Category Archives: Mortgage/Lending

The Morality of Walking Away

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This is not legal advice. For legal advice, consult an attorney not a blog.

I came across this interesting article in the Wall Street Journal, that bastion of conservatism. The article goes into some detail encouraging homeowners to just “walk away” from houses that are deeply under water (not literally, of course; rather, the owner owes much more on the property than what the property is worth). For the record, I agree 100% with the sentiment expressed by the author. Any successful business — or business person, for that matter — would not think twice about breaching a contractual obligation if fulfilling that obligation made no business sense whatsoever. In this regard, and as noted by the author, the economy is fundamentally amoral. It is high time that “regular” people take the same approach as the wealthy and Big Business.

That said, is it really a good idea? I’ve discussed the issue previously (in two parts). Here, I’ll only say that Washington is generally a non-recourse state, but that the situation is much more complicated if you have a second mortgage. Whether you decide to walk away or not, though, that decision needs to be based on what is in your (and your family’s) best financial interests. “Morality” should not factor into the equation.

IRS and Homebuyer Tax Credit: obtaining a”signed” Final Settlement Statement

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This is tax time.

Sometimes escrow offices wonder if we are CPA firms during tax time.   Our office has received numerous phone calls from clients that are in need of their “signed” Final Settlement Statements.   Lynlee wrote a quick post on our blog with an IRS link addressing what the IRS may need from borrowers to claim the tax credit.

As always, please contact your CPA or tax professional for specific details regarding claiming the homebuyer tax credit.

We contacted a CPA and they responded:

“we generally have found that the Final Settlement Statement (with NO signatures) are acceptable.”

Why?  Because in Washington State (and other escrow states) Final Settlement Statements do not have signatures from borrowers.   Final Settlement Statements are mailed to clients after a transaction is closed.  Estimated Settlement Statements are signed at escrow prior to your transactions being closed.

The Financing Contingency: Does it disfavor mortgage brokers?

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As always, this is not legal advice. For legal advice, consult a lawyer, not a blog.

First and foremost, let me admit my own ignorance up front as to exactly how a buyer works with a mortgage broker. Hopefully, someone with such knowledge and experience will clarify any errors below that result from my ignorance. Indeed, this post is for my own education as much as anything else.

In its current iteration, the financing contingency (NWMLS Form 22A) specifically defines “lender” as “the party funding the loan.” Thus, by its very terms, the term lender does not include a mortgage broker, since a mortgage broker simply brokers the loan (i.e., matches up a lender with a borrower) and does not actually lend any money.

So what’s the issue? Its two-fold. First, in paragraph 1 Form 22A states: “If Buyer changes the lender without Seller’s prior written consent after the agreed upon time to apply for financing expires, then the Financing Contingency shall be deemed waived.” [Only relevant portions of sentence included in quote.] If the buyer is using a mortgage broker, it is possible that the buyer will not have decided on a specific “lender” before expiration of the application period (by default 5 days but often shortened). In that case, the buyer may be deemed to have waived the contingency, or at a minimum the buyer may need to get the seller’s written consent for a lender selected after expiration. If seller refuses to give such consent, then the buyer may have waived the contingency. Note use of the word “may” as the form is ambiguous and open to some interpretation on this issue.

One the second issue, however, the risk is clear. If buyer’s financing fails, then per paragraph 4 the buyer must present “written confirmation from buyer’s lender” of the date of application, that buyer had the funds to close (i.e. the down payment), and why the loan was denied. I think its safe to say that a declining letter from a mortgage broker would not satisfy this requirement given the specific definition of “lender” in the form. So don’t rely on a letter from your mortgage broker (as many buyers do).

The upshot? If you’re using a mortgage broker rather than dealing directly with a lender, discuss this issue with your broker to confirm that you will still get the protections of the contingency. Make sure the broker will have “applied” for a loan on your behalf with a specific lender prior to expiration of the application period. And if the application is denied, make sure you get a letter so indicating from the LENDER, not just your broker.

Loan Originators: Stop Your Crying…Let’s Love the Good Faith Estimate

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Okay, I admit…I’ve been groaning, sniveling and bitching along with many other mortgage originators about HUD’s 2010 Good Faith Estimate.   The document has it’s faults and was created pretty much because of the faults of loan originators who used the GFE as a tool for bait and switch.   We’ve had a month to mourn the loss of the old good faith estimate, which was an asset in how I explained scenarios to my clients…it’s gone.  Get over it.

I’m hearing from consumers that many mortgage originators are refusing to issue Good Faith Estimates — even if they have provided the “six points of information” which HUD uses to define a loan application.   A mortgage originator has three business days to provide you with a good faith estimate or deny your “application” if you have provided the following:

  • the borrower(s) name
  • monthly income
  • social security number to obtain a credit report
  • property address
  • estimated value of the property
  • loan amount

HUD has added an additional item (which can be vague):  any other information deemed necessary by the loan originator.

Per HUD’s most recent RESPA FAQs that were updated on January 28, 2010, a mortgage originator cannot refuse to issue a good faith estimate if they do not have supporting documentation (such as income or assets documentation) or verification disclosures signed by the borrower.   If after providing a GFE to a borrower, it is discovered that their income they provided is not how an underwriter would view it, this may constitute a “changed circumstance” allowing a revised good faith estimate to be issued.    If you read the FAQs, you can tell that HUD is well aware that consumers have been having a real challenging time getting their hands on the 2010 GFE.

Update from HUD’s RESPA FAQs (page 11, #33)

“In order to prevent over burdensome documentation demands on mortgage applicants, and to facilitate shopping by borrowers, the final rule specifically prohibits the loan originator from requiring an applicant, as a condition for providing a GFE, to submit supplemental documentation to verify information provided by the applicant on the application…

Similarly HUD has long supported a public policy goal of creating a circumstance where consumers can shop for a mortgage loan among loan originators without paying significant upfront fees that impede shopping”.  (Only a credit report can be charged to a borrower at this point).

So dry your eyes, my fellow mortgage professionals, the Good Faith Estimate IS a tool for consumers to use for shopping…whether we like it or not.  It’s time to open our arms wide and embrace it.valentinescandy 

PS LO’s:  This post (and any of my articles) are not a replacement to your employer’s compliance department or legal advice.

Happy Valentines Day

Major Bank No Longer Allowing Mortgages with Zero Points/Zero Costs

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Technically this is still a rumor in my book because I have not heard this directly from the bank in question…you can watch this video from Think Big Work Small where they state they have learned that Bank of America has all ready started doing this on the retail level and that Wells Fargo is rumored to follow.

The email that I saw today stated that BOA is only offering “par pricing”.   This means that there is no rebate pricing.   Many people have villainized rebate pricing (such as yield spread premium)…it’s become a real dirty word and that’s really too bad.   Rebate pricing is how a mortgage originator is able to price a mortgage rate with “zero points” or “zero costs”.  The mortgage originator is not paying for this stuff out of his or her pockets, they’re using the rebate pricing (ysp) paid by lender for offering a rate slightly above par.   Typically pricing a mortgage with zero points means your rate is higher by about 0.25.   It often  makes more sense for the consumer to have a mortgage priced with zero points depending on what their financial plans are.   Paying a point may take years to “break even” on that cost.

This appears to be a preemptive strike from the banks for what may be coming down the line with Congress proposing a bill which eliminates YSP… this is really ludicrious when the 2010 Good Faith Estimate gives the YSP as a credit to the borrower…so why take it away now? 

It’s not that the loan originator is not getting paid, it’s that the borrower’s cost just went up for that mortgage if they’re working for.   The borrower is losing more options for how their mortgage is structured, right down to the pricing.   The borrower should have the choice of having their mortgage priced with or without points…and they currently still do just perhaps not with every lender.

Home Buyers: Please Be Aware of the Owners Policy on the GFE

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HUD had dramatically revised the Good Faith Estimate to a uniform document with summary of fees.  If you compare a GFE issued prior to 2010, one big difference is that buyers will not see a charge for the owners title policy–why? Because they generally do not pay for the owners title policy–the seller does!  Please don’t ask me why this is on the new GFE and why, if it’s not charged in our market LO’s must disclose it…I don’t have an answer…and don’t have the answer for why mortgage originators are held to the 10% tolerance when quoting this fee when it has nothing to do with mortgage origination.

The fee for an owners title insurance policy is much more than that of a buyer’s policy. Typically the Seller pays for the owners policy and the buyer pays for the lenders policy which has a reduced rate (simultaneous issue). There are also various coverages available with an owners policy and the coverage that is required should be specified in the purchase and sales agreement.

Here’s an example of title fees for the owners (seller) and lenders (buyer) policies based on a $500,000 sales price (FYI LO’s: the owners policy is based on the sales price not the loan amount) and a loan amount of $400,000. Examples below do not include sales tax.

FEES BELOW NOT SHOWN ON GFE PRE-2010

Homeowners Policy (1998 ALTA): $1,192
2006 Standard Owners Policy: $1,053
Extended Coverage Owners Policy: $1,937 (not commonly requested)

 ALWAYS SHOWN ON GFE (because the buyer pays for it)

Lenders Policy (simultaneous issue): $647

So with a purchase price of $500,000 and a loan amount of $400,000; I would disclose $647 plus tax for my estimated title insurance fee for the borrower on my GFE–both now and before 2010.  Now I need to add over $1000 to this scenario on my good faith estimate even though the buyer isn’t paying for it…my closing costs on a purchase appear $1000 higher!  

And to add insult to injury, the title owners policy is included in HUD’s 10% tolerance bucket of charges.

The Talon Group offers this tip to mortgage originators quoting an owners title insurance rate (when you don’t know what the specified coverage will be on the purchase and sales agreement):

Lenders should quote the 1998 ALTA Homeowner’s Policy rather than the less costly Standard Owner’s Policy in block 5 of the GFE. The local Purchase and Sale Agreement defaults to the Homeowner’s Policy because of it’s superior title coverage. There is as much as a 12.5% difference in price between the two policies.

The lender’s policy (and escrow/settlement charges) are included in Block 4 of the Good Faith Estimate and the owners policy is included on Block 5.

According to HUD’s RESPA FAQ’s last updated December 30, 2009:

Q&A #3 page 27:

If the borrower requests an enhanced owner’s title insurance policy or an endorsement to an owner’s title insurance policy after the loan originator issues the GFE, the loan originator may choose to treat such a request by the borrower as a changed circumstance.  The loan originator may then choose to provide a revised GFE to the borrower to disclose the increased charges.  If the increased charges do not exceed tolerances, the loan originator may opt not to issue a revised GFE.

I take this as saying that if the borrower decides they want more expensive coverage after I have issued a GFE and I do not re-disclose the cost difference and it exceeds the 10% tolerance, I just paid for the difference…even though it’s a seller cost!

With a purchase transaction, if the borrower accepts the title insurance company as selected by the real estate agent or seller (assuming the company is not on my “list of providers”), then there is no tolerance as HUD views this as the borrower selecting the service provider (same is true with escrow companies).    Regardless, even quoting from my preferred provider, the fees on my good faith estimate look $1000 higher based on this scenario. 

At least until consumers and mortgage originators are accustomed to using the new GFE (and unless HUD makes additional changes) this is going to take some getting used to!

For the record, this post all of my posts are my interpretation and my opinions–this is not a substitute for your legal staff or your compliance department!

It’s a Wrap…the New vs Old Good Faith Estimate

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NOTE:  This is just my interpretation of the new GFE and I am only a mortgage originator and blogger. This post is just based on my opinion.   Please check with your compliance department at your mortgage company to learn about the GFE requirements.

This the last post in my series of four on comparing HUD’s new Good Faith Estimate to our existing GFE, which is retired on December 31, 2009.   I actually feel like I’m losing an old friend that I’ve relied on for years to help educate consumers.    HUD’s new GFE does not disclose the total monthly mortgage payment (PITI), seller closing costs credits or funds needed for closing.

This is a snapshot of the bottom portion of my current Good Faith Estimate which shows the total payment (upper left corner), closing costs summary and funds needed for closing.

Transactionsummary

HUD obviously feels this type of detail must be overwhelming to the average consumer.  But why total payment, seller closing costs credits and funds needed for closing are missing leaves me scratching my head.

Below is HUD’s summary of closing cost with the new Good Faith Estimate.

summarycharges

As compared to our “old” GFE (below) which clearly outlines the sales price, closing costs and prepaids, the seller credit of $7,500, credit to the buyer for their earnest money deposit of $1,500 and the financed upfront FHA mortgage insurance.   The buyer can also see the funds that are estimated to be due at closing on the purchase of their home.  

FundsNeeded

This is for the same transaction that I’ve been using throughout this series. 

Here is the closest thing you can find resembing a mortgage payment on the new GFE:

newpimi 

This figure above does not include property taxes or home owners insurance which will be included in the borrowers monthly mortgage payment.

Here’s a close up of the mortgage payment on my old GFE:

oldPITI

This actually shows the total mortgage payment and will factor in the monthly home owners association dues (even though it is not a part of the actual mortgage payment).

It’s a pity that PITI has been removed from the new GFE.

For more information about the new Good Faith Estimate, you can start reading HUD’s newly revised 49 page: Shopping for your Home Loan. The GFE review starts on page 11.

Hey home buyers and/or borrowers: which good faith estiamte do you preferred? HUD’s “new and improved” three page document with lump sum totals including closing costs you don’t pay for? Or the existing (for a few more days) GFE that resembles your estimated HUD that you’ll see at closing with details on the specfic closing costs, total monthly mortgage payment and funds due at closing?

New vs Old Good Faith Estimate Continued…

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NOTE:  This is just my interpretation of the new GFE and I am only a mortgage originator and blogger. This post is just based on my opinion.   Please check with your compliance department at your mortgage company to learn about the GFE requirements.

Previously, I reviewed page 1 of the 3 page good faith estimate which will be required for all residential mortgages effective with applications as of January 1, 2010.   We’re moving on to page 2 of the new good faith estimate and comparing it to the old Good Faith Estimate that I (and many) have used.

The current good faith estimate, which is to be retired at the end of this year, provides a line itemization of closing costs.  
ECC

Section 800 of the dear old good faith estimate for the most part contains what the new good faith estimate is now on page 2 of the HUD’s Good Faith Estimate.

What used to be line itemed in Section 800 of the old GFE is now for the most part, lumped together under “Your Adjusted Originated Charges” less third party fees. When you look at the current (soon to be retired GFE); I’m basing this on lines 801, plus lines 811 – 814 even if the seller is paying the fees…by the way, there is no place on the new Good Faith Estimate that shows the seller credit…but if you don’t disclose the funds for closing, I guess HUD feels that point is moot!

Block one of the Good Faith Estimate cannot change–once a GFE is issued, unless it qualifies for a “changed circumstance” or the GFE “expires”, the Mortgage Originator is bound.   A “changed circumstance” is not as easy as it sounds…and warrants a post of it’s own.   They must be documented on only the fee impacted by the changed circumstance is allowed to be modified.  Mortgage originators should be prepared for banks/lenders to balk at your explanation of the changed circumstance–expect to have to “eat the cost” difference if the bank doesn’t “buy it”.

Quick reminder, this post is just to compare a specific FHA scenario based on a current and the new GFE–so if a LO has discount points or YSP, this would look different and it will take a follow up post to review it.

The next section on the new GFE is “Your Charges for All Other Settlement Services“.

YourChargesforAllOtherSettlementServices

Block 3 of this section are items the lender selects and that the borrower cannot. Since this scenario is an FHA loan, it includes the FHA upfront mortgage insurance. This section is subject to the 10% tolerance in aggregate “bucket”. On my old GFE, comparing estimate to estimate, these specific fees would be found on lines 803, 809 and 902.

Block 4 is for the lenders title insurance policy and the escrow fee/settlement services. They’re now lumped together. It doesn’t matter if it’s the same company or not. If the borrower selects a provider from the list provided by the lender, it’s subject to the 10% tolerance. If the borrower deviates from the list, there is no limit to how much the fees can adjust. If the lender does not provide a list, there is zero tolerance from the good faith estimate to the HUD-1 Settlement Statement. I suspect that some big banks will use this to try to capture title or escrow business. On my old GFE, these fees were shown on lines 1101 and 1108.

Block 5 is a doozie. HUD does a great job contradicting themselves with whether or not the owners title insurance policy fee needs to be disclcosed here. In Washington State, this is typically a fee charged to the seller. Yet it really appears as though HUD wants this cost disclosed to the buyer EVEN IF THEY’RE NOT PAYING IT. This fee is not on the old GFE.

Block 7 are the recording fees and is shown in section 1200 of my GFE. Even recording fees that the seller typically pays may be disclosed here. This is shown in section 1200 of my old GFE.

Block 8 is for “excise tax” and it’s my understanding that the only county in our area where the buyer actually pays a portion of excise tax is San Juan County. If I’m wrong–please correct me!

Old/existing Good Faith Estimate below shows the items the lender requires to be paid in advance (prorated interest, 1 years home owners insurance for a purchase and the upfront FHA mortgage insurance) and the left and what is required to start the reserve account.  NOTE:  this is my personal GFE (generated from Encompass).

Reserves_Prepaids

Block 9 discloses what is charged to start your escrow reserve account (line 1001 and 1004 on my old GFE).

Block 10 is the prorated interest based on the day the loan is closing (line 901 of my old GFE).

Block 11 is the estimated (in this case) annual home owners insurance premium which is disclosed on line 903 of my old GFE.

If you add the “adjusted origination charges”  (Box A)  to the “your charges for all other settlement services” (Box B), you come up with a “total estimated settlement charges” (which also includes the owners title insurance policy which is not paid for by the buyer in these parts).    Again, this does not factor in any seller credit–the only credit factored into the new GFE is in the form of YSP (yield spread premium).

summarycharges

I’m going to miss you, Old Good Faith Estimate!   The two things home buyers ask most from the lender (after what’s your rate) is “how much is my payment going to be” and “how much money do we need for the down payment and closing costs”.   HUD’s new GFE answers neither.

New vs Old Good Faith Estimate

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NOTE:  This is just my interpretation of the new GFE and I am only a mortgage originator and blogger. This post is just based on my opinion.   Please check with your compliance department at your mortgage company to learn about the GFE requirements.

In a matter of days, all residential mortgage originators (we’re actually referred to as MLO’s now:  Mortgage Loan Originator) will have to adapt HUD’s new Good Faith Estimate…warts and all.   I promised Ardell that I would show her a comparison between the old and new GFE.   I won’t be covering everything line by line on HUD’s new page Good Faith Estimate–I’ve done that all ready…so some parts of this three page extravaganza may be missing from this post.

Page 1

Important Dates (click on image to for better viewing)

ImportantDates

This is a new feature to the good faith estimate.   GFE’s now have an expiration date if not acted upon by the borrower and certain costs are guaranteed for specific time periods.   Sounds great–EXCEPT I think you’ll find many MLO’s not willing to prepare a good faith estimate to the average “rate shopper” since HUD has spelled out that IF a good faith estimate is provided, it’s presumed that the mortgage originator has enough information to have a complete loan application.

In addition, line two states that MLO’s are held accountable for the third party closing costs they are using in their quote for 10 business days.   So if I rely on an escrow rate sheet from Tim’s company, and they happen to adjust upward during those 1o business days and the consumer decides to proceed with the rate quote, I could potentially be on the hook for the difference.   In reality, there is no way for a MLO to guarantee a third party fee unless they are willing to “eat the difference”.

Summary of your loan (click on image to for better viewing)

SummaryOfLoan2

This section gives you the basics of your loan.   For this estimate, I’m using an FHA loan and as I mentioned in my previous post, some of the details may be wrong.  For example, this references “initial loan amount”…as I write this post, I’m not 100% sure if this should be your base loan amount with an FHA loan or total loan amount (base plus the upfront mortgage insurance which may or may not be financed–perhaps that’s the fine detail: whether or not the borrower finances the FHA upfront mortgage insurance)…I’ve checked HUD’s FAQ’s (all 51 pages based on the latest update last month) and cannot see where this is addressed… anyhow… I went with base loan amount since other closing costs (such as origination fee) are factored off that figure.

Everything is pretty self explanitory…my issue with this section is the fourth line down:

“Your monthly mortgage amount owed for principal, interest, and any mortgage insurance is: $1648.31”  

This payment does not include taxes or insurance.  On the old/existing GFE, my clients actually see a total payment (PITI) of $2008.21.   PITI is gone on the new Good Faith Estimate…I don’t who’s bright idea at HUD this was…now we have PIMI:  principal + interest + mortgage insurance even though the borrower still makes the PITI payment.

Even the next section, escrow account  information, restates the “PIMI” where the GFE could have at least stated what the estimated escrow payment (real estate taxes insurance) would be so that consumers could add these two figures together to come to their actual mortgage payment…but no…that might make a bit of sense.

The bottom of page one refers to closing costs that are shown on page 2…which I will address on the next post.

Ring Out the Old, Ring in the New Good Faith Estimate

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Today between “actual work” Ardell and I were tweeting (on Twitter of course) about the new Good Faith Estimate.

ardell_001

During our dialogue, I offered to share a comparison of our exiting Good Faith Estimate, which we have around for loan applications effective ten more days before we are required to use HUD’s new  Good Faith Estimate.

ardellgfe

The new estimate is highly controversial and you may hard pressed to find many mortgage originators who like it.  I am for having an uniform document for consumers to use when selecting their mortgage–I don’t think this will do it.  I’ll get into more of that later (perhaps on another post if this one rambles too long).   Right off the bat, there are serious flaws with HUD’s attempt at improving the GFE:

  • There is no “total mortgage payment” or PITI (sum of principal, interest, taxes and insurance).  The closest thing we have PIMI (principal, interest and mortgage insurance).
  • There is no section for total funds due for closing.
  • There is no section for seller credit.
  • The owners title policy must be shown on the Good Faith Estimate even though in our area, it is customary for the seller to pay for it.
  • Loan originators who prepare a good faith estimate for a consumer are “presumed” to have obtained enough information for a loan application and are therefore bound by certain costs (including third party) for a specific time period.

This comparison is for a purchase using an FHA insured loan for financing.  I have to admit, I’m not 100% certain if the loan amount on the new GFE is suppose to be the base loan amount or the base loan amount plus the financed upfront mortgage insurance premium–I can’t find that addressed anywhere in HUDs 51 page FAQs on this new document.  I’ll correct this post if it turns out I’m wrong (I’m just using the base loan amount).

The new Good Faith Estimate consists of three pages, HUD added two additional pages even though this is suppose to streamline the process and make things easier for consumers to understand.   I’m not going over it line by line in this post, I am going to review what I feel is most important…and I’ve just decided this will be series (since I can see I’ve all ready rambled too long).

Watch for part 2 where I cover page 1 of HUD’s new Good Faith Estimate…coming soon–January 1, 2010!

NOTE:  This is just my interpretation of the new GFE and I am only a mortgage originator and blogger. This post is just based on my opinion.   Please check with your compliance department at your mortgage company to learn about the GFE requirements.