be enough of a reference for a quality lender, or that working with an online lending vendor may not result in a timely closing. At least with a local lender, one can go knock on their door and find a real person!

RE Comment 47: “And, when I don’t like what I hear from a buyers LO, I’ve actually had my seller counter in writing to the buyer that the buyer use lender B, C or D instead of lender A. If I’m going to suggest that they must change LO’s, then I feel it’s fair to give them 3 choices.”

I don’t include loans with prepays when I’m reviewing possible options with clients…perhaps I should–it is there choice and as long as they fully understand the risk…. I just don’t like ‘em.

If I know the other agent, and they tell me they have worked with a particular LO for a long time, then maybe, just maybe, I might not be so quick to call. But if the offer coming in for a seller client is written by an agent that I don’t know, or is written sloppily (sigh), or has a low down payment, or any of a number of red flags, the first call I make is to the LO to talk turkey.

And, when I don’t like what I hear from a buyers LO, I’ve actually had my seller counter in writing to the buyer that the buyer use lender B, C or D instead of lender A. If I’m going to suggest that they must change LO’s, then I feel it’s fair to give them 3 choices.

Many times I’ve given a LO the ‘benefit of the doubt’ and had all my suspicions turn out correct. This year, more than many other years, the details are critical, and I want to know for sure, that the LO is on top of every teensy little detail .

I realize that we have lots of lender surprises going on, but a good LO will definitely be able to converse with me intelligently enough for me to see if they know what the heck they are doing, and to feel secure that they pay attention and don’t pass their work on to some underling who doesn’t know what’s what.

We often miss other’s points. That is not a reflection on your abilities or mine. It’s a complicated world we live and work in.

We often miss opportunities. Happens to me all too frequently. You pointed that out to me the other day, (thank you again, by the way) where I could have salvaged a loan opportunity.

So, for the edification of the readers that care (that could be just you and me, but let’s dream big), let’s examine my point, and then deal with a hypothetical benefit for Mike.

First, consulting a mortgage professional.

You and I are professionals, but we are not alone. There are many that are as good as you or I, and that hold similarly high ethical standards. We would both like to believe that no one is better, but to think so is dangerously hubristic.

Borrowers get preconcieved notions of the state of the mortgage market, based on advertising (some true, mostly not), supposedly unbiased news and expert opinions from the various media, and by word of mouth.

While SOME borrowers may be hurt by consulting a mortgage professional, (such as being talked into a transaction that only benefits the mortgage person, or getting inaccurate information), but I believe that the majority benefit by such a consultation. Generally, the wiser the borrower, the better chances of a resulting benefit to the borrower.

Borrowers that think they can better their situation, need to consult one on one with a mortgage professional (and treat the LO ethically), because the above sources are simply not adequate to assess an individual situation, and are often flat wrong even on general information.

So, let’s propose a hypothetical improvement for Mike.

I will use a REAL rate sheet, but insert the missing data (hypothetical) for his qualifications, and assume his goal is to simply save money over the next 5 years.

Known/Assumed Qualifications:

Home Value=$2,200,000 (880K/40%)
Loan amount=$880,000
LTV=40%
Income=$100,000
Liquid Assets= at least $880,000
Current loan resets in 5 yrs, currently at 6.5%, other terms unknown

Hypothetical Qualifications

FICO = 800 (he’s rich and smart, why not?)
Other debt= $0 (why would he carry un-leveraged debt, with that much underperforming liquid assets?)
Current loan payment = $5,562.20 (while Mike does not tell us, let’s assume it is fully amortizing)
2 yr averaged income=$150K/yr supported by tax returns, he says this is a poor year, so it is reasonable to hypothesize a better one previously.

Hypothetical Solution

Loan Type= 5 yr ARM, not interest only
Rate= 5.875%, no loan costs (paid by broker, except prepaids), one year prepay penalty, APR 5.73% (don’t get me started on how worthless APR is on ARMS, that’s a whole ‘nother post), rate may change until locked, no escrow account.

Payment= $5,205.53 ($880K at 5.875%, payment does not include taxes or insurance)
5 year savings= $21,400 ($356.67 x 60 mos.)

Mike does not specify the loan type he desires, nor his goals. I cannot (nor could anyone at this hypothetical juncture) promise underwriting approval for Mike’s loan, but at this low of an LTV, it is a fairly low risk loan for a bank, and they are hungry for those, and the hypotheticals fit the guidelines.

While a 30 yr fixed may be Mike’s goal, the proposed solution puts at least $21K in his pocket, and does not worsen his current rate protection of 5 yrs, and minimizes his costs in this transaction.

There are other plausible scenarios that would improve his situation, and many that would not.

And so I conclude, and you, (Rhonda) echo this on nearly every post that I have seen you write;

Borrowers, consult a mortgage professional.

Realistically, while there are fewer of us, the Darwinian effect of the market means that the ones that remain are, on the whole, better qualified than they were 2 years ago.

With the ongoing efforts in forums like these, we will continue to improve the level of professionalism loan originators and related real estate fields.

Frankly, I think the mortgage profession has a ways to catch up to the other fields, but that’s a different story.