How loan originators are compensated and why consumers should care.

Posted on July 6, 2010 by Jillayne Schlicke

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The Merkley Amendment to the Wall Street Financial Reform legislation limits loan originator compensation to no more than 3 percent of the loan amount. If you want to debate the Merkley amendment, please visit this thread or this thread. From the Mortgage Banker’s Association, here is a summary of how loan originator compensation would be limited under the new Dodd-Frank Wall Street Reform Act HR4173

Prohibition on Steering/Loan Originator Compensation – Establishes new anti-steering restrictions for all mortgage loans that prohibit yield spread premiums and other compensation to a mortgage originator that varies based on the rate or terms of the loan. Would allow compensation to originator (1) based on principal amount of loan, (2) to be financed through the loan’s rate as long as it is not based
on the loan’s rate and terms and the originator does not receive any other compensation such as discount points, or origination points, or fees however denominated, other than third-party charges, from the consumer (or anyone else), and (3) in the form of incentive payments based on the number of loans originated within a specified period of time. Expressly permits compensation to be received by a creditor upon the sale of a consummated loan to a subsequent purchaser, i.e. compensation to a lender from the secondary market for the sale of a consummated loan but creditors in table funded transactions are subject to compensation restrictions.

All fees that enure to the benefit of the lender (the entity funding the loan) as well as any third party mortgage broker, now appear in box 1 of the Good Faith Estimate. The loan originator rarely if ever is earning the total dollar amount in that box. Instead, the loan origination fee is divided up between different people. If the massive Wall Street Reform law passes, loan origination fees would be capped at 3 percent of the loan amount, with some exceptions:

3 Percent Limit – Definition in TILA with the following exclusions (1) bona fide third-party charges retained by an affiliate (2) up to and including 2 bona fide discount points depending on interest rate. Also, excludes any government insurance premium and any private insurance premium up to the amount of the FHA insurance premium, provided the PMI premium is refundable on a pro rata basis,
and any premium paid by the consumer after closing

Consumers have ample opportunity to shop for mortgage rates on the Internet and hear radio advertisements all day long for refinance “rates as low as….” however low they might be that day. We would all hope that consumers are much more savy mortgage shoppers when compared with the peak of the real estate bubble.

Some loan originators believe consumers do not care what their loan originator is paid as long as the consumer receives the lowest possible rate and fees available on that particular day for his/her particular loan needs. I happen to believe the opposite is true, with one twist. Consumers do care what loan originators are paid, when they are educated as to how to understand LO compensation.

Some loan originators hold an irrational belief that consumers couldn’t possibly care about their compensation…that consumers ONLY care about getting the lowest rate because their note rate is the single most important thing affecting the monthly payment and their monthly payment is typically a homeowner’s biggest check he/she writes every month. However, it’s important for LOs to understand that they have a vested interest in keeping consumers in the dark about how and how much LOs are compensated. If consumers were to fully understand LO compensation, consumers would have the ability to better negotiate a lower fee. Since many consumers roll their closing costs into a refinanced loan, this *does* affect a person’s monthly payment because the consumer is amortizing the loan originator’s fee and paying a little part of it each month.

If consumers were forced to pay their closing costs in cash up front at the close of escrow on a refinance, consumers might suddenly become much more interested in understanding how to shop for all the settlement costs.

The mortgage industry trained Americans to serial refinance with very little out of pocket expense and to purchase a home using 80/20 loans with sellers paying all their costs. We’re now requiring more money up front on a purchase money loan but many buyers are still in the driver’s seat asking and getting seller concessions and many consumers still refinance by rolling all their closing costs into the new loan.

There are many different ways loan originators are compensated. Here are a few:

Percentage of the loan amount
If the loan amount is $350,000 and the loan origination fee quoted is 1.75 percent, your loan originator is likely not going to take home a $6,125 paycheck. Typically a loan originator is going to split that $6125 with his or her company in some way. It might be a 50/50 split or perhaps some loan originators will get a better split if they are bringing in their own clients.

On that same transaction, a loan originator may have been able to sell you a slightly higher rate than what you could have received had you known a better rate was available that day. When a loan originator works for a bank OR non-depository lender such as a mortgage bank (no checking and savings) this is called earning “overage.” This LO is going to earn an additional .50 percent of the loan amount in extra compensation that he/she does not have to disclose to the consumer. On our sample transaction, that comes out to be an extra $1750. This may or may not have to be split with the loan originator’s company.

When a loan originator works for a mortgage broker, all compensation, including any “overage” which is also called “yield” or “yield spread premium” is disclosed to the borrower on line one of the good faith estimate and the consumer is shown, on the GFE that the consumer is choosing a slightly higher rate in order to pay his/her loan originator this extra compensation.

Before the 2010 changes in how compensation was disclosed to consumers on the good faith estimate, loan originators might have earned even more compensation through processing, underwriting, and administration fees. There’s nothing wrong with these fees, provided there was actually an underwriter, processor, and administrator doing work for that fee. With the new 2010 good faith estimate, all these fees are now disclosed on line one of the GFE.

Besides receiving a split of the origination fee, other ways of LO compensation might be paying LOs based on the total volume of loans and/or total loan amount each month, an hourly wage with a bonus, a salary, or a combination of different methods.

What’s a fair way for consumers to negotiate loan originator compensation?

Fair can be defined in may different ways. Some LOs prefer to always charge the same percentage of the loan amount: 1 percent, 1.5 percent, 2 percent, and so forth, for all their clients. Yet some LOs believe that’s not fair.

Why should one customer who’s loan amount is $350,000 pay $6125 (1.75%) and another customer whose loan amount is $600,000 pay $10,500 (1.75%) and another customer with a $100,000 loan pay $1,750 (1.75%)

Suppose the person’s loan who paid only 1,750 took more time and effort than the person who paid 10,500.

Why should the consumer paying $10,500 help subsidize the price of the loan for the guy who needs constant handholding?

If a loan originator works hard trying to find the best loan program or the absolute lowest rate (so the consumer does not have to spend time shopping) and she put in all kinds of time and effort, this LO is arguably worth more to the consumer. This is the broker model of originating loans. The mortgage broker LO acts as a third party middleman, an “agent” for the borrower, and helps the consumer select the best fit from lots of different mortgage money choices.

Conversely, some consumers are anal retentive (nothing wrong with that. Takes one to know one) and like to do all kinds of research, spreadsheets, analysis, interviewing, reading and experimenting on their own, sometimes for many weeks or months. By the time this person is ready to select a mortgage, the AR borrower has already selected the mortgage product, rate, and company. This obsessive compulsive has even run a background check on the firm and its history of consumer complaints, knows the name of the CEO, where her kids go to school, what type of loan she currently has on her own home, and what paperwork will be asked of him at application. Arguably this customer has already done most of the loan originator’s job (in his opinion), so why should he have to pay a heft LO fee if he’s just going to fill out an online Internet application, send in a package of paperwork, and close “in as little as 2 weeks?”

Well, anyone in the mortgage lending industry knows that the borrower in the mortgage broker scenario could end up being a bunny file, where the broker/LO only spends 5 hours max on that file whereas mister anal retentive’s file ends up being the nightmare scenario from hell and the low-fee company ends up losing money on that transaction.

I take these two polar opposites as examples because a loan originator’s real life is some of the above but mostly everything in between. A loan originator never really knows for sure how much time he/she will spend on a particular file. This is one of the reasons (I’m sure there are others) why LOs simply revert to a percentage of the loan amount: Because everything washes out in the end.

Today’s consumers are left wondering what the hell happened during the meltdown and really don’t buy any of the crap the industry tries to use to brainwash the world into thinking it wasn’t the industry’s fault. “It was the rating agencies,” or “those greedy Wall Street investment bankers are to blame,” or “It’s the big banks: They are the ones who told us to sell the toxic mortgages.” Somebody needs to tell the industry that the more the industry tries to shirk all responsibility, the more guilty the industry looks. The more the industry points outward at everyone but itself, the more the politicians and regulators will pass laws and rules like what we haven’t seen since the 1970s which gave us RESPA, TILA, ECOA and FCRA.

There is no doubt in my mind that the mortgage lending industry will find creative ways of compensating those that can bring the business in the door.

Here is an idea: Why not pay loan originators by the hour? Consumers can pay their loan originator the way we pay for an accountant, a lawyer, an engineer, a paralegal, and other traditional professionals.

In the above example of a $350,000 loan with a 1.75% loan origination fee of $6125, if we estimate that the average number of hours spent with the loan originator was 5 hours, that’s like paying an originator $1225 per hour. There is no LO on this planet worth over a thousand dollars an hour. But this isn’t an accurate figure if indeed the $6125 fee is split 50/50 with the originator’s company So $3063 would be the originator’s compensation….divided by 5 hours means this LO is charging $613 per hour.

That’s a VERY hefty hourly fee for a person who doesn’t even have to hold a high school diploma to become a loan originator. In fact I have personally now met 5 people who have only finished 8th grade that are originating mortgage loans. Even a 20 hour education requirement and a national exam will not keep predatory lenders away from the industry.

Charging by the hour for an LOs time would serve two purposes: 1) it would motivate people to be more efficient with their time when working with a loan originator; and, 2) it would separate the men from the boys and the women from the girls. By this I mean loan originators with over 25 years of experience would be worth more because of their vast amount of knowledge: These LOs would theoretically be more efficient and competent and since they’d spend less time per file, they would be worth more. On the other hand, a baby loan originator who just received the license is going to be in training mode for a while and would arguably be worth less per hour.

Imagine an LO saying to his or her client, “Mr. AR, based on our initial consult, I estimate that it will take me and my team X number of hours to originate your file. It could be more or less, I’ll give you a weekly or monthly fee sheet as we go along. You can pay me by the hour…my hourly fee is X, or you can pay me no more than 3% total. Which would you prefer? It might be less if you select the hourly rate but it will never be more than 3%.” I will bet you 100% of the time the client chooses the hourly rate for the chance that their fee might be lower in the end.

But will things change all that much if LOs were paid by the hour? Maybe not. The baby LOs will still end up working for the depository banks and the experienced pros will still end up at the non-depository mortgage banks and mortgage brokerage firms. When the Dodd-Frank Bill passes, our lives will all change once again but it’s still a great way of making a living and I know the majority of us will still be here doing just that.

If Your Loan Originator Isn’t Licensed Today, They Need to Work for a Bank or Credit Union Tomorrow

Posted on June 30, 2010 by Rhonda Porter

All mortgage originators who work for mortgage brokers or correspondent lenders/consumer loan companies must be licensed with the NMLS as of July 1, 2010 to take a residential loan application for property located in Washington. If your mortgage originator works for a bank or credit union, they only need to be registered with the NMLS (which means “do nothing” at this point).

Last Friday, Deb Bortner, Director of Consumer Services for Washington State’s Department of Financial Institutions, issued this statement:

“Unfortunately, many applicants did not submit by the deadline. I want to assure you that, even with the current budget reductions and staffing constraints, our Licensing Team is doing all it can to balance a timely review while complying with the recent provisions of state and federal laws that are designed to provide increased consumer protection. While we will process as many applications as possible by July 1st, we will not be able to fully address the volume of late applications that we are currently receiving.

It is important to remind each member of the industry that on July 1 an individual may not act as a Mortgage Loan Originator unless he/she is licensed or has received official written e-mail communication from DFI outlining the conditions under which that individual can work…”

It’s unfortunate for consumers that Congress made two separate classes of mortgage originators: Licensed and Registered. You can follow the dollars to figure out how that happened. In my opinion, all mortgage originators should be held to the same standards. Consumers should not have to determine whether a mortgage originator is licensed or not and what licensing means verses a simply registered mortgage originator working for a bank mortgage company or credit union. With that said, I’m thankful to be in the licensed category since those LO’s who are licensed are held to a higher standard than a registered loan originator per the SAFE Act.

Tomorrow, many mortgage originators employed at consumer loan companies/correspondent lenders or mortgage brokers who did not jump through the licensing hoops quick enough will either need to cease taking applications or go work for a bank or credit union. Again, this is for residential mortgage applications on properties located in Washington State (this applies to mortgage originators not in the State of Washington but taking applications on residential property located in Washington).

You can verify if your mortgage originator is licensed by checking http://www.nmlsconsumeraccess.org . You can run a search by entering their first and last name along with the state abbreviation. If your mortgage originator works for a bank or credit union, they’re not required to be licensed and registration is not available for them yet.

Give Your Escrow Officers, Title Companies and Mortgage Funders a Break Today

Posted on June 30, 2010 by Rhonda Porter

As of this moment, I still haven’t heard if the Senate has passed an extension for today’s deadline for transactions to close and still qualify for the Home Buyer’s Tax Credit. Even if the Senate is successful in passing this hot potato the House has lobbed at them, everyone in the industry is inundated with transactions that are suppose to close today. Everyone will still be trying to honor the contract’s closing date.

My title insurance sources tell me that in a “normal” month, 1/5 to 1/4 of their revenue takes place on the last day of the month. Imagine how this has been magnified with the June 30th deadline for closings.

I’m suggesting that if you can wait until tomorrow to call or request something from your escrow and title partners, please do. Many companies are not “over staffed” due to our economy.

This mostly impacts the real estate professionals who are on the “closing end” of the transaction. For real estate agents and mortgage originators, it’s probably business as usual. 🙂

Can Seattle Home Prices Drop “Another” 22%?

Posted on June 22, 2010 by ARDELL

Can Seattle Home Prices Drop Another 22% was a question raised by many here in the Seattle Area, after Zero Hedge posted the Goldman Sachs forecast for Major Cities showing Seattle at a 22% drop by year end 2012. After calling for modest to almost no declines in several major cities, Goldman predicted a 22% drop for Seattle with the 2nd highest drop being only 12% in Portland, and even a 7% gain for Cleveland Ohio and a 5% gain for San Diego. That would put Seattle at minus 27% compared to San Diego for the same period.

You can pick up Goldman’s rationale or lack thereof in that first link, we’ll stick to how likely it is that Seattle could drop “another” 22%. First let’s take a look at where a drop of that size would takes us, in the graph below.
graph (1)
Important to note that I made a slight modification of the raw data for the graph above to account for modest home size variances, equalizing the data as to size of home or price per square foot. The closest rounding point was a median sized home of 2,000 sf. The data is in thousands, so top left in January of 2007 would be $430,000 median home price for a 2,000 sf home and bottom left would be $253,000 for a 2,000 sf home in January of 2001.

I posted a full chart of all of the raw data for those who want to create their own charts and modifications showing actual median home prices for the years in the graph above, median square footage of homes sold in each 30 day period and the # of homes sold. This is for Single Family Homes vs. Condos and King County vs. Seattle Proper.

Back to the graph above in this post. The top line is Seattle Area Peak in 2007. The turquoise and purple lines are “where we are” in 2009 and 2010 without significant difference except for seasonal variances in that 18 month period. I ended these graphs and the data at April 30 2010 due to the switch out of mls systems locally, but am seeing reports that May came in above April at $379,000. So the raw data suggests there is the normal seasonal bump up in May, as additionally influenced by the final tax credit closings which will continue until after June closings, and possibly slightly beyond.

The red line is the hypothetical Goldman Sachs prediction scaled against 2009 data at 22% below in each consecutive month.

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Before moving to conclusions, we need to visit the volume stats (graph below). I have been tracking volume for years in addition to price per square foot, as volume signals recovery or not more so than home prices alone.

graph (2)

Analysis is dependent on rationale of which data to apply, and for my purposes I have been using 2001 and 2002 as “Base Points” for two reasons:

1) 2001 is the earliest I will go when tracking home price and volume data, as Credit Scoring as the primary focus of lending pre-approval guidelines and risk-based pricing, was not a factor in the 90’s. Keeping apples to apples as to the number of people who can qualify to purchase a home, 2001 is a good start point.

2) 2003…toward the end of 2003…was the beginning of ZERO down/sub-prime lending standards. So all years from 2003 through mid 2007 will include an extra bump up as to volume and price created by that loosest of lending standards.

For both of the reasons noted above, it has been my long standing premise that volume of homes sold should be and can be expected to return to 2001 and 2002 levels as to number of homes sold.

One caveat: The number of condos built between 2001 and present is beyond proportional. Those additional “residences” in the form of condos and lofts in the Seattle Area will rob volume from the single family stats in some, and many, areas.

Note: In the second graph above, the volume of homes sold in October of 2009 (green line) exceeded the number of homes sold in October of 2001 (black line). This may not seem like something to view as a positive sign. But given the tremendous drop in volume as noted in January and February of 2009 to unprecedentedly low levels, surpassing 2001 volume stats by October of that same year was HUGE. Of course these numbers at both ends are influenced by the short breaks in the tax credit for home buyers in both January of 2009 and October of 2009…but still a significant signal reflecting that volume has the opportunity to recover to 2001 levels. NOT to 2007 levels! Volume cannot and will not recover to 2007, nor do I expect prices to do so until 2018 at the earliest.

Those who are waiting for a return to 2007 as to price and/or volume would likely have better luck betting on your favorite horse.

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So, just how low will Seattle Area Home Prices go? Well first off let’s acknowledge that Seattle Area Home Prices WILL go DOWN. That seems obvious to me from the RAW DATA, but amazingly I still see many people questioning whether or not the market will go down at all from here. Hard to believe, but yes, some think the current level of $379,000 median home price is going to go up and not “EVER” down from there. One would think the credo of “home prices will never go down” was dismissed along with The Easter Bunny…but no. Some are still looking for a V-Shaped or U-Shaped “Recovery”. Sad but true.

A- Home prices will most assuredly drop by 4.3% in the very near future and likely by 4th Quarter 2010. (See blue square in the RAW DATA link above.) That is where home prices were in March of 2009 before the tax credit was renewed. So seems obvious without the credit, that is where prices will go back to…and likely lower than that without a new tax credit to prop up prices from that point forward.

B- The Tax Credit was meant to stop the downward spiral and eradicate the portion of loss created by momentum and NOT the portion of downward spiral created by fundamental economic problems. It was to eliminate the Fear Factor and the over-correction. Not the market’s legitimate decline point. Consequently the “safety net” being removed is going to create an additional drop of at least 5% in addition to the 4.3% drop noted above, which would take us to a drop of 9.3%.

C- Goldman Sachs is incorrect in its analysis of a 22% drop, because they do not apply the above A and B factors to all Major Cities. So their basic rationale is not credible, nor the number that emanated from that incorrect rationale.

D- Near the end of the time frame for the tax credit, home buyers were not as likely to enter into contracts with short sales and to some extent even bank-owned properties, for fear they would not close on time. Consequently, the median home prices were overly weighted to the high end of my bottom call. The mix of property from here through year end is going to push more toward the 37% under peak of that same bottom call vs the 20% side of the equation, with more “distressed” property in the mix. Not because of increased foreclosures, but because of more people being willing to buy them without a drop-dead-must-close date via the tax credit. It’s really just common sense, and pretty much a given.

Look for a 9.3% drop at some given point between now and the end of 2011. That would be any month in that period with a median home price of $343,753 or thereabouts.

As to 2012??? I expect a significant impact on price, with further declines, stemming from continued layoffs between now and the end of 2012 on a fairly large scale. But this last prediction borders on “the crystal ball method”. So let’s end with a 9.3% drop from $379,000 median King County home price by year end 2011, with an added caution that significant improvement to 2007 price levels will not likely happen before 2018.

In other words…”EXPECT the worst; HOPE for better than that.”

(required disclosure – Market Observations and all stats in this post and the graphs herein are the opinion and “work” of ARDELL DellaLoggia and not Compiled, Verified or Posted by The Northwest Multiple Listing Service.

Loan Home Inc. Lead Generation Scam

Posted on June 21, 2010 by Jillayne Schlicke

Loan Home Inc. is a lead generation company telling consumers that they can be paid for the referral of their own transaction, or the transaction of friends and families.

Before we tease apart why consumers should avoid this obvious scam, let’s briefly review what mortgage lead generation companies do. Loan originators obtain clients from many sources. Some have built up a strong client base over the years, others make sales calls on Realtors asking for client referrals, others work at a bank and possible customers walk into their branch on a regular basis. Not all LOs like working with Realtors because they demand high quality service, and not all LOs have a client base. Some LOs work for companies that advertise on the radio. TILA Mortgage, Paramount Equity, American Equity, and Best Mortgage are some of the companies that advertise on KIRO 97.3 FM in the greater Seattle area. Radio advertising is expensive but it works. The phones ring at specific times and the LOs are there to pick up the phone but since the firm is paying for the radio ads, the LOs will typically split the fee income with their firm as they should.

Lead generation companies troll the Internet for consumer leads, use banner ad campaigns, and/or send out mortgage email spam and then sell these possible homebuyer or refinancing homeowner leads to loan originators who pay a fee to receive that person’s contact information.

I receive all kinds of emails from lead gen companies every week trying to sell me leads (I do not originate loans.) Recently I’ve been responding to the emails and asking if the salesperson can send me samples of the advertising material used to procure the leads. I’ll bet you’re not surprised to hear that NOT ONE COMPANY has replied to my request. Why? Because lead generation firms blatantly violate state and federal lending laws in their advertising. Loan originators typically won’t talk about lead gen tactics because they might already be addicted to the crack that is also known as mortgage leads and they don’t want to turn in their crack dealer.

Clamping down on lead generation firm advertising is not my personal top priority but it should be a priority of any loan originator who wants to advertise legally. The more the industry continues to buy leads procured by using deceptive advertising, the more the industry is unable to get their own phones to ring by advertising legally.

This new scam is quite clever: Loan Home Inc. says anyone can “sign up” their own self(!) for this program and when they decide to buy or refinance, Loan Home Inc., will connect them with a “reputable, ethical” mortgage broker or mortgage loan originator and the consumer will be able to get money back (sounds awesome!) after closing. Whoo hoo! Sign me up! The consumer can also sign up friends and family and get money back when they buy or refinance, too! What could possibly be wrong with this cool-sounding idea?

Well consumers, what’s going to happen is that your name and your friends/family names will be SOLD to mortgage brokers and loan originators who have no clients or who are willing to pay money to Loan Home Inc., for the ability to earn money off your deal. That’s right, you are an object to be bought and sold to the highest bidder.

Realize that whoever Loan Home Inc., sells your contact information to, is going to have to pay Loan Home Inc. a fee and that fee will be much higher than the money you are going to “get back” from Loan Home Inc. because LHI is going to keep a percentage of that fee to cover its costs as well as to make itself a nice profit. Next, whoever has purchased your lead is going to increase the fee you pay BY THAT AMOUNT OF MONEY IF NOT MORE.

In the LHI example, on a $250,000 home loan, consumers are paid $800 for their own home loan lead. If so, then the person who purchased your lead will simply increase the fees consumers pay by……$800. Since the majority of people do not come in with cash at closing on a refinance, consumers will be financing that same $800 over the term of the loan; not necessarily a good financial decision. Another way for the lender funding the loan to earn back the money they have to pay LHI and you is to sell you a loan with a higher interest rate. Worst case, the consumer will pay higher fees as well as a higher rate just for the ability to get back $800 on a $250,000 loan.

LHI also sets up a nice-sounding multi-level marketing plan in their powerpoint slideshow.

I wonder if they hired an attorney who understands Section 8 of RESPA to review their business plan?

Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed.

Violations of Section 8’s anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service.

It doesn’t sound like the company owners have a background in mortgage lending.

From their FAQ page:
Q: Will there be additional fees added to my loan?
A: No. The lead generation compensation that Loan Home pays does not constitute an added cost to the loan or the loan process. By paying you, we are taking profits from the mortgage companies and returning them to you!

Oh boy! Let’s stick it to the mortgage companies. What a great sales tactic. I’m sure the mortgage companies love reading that. Please do not fall for this, consumers. There is no way in hell that any mortgage company is going to just give you back its profit. You ARE paying for the money Loan Home Inc., is giving back to you. It will be in the form of a higher interest rate or in the form of higher fees or likely both. There is no such thing as free money.

Please, please do not fall for this scam. Instead find a local loan originator who lives in your community. If you want to shop, then ask for a Good Faith Estimate from three or four sources on the same day: Your retail bank (where you do your checking and savings), a mortgage banker (a lender that does not offer checking and savings and specializes in mortgage lending), a mortgage broker (who can shop the market for you), or a credit union.

LHI says they are ready to do business in several states (including WA) yet I can find no business license issued to “Loan Home Inc.,” or a license under the name of either of their founders in Washington State.

Interestingly, when I read the biographies of each of their founders, the name of the web page (look up at the very, very top of the web browser) says “Linda Torres.” That’s just sloppy webmaster work but it did entice me to bing her name. Looks like there’s a Linda Torres who’s a loan originator in the Chicago area and the two other founders are from Chicago. I wonder if the leads are being funneled over to their friend Linda who appears to be one of the other founders of Loan Home Inc.

Home Buyer Tax Credit close date extended?

Posted on June 17, 2010 by ARDELL

Homebuyer Tax Credit Update 7/1/2006 Passed both The House and The Senate, so pretty much a done deal. Should be signed into Law by the President today.
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NEW UPDATE 6-29 – Looks like this is going to pass as a stand alone Bill. Passed the house by a huge majority and the Senate is expected to pass it any day now…stay tuned

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UPDATE 6-25 The Bill did not pass. The vote was 57-41, three short of the 60 needed.

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Just received this email. Seems to be “Breaking News”:

“NEWS FLASH Senate OKs new tax credit closing deadlineThe Senate has amended a bill to give homebuyers who were under contract on a home purchase by April 30 an additional three months to close the deal and claim the federal homebuyer tax credit. Extending the deadline for closing from June 30 to Sept. 30 would allow lenders more time to clear a backlog of 180,000 homebuyers nationwide, said amendment sponsor Sen. Harry Reid, D-Nev.”

All of my June 30 or before closings are closed, but I do have one we did not expect to be eligible for the tax credit, because it is a home being built which is not expected to be completed until August 31 or so.

If the closing date requirement is moved out to September 30, as noted in the quote, my clients will be eligible for the $6,500 credit (not the $8,000 one). Since we were at the showroom yesterday morning trying to decide on wood floors in the living room and dining room, which would cost less than this credit, this could be an important decision making factor.

Of course this is so “hot off the presses” that we need to verify and also wait for it to actually be confirmed and signed. But it looks like an extension to September 30 for closing is just about a given…just about.

Buying a Bank-Owned Home? Ball’s in YOUR Court!

Posted on June 12, 2010 by ARDELL

Interestingly, the very same day that Craig wrote his post on assisting a buyer with a bank-owned purchase, I was closing on a very similar transaction.

One difference…mine closed. 🙂

It was even the same servicing company (so possibly and even probably the same bank-owner-seller), and also an FHA loan like Craig’s transaction. Two hurdles that Craig’s transaction may or may not have had was there were multiple offers (hard to win multiple offers if you are the only FHA buyer in the room) and the buyer’s lender at the last minute required that a new roof be put on the house, prior to closing, on a house that was only 14 years old.

I have to agree with Craig, it was absolutely grueling. It’s like being Ray Allen playing against the Lakers, but there is no one else on the Court except Ray!There were too many cooks in the kitchen on the seller side, and it was almost as if they wanted you to be late and wanted the transaction to fail. At the point where the buyer’s lender wanted a new roof on the house prior to closing, I honestly think the seller wanted to move to the back up buyer AND keep my client’s Earnest Money AND collect a $100 per day per diem for as many days as possible running through the Memorial Day weekend and beyond. This is why the SELLER should NEVER be ALLOWED to choose escrow! Somebody wise up and make a law about that!

Think about it. If escrow doesn’t close on time on a bank-owned…who suffers? Buyer can lose their Earnest Money. Buyer can pay $100 per day for every day that it is late (to the seller). So how can the seller be the one who chooses escrow, when the buyer is the one with so much at stake, and the seller with everything to gain if the buyer is late?

Of course my buyer clients did close. My buyer did not close on time BUT he also paid ZERO in per diem costs because I forced the seller’s hand to the point that they were in breach. This is not the first time I have done this with a bank owned, but it takes every ounce of my time and energy for days on end. You have to have your wits about you, stay on your toes, and play every single second, day after day, with the devotion of a Ray Allen or Rondo watching every single move and being always on top of your game. One false move…one split second of incorrect decision, is the difference between the client’s success and failure.

In this corner…the seller side…we have:

Agent for seller…Assistant for agent for seller…off-site transaction coordinator for agent for seller – Escrow Company chosen by seller with TWO closing agents, one working only on the seller side and one working only for the buyer side. FIVE layers before you even get near who the seller is, and the seller has at least a few people in between all those people and the actual selling entity/bank.

…and in this corner we have…ARDELL LOL! Kim and Amy helped do a few end runs on what the buyer was doing AT the house, like choosing new hardwood and getting estimates from painters, etc. I handled the contractual and escrow problems and the buyer’s lender issues…including lender wanting a roof ON the house prior to closing. Trust me, it is no easy feat to put a quality roof on quickly on someone else’s house without their permission. …and of course…then the rain came… If we were not ready to close the buyer would have lost his $10,000 Earnest Money and/or all those many days over the very long holiday weekend in per diem fees.

Like Craig, I can’t give a true blow by blow…but it closed and my buyer clients got the house at roughly $50,000 less than the house around the corner in the same neighborhood, that closed at roughly the same time. It was imperative that THIS be the house, as they maxed out at a price just short of what it would cost for all the things they wanted in a home, school and neighborhood. So a bank-owned was likely the ONLY way for them to get all of those things because of the bank-owned discount.

So yes…for many clients, buying a bank-owned is not only best…but sometimes the ONLY way for them to achieve their goal. The number one thing to remember to be successful in a bank owned transaction is The Ball Is ALWAYS In YOUR Court! You cannot wait ONE SECOND for the other side to do what they are supposed to do. You must do their work…yes they were the ones who needed an extension, but if I did not keep writing the addendums, because it was “their job” and not mine, it never would have closed! I had to do that three times. Banks NEVER answer…they never signed the extensions until it closed…pretty much at the same time.

You cannot ask…you cannot wait for them to answer…you cannot expect them to do what they are supposed to do. You have to run that ball across the Court like you are the only one in the room with the power to make it happen! You can’t worry about what’s fair and not fair…you just have to get it done and do everyone’s work , and figure out who has the authority to move it forward and who does not.

In my case the buyer also had all kinds of things besides dealing with the seller side that made it many times harder, even if it were not a bank-owned transaction. That was a bit distracting. But at the end of the day…it was all worth it, because I truly believe I could not easily find a replacement property for those clients in their price range. THAT is why you do a bank owned…because the discounted price makes it the BEST house for that client…and possibly the only one they can afford that fits their parameters. …and, of course, they also got the $8,000 tax credit on top of that. A grueling work load and struggle…but well worth it.

You don’t do it ONLY for the “bargain” of it…you do it because it is the very BEST house for them.

Bank-owned home? Make offer at your peril…

Posted on June 10, 2010 by Craig Blackmon

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

It appears that the number of foreclosures in the area will continue at a high rate into the foreseeable future. Thus, there will be more and more bank-owned homes for buyers to consider. But from the perspective of an average buyer, is that a good idea?

In my experience, and from my perspective as a lawyer, the answer is an emphatic, “No!” Banks tend to be far more concerned with protecting themselves without regard for actually selling the property. Their required addendums — no changes allowed! — severely restrict the buyer’s remedies if the deal blows up, or if the house is a complete lemon, or even if the buyer’s financing fails. Banks tend to be remarkably inflexible in regards to negotiations. Indeed, they often refuse to sign ANYTHING until it has been signed by the buyer, even when it is their own addendum! Thus, negotiations are difficult, and the resulting contract is weighted heavily in the seller’s favor. Banks impose unreasonable requirements, such as mandating a photocopy of a cashier’s check of the earnest money, rather than just a personal check. As a result of the required contractual terms and the bank’s inflexibility, if the deal gets squirrely the buyer runs a very real risk of losing her earnest money.

Is this true of all banks, in all transactions? Almost certainly not. It has been, however, my experience to date. Are some banks more reasonable than others in this regard? Very probably, but I’ve only come across the difficult ones.

In fact, if you’re thinking of making an offer on a property managed and sold via First American REO Servicing — well, proceed at your own peril. Based on my experience, as well as the experience of others, First American is remarkably difficult to deal with and its actions can be, quite simply, irrational.

I recently assisted a client in attempting to purchase a house from a bank where First American was acting for the seller. I could author a dozen posts about this very unpleasant experience, but who has that kind of time? Instead, I will simply give two examples. When I received the bank addendum, the box for “cash sale” was checked, as was the box for “buyer financing.” Clearly this was an error, as these two boxes were inconsistent. The listing agent agreed that this appeared to be an error. I was concerned about this ambiguity in the contract (like any other competent attorney). I assumed it would be an easy fix. I was, needless to say, wrong. The bank flat-out refused to correct this error and demanded that the contract proceed with these mutually inconsistent terms.

Once under contract, my FHA buyer proceeded to seek financing. Unfortunately, a previous buyer about four months earlier had also sought FHA financing, so an appraisal had been performed. Per FHA rules, another appraisal cannot be obtained within six months of the first. We received essentially no information about this prior buyer or lender, and nobody was able to find this prior appraisal. Eventually, we had to seek a new FHA file number for the property, which would in turn allow for a new appraisal. Of course, all of this took time and naturally required an extension of the closing date. Did the bank agree to a short extension? Of course not. Huh? Ready, willing, and able buyer (who had invested significant time and money into the property) who had a good faith reason for seeking an extension — but the bank did not budge. The deal collapsed as a result, and my client’s earnest money is now hotly contested.

One would think that banks would be anxious to sell these assets. One would think that they would work cooperatively with buyers. One would think that banks would act reasonably and rationally. One would be wrong. In my experience, banks — or at least the individuals sitting at desks in distant states who are responsible for these files — are unreasonable and, in at least one instance, may even be irrational. Proceed with an offer at your peril.

Fannie Mae adds Speed Bump Prior to Funding Your Mortgage

Posted on June 2, 2010 by Rhonda Porter

photo compliments of veggiefrog via Flickr

Effective on loan applications taken on June 1, 2010 or later, Fannie Mae is requiring lenders to confirm that undisclosed liabilities are not present prior to funding a transaction as part of their Loan Quality Initiative (LQI). Currently a credit report is pulled and is valid for a specific amount of time–as long as the transaction closes prior to the expiration of the credit report, it typically is not repulled. Fannie Mae is now requiring the lender to make sure that there is no new or undisclosed credit at closing. Relying on the original credit report pulled at application is no longer good enough.

Fannie Mae’s FAQs suggest these tips for lenders to help confirm there are no undisclosed liabilities:

Retrieving a refreshed credit report just prior to the closing date and reviewing it for additional credit lines.
Utilizing new vendor services to provide borrower credit report monitoring services between the time of loan application and closing.
Direct verification with a creditor that is listed on the credit report under recent inquiries to determine whether a prospective borrower did in fact obtain credit or enter into a financial arrangement that is not disclosed on the loan application.
Running a Mortgage Electronic Registration System (MERS) report to determine if the borrower has another mortgage that is being established simultaneously.

This means days before funding a Fannie Mae loan, the transactions are subject to being re-underwritten and if the borrower is “borderline” (which is a 620 mid-credit score in today’s climate and/or higher debt-to-income ratio) or decides to purchase their appliances for their new home before closing…they could potentially “kill” their deal and find themselves being “unapproved”.

Fannie Mae states that loans should be resubmitted to underwriting if:

additional debts have been incurred which would increase the debt-to-income ratios
if new derogatory information is detected
if the credit score has materially changed

Borrowers should understand that the loan application is intended to represent their financial scenario and whenever (even before LQI) changes are made to their application, their mortgage originator needs to know. This is not new. When changes occur and a borrower is aware (such as taking on more debt or changing their employment) and they hope they “won’t get caught” before closing, they’re committing fraud. This is what Fannie Mae is trying to prevent with LQI.

Borrowers with conventional financing need to be extra mindful of LQI. Using a credit card to fill your SUV full of gas could potentially ding your score if you’ve carry a balance of 30% or more of the available credit limit. Even closing a credit card during or just before a transaction could drop your score low enough to where the lender may have to reconsider your loan approval AT CLOSING.

For mortgage companies and banks (anyone who sells loans to Fannie Mae) it boils down to having to refresh, repull or face re-purchasing the loan if changes to the credit report are found between application and funding. Fannie Mae is not specifically requiring credit reports be repulled prior to funding–they are holding the lender responsible for changes if they don’t.

Borrowers, real estate agents and originators need to be prepared for potential delays in closing, repricing of their mortgage loan (which would trigger another delay due to MDIA) or the loan potentially being denied. It’s more important than ever that borrowers work closely with a qualified mortgage professional who can help guide them through the process.

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