Category Archives: Mortgage/Lending

Triggering My Hot Spot

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I have blogged about this before…it is really one of my “hot spots”.   This morning, not only did I receive an email from this company (oh, I mean SPAM) stating that this is information that I requested, which I did not, it is about something I am absolutely against: selling consumer’s information when they’ve had a credit report pulled to become preapproved.    [photopress:trigger.jpg,full,centered]

If you go to their website, they state, “Receive a daily feed of consumers in your target market that just yesterday had their credit checked for a mortgage loan approval.That ’s right, these consumers have just had their credit checked within 24 hrs, specifically for a mortgage loan approval! Now you can provide them with a pre-approval in just a few days for unlimited growth potential.”

Picture this, Mr. and Mrs. Homebuyer meet with a Loan Originator and sign many documents for the preapproval process including disclosure forms that their private information will not be sold. Within hours, they begin to receive relentless phone calls and post cards from other lenders.   It’s too bad the credit bureaus are not a party to this agreement and that it is legal for the bureaus to re-sale credit scores, addresses, phone numbers, debts, etc.

I’ll go eat a box of Valentine’s candies and go chill out in a corner somewhere.

 

 

There's No Love for the Subprime Borrower

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It’s all over the news, we’re hearing about major subprime lenders having to restate their losses and every day, lenders are coming into my office to inform us of changes to their guidelines.   This is all good, right?    It will be tougher to provide loans for home buyers who maybe should be spending more time to learn about budgeting and using their credit cards.    What about the people who are all ready in these programs?

First, allow me to explain the basic dynamics of these loans.  Many of these mortgages are zero down, 80/20s (80% of the loan to value for the first mortgage/20% of the value for the second mortgage).   The first mortgage is typically offers a fixed rate for 2-3 years with a prepayment penalty (the standard is six months interest) that matches the fixed rate period.   In addition, the mortgages may be interest only or amortized at 30, 40 or 50 years.    The rates on these mortgages are completely dependent on credit score. 

When I meet with Mr. and Mrs. Subprime, I advise them of their options of buying now using this type of subprime mortgage or that they can work on their credit, job history, etc. and buy later with a better mortgage program.   Because there are no guarantee of what rates will be (or maybe because they know there’s not guaranteed they’ll clean up their act) and because they want to buy a house now, they often opt for the subprime mortgage.   Once this happens, I heavily stress (or Jillayne would say, I lecture 🙂 —which I’m sure I do) to Mr. and Mrs. Subprime that they have 2-3 years to change their spending habits because once their fixed period rate is over, their mortgage is going to adjust and do so big time.    I let them know that I want them to be in the best position for a refinance into permanent financing (or to have a better mortgage should they decide to sell the home assuming they have any equity) and that the subprime mortgage they are using to obtain their home is temporary financing.  

Many of my clients in these mortgages have done very well and I’m proud of them.   They have taken the responsibility of owning a home and having a mortgage to heart.  I’m able to restructure the original mortgage and improve their situation greatly.   The concern is for Mr. and Mrs. Subprime who just didn’t get the hang of it.   They continued to charge up their credit cards, they bought or leased a new car to go in their new driveway and maybe a new TV, too.   They’ve been sliding ever since the holidays and are now having a tough time paying their mortgages on time.   Maybe they just have one mortgage late.   Their credit is rough at best.   Their fixed period (and prepayment penalty) is over and now they really need to refinance fast because their mortgage has adjusted for the first time—their rate is now 2% higher.  Their situation has gone from bad to worse.    With all the tightening in the subprime market, even if their credit scores and scenarios are the same as when they bought, there may not be a program for them to refinance out of now.   They will be forced to sell (hopefully they have enough equity to pay commissions and other closing costs) or to somehow manage to choke down their increased payments.

I guess this post is a plea of sorts.  If you currently have a subprime loan (especially the type I described) please contact your Mortgage Planner to have your credit reviewed to make sure you’re on the right track to be able to refinance (or have a better loan for when you sell) when the time is due.   Do not assume there will be a program for you if you have not made significant changes to your spending and use of credit cards.   If you’re a real estate agent or loan originator, check in on your subprime clients to let them know of the changes in the industry…see if they need guidance to stay or get on track so they don’t wind up stuck with a higher mortgage payment, being forced to sell or foreclosure.

Confessions of a Zero-Down Lender

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This is a two part (well so far I’m planning a second post…their could be more) series of a couple of clients (names changed to protect identities, of course!) who have purchased homes utilizing 100% financing.   Both parties utilized similar programs but they wound up in entirely different situations.  

Mr. and Mrs. Spender eagerly wanted to purchase a home.  They were tired of renting and had two kids with one on the way.   They didn’t have a lot of money in savings and their credit had a troubled past (some of it was medical and some was plain irresponsible).    They live paycheck to paycheck but they are anticipating receiving raises and bonuses from their employer.   Their credit report shows that they rely on their credit cards and you can see on their bank statements that they dine out a lot and spend their money on frivolous extras.  

Based on their credit scores, I was able to provide them with an 80/20 from a sub-prime lender who does not verify where their funds are coming from for closing and would allow for the seller to pay up to 6% of the closing costs.   I structured their preapproval with the seller paying all the closing costs.  In fact, at funding Mr. and Mrs. Spender receive a check back for a majority of their earnest money.

Not long after closing, the Spenders discover that the gas heater in their home was defective (apparently this was missed on the home inspection?).   It just so happened that the repair company they called to repair it had previously serviced it and informed the previous owners that it needed to be replaced.  Mr. and Mrs. Spender decided to take their Seller to Small Claims Court and their Agent attended with them.  I had asked them what the results were, here is their edited response:

“Yes we took them to court and even though we had all the documents showing that the (sellers) knew the furnace needed to be replaced and needed to be fixed the judge did not find that we had proved our case… so we got nothing.. (the Real Estate Agent) came with us and she was just as shocked…  She too was amazed that all the paperwork we sign to protect us from buying a home with flaws, the (Sellers) even stated and had to initial that there was no problems with the heating system and even though we had documentation to show that they knew there were problems and didn’t disclose it… we got screwed to be honest…. They knew.. They didn’t care… and the judge just wanted to get out of there… It was a joke…

Quick Update on Loan Originator Licensing

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Since I’ve covered Loan Originator licensing before on Rain City Guide, I thought I should provide this update.   Apparently DFI is loosening up on their previous decision to not allow LOs to take loan applications if they did not submit the required information prior to the original January 31, 2006 deadline.  

So if a Loan Originator did not follow the new simple rules before January 1, 2007, they can still practice business if they just complete DFI’s online application, the MU4 form and submit their fingerprints for the background check.    As a Licensed Loan Originator who was able to take time out of my busy schedule to comply with DFI’s requirements, I’m just a little concerned and I hope this is not a trend.

 

 

Children, Can You Say "Suitability"

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If Congressman Barney Frank has his way, all mortgage originators will have to utter those words in the back of their minds when considering loan options for their clients.   Frank is not just any member of Congress, he happens to be the new chairman of the House of Financial Services Committee and his top priority is to create national laws to protect consumers from predatory mortgage practices.

Recently, on The Perennial Borrower post, I was asked by RCG readers how do I determine what loans are right for clients with all the options that are available in today’s mortgage marketplace.  It takes a great deal of determining what the available financing options are, what their financial plans are and then what mortgage makes the most sense, or is the most “suitable”.   This doesn’t happen automatically for every borrower with every loan originator.   Which is why states like Washington are now licensing Mortgage Brokers and Congress is looking into the same on a nationwide basis.  Currently, when we have subprime lenders calling on our office, they promote “how low they can go” in the borrower pool.   55% debt to income ratios are common–heck, you hardly have to be re-established out of your bankruptcy if you don’t mind the interest rate.  Can’t document your income, assets…don’t have a job but your credit is good–fantastic, we have a loan for you!  It’s true, there are a lot of mortgages that seem crazy and while they may not make sense for some, they do for other clients.  Suitability.

According to Kenneth R. Harvey’s article last Saturday, “…a new national standard might require loan officers to determine an applicant’s suitability for a particular loan program based on:

• Employment status, income level, assets and likelihood that income or employment could change;

• Other recurring expenses and the effect they could have on the borrower’s capacity to repay;

• The potential for higher future monthly payments based on the structure of the loan.

A suitability standard might also ban brokers and others from steering less-sophisticated borrowers to higher-cost mortgages than they qualify for, such as pushing them into complicated higher-rate subprime loans when they could qualify for prime rates and simpler programs.”

This sounds great…however; there is always another side to the story.  NAMB is concerned this could “lead to accusations of discrimination.”  I agree, I mean, are loan originators to provide IQ test to borrowers before determining if they truly understand a more sophisticated loan?  Who are we to judge?   Many times, this surprises me, I may not physically meet my client.  The entire transaction may take place over the phone or internet.  You do get a “feel” for whether or not a person understands the mortgage product by the questions they ask, but how do you really know?   If you’re a borrower who wants an option ARM and a lender (deciding you are less-sophisticated) insists on giving you a 30 year fixed, have you been discriminated against?

2007 should be a very interesting year in the mortgage industry.

End of Month Fireworks: LOE's and YSP's

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(LOE) Letter of Explanation:

Can a loan officer draft their own letter of explanation (typically to explain issues on a credit report or some other circumstance) on behalf of the borrower? Is this ok, ethical or worse, fraudulent. If they can draft the letter and the borrower signs it, is it acceptable at that point? If underwriting became aware of this, even though the borrower signed the form indicating that it is a true statement, would that fly? My wife and I are arguing over this, but we don’t know the answer.

YSP (Yield Spread Premium):

There may be some agents that do not understand this, so I’ll let the loan officers explain its meaning and various uses.

Recently, a borrower at a signing was given a brutally clear disclosure/explanation of the YSP as part of their loan package. It disclosed how the YSP could be used to assist the borrower in paying for closing costs, or buying down the interest rate or used as additional compensation to the loan officer for INCREASING (this “increasing” verbage was on the disclosure and not used here for effect) the interest rate over what the borrower could have received. This disclosure actually stated the interest rate on the note and the specific amount of the compensation going to the broker over and above the 1% loan origination. I’ve never seen such a clearly explained YSP disclosure. Many lenders do not have a YSP explanation disclosure as part of the loan documents.

Did the disclosure or the loan officer (LO) kill the transaction (with borrowers who had sterling credit, pushing the envelope with a 3 yr. pre-pay penalty AND the YSP)? I really would like comments because my guess is that the LO will blame the lender. In this case, the borrower was highly concerned (there is a better word for it , but concerned will do) and promptly called the LO to discuss the situation and I’m speculating that the conversation also touched on why this disclosure was not given when they made loan application or on the GFE. The borrowers promptly signed the rescission and left. Although I am somewhat aware of up-front disclosures on the lending side, perhaps someone in the business could shed light on this. Obviously, you cannot know loan fees until the lender, loan program and interest rate is chosen.

Lastly, should any escrow firm be entitled to a full escrow fee for fulfilling their job and recovering any third party fees incurred during the escrow period? Any escrow/title/attorney folks want to comment on that?

New Law To Regulate Mortgage Professionals

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On March 9th Washington State’s Governor Christine Gregoire signed House Bill 2340 which will regulate all Loan Originators in the brokering of residential real estate loans. According to Washington Association of Mortgage Brokers the new legislation requires the following:

  1. All Loan Originators will need to pass a basic compliance skills examination prior to January 1, 2007;
  2. Continuing Education will be required on an annual basis;
  3. Background checks will be required prior to licensing, removing felons’ and person with criminal histories that do not warrant the public’s trust.

Washington Association of Mortgage Brokers (WAMB) also states:

(The licensing) creates new consumer protections by raising the bar for practitioners in our industry by achieving two key objectives: 1) it will help weed out those in the industry who do no have the consumer’s best interest in mind and creates a revocable license for those that employ unethical and illegal practices; and 2) it will strengthen our industry by exposing educational opportunities needed for brokers that care about doing things right, but may be lacking the knowledge to remain compliant in accordance with State and national regulations.

WAMB provided some interesting facts about other states that have implemented a licensing requirement:

  • In Ohio 10% of loan originators were removed due to felony convictions.
  • In Utah 25% of loan originators never passed a basic compliance skills examination.
  • Many “out of state