A few weeks ago, a home buyer shared some pricing scenarios a fellow mortgage originator was offering to them.
Scenario 1 looks like the mortgage originator wants the borrower to believe they’re only making a half point in loan fees and the borrower is paying an additional 0.625% to buy down the rate further. How the borrower should look at this is that if they select Scenario 1, they are paying 1.125% to have 4.50% for a rate. (This was provided to me in mid-March and does not reflect current pricing).
On most current Good Faith Estimates have the following lines designated for “points”
- Line 801 = Loan Origination
- Line 802 = Loan Discount
- Line 808 = Loan Origination if you’re a Mortgage Broker
In all my years (9 as of April Fools) of mortgage originating, I’ve never seen an estimate with 0.5% origination and 0.625% discount points. It just seems silly to me. This really illustrates why a consumer should just add up the points paid regardless of if they are entered as discount or origination–if you’ve paid either, you’re paying points. In fact, as I’m sure I’ve mentioned before (but it’s worth repeating) you should add up all closing costs disclosed in Section 800 of your Good Faith Estimate to see what you are paying for interest rate. Some lenders may have additional fees, such as processing, underwriting, funding…etc. Unfortunately, APR is not a fool proof way to compare interest rates.
While I’m dishing out advice, selecting a Mortgage Professional by interest rates–when we are currently receiving a new rate sheet ever 5 hours is crazy. Odds are, you’re not comparing apples to apples and rate quotes don’t mean anything unless you’re locking in at that moment.
In this current market, make sure:
- Your loan is locked for enough time to accomodate your closing. A 30 day quote on a 35 day closing isn’t going to cut it.
- Will your Mortgage Originator honor the closing costs shown in Section 800 of the Good Faith Estimate?
- Will your lender be able to provide loan documents to the escrow company earlier enough to accomodate the escrow company so they can provide you with an estimate HUD to review prior to signing? (You need to request this, if you want to have your estimated HUD-1 Settlement prior to your signing appointment–it’s generally not requested by borrowers).
I agree with you on the pricing trick…..good catch and great advice. That trusted ‘banker’ would have made a nice commission on that deal. I’m not sure if this is still allowed but bank originators are allowed to charge origination fee, discount fee, and still receive YSP (without disclosing the YSP)….crazy. True brokers have to disclose more in terms of fees they make yet get blamed for overcharging clients. Wait till 2010 when YSP must be credited back to the client. The avg. person will get even more confused with how originators twist and sell their pricing.
Rhonda:
I do not see a trick. Of course, we have inadequate information to know if there is trick, since we do not have the rate sheet that GFE was based upon, nor do we know if the GFE would have been honored.
How can we know that the amount entered on line 802 did NOT go to obtain a price below par, without the rate sheet that it is based upon?
Rule #1. If a loan originator (wholesale) puts any amount on line 802 (Loan Discount) it must be proven to go to the lender, and not to the broker, for a rate below par. If the broker were to keep that amount, and the file were audited, the broker would have to return that amount to the borrower, and possibly face other fines.
I have created, and closed loans with a 0.5% loan origination fee, and with some discount points going to the lender to buy down the rate further. There was nothing tricky about that, just compliance with the law.
I have also entered flat fees in line 800 or line 808, and added discount costs, where there was a a discount fee being paid to lower the rate (below par, of course)
It is illegal for a mortgage broker to put a figure on line 802 and keep it. It must go to the lender. It is also illegal for a correspondent lender to put a figure on line 802, without proof that the amount actually did go towards buying down the rate. That’s why we have to keep the rate sheets and lock info in the files for compliance.
I generally agree with your other points, especially that rate quotes don’t mean anything unless you are locking at that precise moment.
Rhonda:
I do not see a trick. Of course, we have inadequate information to know if there is trick, since we do not have the rate sheet that GFE was based upon, nor do we know if the GFE would have been honored.
How can we know that the amount entered on line 802 did NOT go to obtain a price below par, without the rate sheet that it is based upon?
Rule #1. If a loan originator (wholesale) puts any amount on line 802 (Loan Discount) it must be proven to go to the lender, and not to the broker, for a rate below par. If the broker were to keep that amount, and the file were audited, the broker would have to return that amount to the borrower, and possibly face other fines.
I have created, and closed loans with a 0.5% loan origination fee, and with some discount points going to the lender to buy down the rate further. There was nothing tricky about that, just compliance with the law.
I have also entered flat fees in line 800 or line 808, and added discount costs, where there was a a discount fee being paid to lower the rate (below par, of course)
It is illegal for a mortgage broker to put a figure on line 802 and keep it. It must go to the lender. It is also illegal for a correspondent lender to put a figure on line 802, without proof that the amount actually did go towards buying down the rate. That’s why we have to keep the rate sheets and lock info in the files for compliance.
I generally agree with your other points, especially that rate quotes don’t mean anything unless you are locking at that precise moment.
And yes, mortgage pricing is silly, and needlessly complicated.
But we have no choice but to comply with the law, which is often silly and complicated.
Roger is correct. The confusion is created by calling things “points” when they’re not points. Unfortunately, HUD in their great wisdom, allows this.
801. Loan Origination fee (sometimes called points)
This is the fee the borrower pays the LENDER. A broker by definition is not a lender.
802. Discount fee (sometimes called discount points.)
This is the fee the borrower pays to reduce the interest rate.
808. Mortgage Broker Fee
This is the fee the borrower is paying a third party loan originator who is license under a broker.
To call all of these lines “points” is confusing. Behold the HUD Handbook: Your Guide to Settlement Costs:
http://www.hud.gov/offices/hsg/sfh/res/sfhrestc.cfm
This booklet is to be given out to all consumers within 3 days of the date of the application, along with the GFE and TILA. This booklet explains how to read a GFE.
Roger is correct. The confusion is created by calling things “points” when they’re not points. Unfortunately, HUD in their great wisdom, allows this.
801. Loan Origination fee (sometimes called points)
This is the fee the borrower pays the LENDER. A broker by definition is not a lender.
802. Discount fee (sometimes called discount points.)
This is the fee the borrower pays to reduce the interest rate.
808. Mortgage Broker Fee
This is the fee the borrower is paying a third party loan originator who is license under a broker.
To call all of these lines “points” is confusing. Behold the HUD Handbook: Your Guide to Settlement Costs:
http://www.hud.gov/offices/hsg/sfh/res/sfhrestc.cfm
This booklet is to be given out to all consumers within 3 days of the date of the application, along with the GFE and TILA. This booklet explains how to read a GFE.
I once wanted to call my loan company Pointless Lending, but my partners thought it was too frivolous at the time.
In a perfect world, lines 800 and 808 would be flat fees, and ONLY line 802 could be called points, since it actually does completely depend on the loan amount.
Line 808 has to be paid to a mortgage broker, who may then pay it, or some portion of it, to a loan originator. Lenders and escrow companies do not directly pay loan originators.
I once wanted to call my loan company Pointless Lending, but my partners thought it was too frivolous at the time.
In a perfect world, lines 800 and 808 would be flat fees, and ONLY line 802 could be called points, since it actually does completely depend on the loan amount.
Line 808 has to be paid to a mortgage broker, who may then pay it, or some portion of it, to a loan originator. Lenders and escrow companies do not directly pay loan originators.
Brad is correct–this GFE is from a mortgage banker.
I really think that lines 801, 802 and 808 should be reduced to one line. Or at least have line 801 corrected to be fees paid to the loan originator (to clear up the mortgage broker not being a lender issue).
Brad is correct–this GFE is from a mortgage banker.
I really think that lines 801, 802 and 808 should be reduced to one line. Or at least have line 801 corrected to be fees paid to the loan originator (to clear up the mortgage broker not being a lender issue).
Even HUD’s description jumbles the origination/discount points together:
Roger, today at Mortgage Porter for a 30 year fixed, I quoted 4.625 with one point and 5.000% at zero points.
Would the 1 point for 4.625% be a discount point since the rate is lower than 5% with 0 points?
Roger, today at Mortgage Porter for a 30 year fixed, I quoted 4.625 with one point and 5.000% at zero points.
Would the 1 point for 4.625% be a discount point since the rate is lower than 5% with 0 points?
Once again, thank you Rhonda.
eDamn! eDamn since this is online.
5% at 0% is FABULOUS!!! I’ll just say this one more time, but when I started in real estate, at age 3, in 1983, interest rates were 17.5% … and no one then thought we’d ever, ever, ever see lower than 10 or 12%.
Once again, thank you Rhonda.
eDamn! eDamn since this is online.
5% at 0% is FABULOUS!!! I’ll just say this one more time, but when I started in real estate, at age 3, in 1983, interest rates were 17.5% … and no one then thought we’d ever, ever, ever see lower than 10 or 12%.
Thanks, Leanne. The consumer who shared this GFE w/me actually thought they were only paying 0.625 for scenario 1… when in fact, they’re paying 1.125% when you add the half point for the origination fee.
The truth of the matter is what bean counters call substance over form. Regardless of the label for the cost of obtaining financing be it loan fee, discount fee, processing fee, etc, all costs directly related to obtaining financing are prepaid interest. The loan’s note rate or interest and all direct costs are used to calculate the effective interest rate or the true cost of financing through discounted cash analysis. The APR is closest calculation to the effective interest rate. I believe Jillayne told me a few years ago that APR is calculated with slight differences throughout the country. I have never researched further, so I do not know how much variation exists.
Using discounted cash flow analysis to calculate the effective interest rate (and probably APR) allows for an absolute apples to apples comparison of the cost of financing across various pricing schemes.
Rhonda, actually, I was referring to one of your comments where you said you’d quoted 5% at zero points that day … that is just a fantastic rate.
5% at 0 points a fantastic rate? Good Lord. I have four former clients who skipped payments for 4-5 months on a Wells Fargo 1st and are now locked at 4.0% on a 40 year(was a 30 year)with no appraisal and no fees what-so-ever. **Get this** two of the properties are rentals..YES RENTALS!
In addition to that these clients stopped paying on their He-locs and got the payments chopped in 1/2. They owed about 60k and their payment is now 160.00 instead of 340.00.
They take the credit hit but as they told me “Were saving 1000.00 a month and were able to put nearly 10k in the bank for reserves!” “Ray if I didn’t do it I would be an even bigger idiot then the day I bought the home.”
None of them are too concerned about their credit hit for they say they are UPSIDE down in their homes and couldn’t get ANY credit if they tried. This allowed them to get 10k + and help their family by doing the “unthinkable.”
Fantastic rate 5%? I do not judge. I just report and continue to be amazed. We are in VERY different times and I suggest Mtg and Real Estate professionals advise all our clients of what is TRULY being offered.
5% at 0 points a fantastic rate? Good Lord. I have four former clients who skipped payments for 4-5 months on a Wells Fargo 1st and are now locked at 4.0% on a 40 year(was a 30 year)with no appraisal and no fees what-so-ever. **Get this** two of the properties are rentals..YES RENTALS!
In addition to that these clients stopped paying on their He-locs and got the payments chopped in 1/2. They owed about 60k and their payment is now 160.00 instead of 340.00.
They take the credit hit but as they told me “Were saving 1000.00 a month and were able to put nearly 10k in the bank for reserves!” “Ray if I didn’t do it I would be an even bigger idiot then the day I bought the home.”
None of them are too concerned about their credit hit for they say they are UPSIDE down in their homes and couldn’t get ANY credit if they tried. This allowed them to get 10k + and help their family by doing the “unthinkable.”
Fantastic rate 5%? I do not judge. I just report and continue to be amazed. We are in VERY different times and I suggest Mtg and Real Estate professionals advise all our clients of what is TRULY being offered.
One last point…………..In my opinion all these homes are going back anyway. Not a matter of IF…………..Just when!
The Fed is going to have to do more to slow down the number of homes that become REOs through encouraging short sales without recourse, loan modifications, etc. Each additional new REO requires a bank to keep additional cash on hand. If the bank can’t raise the cash to meet banking deposit requirements, then the FDIC will come knocking just before closing on a Friday night. This is especially problematic for for the local banks.
Ray, I’m hearing of clients who have contacted Wells and other banks and are being told “no, you make too much money” or “call is back in two months”.
I’d like to know what (cherry picking) system they are using to determine who they will help and who they will not.
One person that emailed me yesterday, Wells told them to call back in a couple months, has an FHA underlying mortgage–they can do a Streamline refinance as long as they have not been late on their mortgage in the last 12 months and their credit scores are 620 or better.
Consumers do need to investigate all options…right now, banks are still trying to figure it out. And I can’t imagine how inundated they will become (are) with the Affordable Home refinance (some consumers can use any mortgage originator others are forced to use their mortgage servicer/bank)…Chase is all ready taking forever to process subordinations (I’m at 3 months for a couple refi’s I’ve been working on).
Ray, I’m hearing of clients who have contacted Wells and other banks and are being told “no, you make too much money” or “call is back in two months”.
I’d like to know what (cherry picking) system they are using to determine who they will help and who they will not.
One person that emailed me yesterday, Wells told them to call back in a couple months, has an FHA underlying mortgage–they can do a Streamline refinance as long as they have not been late on their mortgage in the last 12 months and their credit scores are 620 or better.
Consumers do need to investigate all options…right now, banks are still trying to figure it out. And I can’t imagine how inundated they will become (are) with the Affordable Home refinance (some consumers can use any mortgage originator others are forced to use their mortgage servicer/bank)…Chase is all ready taking forever to process subordinations (I’m at 3 months for a couple refi’s I’ve been working on).
Michael, you can ask 5 LO’s to provide you the same rate quote w/same closing costs and you’ll probably get 5 different APRs. There are too many moving parts and potential to manipulate the figures to rely on it for “rate shopping”. (Not to mention rate shopping in a market where there may be 3-5 rate changes per day just doesn’t make sense).
Seems to me these five LOs are violating the FDIC Law, Regulations, Related Acts, Section 6500 Consumer Protection, Part 226, Regulation Z (otherwise known as TILA) enforced by the Comptroller of Currency Administrator of National Banks.
Is the Fed definition of APR open to interpretation? Is there an enforcement issue? Is there an education issue to acquire the skill set and understanding of proper discounted cash flow techniques?
There aren’t any solid definitions as to what costs are included in the APR which is why it is worthless. In addition, APR assumes you are keeping your home for 30 years which skews the number. NO ONE keeps a mortgage 30 years. Finally, the APR doesn’t work on ARMs since no one knows what the index used to calculate the rate will be in the future.
APR is an attempt to make a multi dimensional decision one dimensional.
Picking mortgage based solely on the cheapest is the fastest way to shoot yourself in the foot.
There aren’t any solid definitions as to what costs are included in the APR which is why it is worthless. In addition, APR assumes you are keeping your home for 30 years which skews the number. NO ONE keeps a mortgage 30 years. Finally, the APR doesn’t work on ARMs since no one knows what the index used to calculate the rate will be in the future.
APR is an attempt to make a multi dimensional decision one dimensional.
Picking mortgage based solely on the cheapest is the fastest way to shoot yourself in the foot.
I am sure there is resistance to change to a unified standard from banks as it would cut down on the ability to manipulate rates with creative accounting for marketing.
It almost sounds as if potential homebuyer’s need to bring their CPA along.
Michael:
It is just impractical. There are a lot of fees that banks don’t even know accurately at the time of application. APR is a good tool, but it shouldn’t be the only criteria that is used when selecting a mortgage. Unfortunately, banks have trained consumers to only look at rate which is why so many people get burned especially in this new market we are in where underwriting guidelines make the difference between an approval and denial.
Rate quotes are NOT a commitment to lend money. Any LO can pull rates out of their you know what. They can also lock rates. However, it doesn’t mean the loan will actually close. You have to depend on the expertise of the person you are dealing with to ensure you are getting good guidance and the loan actually makes it to the closing table.
Rhonda:
Re#8
You asked:
Would the 1 point for 4.625% be a discount point since the rate is lower than 5% with 0 points?
Sorry to answer so late, but my notify is not working for some reason.
Still insufficient information to answer correctly. It requires the rate sheet you are quoting from to give the correct answer.
Assuming you quote the rate as a correspondent lender, where there is no YSP disclosure required, you can certainly put the 1% on the loan origination line #801.
However, if you wished to put the 1% on line #802 discount points line, you would need to show the auditor the rate sheet that this was quoted from, with evidence that the 4.625% was a direct result of a payment to the originating lender, and achieving a “below par” rate.
The same rule holds for banks. If they wish to put any amount on line #802, they must be able to demonstrate that that payment reduced the interest rate below par, and was not just some way to blithely increase the fee.
So the short answer for any LO is: Beware of putting something on line 802, unless you have evidence in the file that demonstrates that fee is going to pay for BELOW par pricing.
It is not sufficient to simply have a lower rate. Here’s a scenario that would SEEM legal, but is not.
Simplified Fictional Rate sheet
5.5% pays LO 1% rebate
5.00% pays LO 0.0 rebate
4.5% has cost of 1 discount pt paid to lender
Assuming LO wants to make 1 pt, you could say that 5.5 is with no pts (fee coming from lender) and 5% is with one point, and 4.5% is with 2 points.
LO sends a GFE at 5%, and puts the 1% fee on line 802, because it “lowers the rate” from 5.5%.
Wrong. The 1% fee must go on either line 801 (if bank, mortgage bank, or correspondent lender) or 808 (if brokered)
However, if the LO sends out a GFE at 4.5%, with 1% on line 802, AND 1% on either line 801 or 808, THAT is correct.
The rules are inadequate to truly help borrowers make effective decisions, and are constantly jiggered to help whomever pays the most to lobby the rulemakers, under the guise of helping the borrowers.
The best we LO’s can do is to explain it as clearly as possible, and follow the rules. Sadly, no one in the regulatory arena seems to want to hear from us about how to improve and clarify the rules, and worse, many lenders and LO’s exploit the complexity of the rules to benefit themselves, at the expense of borrowers.
Russ, I always like your common sense comments. You truly “tell it like it is”.
Rhonda, thanks as always for getting the conversation started and keeping it real.
Rhonda:
Re#8
You asked:
Would the 1 point for 4.625% be a discount point since the rate is lower than 5% with 0 points?
Sorry to answer so late, but my notify is not working for some reason.
Still insufficient information to answer correctly. It requires the rate sheet you are quoting from to give the correct answer.
Assuming you quote the rate as a correspondent lender, where there is no YSP disclosure required, you can certainly put the 1% on the loan origination line #801.
However, if you wished to put the 1% on line #802 discount points line, you would need to show the auditor the rate sheet that this was quoted from, with evidence that the 4.625% was a direct result of a payment to the originating lender, and achieving a “below par” rate.
The same rule holds for banks. If they wish to put any amount on line #802, they must be able to demonstrate that that payment reduced the interest rate below par, and was not just some way to blithely increase the fee.
So the short answer for any LO is: Beware of putting something on line 802, unless you have evidence in the file that demonstrates that fee is going to pay for BELOW par pricing.
It is not sufficient to simply have a lower rate. Here’s a scenario that would SEEM legal, but is not.
Simplified Fictional Rate sheet
5.5% pays LO 1% rebate
5.00% pays LO 0.0 rebate
4.5% has cost of 1 discount pt paid to lender
Assuming LO wants to make 1 pt, you could say that 5.5 is with no pts (fee coming from lender) and 5% is with one point, and 4.5% is with 2 points.
LO sends a GFE at 5%, and puts the 1% fee on line 802, because it “lowers the rate” from 5.5%.
Wrong. The 1% fee must go on either line 801 (if bank, mortgage bank, or correspondent lender) or 808 (if brokered)
However, if the LO sends out a GFE at 4.5%, with 1% on line 802, AND 1% on either line 801 or 808, THAT is correct.
The rules are inadequate to truly help borrowers make effective decisions, and are constantly jiggered to help whomever pays the most to lobby the rulemakers, under the guise of helping the borrowers.
The best we LO’s can do is to explain it as clearly as possible, and follow the rules. Sadly, no one in the regulatory arena seems to want to hear from us about how to improve and clarify the rules, and worse, many lenders and LO’s exploit the complexity of the rules to benefit themselves, at the expense of borrowers.
Russ, I always like your common sense comments. You truly “tell it like it is”.
Rhonda, thanks as always for getting the conversation started and keeping it real.
Rhonda:
Why did my setting change to moderated?
I don’t think I’ve tossed any bombs in the room….Maybe it’s the length?
Kind of a pain, as it doesn’t allow for edits after posting.
Rhonda:
Why did my setting change to moderated?
I don’t think I’ve tossed any bombs in the room….Maybe it’s the length?
Kind of a pain, as it doesn’t allow for edits after posting.
Roger, I haven’t done anything to your settings and I’m not aware of any changes. I do think the length of your comment could possible trigger the “moderation”.
OK….I’ll see if I can shorten the comments..haven’t been very successful at that 🙂
Nope, still moderated…
Sorry Roger–it’s not me. Maybe email Dustin directly would be better than commenting all over my post. 😉 I have no idea why you’ve gone into the “moderation” category.