As a Correspondent Lender, it’s difficult for me to call myself a mortgage broker or a mortgage banker since I’m an odd [photopress:scrooged.jpg,thumb,alignright]mix of both. I’m sure my sister-in-law who happens to be the President of our company would prefer to say the “best of both worlds” and she could be right. This is not what this is post is about. As a correspondent, we work with about 70 or so different lenders and all of their guidelines; the main difference between us and a broker is that we close in our credit line (more like a bank). Although we process, underwrite and draw loan docs at our office, we still get to react to what our lenders send us as far as ever changing guidelines. Here is one example.
At 4:45 p.m. today I received a memo from one of our lenders dated today stating important changes effective tomorrow. I’m honestly not sure if this lender operates based on west or east coast times. The memo states:
[Major Lender] is deeply committed to achieving two extremely important short-term goals:
1) Responding to the current market turmoil in a manner that ensures continued strength and prosperity.
2) Communicating these changes in a manner that reduces confusion and allows you to focus more time and energy on your customers.
As new information is processed regarding loan credit performance, we all must be prepared to react quickly and decisively to eliminate the problem areas….This announcement is the result of feedback received from our investors and has our own analysis of the guideline characteristics that are driving under-performance of some loans, and an exhaustive project involving all areas of [Lender] to find opportunities to preserve the intended value proposition of our products while solving the specific credit problem.
We have new memos constantly being issued per each individual lender we work with regarding what loans they’re wanting and not (what their new guidelines are). We’re going through another “tightening” with underwriting. Here are a few samples of what I’m witnessing from various lenders:
- Credit based pricing all ready in effect for Fannie/Freddie (conforming) loans. (Some banks are taking advantage of the circumstances and are increasing the rate now. Possibly to re-coup current or future losses).
- Non-conforming mortgages topped out at a 90% total loan to value.
- Stated income and no-income verified mortgages are the ghost of Christmas past.
- 45% debt to income ratios for non-conforming no matter what your AUS (computer response) says.
- Second mortgages are less available (we’ve gone from several lenders offering them to just a couple).
- Bridge loans are less available.
Not all lenders (banks) have the same guidelines so as a Loan Originator who has many lenders to work with, you need to know you client and put on your dancing shoes! As a potential home buyer or someone considering a refinance, the more time you have to work with a Mortgage Professional to get yourself in the best postion to have a mortgage, the better off you will be.
Hopefully FHA will get easier. But we can say good buy to stated income.
Thank you, Rhonda.
As a prospective buyer, this is extremely useful information.
Personally, though, I’m only going to get concerned (for me, that is) when an average score of 720+ with 20% down for a 400K loan is not available, or shooting up in terms of rates. Do you see that as likely, given that this is in the “conforming” category?
I thought that the GSEs would be fine given that they only buy/sell conforming loans, but recent news has me a little concerned. I understand if they put on a couple of extra thousand here and there in fees(which they’ve done) but the availability of loans in that particular market is what has me concerned.
What are your thoughts?
Thanks…
SeattleProspectiveBuyer, based on your scenario, assuming your income and assets can be documented and verified; you should be sitting pretty.
I’m not quite “getting” your second question (I may need more coffee). Can you please elaborate?
One more thing that’s going away is the right to pay your own taxes and insurance (waiving your reserve account). So far, it looks like this will impact subprime first…we’ll see if this creeps over to prime borrowers too.
Personally, I feel that anyone with a credit score below 680 should have an escrow reserve account (not be allowed to pay taxes and insurance on their own).
I also may need more coffee. 🙂
What I’m concerned about is that I’ve read reports of the GSEs losing money due to this “subprime” mess, but my previous understanding was that they only dealt with “conforming” loans and therefore they wouldn’t be affected by all this toxic subprime waste. So if they can lose money on conforming loans, then is it possible they could restrict the market for conforming loans in the future?
I suppose this is already happening in the form of some fees that credit-based pricing that they are initiating. Fees and mild interest rates I can deal with, it’s *availability* of the programs in the first place that I’m more concerned with.
So, my coffee-starved brain is wondering if I should be at all concerned with the availability of a mortgage in the next year or so, given my situation as described above.
Hope that made sense. 🙂
“One more thing that’s going away is the right to pay your own taxes and insurance (waiving your reserve account). So far, it looks like this will impact subprime first…we’ll see if this creeps over to prime borrowers too.”
This bothers me, but not enough to pay more interest over… On my last mortgage they were forever adjusting the monthly amount, informing me of an overage, sending me a check, informing me they were going to raise the amount. It was crazy. Oh well, it’s not a huge concern for me.
GSEs (Fannie/Freddie) are impacted. They dabbled in what may be considered subprime with “expanded approvals”.
Also, you pay more interest (or in fee) to pay your own property taxes. In WA state, it cost 0.25% to waive your reserve account. The LO may or may not tell you this. If it is not disclosed, then it is priced into your rate.
I’ve never understood why people would want to pay their own taxes. The amount of interest earned is neglibile, especially after you factor in having to pay taxes on it. And paying something so sizable every 6 months is a pain.
Now insurance, that’s another matter. That just complicates things, and it’s not like the lender doesn’t get notice if you don’t pay your insurance directly.
Kary:
I usually recommend my client’s pay their own taxes. Most of my clients can usually handle the lump sum payments, so that isn’t a big deal. However, the main reason is because if the banks (or the call center in India for the servicing company) isn’t handling the escrow account, IT IS ONE LESS THING THEY CAN SCREW UP. I have seen too many times where escrow accounts get messed up and it is a PITA to fix.
On my own mortgage, the bank paid the tax bill for my ENTIRE CONDO building out of my escrow account leaving me with an account that was negative $20,000 dollars. It took forever to get it corrected.
Rhonda:
Nice work. I’m surprised that more loan originators are not paying attention to the Fannie and Freddie overlays, it makes a whale of a difference to rate and/or costs. One by one, the lenders are adding them in, soon they will all have them.
As for the confusion regarding the reasons for the increase in rates/costs from the GSE’s (Fannie and Freddie), I think it is because the problem has been conveniently and incorrectly defined in the public arena as strictly a subprime problem, with the blame being put on the adjustable rates.
These ARMs are problems for some, I’m sure, but according to a study at
http://www.bos.frb.org/economic/wp/wp2007/wp0715.htm ,
the ARMS are not the primary cause of the foreclosures. The 2 main causes are subprime mortgages (presumably made mostly to subprime borrowers), and declining property values.
Most subprime borrowers have a documented pattern of not meeting their obligations (forget the reasons, just analyze the data). I cannot really fathom decent originators putting prime borrowers in subprime mortgages, but I cannot find any statistics that document it’s frequency or severity (I’d love to see that study!). Mostly is does not make sense to me from the origination side in a dollars and cents equation, as prime loans pay better.
Declining property values will affect ALL lenders, as it greatly increases the likelihood that the borrower will mail in the keys, according to the logic and belief system of the borrower.
The latest reliable number I have seen regarding mortgage loss write downs was $100 BILLION, and climbing. Chump change to the Bush War profiteers, but in the financial markets that is one serious sum.
Anyways, I enjoy your writing. Keep it up.
PS Why are you overstating your YSP so much?
“As a Correspondent Lender, it’s difficult for me to call myself a mortgage broker or a mortgage banker since I’m an odd mix of both.”
I can help you overcome your difficulty.
The license issued by the state for your company says “Mortgage Broker.”
The individual license you hold says “Loan Originator.” Licensed loan originators work for brokers, not bankers.
Your company is a mortgage brokerage firm with a correspondent line of credit.
Your company is not a bank, but you do have a correspondent line of credit with a bank.
So your company is a broker not a banker.
If you worked for a federal or state chartered bank, that also brokered loans out, then you could call yourself a banker.
Brokers with a correspondent line are generally well regarded within the industry. Other brokers look up to these companies because they often have decades of a solid, proven track record of good service in their community.
Medium to large sized brokers with correspondent lines will likely survive our current mortgage market conditions because they are often FHA approved.
Roger, I’m glad you like the post…you lost me with your PS. It’s very rare that I have YSP since I hardly broker. We close a majority of our loans in our credit line.
Jillayne, thanks for your “technical” answer. I completely understand that I’m licensed and how a correspondent works. 🙂 I’m saying that I don’t relate totally to brokers or bankers. And we are a mix of both. I don’t have the YSP issues (yet I can be paid on the back end just like mortgage bankers-we just don’t disclose it as brokers are being required to) unless I broker a loan; which is not usual these days. Yet, like a broker, I get to work with all the lenders (banks) and their products.
Rhonda:
Sorry, alphabet soup mixup. I meant to say your APRs seem grossly overstated.
I’d like to give you a call next week sometime. I like my broker, but you may be with a better one, offering better rates on your correspondent lines. I never use correspondent, because broker rates are always better, at least where I am, and I never concern myself with showing the YSP, since my net revenues are modest.
You have a nice web-site as well, full of relevant and timely content.
Thanks for fighting the good fight!
Roger, thanks! I think we error on the high side with our APRs which is also why people should not use them to shop. I believe we’re including escrow fees and if I’m not mistaken some lenders do and some don’t.
YSP…APR…SRP…GFE…TIL…it is all soup! 🙂
Hey, guess what?
For the first time ever I showed up on Google, from my comment on your site!
Thanks, I feel famous finally! 🙂
Here’s a 2008 prediction for you.
More independent loan originators (ILO’s) will go from 1099/self-employed to W-2 than ever before!
Here’s why.
Currently, only W-2 employed loan originators can legally do FHA loans. Yes, I know that some LO’s get around this in a variety of ways, but the loopholes are tightening, and the risks of discovery have grown. Flat out, FHA says you not only must be a W-2 employee, but that you cannot be employed (or self-employed) anywhere else in any related business.
FHA loans dwindled from 19% market share in 1996 to 1.9% in 2006, replaced mostly with the expansion of subprime.
Today, most folks think that FHA will expand to it’s former level in 2008, based on the loss of subprime lenders, and the ghastly pricing and guidelines. I think it will exceed it’s former prominence.
The new Fannie Mae/Freddi Mac overlays are much more significant than folks are thinking, and they will drive more borrowers to FHA.
Here’s an abbreviated example:
So, you have a borrower with a 650 FICO that wants to CO refi to 80%. Not a subprime or even Alt A loan, pretty average. Full doc, of course, and wants the safety of a 30 year fixed.
Let’s look at what you could offer them in the post overlay era. I will quote from HSBC (12/29/07), since they have both the overlays and FHA. ALL lenders will have them by Feb 1st 08, most well beforehand.
Conventional, your par rate is 6.75% (w/ 2.0 in hits, 6.75 nets .44 back)
FHA, your par rate is….5.75% w/ .355 back
Of course there are other factors to consider. The FHA loan will have PMI equal to .5 to rate, and will be at least somewhat more expensive in cost. But, the FHA loan has no hits!
So, who would win this deal? The FHA/W-2 ILO, or the conventional ILO? The one with the rate .5 less, that’s who!
The picture looks considerably worse for conventional at anything above 80%, since both would have PMI, and the difference becomes more like 1 percent worse to rate.
Even your Mom wouldn’t stay with your conventional loan on that deal!
The difference is a little less with a 660 FICO, conventional ILO gets to offer a 6.625% w/.375 back.
As long as these differences remain, I would expect to see FHA business to reach 25% of the total, and a mad rush for ILO’s to become W-2 employees, instead of 1099’s.
Of course, the beauty of a prediction like that is that I have no idea how to measure the results (of ILO’s converting from 1099 to W-2)! Maybe I will be able to measure the percentage of FHA loans by the end of the year, but it appears those stats are slow in coming out as well.
Does anyone care to comment on or dispute my assumptions. Honestly, I kind of hope I am wrong. I’d much rather stay 1099!
Welcome to the family Roger! 😉 You’re not the first to say that a rain city guide comment is the fist time they ever noticed they showed up on Google. There is even a contributor or two who started by leaving comments. Then after noticing how well RCG was doing on Google with just comments they asked to come on as full time contributors!
Roger, I begged a 670 conforming conventional refi to let me lock them in today and they did. I believe most of my lenders will be going by the credit score pricing of Fannie Mae/Freddie Mac by the end of this year.
I’m just returning from a dinner with people “in the biz” from Las Vegas and it was very interesting talking about our different markets and what we’re experiencing.
Your pricing I’m just not totally getting (probably because I’m really not a broker)…I think I’ll have to send you an email…as I’ve said, I’ve only worked for one mortgage company which is a correspondent lender (I’m grateful for that but I know no other)..
Rhonda;
Glad you were able to convince your borrower to lock, the changes are real and are definitely going to be in place with all lenders very soon.
I’d be happy to take you on a stroll through broker-world, and show you the sights. That’s been my address for about 3 years. Before that, I was at Countrywide (only one rate sheet to figure out!).
The change was daunting at first, but when I found that I had complete freedom to find my clients the best loan program, with the most advantageous combination of costs and rate for them, I knew I would never turn back.
I have had correspondent lending available to me for about 8 months now, but since it has not been priced as competitive as brokered loans, I have not used them.
I think there are some advatages to correspondent lending, including ease of use, familiarity, non-disclosure of YSP, and possibly pricing (as the correspondent pricing differs from broker to broker, depending on the deal the broker has with the lender, and how much the broker decides to keep).
Even though I am intensely cost driven (on behalf of my clients), I do not necessarily believe it proves that advantageous to me. It is not ALWAYS the customer’s greatest concern.
If fact, I find that many other ILO’s are more successful in this business, because they pay more attention to other areas, possibly with a greater ROI for them. Salesmanship, PR, customer service, successful advertising, knowledgable authority, referral relationships, and a keen attention to trust, are all important to staying in the business.
I close with saying that I have admired the writing in this guide from all of the contributors, and have particularly followed yours (Rhonda) and Jillayne’s columns, as they are closest to my business concerns. I may have a slightly different perspective, but I have found little that I disagree with, and the facts have been generally solid, footnoted, and relevant.
PS, On the APR question, I reran the numbers and I realized you were NOT overstating the APR. The APR rate implies the APR costs are $5,853, and since you are charging $4,000 for a point, the remaining $1,853 looks pretty standard, as some loan costs are inexplicably omitted from the APR calculations, while others are inexplicably included. It actually looks quite reasonable, compared to the bogus APR’s that typically appear in the Seattle Time Mortgage directory.
I’m happy to publicly eat my (erroneous) words any time, but I plan to go on a diet Jan 2, so I’ll have to be more careful in the future! 🙂