Tuesday, March 8, 2011

The Looming War on Mortgage Lending...

I am not sure how this is going to end, but if the past few months is any indication, it is going to end in a bad way.

Conservative lawmakers have been given a mandate to cut spending. That being said, it appears all budget items are on the table, including the privatization of Fannie Mae and Freddie Mac.

In order to make to make the shift from government controlled entities back to the private sector, the two GSE's will have to be made more attractive to Wall Street and investors. One way to do so is to eliminate the subsidies and insurance now provided by the government.

That sounds good on paper, but if an action such as this is acted upon, it could place a already cold real estate market into a deep freeze. The GSE's currently purchase loans from lenders and banks and then sell them off to investors globally. This allows the lenders to offer more loans to new borrowers, and so goes the mortgage lending cycle. If the GSE's are not there, and it is left to the marketplace to decide, there could be an interruption in the cycle. The end result could ultimately harm the borrower with higher interest rates, fees and tougher loan qualifications with nowhere else to turn.

Enter the real estate consortium of real estate agents, builders, banks, civil rights groups and other concerned citizens. The NAR, ABA, NAHB, NFHA and other civil rights and real estate trade organizations are planning to go to Washington and make sure their voices are heard and actions are taken contrary to the conservative law makers wishes.

This group has galvanized their separate but equal interests in the real estate industry into one potent machine aimed at accomplishing one goal - the continuation of government backed insurance on mortgage loans.

Why is this going to be a war ? Well, a lot of new conservatives have been hired by voters to curb government spending, and cutting the responsibility of backing mortgages is a way of cutting costs and saving money. But, the aforementioned real estate and civil rights organizations are a powerful lobbying corp, with deep pockets.

These two are heavy hitters - one with a mandate to give the taxpayers what they are looking for - savings; the other looking out for the public's interest by making sure housing continues to be affordable.

I am not real clear as to which side is right, because the devil is in the details. If one side wins, does that mean the other side deserves to lose ? I have a bad feeling no matter which side is victorious, it will not end well for taxpayers or borrowers in the future...

Tuesday, March 1, 2011

Why We Remain Financially At Risk...

You would think that after the TARP funds were distributed to all of the major banks, and then returned to tax payers shortly thereafter - that the U.S. would be somewhat solvent as far as lending institutions go...

Well, according to the economists at New York University's Stern School of Business - not so fast.

With the help of Nobel Prize winner Robert Engle, the university has developed it's own model on how to measure if a financial institution is systemically "risky".

There is a somewhat sophisticated mixture of financial benchmarks used in order to determine the risk level, but it basically shows that the largest lending institutions would possibly need the same infusion of cash and tax payer backed funds if the financial events of 2008 repeated itself any time in the near future.

But it is not fair to place all financial institutions in the same boat. Just like any other sector in business, some lenders just do things different than their competition. In this case, bigger can be better, if it's done correctly.

I do not know how the large institutions can become less risky, since risk is the game they play. But it appears that you can be in the risk game, and not be risky at all...

Want to know more ? Visit the site with the results, Vlab.Stern.edu and read the findings and other information concerning the riskiest financial institutions in the U.S today.

I would like to thank Bloomberg Businessweek magazine for presenting this article. It is the Feb.7th - Feb.13th 2011 edition of the weekly magazine. The article is located on Page 39, and is written by Craig Torres. Good information to know, Craig...Thank You

Monday, February 21, 2011

Is Congress Trying to Eliminate Mortgage Brokers ?

April 1st. April 1st is April Fool's Day. It's also one of my dearest friend's birthday.

But this year, it's significant in another way as well. April 1st, 2011 is the day Mortgage Brokers will have to decide how they will be compensated - 100% by the borrower, or 100% from the Lender. One or the other. Brokers will not be able to "straddle the fence" and receive compensation both ways anymore, as has been the case for quite some time now.

Brokers are going to lose the ability to tailor the loan to suit the borrower. If compensation is to be lender paid, the broker must pick one flat premium to charge on all loans, no matter the situation. No broker credit allowed. And because the lender premium will have to pay for all of the broker compensation and lender fees, that means a higher rate must be charged by the broker to cover the costs. This means higher interest rates have to be quoted to borrower. Who benefits the most from this ? The large banks do, that's who.

Now that the only borrower who can get a loan is a borrower with a good score, all lenders, banks and brokers are competing with interest rates, not loan programs like a few years ago. And if everyone is competing on the pricing of interest rates, it would appear as if brokers are really about to lose...

Sounds like a really bad situation for borrowers and brokers. It's difficult enough getting a transaction to work as things stand today. This new legislation is bound to make things worse, it seems.

But will it really ?

My first impression was yes, it's bad. Real bad. But after thinking about it a bit, reading some lender guidelines on the subject, and watching video from my friends at TBWS.com I am not so sure.

Of the course the "big banks" would love to crush their smaller, more elusive competition (smaller regional banks and mortgage brokers), and with the help of Congress, it appears the new financial reform legislation is geared towards serving that purpose. Brokers and smaller lenders have long shared a "scratch my back and I'll scratch yours"relationship in the past, and the new law will probably strengthen the mutual benefit affair between the two...

The one-way or another broker compensation legislation is definitely in place to cut out the niche brokers and small banks, and to give an even larger slice of the mortgage loan pie to large lending institutions.

But, I do not think it is actually going to be that bad. Sure, brokers and banks will have to make adjustments to comply, but they will. The everyday, hard working industry professionals will figure out the legislation, the competition, and the way to get things done - despite the constantly changing obstacles that are ever present.

Hasn't it always been that way ?

Wednesday, February 16, 2011

Pre-Qual, Pre-Approval, Conditional Approval - What's the Difference ?

As long as I have been in the mortgage business (about 8 years now), there has always been confusion by borrowers (and some loan officers) about the difference between a loan Pre-Qualification and loan Pre-Approval.

Not Even Close...
A Pre-Qual, or Pre-qualification can almost be considered a task as simple as someone looking at a credit report and saying "yes, they have a credit report with decent scores, therefore, they are pre-qualified for a mortgage loan !". It isn't that simple, but it is very, very close. A pre-qual has no real standing, and is virtually worthless. There are so many nuances with a REAL approval for a mortgage loan that a pre-qual simply misses. If a broker or lender tells you they will "pre-qual you for a mortgage", first ask them what they mean by "pre-qual". If they then describe to you they will basically only review your credit report, tell them, "never mind". A pre-qual is simply a wast of everyone's time...

Better, But Still Not There Yet...
A Pre-Approval is a little better. Why ? Well, a pre-approval contains more information about the borrower. Generally, a pre-approval involves URAR 1003 loan application. A lender, or broker will actually ask the borrower questions based on the 1003. Then, they just fill in the blanks. It is very similar (it is the same document the loan officer will use for loan submission to underwriting, but usually does not have verified information) to the actual loan application.

Once the broker has the information, they will then submit the information to either Fannie Mae's DO/DU (Desktop Originator/Desktop Underwriting) or to Freddie Mac's LP (Loan Prospector) Loan Approval engines. A broker or lender can use DO/DU or LP to pre-approve a FHA, VA, or Conventional loan for a borrower. It is very powerful, and it is a simple, quick way to see if the borrower fits into the scope and parameters of the loan program they are seeking. DO/DU and LP are also used as guidelines by underwriters as to what the borrower will need to provide to the underwriter in order to receive final loan approval. We will talk more about that in a minute. But you still are not there yet...

You Are Getting Close...
A Conditional Approval is actually that - Your loan is approved based on the conditions that have been set by the underwriting. The 1003 has been completed by the loan officer with the information contained on the application verified with the borrower's documentation. The loan officer has looked at paystubs, W2's, bank statements and verified work history, rental history, and various other items and tasks required for the loan to be approved. A conditional approval is much better than a pre-qual and a pre-approval, but it definitely the riskiest area to be in, and the scariest. You are fully immersed in the loan process now. The chips are stacked - you have drawn a line in the sand...This is your position and you will stand behind it, 100%. You are all in...

There are so many things that can go wrong now, and you are totally exposed, unlike when you are in the pre-qual/pre-approval stages. You can pay for an inspection and the foundation is bad. You can pay for a appraisal and the value is not there. Or if it is at first, the lender will ask for a field review and drop the appraised value $60,000 (welcome to today's real estate market !), which will absolutely kill your deal. Or their is a cloud on the title of the property. There are so many things that can go wrong here.

I do not mean to scare anyone. Most real estate transactions go through okay. Very few have things that happen that stop the transaction cold in it's tracks. But I will tell you this - There Will Always Be Something to Deal With in a Real Estate Transaction, I can promise you...

This is What You Want...
Final Approval. Nirvana. You have made it. This is what it is all about. You have met all of the conditions required to close your mortgage loan transaction, and everything has checked out and fits the parameters set by the DO/LP Approval and underwriting. The underwriter now has no choice - they issue Final Approval, and your loan is Clear to Close. The underwriter then forwards your loan to the lender's closing dept., and then you schedule your closing. The bumpy ride is over, and you have won...

I have been through this process a hundred times, and everyone of them is a unique experience, never to be forgotten...

So, the tip of the day is this - Ask for a "Pre-Approval", always. It will start you off on the right track, and if you do not measure up right now, at least you will know what you may need to do in order to get your final approval in the future...

Thursday, February 10, 2011

Who Does the Closing Attorney Represent in a Transaction ?

Who does the Closing Attorney represent in a real estate transaction?

Well...It depends...

In a cash transaction in the state of Georgia (outright purchase of the property), the attorney generally represents the party that contacted them first to oversee the transaction. But this can be seen as a gray area as well, it's according to how the parties act in the transaction as to whose interest the attorney represents. Therefore, it is very important to establish who the attorney will represent in the transaction at the very beginning, so there is no confusion. There is a box of the GAR Purchase & Sale Agreement form (Page 2, Paragraph 7) that allows either the buyer or seller to be represented.

Borrower's almost always assume (mistakenly) that the closing attorney represents them during the real estate closing. It is totally understandable to think this, since the buyer generally is footing the bill for the title services.

Sometimes the seller thinks the attorney represents their interest in the transaction, since they offered to pay closing costs to the buyer. And it is true, generally the seller can stipulate who the closing attorney shall be simply because they are paying the cost for the attorney.

But if a lender is involved in the transaction (in the State of Georgia), the attorney represents the lender, and acts on the behalf of the lender throughout the whole transaction. It doesn't matter if it is a purchase or refinance transaction (see the GAR Purchase & Sale Agreement, Page 2, Paragraph 7)

Every so often, (rarely) you run into a closing attorney who is NOT on the lender's approved attorney list. If they are not approved (or blacklisted), you cannot close your loan with that attorney. You have to find an approved attorney. And the seller has to choose an approved closing attorney (or allow the buyer to select the attorney), or choose another buyer.

That's how you know who's interest the closing attorney represents...

Tuesday, February 8, 2011

What Alternatives Do You Have ? Alternative Credit and How to Make it Work for You...

More and more these days, it seems I am running into buyers and borrowers that just have, for some reason or another, decided to stop using creditor that report to the credit bureaus.

For some clients, this is a REAL BAD THING, because their credit scores were bad before, and since there has been no recent activity, the bad scores are frozen in time, as well.

These potential borrower have one thing to do and one thing only - GET THAT SCORE UP IMMEDIATELY. There are several ways to do this, but there is one way I recommend to most people in this situation: Find a prepaid credit card company (two or three actually, if you really want to get your credit in good condition quickly), and pay the fee. Charge on the card, and make sure you carry a balance of 1/3 of credit limit at all times. If there is a possibility of a debt-to-income ratio issue, simply pay off the balance 45 to 60 days prior to signing a mortgage loan application. And it should work. I have had several clients to follow this formula, and it seems to turn out in a positive way. However, the borrower must be patient. It can take up to a year of seasoning to maximize the effects of the new credit and diminish the old bad credit on the credit report.

For others, it's a good thing. Their credit scores appear to "freeze" in time, holding up that same numbers as the last time there was any activity by the borrower. These borrower have the scores to qualify for a mortgage loan immediately, but do not meet the tradeline qualification quantities or seasoning required by the lender.

That's when Alternative Credit Data comes into play. Lenders understand (yes, they ACTUALLY understand this, at least some of them do) that not everyone uses credit to live. A lot of people use alternative means - barter, money orders, checks (remember checks ?) and cash to actually pay to live. So there is a system set in place where a borrower can use alternative credit to get around normal credit requirements.

First and foremost, a borrower that will use alternative credit must know in advance they will do so, that way they can make sure their cell phone, electrical and gas bills are in their (the borrowers) name. The alternative credit account(s) must be in the borrowers name. Otherwise, alternative credit will not work.

There are different levels, or tiers, given to alternative tradelines:

Each tier has a descending level of importance, with the Tier I alternative tradelines carrying the most weight, and the the Tier III tradelines carrying the least. For instance, proof of 12 months Rental Housing payments are so strong, they often double as Verification of Rent and as 1 of the necessary 3 tradelines needed to meet the the alternative tradeline requirements.

There is one caveat to all of this is - with any source of alternative credit provided, you cannot be late. You are putting the last nail in your coffin if you provide documentation with a history of lates. Take my advice - Don't do it.

You will get the benefit of the service being provided to you, and have the ability to tap into this source when you are ready to take the plunge and buy a new home, without the hassle of maintaining the much heralded credit score rating...

Thursday, February 3, 2011

Rental History - Where You Live and How You Pay Matters...

Inevitably, people who rent or live at home always run into this problem - they do not have a 12 month history of rental payments. So when they decide to apply for a mortgage loan, this fact slaps them right in the face, and can lead to the borrower not being approved.

Of course, this does not apply to those who live in apartment complexes, or have a mortgage in their name that reports to the credit bureaus. The rental or mortgage history is easy for a prospective lender to track in this case, because a apartment complex is a non-interested third party, and your mortgage company will report to the bureaus if you are late with your payment.

The problem arises when a potential borrower lives at home with his or her parents. If you are seeking FHA financing you may be okay (with certain lenders and when certain loan parameters are met, rental history is not required), but as lenders continuously tighten lending requirements, I have seen rental documentation become a requirement on some FHA loans.

So I am going to say what all mortgage industry professionals know, but the general public seems to be totally unaware of - You must pay your rent with a check, or automatic withdrawal from your banking account. And you must pay at the same time, AND same amount, for 12 months consecutively, in order for a lender to consider your rental history as valid. Renters which have a landlord will be required to provide rental documentation in the form of 12 month's bank statements, because the lender will not accept a VOR (Verification of Rent) from this source. The landlord is deemed to be an INTERESTED party (they may not tell the truth about the rent being paid on time, or they could say you were late one month, and you weren't), so lenders do not accept any written documentation from the property owner. VOR's are only acceptable from a apartment complex or property management company.

I have had people to say they pay by checks some months, then by money order, then - sometimes with cash. Or they paid $600 last month, and $750 this previous 10 months, but have been able to skip a month or two because they did some personal favor for the landlord. All of this sends a red flag to the lender, and the borrower with the best credit scores and income is all of a sudden in trouble.

So, if you are a person wishes to purchase a home within the next 12 months who lives at home with your parents rent-free, has a roommate that you share a apartment with but you're not on the lease, or rent from a private landlord, do yourself a BIG favor - open a checking account and pay by check from NOW ON.

When it's time to buy your new home and get mortgage financing, you will be glad you did...