Will Banks Cash In on the New Good Faith Estimate

Posted on December 15, 2009 by Rhonda Porter

The new Good Faith Estimate will be required to be used on all new loan applications effective January 1, 2010. Part of HUD’s GFE may include a service provider list which consists of title and escrow/settlement providers (boxes 4, 5 and 6; section b on page 2 of the GFE). This list (if permitted by the lender) is important to the consumer as it will determine what the cost difference can be between the good faith estimate and the settlement statement at closing.

If a borrower relies on a service provider (title and escrow/settlement services) on the list given to them by their mortgage originator with the good faith estimate, there is a 10% tolerance. This means that if the cost at closing comes in more than 10% higher of the sum of those fees than what was provided on the good faith estimate, the lender will pay the difference (or credit the borrower) over the 10% sum of those fees. However if the lender permits and the borrower to shop for their own title and/or escrow vendor, the loan originator is “off the hook” should the fees come in higher at closing.

Per HUD “if no service providers are listed, then it is assumed the customer could not shop and fees will be bound by the tolerances” and that “lenders are responsible for fee requirements listed by their loan officers or the broker”.

If the lender “permits” the borrower to shop for title and escrow services, they must provide this written list which must include at least one service provider on a separate sheet of paper and then the lender is subject to the 10% tolerance (based on the aggregate of those fees).

I see this as a huge opportunity for the banks similar to what we’ve witnessed with HVCC. This is their big chance to control where escrow and title go–to them! Banks will state that they do not want to risk being off on their quotes with new binding good faith estimates and it’s my belief they will do their best to keep escrow and/or title “in house” or affiliated providers. Some mortgage brokers may find that they will have to use the banks preferred title and escrow vendors just as they do the banks appraisal management companies. Should this happen, we may see banks use low cost centralized services, similar to many bank processing centers (some are even located out of state).

How will borrowers know how to select or shop for a title and/or escrow company? Can they rely on their bank loan originator to help them select a title or escrow provider when the MLO (Mortgage Loan Originator) is directed to only have the bank’s providers on the list? The new RESPA laws will not allow MLOs to recommend anyone who is not on the service provider list. Should the consumer rely on their real estate agent to recommend the title and escrow provider (many brokerages have joint venture relationships)?

With a purchase, if the title and/or escrow service providers are other than those designated on the written service provider list, then it is presumed that the buyer/borrower selected those providers (even if it was directed by the real estate agents or seller) since the buyer agreed to the contract. With this scenario, the lender is not subject to the 10% tolerance in fees for those costs. Buyers may find a surprise comparing the good faith estimate at signing to the HUD Settlement Statment if the title and/or escrow company are different from what was designated on the purchase and sales agreement.

The new Good Faith Estimate may wind up being a huge set back for independent escrow companies and smaller independent title agencies who will most likely lose any relationships they have forged with loan originators who happen to work for one of the big banks.

By the way, if you are planning on selecting your escrow and/or title provider. You may want to start researching prior to your prequalification process with the mortgage originator. You may find that effective January 1, 2010 most mortgage originators will not want to provide a good faith estimate until you have committed to working with them as the new GFE’s are binding for the loan originator unless certain “changed circumstances” permit the MLO to issue a revised estimate. Per HUD:

“If a GFE is given during prequalification, the receipt of one of the six required pieces of documentation will not constitute a “changed circumstance.”

The loan originator is presumed by HUD to have the “six required pieces of documentation” if they issue a good faith estimate.

…I’ll be writing more about this on a future post.

Zillow Adds Rentals

Posted on December 15, 2009 by Jim Reppond

Today Zillow announced the addition of rental listings and search to their arsenal of tools for consumers. Now anyone can list a home for rent, and Zillow users can now search both rental homes and homes for sale in their area. Consumers can do a map search by monthly payment for both for-sale and for-rent homes simultaneously based on a monthly payment they can afford.

According to a recent Harris poll, one in four people who plan to move in the next three years say they will search for both homes for rent and homes for sale. This may be a function of the current economy. Sellers may choose to rent their homes now, rather than sell at a lower price than they could have received a few years ago. Conversely, these same home owners may choose to rent their next home when they move if they can not sell their home now.

Zillow is launching a new “rent vs. buy” comparison search that allows consumers to use a “monthly payment” filter to calculate what they can afford to purchase using the current day’s local mortgage rate for a 30-year fixed mortgage. Zillow already has a massive amount of real-time data on mortgage rates built into their “Mortgage Market” feature that they can draw from.

Zillow plans to offer landlords and agents a Featured Listing rate of $9.95 for 180 days, whether it is a listing for sale or for rent. Featured Listings can include unlimited photos and links to outside websites. With Zillow’s ZIP code, neighborhood, monthly payment, and map search functionality, I imagine Zillow will give even free Craigslist some serious competition.

Buy Now or be Priced Out Forever!

Posted on December 6, 2009 by ARDELL

I once heard that an Ocean Front property could have been purchased for $70,000 back in the 70’s. That property is over $4 Million dollars today. If I could turn back time…I would buy that. Not to make money on it. To own it. To enjoy it. For generations of my children’s children to enjoy.

This afternoon I will be at a home inspection of a house my clients are buying for slightly less than $300,000. The wife cried when the seller accepted their offer. It’s the kind of house some people would turn their nose up at and say “I’d rather rent”. But I can’t help but think of how my children in L.A. would celebrate being able to buy a house like this, just as my clients are. Having a yard for the kids to play in. Buying most any house for $300,000 or less is just not an attainable objective for many people who want and need to live close to where they work.

Many homes this year could be had for $100,000 to $150,000 less than in 2007-2008. This has been a great year for some of my clients who could not buy a home last year.

“Buy now or be priced out forever” is a phrase that is often joked about…but…sometimes it’s true.

How Does a Short Sale or Foreclosure Impact Your Credit

Posted on December 4, 2009 by Rhonda Porter

Ardell posed a question on her last post about credit scoring that I’ve been meaning to address here at Rain City Guide on how credit scores are impacted by short sales or foreclosure. When I was speaking at the Mortgage Girlfriends Mastermind Retreat in Scottsdale this summer, I had the opportunity to meet Linda Ferrari, a well known credit expert and author of “The Big Score – Getting It and Keeping It” (a book I highly recommend everyone read).

According to Linda, “a foreclosure can drop a credit score 50-250 points (this includes points all ready lost to delinquent payments). The difference in point loss depends on how many points someone has to lose in the payment history factor of his or her credit report. Thus is someone has a 750 credit score and they opt to foreclose, their score could drop 250 points. However if someone has a 500 credit score, they may only lose 50 points for the same derogatory.”

It hardly seems fair to me that someone who has established excellent credit and they are faced with a huge financial hardship, they’re penalized on a greater scale simply because they have “more to lose” (reminds me of our income tax system)! With a foreclosure, you can expect to wait about 5-7 years to purchase your next home (based on current guidelines) assuming a mid-credit score of 680 and a 10% down payment for conventional financing.

A deed in lieu of foreclosure may impact credit scores the same as a foreclosure depending on how it is reported to the credit bureaus–they don’t have to report it as a foreclosure…if they do, the credit will be scored as such. Here’s what Linda recommends you try negotiating how the deed in lieu is reported on your credit with the lender in preferred order:

Paid As Agreed. Credit scores will have already dropped over 100 points due to default in payments; however, if reported as Paid As Agreed, the borrower will be able to purchase another home in a shorter time period.

Paid Settlement. Credit scores could drop 75-100 points in addition to the points already lost for delinquent payments.

Foreclosure. Credit scores could drop 100-150 points in addition to the points already lost for delinquent payments.

One advantage of a deed in lieu of foreclsoure is you may be able to purchase a home, if you so desire, a minimum four years afterwards with 10% down payment, based on current guidelines.

A short sale is potentially the least damaging to your credit scores assuming you’ve been able to make mortgage payments on time. According to Linda, credit scores may drop from 50-150 points (depending on what else is going on with your mortgage and credit history). You may also be able to buy a home quicker using this route. Linda Ferrari writes on her blog why you may not want to consider using a short sale as an option should you be in financial distress.

FHA may allow borrowers who have lost a home due to short sale, deed in lieu or foreclosure a little quicker than conventional financing–around three years depending on various factors. Extreme extenuating circumstances may allow for a shorter time period. Again, this is current guidelines. I wouldn’t be one bit surprised to see FHA change this guideline to be more in line with conventional financing.

You have to keep in mind that credit scoring is accumulative, everything is factored to come up with those three scores that are suppose to reflect your current credit. The only real good news about credit scoring is that your scores are temporary–they are changing constantly. Pay down a credit card, establish good payment history on your installment loan and your scores will improve over time.

How much is your credit score damaged by ?

Posted on December 4, 2009 by ARDELL

FICO Did you know that if you have a credit score of 780 or higher, you might damage your score more from a single 30 day late payment, than a 680 score person might get dinged for a Foreclosure? Sad but true. Read it and weep.

Hat Tip to Jay Thompson’s “The Phoenix Real Estate Guy”.I’m sure this chart will anger a lot of people with high FICO scores. Best I can attempt to explain this is Richard Gere will likely get a lot more flack if he spit on the pavement, than a homeless person might :). Or better yet, Tiger Woods will clearly get a lot more flack for his misbehavior than your next door neighbor.

Personally I think the Country would be better served if someone CHANGED the system vs. simply requiring lenders to EXPLAIN how it works. I screamed aloud the day risk based pricing via credit scoring passed. But people looked at me like I had two heads. I wish more people were screaming with me that day…

How much home can you afford?

Posted on December 2, 2009 by ARDELL

There are few things more important to me than a home buyer being able to qualify themselves, vs. taking anyone else’s word for the answer to “How Much Home Can You Afford?” Since I am a real estate agent and not a mortgage professional, I like to post a laymen’s view at least a couple of times a year on this topic. This simplistic approach should be any potential homebuyer’s first step in “the process”. I also think that any Buyer’s Agent should go through this detail with their clients before assisting them in making an offer on a house, so consider this an agent tutorial post as well.

There are many easy to use Mortgage Calculators like this one on Zillow. But just as you should know that 6 times 3 is 18 without needing to use a calculator, you should know WHY the online mortgage calculator is spitting out a number. If you know that 6 times 3 is 18, you will know if the calculator sums that out at 37, that you or it did something wrong. Same with Mortgage Calculators and Pre-Approval letters. You should know enough to know when the answer is outside of most people’s “comfort zone”.

Back to the online mortgage calculator. The first data field you need to fill out is “current combined annual income“. You need to know a few things to answer that question correctly.

1) When they say “income” they mean GROSS income, not your take-home pay.

2) If you are salaried, and make the exact same amount every paycheck, then your current salary is what goes in that data field. If any portion of your income is based on an hourly rate or a bonus for production, then your most recent income information is not usable. Unless it is a promise to pay (salary), then your “annual income” is determined by averaging your last two years worth of income AND is subject to subjective changes by the lender’s underwriter. Sometimes that happens a week before closing! So best to qualify yourself using projected, realistic potential outcomes.

If you just got a raise from $75,000 a year to $85,000 a year, and none of that $85,000 is subject to change based on hours worked or bonus income, then the full $85,000 a year goes in that box.

If you made $85,000 a year of which $60,000 is salary and $25,000 is overtime and/or bonus income, then $85,000 is NOT what you put in that box. If you had overtime and bonuses of $15,000 last year and $25,000 this year, then you add the two together and divide by 2, making your annual gross income $60,000 salary plus $20,000 of overtime and bonus pay. HOWEVER, if it is the reverse and you had $25,000 last year and $15,000 this year…not likely the lender is going to look at a figure higher than $15,000. They may impose a continued downward trend on that recent $15,000 earning vs. $25,000 the year before. In fact they could exclude it altogether as an unreliable source of income, unless your employer produces a letter guaranteeing that the overtime and bonus income will not drop below $15,000 for the next year or two.

3) “monthly child support payments” is the next line in that particular “mortgage calculator” and is the only additional income category. That doesn’t seem right at all to me. Best to contact a lender regarding all of your “other income” sources to determine which, if any, they will use. What if your child support payments are ending in 8 months? What about interest income, alimony payments, etc.? Unless you need to use these other income sources to qualify, and expect them to continue for the life of the loan, or at least for 10 years, I would suggest not including this “other” income. It will give you a “cushion” of extra monies if needed. Buy a home you can afford without these extra income considerations, if at all possible. More on this when we get to “back end ratio”.

Back to the handy but not so accurate online mortgage calculator it makes no sense to me why they would ask for HOA dues in the “income-debt” portion and then again when getting to estimated monthly payment for the new loan. In fact the whole “income and monthly debt obligations” section is poorly worded for accuracy. Once you get past income, you want to calculate your monthly “debt” payments. The most common of these are”

Car payments, Student loan payments, credit card payments, alimony or child support payments (though technically not “debt”). What you do not include are regular living expenses like utilities, gas, car insurance…all of these are not “debt’ payments.

Now skip all the way to the bottom and see the terms “front end” and “back end”. The calculator has a pre-set for 28% front end and a 36% back end. it allows you to change these pre-sets, but do not do that until you understand the numbers using the pre-sets. Assume that the pre-sets are the Average Comfort Zone for most people.

“Front-end” is your housing payment. “Back-End” is your total debt PLUS your housing payment. Old school rules work like this:

You make $10,000 a month gross at 28% = $2,800 a month for housing payment “front-end”
You make $10,000 a month gross at 36% = $3,600 a month for housing plus debt payment “back-end”.
IF your debt payments are $1,000 vs the $800 allowed, then your front end should be $2,600 vs. $2,800. $3,600 back end minus $1,000 = $2,600, so your “back end being out” reduces the amount available for housing payment by $200.
BUT that does not work in reverse. If you have NO DEBT, your housing payment stays at $2,800 and DOES NOT increase to $3,600. This based on how likely is it that you will have no debt for 30 years?

That last paragraph is the most important paragraph in this post, so take the time to understand it well.

28% front end and 36% back end has been the long term conservative approach since forever. It is also very rare that a lender will use these ratios when qualifying you for a mortgage, so YOU must do it yourself. Then when you know your payment should be $2,600 and the lender qualifies you for a payment of $3,500, you know just how much your lender is stretching you outside of conservative standards. That tells you how difficult it may be for you to actually make that payment for the next 3-5 years. A family with 4 children might only be able to spend 20% to 25% of their gross income on housing payment. A single person with a high income may be able to stretch to 33% of their gross income on housing payment. If you are a VA buyer…this is very important, as VA uses one ratio and not two (last I looked) allowing you to spend your full back end allowance on housing payment if you have no current debt.

One of the things that prompted me to write this post today was this comment I saw from a lender on Zillow:

The rules are still tightening-to a fault. Fannie Mae will soon be announcing that they are going to a 45% back end ratio and any borrower with a 620 fico score has to put down at least 20 percent. I can live with the 20 percent for a 620 fico,but the 45% back end ratio is going to make it even more difficult…

As you can see, lenders are not used to people qualifying at a conservative standard of a 36% “back end ratio” and are complaining that the rules are too tight when requiring a 45% back end ratio. OUTRAGEOUS! Remember we are using GROSS income and not net income. So 45% of your gross income on housing payment and debt is clearly NOT too “tight” of a rule.

Knowing how to qualify yourself using 28% front end and 36% back end, will help you know for yourself what monthly payment you truly can afford. Here’s my suggestion: If conservative ratios say you can afford $2,800 for a housing payment, and your lender says that number should be $3,500, test it first. If your current rent payment is $1,700, try putting $3,500 minus $1,700 in the bank every month (not on average). If you can’t put an additional $1,700 a month in the bank easily, each and every month for at least 6-9 months, don’t consider buying a house at the max your lender “says” you can afford.

In fact regardless of the ratios, it’s a very good idea for you to pretend you have that new housing payment well in advance of making an offer to purchase. Test for yourself, by banking the difference, before taking on that 30 year obligation to pay.

Hug Your Escrow Officer and Funder Day

Posted on November 30, 2009 by Rhonda Porter

The original expiration date of the first time home buyer tax credit is today. This means that escrow companies, title companies, funders at mortgage companies, courthouse runners, the county recording clerks and anyone else who is involved in the final process of a real estate transaction are very busy today due to the increased volume. I expect receiving recording numbers to take bit longer than usual.

I hereby declare today, November 30, 2009 National Hug Your Escrow Officer and Funder Day. Give ’em a break and show extra compassion and patience for the what they may be experiencing today.

Perhaps this should be an annual (if not daily) event.

Hugs! 🙂

Update: lender conditions just get nuttier

Posted on November 30, 2009 by Tim

I don’t make this stuff up folks. It is getting to the point where I think loan officers need to seriously think about who they do business with. It matters zero how low the rates are for this lender if they can’t close or create an atmosphere where it is so difficult to work with that it places stress on your long term business relationship with your customer:

A fully executed, signed and on-time delivered loan package was rejected resulting in a full re-draw due to:

“the vesting on the Deed of Trust said, Husband and Wife, instead of Wife and Husband.”

This is an extremely easy fix, but yet it was rejected. No progress was made in trying to convince the lender how absurd this was nor how foolish the lender looks to the professionals involved in closing the transaction, never mind how dumb they look to the borrowers who have every right to request another lender. This places the borrowers loan lock in question and adds expenses including wastes an unbelievable amount of time that could be spent on transactions placed with lenders that have their act together.

Stop Acting Rich: Household struggles go beyond the mortgage payment

Posted on November 23, 2009 by Tim

This past Sunday, I was given a book by a gentleman who by most measures is financially well off and more importantly is a success story both personally and professionally. The book he and his wife offered me is called, “Stop Acting Rich,” by Dr. Thomas Stanley (Ph.D) of famed bestsellers The Millionaire Next Door and The Millionaire Mind.

The real estate industry is an incredible laboratory. It provides us with an interesting foray of social and cultural samples and Dr. Stanley heavily uses housing early on as the springboard for this book. Perceptions of wealth and happiness seem closely correlated to what the cultural norms place on us and pressure people to become what Dr. Stanley terms, “aspirational Millionaires.” But, is true wealth achievable and what does it look like? If you emulate most real millionaires profiled, you won’t be driving a top tier BMW or always wearing Enzo Angiolini, Ferragamo or Allen Edmonds shoes.

In my view, much of what is written in the text is really a story about real estate and how housing shapes our habits of consumerism. And that is why is it a fascinating read into what people perceive as true wealth.

From the Preface in “Stop Acting Rich“:

The reason why so many homeowners today are having a difficult time making ends meet goes way beyond mortgage payments. When you trade up to a more expensive home, there is pressure for you to spend more on every conceivable product and service. Nothing has a greater impact on your wealth and your consumption than your choice of house and neighborhood. (emphasis added)

More exerpts from Dr. Stanley:

My research has found that most people who live in million-dollar homes are not millionaires. They may be high-income producers but, by trying to emulate glittering rich millionaires, they are living a treadmill existence. (I know several people who are “aspirational Millionaires.”)
In the United States, there are three times more millionaires living in homes that have a market value of under $300,000 than there are living in homes valued at $1 million or more.
Most millionaires do not reach the millionaire threshold until they are near 50 years of age. Most became millionaires, in large part, because they led a frugal lifestyle. By the time they reached the millionaire category, they were set in their ways, so even after becoming wealthy, they typically remain frugal. (do you know frugal millionaires like this? I do.)

“Ours is a culture of hyperconsumerism. Not only can and do we buy nearly everything (except for the truly outrageously expensive), but we seen to have come to believe that we can and should have it all and that who we are is dependent on the ability to live the right neighborhoods, with appropriately sized homes filled with brand-name appliances, with prestige cars parked in the driveway with expensive golf bags and clubs in the trunk, and so on.”

“In a way, the credit crisis of 2008-2009 is serving as something of an intervention. But the for treatment to work, you must take a cold hard look at your balance sheet and at your life, and determine if you would be wealthier if you would stop acting rich.” – Thomas Stanley, Ph.D, author of Stop Acting Rich

This book should be at the very top of the list for those in the real estate business. Get rich slowly seems to be more in vogue today but, sadly, Dr. Stanley feels that although the recession may have caused many to take a breather, every indication is that we will pick up right where we left off when gentler and more favorable economic winds blow again.

Seattle Schools – Admit by Address

Posted on November 19, 2009 by ARDELL

The Seattle Times reports that Seattle is returning to a neighborhood-based system. Given it has been about 30 years since Seattle abandoned that system, this is big news for everyone who lives in Seattle, particularly people who are buying homes in Seattle.

According to the article, this decision passed by unanimous vote last night at 11 p.m.

If we’re going to use our limited resources efficiently, this is a big opportunity to reduce transportation costs, balance out enrollment so that hopefully the vast majority of our schools have enough students in them to be successful,” said board president Michael DeBell.

When people are looking for homes to buy, having a geographically based school system is very important. Not knowing which school your child is likely to attend adds a layer of uncertainty to an already uncertain process. I’m sure this decision will be controversial, but I have to agree that when an entire community is vested in the success of the “neighborhood” school…the system will improve via more outside support. Also, it will be easier to target the schools and communities that need more support than the local community can itself provide.

I went to the school around the corner from my house. I could even see inside the school from my yard. My children always attended the school nearest my home, and I used “which school?” as the basis for my home buying decision. Parents and children from the neighborhood around the school volunteered to help with seasonal maintenance projects and had a vested interest in the school being a safe and attractive neighborhood component.

On all counts, I think this is a good decision. Still I expect it will have as many unhappy constituents as it has happy supporters, until the system is in place long enough for people to forget the three decade old “used to be”.